AZZ Inc. Stock

Good day, and welcome to the AZZ Fiscal 2027 First Quarter Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Phillip Kupper, Managing Director of Three Part Advisors. Please go ahead.

Good morning. Thank you for joining us today to review AZZ's fiscal 2027 first quarter results for the period ended May 31, 2026. Joining the call today are Tom Ferguson, President and Chief Executive Officer; Jason Crawford, Chief Financial Officer; and David Nark, Chief Marketing, Communications and Investor Relations Officer.

After today's prepared remarks, we will open the call for questions. Please note that the live webcast for today's call is available www.azz.com/investor-events. Before we begin, I would like to remind everyone that our discussion today will include forward-looking statements made in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

By their nature, forward-looking statements are uncertain and outside the company's control, except for actual results, AZZ's 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 latest annual report on Form 10-K and quarterly reports on Form 10-Q. 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, which should be considered supplemental and not as a substitute for GAAP financial measures. We refer shareholders to our reconciliations from GAAP to non-GAAP measures contained in today's earnings press release.

I would now like to turn the call over to Tom Ferguson.

Thank you, Phillip. Good morning, everyone, and thank you for joining us today. We appreciate your interest in AZZ and the opportunity to discuss our first quarter fiscal 2027 results. We are off to a strong start. For the first quarter, we delivered record sales in both segments generated solid cash flow, maintained a strong balance sheet announced raising our dividend and raised our full year guidance.

These results reflect the strength of our strategy, the durability of our end markets and the continued execution of our teams. Our results consistently reflect our ability to convert demand into high-quality profitable growth. We continue to leverage our market leadership positions in both Metal Coatings and Precoat Metals to expand earnings and generate robust cash flow while investing strategically to extend our competitive advantages.

In Metal Coatings, we are investing in added capacity where demand supports attractive returns. In North Texas, for instance, we successfully commissioned a new large kettle to meet growing regional demand for hot dip galvanizing effectively doubling our capacity at Crowley, Texas. This low-risk, high-return investment supports growing customer demand and strong market fundamentals.

David will discuss U.S. end market demand in more detail in just a moment. Additionally, a key element of our growth strategy is identifying innovative ways to grow share and deepen customer partnerships. One example of this is a vertically integrated manufacturer who chose to partner with AZZ to divest its noncore galvanizing operation to reduce complexity and cost. As part of this agreement, we acquired their galvanizing Kettle in zinc, providing them with immediate cash liquidity while securing a long-term service agreement. We believe this deverticalization model creates value for our customers while delivering long-term revenue streams for AZZ. We view this as a scalable blueprint for future partnerships.

At Precoat Metals, our Washington, Missouri facility continues to ramp production as planned. We remain on track to reach targeted utilization with our strategic partner, while actively seeking the commercialization of the remaining capacity. Facility is approaching an expected contribution margin levels for this year and performance with our partner in this beer and beverage-related container category has been very encouraging. Across both segments, our focus remains clear, increased share of wallet, capture incremental market share and deploy capital into high confidence organic and inorganic growth opportunities. These investments drive operational efficiencies and position us to deliver sustained long-term growth.

Underlying all this progress and momentum are structural advantages that differentiate AZZ, including our proprietary technologies. In Metal Coatings, our digital galvanizing system, drives consistency, efficiency and data-driven decision-making at scale. In Precoat Metals, CoilZone enhances customer visibility with real-time insights that improve throughput and enable benchmarking across our footprint. These digital capabilities are not just operational tools, they are scale, strategic assets that strengthen customer relationships, improve execution and are forming the basis for utilizing AI to improve customer intimacy, fine-tune pricing decisions and support operating efficiency improvements and sustainability.

Looking ahead, we remain confident in our ability to execute on our strategic priorities, winning in our markets, deploying capital with discipline, investing in high-value capacity expansion, delivering superior customer service and leveraging AZZ's differentiated capabilities. Collectively, these efforts position us to drive profitable growth, enhance shareholder value and reinforce our leadership across our end markets.

With that, I will turn it over to Jason.

Thank you, Tom. We delivered record first quarter sales of $448.5 million, up 6.3% year-over-year, driven by strong double-digit sales growth in our Metal Coatings segment which increased 12.3%. This performance reflects continued momentum across construction, industrial and infrastructure end markets. Precoat Metal sales increased 1.5% year-over-year supported by the pass-through of higher paint and input costs and the continued ramp-up at our Washington, Missouri facility, partially offset by softer volume in certain construction, HVAC and appliance end markets.

From a profitability standpoint, gross profit was $112.2 million or 25% of sales, representing a 30 basis point improvement year-over-year. This reflects favorable mix, pricing discipline and improved operational execution. SG&A expenses were $35.1 million or 7.8% of sales compared to 8.2% last year. Even after excluding the $2.2 million noncash retiree incentive charge in the prior year, we demonstrated good cost control while supporting growth.

Operating income increased to $77 million or 17.2% of sales, an improvement of 70 basis points versus the prior year, reflecting strong incremental margins on higher volumes. Turning briefly to the Vale JV. As a reminder, our first quarter of the prior year included $173.5 million of total equity and earnings of which a substantial portion was related to the divestiture of its electrical products group. While this creates a difficult year-over-year comparison, it's important to note that our current results reflect our 40% interest in the remaining business.

Our JV partner continues to pursue the divestiture of its remaining available operations. Interest expense improved to $11.3 million, down $7.3 million from the prior year, driven by deliberate debt reduction following the Vale distribution and financing optimization initiatives discussed in more detail in our SEC filings. This highlights the strength of our balance sheet, support from our capital market partners and our continued focus on reducing debt and the company's cost of capital. First quarter's income tax expense of $14 million reflects an effective tax rate of 21.2% compared to 22.2% last year when we exclude the impact of the JV equity earnings. GAAP net income was $52 million, and adjusted diluted EPS was $1.85, up 3.9% year-over-year demonstrating continued earnings growth despite the absence of the prior year JV-related earnings.

Consolidated adjusted EBITDA was $99.5 million or 22.2% of sales. Infrastructure Solutions adjusted EBITDA dropped from $7.6 million in the prior year first quarter to a loss of $0.8 million in the current quarter, reflecting the impact of the business divestitures in the [ Aveo ] JV that occurred throughout fiscal year 2026.

In our Metal Coatings segment, an increase in large projects and the sale of land in the prior year quarter contributed to a drop on year-on-year margins. While margins in our Precoat Metals segment improved modestly, on operational performance and mix from our Washington, Missouri facility. Importantly, underlying margins remain strong and consistent with our long-term expectations.

As Tom noted, our Washington, Missouri facility volumes continued to ramp in line with expectations, and we remain on track to contribute meaningfully to revenue and profitability as we move through fiscal year 2027. In addition, we are starting to make progress in commercializing the remaining capacity at this facility.

Turning to our balance sheet and capital allocation. We generated $37.1 million of operating cash flow in the quarter driven by earnings growth and disciplined working capital management. Our net leverage remained low at 1.4x, providing significant flexibility to fund growth and return capital to our shareholders. Capital expenditures totaled $18.7 million, with a growing focus on high-return organic investments. We remain committed to returning capital to our shareholders. We recently increased our quarterly cash dividend from $0.20 per share to $0.24 per share, representing a 20% increase and further underscoring our confidence in the sustainability of our earnings and cash flows.

In addition, we continue to maintain a strong share repurchase program with $133.2 million available. However, no shares were repurchased in the first quarter. Overall, our capital allocation priorities remain unchanged, that is to maintain a strong balance sheet, invest in high-return growth opportunities and return excess capital to our shareholders.

With that, I'd like to turn the call over to David.

Thank you, Jason, and good morning, everyone. This quarter, we have enhanced our disaggregated sales disclosure in the 10-Q to provide greater transparency and improved end market comparability.

Our reporting now reflects 6 primary categories: construction, which remains our largest end market and includes commercial, residential, agriculture and data centers. Industrial, mainly comprised of processing plants for a variety of applications, including power, food and water as examples. Infrastructure includes electrical, transmission and distribution, solar, petrochemical and bridge and highway projects. HVAC and appliances includes both residential and commercial HVAC as well as appliance. Transportation includes truck, trailer, bus and RVs and finally, container, which represents food and beverage-related end markets.

Our other category represents all other miscellaneous sales. This updated framework better aligns our disclosures with how we manage and evaluate the business and no longer calls out consumer or electrical.

Now turning to performance. Consolidated sales grew 6.3% year-over-year. Construction grew at 3.9% driven by continued strength in large data center and manufacturing-related projects. Industrial sales increased by 7.8%, supported by increased demand for utility scale power projects. Container was up 194% primarily resulting from the ramp at the new Washington, Missouri plant, as mentioned by both Tom and Jason. While infrastructure was essentially flat compared to the same quarter in the prior year, with mixed results by segment.

Offsetting our growth in construction, industrial and container end markets were transportation down 1.2% on lower commercial trailer activity and HVAC and appliances down 2.4% on lower residential new construction. Looking ahead, we believe we are in early stages of a significant and sustained investment cycle. Modernizing the aging electric grid to support our nation's accelerating electrical demand will require a meaningful step-up in capacity and capital deployment. This dynamic, combined with ongoing investment in infrastructure, energy and industrial capacity supports our view that a once in a generation infrastructure rebuild is underway.

Our thesis is that AZZ is well positioned to benefit from a multi-decade capital investment cycle across utility, transmission, distribution and grid technology. Importantly, these trends are not cyclical, they are structural long-duration drivers that are increasingly central to our customers' capital spending priorities. We continue to see strength at the customer level. For example, one of our largest galvanizing customers has recently reported a 35% growth in their utility-related structures backlog. While we do not operate the business on a backlog basis, this customer's demand forecast, along with others, provides us confidence in future activity and the durability of certain end markets.

With that, I will turn the call over to Tom.

Thank you, Dave. Adding to Dave's commentary on industrial, infrastructure and utility momentum, we are evaluating how our footprint aligns with anticipated demand. Regionally, the Southern U.S., beginning with Texas and expanding East through key growth states is expected to account for nearly half of the country's proposed utility capital spending.

This reinforces our recently completed capacity expansion in North Texas which we believe is both well timed and strategically aligned with our growth priorities. Reflecting strong sales momentum and operational resilience, we are confident in raising our fiscal 2027 outlook. We now expect sales of $1.8 billion to $1.85 billion, adjusted EBITDA of $375 million to $415 million, adjusted diluted EPS of $6.75 to $7.15.

As we drive growth, we also expect to reduce debt by $130 million to $170 million, in fiscal 2027, demonstrating our continued commitment to balance sheet strength alongside expansion. Looking forward, our strategy remains clear and consistent. We are scaling the business through a combination of organic investments, market share gains and a disciplined M&A approach. We are actively evaluating a robust pipeline of high-quality acquisition targets that align with our core capabilities and meet our return thresholds. We expect to announce a deal later this month. We are also evaluating greenfield galvanizing opportunities where we can partner with strategic customers. These efforts position AZZ to capitalize on what we believe is a long-duration secular growth cycle driven by increasing demand for infrastructure, electrification, data centers and grid modernization. At the same time, aging infrastructure across North America continues to require significant reinvestment, further reinforcing the long-term opportunity set. Our confidence is reflected in the Board's recent decision to increase our quarterly cash dividend to $0.24 per share.

Finally, we believe AZZ is uniquely positioned operationally, strategically and financially to deliver sustained, profitable growth and long-term shareholder value. Before we open the call to questions, I'd like to recognize and thank our employees. I am proud to work alongside such a talented and dedicated team that brings pride and passion to everything they do to serve our customers.

Now, operator, we are ready to take questions from analysts.

[Operator Instructions] The first question today comes from Ghansham Panjabi with Baird.

It's actually Josh Westley on for Ghansham. Maybe, Tom, if we could just start off on just the overall market conditions. Obviously, it sounds like end market demand is pretty robust for you guys. But just in terms of the volatility over the past few months with energy costs from the Middle East, et cetera. Just curious how that's kind of translated into customer decision-making, how they're thinking about going forward with projects? Are they getting delayed right now and getting pushed into the back half of the calendar year? Anyway, any thoughts on year end would be great.

Sure thing, Josh. A couple of things. One, on the Metal Coatings side, I think the markets are robust. You see it in the growth in the quarter and has taken our guidance up is because we see a lot of strength there going forward for at least the balance of this calendar year.

There's been talk of project delays depending somewhat on interest rates or energy costs and things like that. But for the most part, the things that we're seeing they've got to put towers and poles in the ground. They've got to continue to improve the grid and then data centers, I'd say the majority of our plants have at least one data center project going on at any given time lately.

So we have not seen much in terms of headwinds there. As a matter of fact, it's mostly stuff moving forward, customers converting capacity to where they can focus more on poles, towers and things related to electrical infrastructure. On the Precoat side, I'd say we had encountered the tariff impact, which has made substrate less available in many ways or of higher cost. I think that's probably stabilized at this point as we're looking forward.

So not much more impact on tariffs and the substrate prices have gone up, it could actually bring some imports back into play, which is generally good for our customers on the Precoat side. So I think everything we're looking at is pretty positive, and we feel like either like on Precoat, we've bottomed and stabilized in terms of market conditions. We're benefiting from the container demand on -- especially for the new Washington site, which has ramped up according to schedule and it pretty much hit its pace now and almost at its run rate early. And on the Metal Coatings side, there's just not a lot of clouds on the horizon. Obviously, we battle it out at 48 sites every day, but most of those sites are -- I'd say we're winning every day.

That's great. Maybe just for my second question, Tom, on that deverticalization model that you're talking about with your customers. Just any more color on that would be great. I mean it sounds like a lot of it are maybe customers that you kind of service flex capacity for right now. Is that correct? And is this a trend that's kind of growing across your customer -- sorry, customer base, how should we think about that?

Yes, it's something we talk about and we like and we talk to a lot of our customers about it if they've got a kettle and especially when that kettle goes down and they've got to replace it or repair it, that's a great time for our teams to be in there talking to them, why do you want to go through this headache. We've got plants within relatively short distances from you, we can negotiate a long-term agreement, and we can take that furnace and kettle off your hands and give you a decent price for your zinc.

So we're having those conversations with customers all the time. There's a target list of those. We're happy that we finally got one closed. We had not done one of these since I'm going to say, about 5 or 6 years now. So we'd love to see this turn into -- and that's why we wanted to talk about it because we just want to make sure our customers -- we've got their attention that this is something we can do, and we're happy to deploy some of our capital towards helping them with what we think is a better long-term solution for them. And we just like to think we're a whole lot better at how dip galvanizing than they probably are since it's not their focus.

The next question comes from Nick Giles with B. Riley.

This is actually Henry [indiscernible] on for Nick Giles. Maybe to start off start off on M&A. It's been in the background for a while now, and you mentioned likely announcing one this month. I'm just curious on what some of the gating factors might be willing sellers, sites that make sense geographically? Any color there would be really helpful.

I think we've -- the one I'm hoping we're going to close. I'd say we got a little bit rusty, even though we did [indiscernible] last year. Normally, I'd like to see us get these done in 45 to 75 days, and this one's kind of drag along for about 6 months.

So particularly on what I'll call a one-off galvanizer. So I think this is us being disciplined and making sure that it's not just that we're crossing the Ts and dotting the eyes. It's that we've got to have a sense of urgency by getting these things done. And because they just drag and, of course, it cost us money to do that, but it also delays our ability to take them on and get them into our process and our playbook. So there's more out there. I think we're having a lot of conversations. Obviously, galvanizing market is fairly hot right now. So some of these owners, I think they're kind of sitting on what they view as good demand at the moment and just not at that peak point where they're ready to to transact something. But yes, I'd say our guys are having conversations every week, every month with a pretty good number of these independent owners.

And I'd like to see more of them break loose. We're paying better multiples than probably we have historically, but it's -- part of that is just our ability and our confidence in our ability to drive the synergies and grow those businesses. So I'm hoping some more break loose, but it will be good to get this next flag on the map for us. And then on the Precoat side, we're also working some things. Obviously, those are typically bigger. But just -- they would still be a bolt-on because we want to be able to bolt in on drive the synergies, run the playbook and not disrupt anything. So we're not looking for anything like a third leg.

Got you. That's very helpful color. And then just to confirm, with the one that might close at the end of this month, would that be the same one you mentioned on your last call that was in due diligence?

That's correct.

Okay. And then for my second question, 1Q came in really strong here and your EBITDA run rate is now at the higher end of your updated guide. As we try to model 2Q and 3Q knowing 4Q tends to be softer. Are there any seasonality or other factors we should be keeping in mind?

No, we're feeling pretty good. I mean the things that affect us, fourth quarter is usually tell us what the severity of the winter is going to be and we'll tell you what our forecast is going to be for that quarter. But I think -- which is why we'll reforecast that as we get towards the -- as we can see what winter stacking up to be. But in terms of -- unless it hits our sights directly, it's usually more positive than negative for us. So not that we're projecting any.

But yes, there's nothing within our control or that we're hearing from our customers that would indicate we're going to see anything unusual. So we would anticipate second and third quarters tracking. And I will say we're almost halfway through the second quarter. And we got off to a really good start. So we're feeling good.

Next question comes from Daniel Rizzo with Jefferies.

Would there be like the customer has to be responsible for agreed to taking on 75% of EBITDA. How would it be structured -- is it like a take-or-pay component. I mean any color on, I guess, what would be the cost to you guys in terms of CapEx?

Yes. On the Galvanizing side, we typically on Precoat, we went with the take-or-pay because it was a huge investment. And particularly, for AZZ we are new into Precoat, so we wanted to make sure that we had the demand there and that we had a great partner customer committed. For galvanizing, we're just usually looking for anchor customers. So usually existing customers that we do a lot of business with, but maybe they've expanded the site. They've been investing in a new -- some new production capacity. And we want to be partnered with them. So we're not looking for a contractual arrangement. I would just say that we've probably got about a dozen of our sites that have that anchor customer that makes up anywhere from 10% to 25% of potential -- of volume. And as long as we've got that kind of knowledge and clearly, the relationship, yes, we don't require a contract. We're typically probably with inflation the way it's been on materials kettles, furnaces, everything else, what you've seen in our run rate CapEx, we're looking at $35 million, $40 million to -- including real estate or even, I would say, somewhat dependent on the cost of the real estate in some cases, 18 months build-out and then ramp up. And because they're -- we're talking to what we would consider anchor customers, the ramp-up should be much quicker than than we did in Reno, which was our last greenfield plant. And the ramp-up took longer, if we didn't have an anchor customer in the area. We did it just because it was a high-growth region that had a lot of potential for the future, which we're very pleased with at this time.

Are there other high-growth regions you could point to? I don't know if you can do that on a public call or anything like that or places you're looking within the U.S. or whatever?

Yes. I think -- yes, I'm not going to point to anything specifically. Once we commit to some real estate, we'll get an announcement out and let folks know where we're at and what we've committed to. There's quite a few. When we look at a map, even though we've got 42 high galvanizing plants. There's still quite a bit of open space out there with growth. We tend to be either in the high-growth states like Texas right now and some of the Southeast. And -- but yes, there's several places where we think we can provide a better solution than some of the competitors and provide it closer to some of the customer concentration.

So it -- and I'd say this is a balanced strategy. If we could buy decent competitor in the area. We'd love to do it. But these are areas where there is some competition, but they're not going to be willing to sell. So that brings forward the greenfield opportunity and particularly when we're talking to major customers who want to have that discussion.

The next question comes from Adam Dalheimer with Thompson Davis Co.

Congrats on the strong Q1. Tom, I wanted to ask and you've talked around this, but I still feel like it's worth asking. You guys beat the first quarter by -- on the EBITDA line, $2 million but you raised the full year guide by at the midpoint by $15 million, which is a pretty -- it's a strong move, but I'm just curious what gave you the underlying confidence to do that?

Yes. Part of it is that the new Washington site, hit its dates and commitments, and so we're feeling bullish about that new site and working with our partner and what they're telling us. So a chunk of it is just tied to the new site getting to its run rate targets and we believe being sustainable at those run rates sooner than we had budgeted for, if you want to call it that. So that's 1 piece of it. As I mentioned, on the Precoat side, there's a couple of things going on. We're seeing even though the markets in some areas are still soft because of the lack of substrate. Still, you've got pain price increases that have gone through. You've got and we've got our usual material burden and stuff we put on top of that. And then we have -- we're now pushing price to either keep up with material inflation. And in some cases, we've added -- well, we are adding surcharges on the zinc because zinc stayed high. So you factor all those things in, and we felt good about taking the EBITDA up significantly more than what we had generated in the first quarter.

Awesome. Yes, it's great to see. And then on on the expansion at Crawley, is that fully ramped yet? And I'm curious if there are other facilities where you could do the same thing, adding a kettle.

Yes. So it's always nice when we can do that. It's not even really a brownfield. We're basically -- we were structured to be able to tuck in that second kettle and ramp it up. We had the demand for it. So we feel good about that. That's another piece as we look at the outlook for the second half of the year that will be at full run rates. It's -- we've got others, we look at this Texas just -- it's a hot market. I'd say there's probably a couple of others.

The other thing we're doing is we talk about secondary services as we put in ground line coating and things like that. So we've done that in a couple of sites. We put in a spin kettle not that long ago. So these are things we're continuing to look at. And I don't think we have another kettle ready to go the balance of this year. But as we get to the planning process, we'll start looking at that. This was one that we pulled forward late last year, which is why we were able to get it ramped up this early in the year instead of waiting.

So we'll continue to look at that. I think we're feeling good. We -- I think we talked about this. We put a team in place, call it, operational excellence and support which allows us to probably be more aggressive on some of these investments and get them in the ground faster and get the production from them. So we're feeling real good about what the team is doing in that regard.

The next question comes from Timna Tanners with Wells Fargo.

I wanted to ask about the Metal Coatings sales progress, so double digits for the last 4 quarters. And that's coincided with really strong move, of course, upward in zinc at the same time. Can you just remind us how to think about what a flatter zinc outlook could mean for the sales growth in that segment?

Well, a couple of things. One, we don't -- unlike with pain on the Precoat side, we don't tie the pricing directly to -- generally, we don't tie the pricing directly to zinc. But with zinc where it's at now and whereas -- even if it doesn't continue to trend up, we would still move forward with the surcharges because of the level it's at.

So unless it took a significant dip down you're going to see the surcharge impact flowing through in sales. So I think that's one piece. In terms of the other, typically, the zinc we're buying today is going to flow through our kettles in 6 to 8 months out. So we're very confident that we understand what the cost is going to be going through those kettles which also makes us confident in what we're going to be doing with the surcharges.

We did do some general pricing, but Tim, as you probably remember, we price individually at all 42 sites pretty much every day. So they're reacting to the market. Obviously, we have some margin targets and pricing guidelines in place. And then when we put through a blanket or when we put through surcharges, those are mandated from the top, but in reaction to what's going on in the local market.

So we feel really good about the sustainability of of the actions we've taken and how that's going to flow through into continued sales and revenue.

Okay. That's helpful. Can you elaborate on the comments you were making about some of the struggles to obtain substrate? What do you mean by that? I mean I know there's higher tariffs on imported material, but -- and then you mentioned that there may be more coming in going forward. I think that's a function of the higher prices maybe starting to attract supply. But can you elaborate on what that means for your business to understand that dynamic better please?

Yes. For our -- because most of our customers are -- their choices either buy from a mill or in a mill who paints or by their substrate from a mill or a distributor and then have us paint it. So the imports used to be heavily when our customers were buying imports -- imported substrate. That was a high percentage chance that we're obviously going to be one of the ones that paints it versus domestic, it's a little less.

So the availability for our customers it's costed us more for the substrate as they provide us today, either because of the tariffs and what domestic mills are pricing than that, which to your last point is now making some of the imports potentially more attractive because it's at a price point that makes sense even including the tariffs. So that's just been thing that we've run into where our customers are managing their inventories a little tighter. They're -- their ability -- and Jason can probably add something to this since he's close to it.

So it just created some disruptions in ability to plan, ability to know for sure that you've got the substrate available for your demand and how you're making those decisions.

I mean, to be fair, Tom, I wouldn't add much more on top of that. Just the supply constraints that our customers are seeing is on an impact on the decisions that we're working very closely with them to get through those disruptions as the supply starts to ease itself up a little bit and hopefully, some imports come into that equation, and it gives our customers more options that a lot more of that business starts to flow through Precoat versus other alternatives. So it's been a challenging environment over the last 18 to 24 months, and we see the horizon that's starting to ease itself up a little bit.

The next question comes from Mark Reichman with NOBLE Capital Markets.

With respect to the Washington, Missouri facility, you mentioned that it's approaching its target run rate. So if we could just step back a minute, could you just remind us the full capacity, you've got roughly, I think, 75% of the capacity that's under contract. So what are your production targets and where is the facility operating now? And how long will it take to get to your production target?

Yes. Good question, Mark. We spoke about the facility in the $50 million to $60 million sales range for about 75% capacity. As you look at our Q1 performance, then we are starting to approach that on a run rate basis, so plus or minus $15 million. Certainly, we're not at $15 million, but we're starting to approach that as you look at our progress through the quarter, as we start into the second half of the year, then we should be starting to hit those targets from aligning with our contracted customer.

And then equally, as we come through the quarters, we come through the year, our margin profile or operating performance starts to get up to kind of full run rate to the point that once we get to the end of the year, via our contracted customer, we should be at those full run rate metrics and performance. And then it really starts to provide a meaningful impact to our financial performance. On top of that, the other 25%, as we start to really get into the swing with our partner customer allows us the opportunity to start to think about that next 25%. So it's starting to become a part of our thought process and our discussions out there in the market, but that's still further out there into the second half of the year.

Is it more helpful to talk about it in terms of the revenue versus, say, like the tonnage or the output?

Yes. I mean the tonnage, we certainly convert tonnes, we've always spoke about revenue. We don't really speak a lot of tonnes. The challenge with this facility is it's 100% aluminum and you start to talk about tons and they really get -- add another layer of confusion in comparison to the vast majority of our world is steel.

Okay. Well, that was very helpful. Just a second question, and I did appreciate the disaggregated sales section in the 10-Q. And I was hoping that David, he provided a lot of color on this call, but if you could just maybe dive a little deeper in terms of the construction and industrial, what really kind of drove that growth? Was it data centers? And how durable do you see that -- and then are there any puts and takes for the remainder of the year in any of the other categories? I guess we would expect to see container continue to grow with Washington, Missouri, but what about some of the other categories?

Yes. Sure, Mark. I'll jump in on that one. A couple of things. Certainly, one of the -- and in fact, the highest growth area in our Construction segment was data center. So certainly outpaced the rest of the group. But double-digit growth there as well as in general construction as well. So I think we feel pretty good about what we're seeing overall, as Tom had mentioned, with the customers and the backlog for the back of the year. But certainly, data centers led that segment or that end market rather.

The next question comes from John Franzreb with Sidoti & Company.

Congratulations on another good quarter. I might have missed this, but when you raised your revenue guidance, it seems to me like it was entirely in Metal Coatings. I didn't hear any underlying meaningful improvements in Precoat. Am I reading this properly? And does that explain a lot of the EBITDA improvements. I'm just curious about how you deconstruct the revenue guidance by segment.

Yes. I mean I can certainly add to that. When you think about both segments and where we put our guidance out at the start of the year, coming out of the winter season coming into our construction season. And equally, as Thomas commented, so think about our Washington facility. All of those have contributed to us providing an update to our guidance and an improvement in our guidance. So I wouldn't necessarily say it is only centered in the Metal Coatings segment, especially when you bring the new Washington facility. And so it's more across the board as you look at it. And certainly, that's what we are seeing as we look at it more from a market point of view as opposed to the 2 businesses.

And I'm just curious, with the new facilities, the greenfield facilities, were they included in the revenue guidance, the original revenue guidance?

No.

The next question comes from Eric Boyes with Evercore.

765 kV higher-voltage transmission is kind of an interesting storyline in T&D. I'm just wondering with your kettle size and footprint, how do you see that flowing through to AZZ. Is that incrementally meaningful? And then do we maybe see that in calendar '27 or is that something that's further out?

Yes. We do think that that's going to be meaningful to us. As you know, AZZ operates the largest kettles in the nation. So certain locations, like we mentioned, Crowley, Texas, Arizona, areas where we've got some of the largest kettles in our fleet are ideally positioned for some of the larger KV projects. And most of those towers to are ones that have multiple sections to them.

So when you think about the way they are constructed and then galvanized, they fit pretty well into our kettles. So we do think that as that segment of the market continues to grow, we're going to be really positioned well to take advantage of it.

And for my second, can you just speak to how the large project mix in Metal Coatings and T&D, data center, solar, et cetera, may impact EBITDA margin structurally there?

I think the team has done a great job of, as I mentioned, some of the surcharges and things like that, that they're doing going forward. So to protect margins and offset the material inflation and things like that.

So even though large projects are more competitive, we still have a really good mix of business overall. And I don't know that the mix is -- well, I do know that the mix, as we look forward, we don't anticipate pay to being a whole lot different than what it's been in the last couple of quarters. So we feel good about that margin profile and the team being able to drive their scale and their leverage and do what they need to do on surcharges and things like that to offset the material inflation to be able to protect those margins in the 30% range.

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

Yes. Thank you for joining us today. And I don't think it came up on the call, but at least I don't recall any questions about it. But we -- obviously, Jason had mentioned, we do have an approved share buyback facility that if the stock continues to trade in the range it has for the last week or so, then we would anticipate being in the market to buy some shares back.

Good point in time for us. Other than that, I think we've pretty much answered what we hope I wanted to know. Look forward to finishing up a good Q2 and having another conversation here in a couple of months. So thank you very much.

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

Good day, and welcome to the AZZ Inc. Fourth Quarter Fiscal Year 2026 Earnings Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Phillip Kupper, Managing Director of 3 Part Advisors. Please go ahead.

Good morning. Thank you for joining us today to review AZZ's fiscal 2026 Fourth Quarter and Full Year Results for the period ended February 28, 2026 joining the call today are Tom Ferguson, President and Chief Executive Officer; Jason Crawford, Chief Financial Officer; and David Nark, Chief Marketing Communications and Investor Relations Officer. After today's prepared remarks, we will open the call for questions.

Please note that the live webcast of today's call is available at www.azz.com/investor-events. Before we begin, I would like to remind everyone that our discussion today will include forward-looking statements made in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. By their nature, forward-looking statements are uncertain and outside the company's control. Except for actual results, AZZ's 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 delays in the annual report on Form 10-K.

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, which should be considered supplemental and not as a substitute for GAAP financial measures. We refer shareholders to our reconciliations from GAAP to non-GAAP measures contained in today's earnings press release.

I would now like to turn the call over to Tom Ferguson.

Thanks, Philip. Good morning, everyone, and thank you for joining us today. We delivered a strong close to the year and achieved record sales and profitability for the third consecutive year. I'm especially proud of how our teams recovered from the major winter storm in late January to finish a strong fourth quarter. Full year sales totaled $1.65 billion adjusted EBITDA surpassed $367 million and adjusted earnings per share grew 19% year-over-year to $6.19. Our performance reflects the strength of our strategy disciplined execution, operational excellence and commitment of teamwork and values-based culture across the organization. During fiscal 2026 we further fortified our competitive position by driving market share gains across our segments.

AZZ continue to win by delivering superior customer service and operating with discipline and consistency while leveraging our proprietary technologies and galvanizing research capabilities to create differentiated value. Throughout the year, we made organic investments across both of our segments to enhance operating efficiencies and support our long-term growth. A key milestone was the completion of our greenfield precoat metals facility in Washington, Missouri, this investment advances our organic growth strategy and strengthens our free code Metals segment, expanding AZZ's participation in the growing alminum coatings and beverage-related end markets.

We further expanded our Metal Coatings platform last year through the acquisition of a galvanizing facility in Canton, Ohio, which extended our footprint and broadened our service offering for new and existing customers. At the same time, we continue to evaluate acquisition opportunities through a disciplined capital allocation framework while growing an active strategic pipeline of deals. Jason will cover our fourth quarter results in detail.

So I'll focus my remaining comments on the significant secular tailwinds that continue to propel our long-term growth. We are seeing momentum across our end markets driven by infrastructure-related investment themes that are reshaping the industrial landscape. These include industrial reshoring, bridge and highway investments, hyperscale data center expansion, investments in power generation, transmission and distribution and continued growth in renewable energy. Each of these trends are structural multiyear and increasingly central to our customers' capital spending priorities.

As we've seen throughout the year, these markets rely heavily on galvanized steel and coated metal solutions areas where AZZ brings meaningful scale, deep coding experience, operational reliability and exceptional value. Our diversified portfolio positions us uniquely to be able to support large-scale complex projects across multiple end markets and states often simultaneously, and to do so with consistency and speed. Together, these demand drivers and our differentiated operating model allows AZZ to capture market share and deepen existing customer relationships. Dave will share additional details on how industry dynamics translate into project activity in just a moment. We continue to drive incremental improvements across our network using our digital galvanizing system in metal coating plants and coal in precoat metals these systems [indiscernible] customer engagement, while driving productivity and margin improvement across our operations. together, these custom digital capabilities reinforce our competitive advantages and support consistent profitable growth.

With that, I'll turn it over to Jason.

Thank you, Tom, and good morning. Starting with a summary of results for the year. In fiscal 2026, which ended February 28, 2026, we reported record sales of $1.65 billion up 4.6% from the prior year. For our core segments, we increased metal coating sales 14.1% and generated strong EBITDA of over $235 million or 31% of sales. For pre-court metals, despite a modest 2.3% sales decline driven by industry-wide softness in residential and other key markets we generated solid EBITDA of $176 million or 19.8% of sales. Consolidated gross margins remained robust at 23.9% and operating income from the year rose by 12% to $165 million. Also, for the full year, GAAP net income comparisons included 2 noteworthy matters.

First, in 2026, our Vail joint venture generated equity and earnings from unconsolidated subsidiaries totaled $210 million, primarily driven by successfully divesting businesses within the joint venture which I will discuss in more detail in a moment. Second, for the fiscal year 2025, GAAP net income available to common shareholders included our preferred stock redemption premium expense totaling $75 million. Adjusted net income, excluding these items, plus intangible asset amortization and restructuring charges resulted in adjusted EPS of $6.19, an increase of 19% on the prior year. In addition, consolidated adjusted EBITDA increased year-over-year to $367.6 million or 22.3% of sales, up from 22% of sales a year ago.

Shifting to our quarterly results. We reported record fourth quarter sales of $385.1 million represent a 9.4% increase from $351.3 million in the prior year period. This was supported by strong double-digit sales growth from our Metal Coatings segment, up 25.7% year-over-year. Compared to the prior year, Q4 results benefited from continued momentum from higher infrastructure-related demand and less impact from inclement weather. Precourt metal sales were down 2.4% for the same quarter of the prior year, primarily due to continued lower end market demand and pockets of construction, transportation and HVAC.

The company's fourth quarter gross profit was $87.6 million or 22.7% of sales, up 30 basis points from 22.4% of sales in the same quarter of the prior year. Selling, general and administrative expenses totaled $30.5 million in the fourth quarter or 7.9% of sales. This compares favorably with last year's fourth quarter which reported $38.2 million or 10.9% of sales, inclusive of $6.7 million in accrued costs related to legal, retirement and severance expenses. Operating income for the quarter was $57.1 million or 14.8% of sales and exception 330 basis point improvement compared with $40.4 million or 11% of sales in the fourth quarter of the prior year.

Also in the fourth quarter, we reported a net loss from the AVAIL joint venture equity and earnings of $21.7 million primarily reflecting a loss in the sale of the welding services buses and an unfavorable prior period adjustment from AVAIL. Excluding the loss on sale and prior period adjustment transactions, the Val joint ventures, equity and earnings for the quarter was approximately $700,000 compared with $3.7 million for the fourth quarter of the prior year. Interest expense for the fourth quarter was $11.2 million, an improvement of $6.2 million from the prior year, driven by debt paydown from continuing operations debt paydown from the Vale joint venture distribution, the issuance of an AR securitization loan with favorable pricing and a favorable repricing of the term loan.

The fourth quarter's income tax expense was $8.7 million and GAAP net income was $5.9 million compared to GAAP net income of $20.2 million for the fourth quarter of the prior year. We reported adjusted net income of $40.4 million, excluding intangible asset amortization and valet loss discussed earlier resulting in adjusted diluted EPS of $1.34, up 36.7% versus a year ago. Fourth quarter adjusted EBITDA was $81.3 million or 21.1% of sales compared to $71.2 million or 20.2% of sales for the same period last year.

Turning to our financial position and balance sheet. Consistent with our capital allocation priorities for the year, we executed with discipline across our balance sheet, growth investments and shareholder returns. We reduced debt by $385 million and ended the year with a net debt-to-EBITDA ratio of 1.4x providing significant financial flexibility moving forward. We continue to invest in the efficiency of the core buses. During the year, we invested $80.8 million in capital expenditures, a growing portion of which was dedicated to internal growth initiatives. Also included in the year within our capital expenditures was approximately $7.9 million on our new Washington, Missouri facility over the past 3 years, we've invested approximately $125 million in this aluminum coil coating facility with the team delivering the project on time and on budget.

With the facility now fully operational, volume continues to ramp in alignment with our partner customer and was profitable at the contribution margin level in Q4. Finally, winning offer investments for the year. We further strengthened our Metal Coatings segment by acquiring a galvanizing facility in Canton, Ohio for approximately $30 million, demonstrating our commitment to grow the core businesses organically and inorganically. At the same time, we remain committed to returning capital to our shareholders.

During the year, we paid $23 million in cash dividends and repurchased $20 million and shares at an average price of $98.28 per share. Together, these actions reflect a disciplined approach to capital deployment and our focus on creating long-term shareholder value. For the remaining AVAIL joint venture invent, we account for our 40% interest as equity and earnings on unconsolidated subsidiaries, which also constitutes a separate operating segment. In 2026, Arval generated equity and earnings of $210 million, which includes the sale of its electrical and welding businesses and provided cash distributions of $287 million during the year. ESG's cash flows from operations of $525 million includes $273 million of cash distributions from Aval net of the associated taxes paid.

The remaining $14 million of cash distributions from AVAIL were classified as cash flows from investing activities. Finally, as expected, 2026 cash taxes were higher in the year associated with higher equity and earnings from Avail offset somewhat by positive effects from the 1 big beautiful Bill Act on depreciation, R&D expenses and interest expense.

With that, I'll turn the call over to David.

Thank you, Jason. Good morning, everyone. Consistent with our disclosures found in the company's 10-K, Total sales for the full year grew at 5% as compared to the prior fiscal year. Construction, our largest end market, grew at 3%, while Electrical & Industrial delivered strong double-digit sales growth, resulting in 17% and 15% growth rates, respectively. As Tom noted, AZZ continues to benefit from early stages of a longer investment cycle driven by sustained U.S. infrastructure-related spending and the continued expansion of large data centers.

These often pair with the construction of significant co-located power generation, driving our electrical, industrial and construction end market results. Our consumer end market performed well, growing at 6% on higher volume of coated aluminum, driven by the shift from plastic to aluminum in the beverage market and the continued ramp of the new Washington, Missouri facility while our transportation category declined by 3% due to weaker overall on-demand for semitrailers. Looking forward, industry research characterizes the AI data center build-out as more structural rather than cyclical and the U.S. data center electricity demand is expected to roughly double by the end of the decade.

Despite ongoing geopolitical and interest rate uncertainties, we believe AZZ's demand is driven by fundamental shifts in the economy rather than traditional construction cycles. External forecasts indicate that the U.S. hyperscale data related spending will be approximately $700 billion in calendar year 2026, with AI investments accounting for the majority of that capital. This infrastructure heavy spending environment aligns well with our end markets. Modern data center construction requires advanced corrosion protection and usually drive significant investments in on-site power generation, grid reinforcement and transmission infrastructure.

These are complex multiyear projects that require substantial hot-dip galvanized content. As a result, our Metal Coatings segment is well positioned to support this expanding market. Excluding data centers, we anticipate nonresidential construction will continue to remain subdued in fiscal year 2027, primarily driven by interest rates, geopolitical and lingering tar-related uncertainties. Within the residential housing market, current industry research indicates that single-family housing starts are expected to be at to down low single digits as a large stock of homes already under construction dampens new starts. Additionally, Current estimates project 30-year fixed mortgage rates will remain above 6%, limiting affordability and slowing demand for new construction. As a result, builders are increasingly focused on finishing existing projects and offering incentives to reduce current inventory. We expect the softness in both residential construction may provide a headwind for our precoated Metals segment in the current fiscal year.

With that, I will now turn the call back over to Tom.

Thank you, Dave. We anticipate the number of data center projects entering the construction phase in 2026 will increase, which will drive further infrastructure build-out. Importantly, our customer demand is not isolated to data centers. We are seeing continued strength across key end markets, including bridge and highway construction, power generation and electrical transmission and distribution all of which are supported by long-term secular tailwinds. These projects drive sustained demand for hot dip galvanizing services and may create incremental opportunities for pre-coated metal solutions. .

We win in competitive markets because we provide delivery, reliability, high quality and speed of execution. While we are off to a good start in the first quarter, it is early in the year. So today, we are reiterating our fiscal 2027 guidance. Sales are expected to be in the range of $1.725 billion to $1.775 billion adjusted EBITDA in the range of $360 million to $400 million and adjusted diluted earnings per share in the range of $6.50 to $7. We estimate debt reduction in range from $130 million to $170 million in fiscal 2027. We are confident that our strong financial and market positions will enable us to capitalize on strategic growth opportunities, while executing on our broader capital allocation plans.

Due to our strong balance sheet and desire to provide above-market growth, we will remain selectively aggressive in our approach to M&A opportunities. We focus on investments to strengthen our metal cans and precoated metal segments, expand our geographic reach and deepen customer relationships. Using a proven disciplined playbook, we are pursuing opportunities that reinforce our competitive advantages and deliver sustainable returns for our shareholders. As we look ahead, we are confident in AZZ's ability to consistently improve performance and execute at a high level, while delivering profitable growth and long-term value for our shareholders.

Finally, I'm proud to recognize AZZ's 39th consecutive year of growth and profitability from continuing operations. This achievement is a direct result of the dedication, expertise and commitment of our employees across the organization. Our focus on safety, quality, customer service and execution continues to differentiate AZZ and I want to sincerely thank our teams for the outstanding work they do every single day.

Now operator, we would like to open the call for questions.

[Operator Instructions] The first question today comes from Ghansham Panjabi with Baird.

I guess, first off, on Metal Coatings, obviously, a very big year last year from a volume standpoint, including what you delivered in the fourth quarter. If you could just share with us, what are you embedding for growth specific to fiscal year '27 for the segment? And then for pre-code, if I understood you correctly, I know you called out some headwinds as it relates to residential construction. Are you expecting a worsening of the trend in terms of volumes or just headwinds that may be offset with other tailwinds, including your Washington a Missouri plant. .

Yes. I can pick that up. So from a metal coatings point of view, if you look at the projections for the next year, somewhere in the mid-single to upper single digits for that business. Obviously, ending the year very strongly, and that builds momentum coming into the year. As you look at the pre-cometals business, probably in and around where we've seen them. So relatively flat year-on-year as you look at the overall market, where the benefit is, obviously, they've got better comps year-on-year to compare against versus the pre sorry the Metal Coatings business, we've got a little bit more difficult comps. So on high mid- to high single digits, they are relatively flat.

Okay. And then for pre-code, just to clarify, what is your exposure towards residential construction for that segment?

Yes. I think if you look at overall, the market that they cover, so if you look around 75% of their end markets are driven by construction. And then around about 1/3 of that has that residential exposure.

Okay. And then just for my second question, as it relates to zinc prices and just maybe you can comment on your rumtrial basket trends in context of what's been happening with commodities more broadly, obviously, the events in the Middle East, et cetera. What are you seeing at this point? And how are you managing through that?

Yes. I think from a zinc perspective, there hasn't been much effect. Prices were trending up before all of the disruption. And as you know, that's about to months in our kettles and we were feeling that coming into the year anyway. So we've but there's general inflation going on within both segments, whether it's pay prices going up, which also which is more of a pass-through on the precise side, but on the albanizing side, it's acids, caustics, chemicals, as I like to call it, super open do all that stuff is inflating.

And we that's why we come value pricing. We try to keep up with pricing. The 1 thing we're doing from a surcharge perspective is in relation to transportation, fuel costs, things like that because we do have a large fleet of our own trucks and trailers. So there were using surcharges to offset that and make sure we protect our margins. We're not seeing that change. There's hardly a day goes by anymore that we don't get some price increase from suppliers. And so both segments are pushing price to offset that and maintain margin. And it seems to be expected in the marketplace now because everybody is facing the same issues.

The next question comes from Daniel Rizzo with Jefferies.

So just thinking about the preco market, obviously, higher interest rates are an issue, but are there other meaningful affordability issues that you can pinpoint for the commercial market. I mean, I think we all understand what happens with residential, but for nonres, I was wondering if there's other things that are kind of a factor that are hindrance besides, again, high interest rates.

Yes, Daniel, really pretty much everything we've described in the remarks. When you think about nonresidential, we've seen project costs overall from some of our end markets and customer go slightly up and get inflated due to some of the things that Tom mentioned. Obviously, when we put our budget together, the war in Iran had not started yet. But so we've seen some escalation there. And again, interest rate uncertainties, I think, are going to be the main thing on the residential side.

And I would add that 1 of the things we are facing is availability is sub-grade. It's with tariffs on imports, domestic supply ramping up there are some constraints in terms of available sub strength to be painted. So some of our customers are experiencing that. So which drives them to wait and probably to inventory less wait until it's closer to the demand for the season to go ahead and place orders to be able to best utilize the substrate that's available. So that's 1 of the things we're seeing, which tends to drive us to it fits our profile, quick turnarounds, small lots, lots of customization.

So it's that's a little bit of an underlying trend, which does increase cost on projects and also makes demand a little less harder to predict because they're not buying to normal inventory trends.

More so for metal coatings, are backlogs a thing, just given the size of your projects and what people are planning out, I assume years ahead. But I was wondering if you have a sizable backlog or that's not something that's not part of your business.

Yes, it's really not part of our business. We I say this jokingly. A lot of our sites, they look out on the yard and then that's their demand and backlog for the week. But and we're really good at turning stuff. And so our customers depend on the fact that we're very, very reliable. They get it to us on Monday. We're going to have it back to them on Friday. So we're aware of it because in our sales process, we're forecasting it. So as customers are communicating to us what their demand is going to be month in, month out. and even week out. So we feel really good on the metal side right now.

Most of our customers it's a broad-based growth profile in infrastructure. So it's not any 1 whether it's data centers, pull our substations and then all the stuff that has to go in, whether it's roads, lighting, electrical systems to support data centers in substations and things like that. So it's a really broad-based market and our network of facilities plays well to it. So we don't record backlog that way, but we can look forward and say, our customers are bullish on demand in the metal coatings space.

The next question comes from Adam Thalhimer with Thompson Davis.

Congrats on the strong quarter and the strong year. On the data center piece, how are you guys handling the demand? I mean, do you have certain facilities that seem to be dedicated towards those projects? And then from a disaggregated sales standpoint, do you put that revenue into construction or into industrial or some other bucket?

I'll let David answer the second part of it. On the first part, we just had our annual Metal Coatings, plant managers and sales managers meeting and so we've got 120 folks in there, and there was hardly a 1 single plant manager or sales manager, I talk to that isn't working on one, 2 or 3 data center projects at any given time right now. So very, very broad-based. It's what they like about us is we've got a network of facilities and so we can handle large projects across multiple facilities or in many cases, on facility can handle the entire project.

So gives them surety of delivery, reliability of execution, all those kind of things that just play well for pick and AZZ for your galvanizing. In terms of how we coat it. That gets a little dicier, so I'll turn that over to David.

Yes. Thanks, Tom. There's some variation in how it gets coated based upon how the order really comes to us, whether it's from a general fabricator or a dedicated project development team, et cetera. So sometimes you'll see that show up as you can see in our results by electrical and industrial because we know we can visually see it. And we know that, for instance, it's a monopole and that's obviously going to be in electrical whereas some of the structures, and you've been to some of our plants, Adam. So you've seen some of the things that we're working with.

It can be a little more unclear as to if it's going into a data center or if it's going into an LNG project, for instance. So that sometimes we'll get a little bit more clouded and will go into either construction or industrial as a result.

Okay. Good color on that. And then I wanted to ask about M&A potential M&A. You mentioned a pipeline of deals. Can you just update us on what the pipeline looks like and potential timing?

Yes, the pipeline is looking good, particularly on the Metal Coatings side. They're mostly what we're looking at, they're one-off sites. And so if you just kind of take our average fleet sales and EBITDA, call it $15 million in sales. $4 million to $6 million in EBITDA. That's kind of the size that we're looking at in terms of bolt-ons. .

We've got 3 or 4 in fairly active discussions. We've got 1 underway in due diligence. So love to get 1 closed in before we talk again and then see if David and his team can get a couple more close this year. On the precut side, we've got 1 that I'll call in active discussions. It's not a big one. So it's kind of a single line sort of thing. And that bot sums it up. There's obviously the bigger things that we're looking at, but they're going to be further out. I don't know that I project any of the larger ones for this year.

The next question comes from Nick Giles with B. Riley.

My first question was just CapEx is around $90 million at the midpoint. I saw in the assumptions that hot dip capacity expansions are part of that. Can you just speak to what the potential EBITDA impact could be? And how much of those expansions are embedded in this year's guide versus something that may be more visible next year?

Yes. I think as we're looking at adding kettles, we're adding 1 here in North Texas because of demand. It will be starting up here in the next month or so. So it's going to have some impact. I'm struggling to want to publicly say what a new cattle is worth in terms of EBITDA. But it is going to have an impact. It's at a large site. So it's going to give us incremental capacity. The other things we're doing, and we are looking at other locations to add kettles those are fairly quick. We could put them in, and we approved the 1 I talked about just a few months ago, and it will be up and running this quarter. or June 1.

So not long cycle times on these things. hopefully has a couple of million impact in EBITDA. If you ask the Metal Coatings team, they would say it's embedded in their forecast. If you ask me, I'd say maybe, maybe not other things we're doing in ground line coating that's common with poles and towers and things like that. So doing more of that just because transmission distribution continues to boom. So adding that capability. Once again, $2 million or $3 million investments for nice incremental sales and EBITDA. Jason, do you want to add any color to that?

I mean, I think it's if you look at the growth in that business continues to go in the right direction and some of these cats are getting ahead of the curve and making sure when the volume hits then we're in the right place to go deliver against that. I would say the forecast and guidance that we have at the moment, plus or minus includes it. Really, you look, it's more kind of long-term returns.

I mean the good news is they're really low-risk investments because the demand is already there. .

Understood. Appreciate that, guys. And you know the stock has obviously been on the nice run. So just was curious to ask about your appetite to do more buybacks here? Or would you prefer to keep more cash on the balance sheet just for some of those M&A opportunities that you mentioned?

Yes. I think given the activity we've got on the acquisition side, we're committed to minimizing the dilution with stock buybacks. And so we remain committed to that. so that remains in terms of capital allocation strategy. Given the list of possible or even becoming more probable deals that we can get done. I like using the cash for that because that's going to set us up. It brings immediate EBITDA uptick for us. And as you know, our guidance does not include the M&A incremental that we would pick up.

The next question comes from Gerry Sweeney with Roth Capital.

Tom, Jason and Dave, the we've hit upon Metal Coatings quite a bit. But just 1 follow-up question, especially on the transmission and distribution. It sounds like you talk a lot to some of the metal fabricators, et cetera. But I'm just curious as to do you ever talk to some of the end users or the end purchasers and how much visibility you have on that? Or how forward out do you can you see or at least some discussions in general terms?

Yes, I'd say we look at the general end user trends in terms of their spending and where they're going to be adding capacity and things like that. David can add more to it. But we attend a variety of conferences where we're in touch with that. And a lot of that is generally available capacity additions in terms of gigawatt additions so that kind of stuff. We're in contact with them. We compare that to what our customers are telling us and then we look at the general available market trending data. And David can put some color on it.

Yes. Thanks, Tom. Yes, Gerry, I would add to that. We've been more active than we have in the past and marketing directly to the industry and end users of it. Metal Coatings team, in particular, has put together a nice bit of marketing materials. And as Tom mentioned, has recently been to some industry conferences as well to showcase our capabilities for that market. So we're pretty pleased with what we're seeing there. And again, it shows up in the results and it also shows up in some of the backlog that those GCs and others that are calling on them share with us that give us a good forecast.

Got you. And then just 1 more quick question. Just on the Washington facility. I think you mentioned that it was profitable on a contribution basis. And in the fourth quarter. What utilization is that running at? And how should we think about that sort of ramping up through the rest of the year, if it's not already there?

I'd say it's at about 40% now. It's going to continue to ramp and we've got yes, it's got to produce around 45,000 to 50,000 tons this year and we're feeling pretty comfortable with the trends that it's going to get there. And so that's really going to ramp up as we get to second quarter, third quarter, fourth quarter. But we're watching that positive trend month in, month out, Jason, I don't know if you want to add something there.

Yes. No. I mean it's very much ramping up to our expectations, getting to that 40%, 50% here in the first quarter or sorry, getting beyond the 40% closer to the 50%, there's 3 different processes and the 3 processes are at slightly different stages. But all signs in terms of the plans for the year are very much in alignment with expectations.

Next question comes from John Franzreb with Sidoti & Company.

Congratulations on a great year, guys. Just want to stick with the Washington facility. What was the revenue contribution of that business in fiscal 2026?

I think it was about $11 million or so in revenue. .

For the full year?

Yes, for the full year. I believe that's...

All right. And I'm curious about filling the balance of the plant. I think you had about 75% of it allocated where do you stand on the remaining 25%?

We've got a lot of interest in it. We're trying to make sure we take care of our partner first. And so, so we're continuing to ramp their volume up. As you know, the aluminum business is booming. So but yes, we won't have any trouble filling that capacity once we've taken care of our partner first. And so we would hope to by, call it, by the end of the third quarter to be in a position to start filling the balance of that.

Got it. Got it. Understood. And I just got off a conference call where the company mentioned that there was a concern about municipality spending in the coming year. Is that something that you share? Any kind of commonality with? I'm just kind of curious about your thoughts there.

Yes, it's interesting because a lot of the communities we're in. We tend to be heavily concentrated in the Midwest, the South and the West, a little bit up in Canada. Most of the municipalities we're talking to are in good shape. They've still got like here in DFW, there's still a lot of growth in housing, multi-unit housing commercial construction. So we still got a lot of companies moving. And that's kind of the story throughout as, which is our biggest concentration of capacity for galvanizing.

So every 1 of those communities is struggling with their budgets, but every 1 of the communities has to make these investments. So it's yes, it just is what it is. As you move up further through the Midwest. Mostly, I'd say 2/3 are very comfortable. They're moving forward with these infrastructure projects because they have to and then even in the other areas, the difficulty, I think the difficulty here is if you've got a big data center moving in, and it's going to require you to expand roads, you're going to have different means on your electric utilities. I think those are still being sorted out.

So not that we're having direct conversations with those municipalities, but just kind of looking at the challenges that they're facing, how do they balance their budget when you've got this big facility coming in, which and it's going to require infrastructure. It's going to require water is going to require electricity some of the bigger data centers, they're building as David pointed out, they're now building the power generation concurrently with it. But you still got to give roads and other infrastructure, things to it. So I don't know. It's a challenge. I don't see it creating problems for us this year. But I think as you go out further, that's going to become a bigger question for a lot of these municipalities.

[Operator Instructions] The next question comes from Eric Boyes with Evercore. .

First, could you please remind how paint pass-through is typically incorporated in pre-code. Is it directly itemized for customers? And how many months of paid inventory does precoat generally carry?

Yes, Eric, I can pick that up. So generally, the paint is not itemized and obviously, the end customers have a very good understanding and typically have a relationship with the paint companies. So any paint pricing that comes from the paid companies has generally passed on for 1 through to the end customer. And that's something that's within the industry and not just within AZZ.

Great. I appreciate that, Jason.

And then sorry, you asked about inventory, sorry. We have very, very tight in inventory. All inventory is bought to customer order. So as you can appreciate there isn't any speculation in terms of the manufacturing within that business. given it's all custom colors, et cetera, et cetera. So generally, we have around about 3 or 4 weeks' worth of inventory on hand. We hold a little bit more of the common product in terms of primes and backers, but when you really get to the top coats and the customization, then it's pretty much coming in the door to align with the production schedules.

Got it. I appreciate that. And then second follow-up. I think you said earlier on the call that Precoat is expected to be roughly flat year-over-year. But on kind of a quarterly cadence, is that assuming some contraction in the first half? And then in the back half, we see some end market normalization? Or is that more kind of flattish across the year?

Yes. I mean I think we're looking at it more flat across the year. And I would say, from a conservative point of view, we keep getting signals, things are turning and not quite a transition into results, et cetera. The only thing I feel to mention in the first part of that question, that Girsham had provided is the addition and growth associated with the new Washington facility really. So when you start to add that into the equation, then Precoat should show growth quarter-on-quarter as we go through the year.

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

I just want to thank everybody for joining us today. Hopefully, what you're taking away is we feel like we're off to a good start this quarter, feel good about the year at this point, even with all the external things that may be going on out there, what's within our control, we feel very good about, and we feel that we've got great teams working real hard to do everything they can for our shareholders. So look forward to talking to you at the end of the first quarter. Thank you. Have a great day.

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

Good day, and welcome to the AZZ Inc. quarter 3 Full Year Earnings Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to [ Philip ] Cooper with Three Part Advisors. Please go ahead.

Good morning. Thank you for joining us today to review AZZ's third quarter fiscal 2026 results for the period ended November 30, 2025. Joining the call today are Tom Ferguson, President and Chief Executive Officer; Jason Crawford, Chief Financial Officer; and David Nark, Chief 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/investor-events.

Before we begin, I would like to remind everyone that our discussion today will include forward-looking statements made in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Either nature, forward-looking statements are uncertain and outside the company's control. Except for actual results, AZZ's 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 latest annual report on Form 10-K. 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 we'll discuss non-GAAP financial measures, which should be considered supplemental, not as a substitute for GAAP financial measures. We refer shareholders to our reconciliations from GAAP to non-GAAP measures contained in today's earnings press release.

I would now like to turn the call over to Tom Fergus.

Thank you, [ Philip ]. Thank you all for joining us today, and Happy New Year. After I provide a brief overview of our results and an update on what we are seeing across our segments, Jason will cover AZZ's detailed financial results, and Dave will discuss industry dynamics across our end markets.

First, let me share a couple of important milestones. We achieved record sales of $426 million in the third quarter, surpassing any quarter in our company's history. And we had a record high trailing 12-month adjusted EBITDA of $358 million. These financial results reflect our unwavering commitment to execute on our disciplined strategy that focuses on driving growth and creating shareholder value. This quarter, we maintained our cash dividend of $0.20 per share, marking 63 consecutive quarters of consistently returning capital to our shareholders through cash dividends.

Now turning to our third quarter results. We grew total sales by 5.5% and generated a robust adjusted EBITDA of more than $91 million. Metal Coatings delivered an exceptional quarter, with sales rising 15.7% year-over-year, fueled by higher volumes and strong demand from infrastructure projects. Segment EBITDA margins of 30.3% reflect an increased mix of larger projects in electrical, solar and transmission and distribution work, which tend to be more price competitive. Precoat Metals delivered sequential improvement over the prior quarter, though sales were down 1.8% year-over-year. This was primarily the result of continued softness in construction, HVAC and transportation markets.

Meanwhile, food and beverage container demand reached new record highs, driven by new customer acquisitions and market share gains. This trend further underscores the accelerated shift from plastics to aluminum, which aligns with the ongoing ramp-up at our new Washington, Missouri facility.

Overall, the increase in end market demand was driven by growth in infrastructure modernization, energy transition and industrial reshoring along with data center construction, integrated LNG power generation and renewable energy projects. These market sectors depend on galvanized steel and coated materials, areas where AZZ offers unmatched scale, coating solutions expertise, and exclusive technologies to deliver exceptional value to our customers. Our diversified portfolio positions us uniquely to seize project opportunities across multiple end markets. Dave will share more details on this in a moment.

We continue to emphasize AZZ's proprietary ERP platform as a core differentiator within our business model. Our Digital Galvanizing System and coil zone platforms deepen customer relationships and reinforce our competitive moat while providing durable returns on invested capital. Operationally, the systems are margin enhancing through higher throughput, improved yields, better zinc utilization, improved administrative and production efficiencies and increased customer connectivity. Importantly, these benefits are achieved with limited incremental capital, making our technology investments highly accretive to ROIC, while also reducing waste and supporting more sustainable operations.

Subsequent to quarter end, [ Avail ] completed the sale of a majority interest in its Welding Solutions business, which they refer to as [ WSI ]. The transaction creates value for shareholders and further simplifies [ Aval's ] portfolio. Our joint venture partner remains focused on completing additional divestitures with only the [indiscernible] and a small portion of international WSI business left.

With that, I will turn it over to Jason.

Thank you, Tom. For the third quarter, we reported record sales of $425.7 million, representing a 5.5% increase from $403.7 million in the prior year period. The growth was led by our Metal Coatings segment, where sales increased 15.7% year-over-year, driven by higher volumes and infrastructure-related spending across our largest verticals. Although Precoat Metals sales improved sequentially from last quarter, sales were down 1.8% from the same quarter of the prior year, due to an overall weaker end market environment. Driven by lower volumes in construction, HVAC and Transportation, partially offset by residential reroofing and stronger food and beverage container sales. Within Precoat Metals, excess imported [ prepainted ] metal has worked its way through the market. And with tariffs likely to remain in place, we anticipate Precoat Metals will start to benefit from the replacement of prepainting metal imports.

The company's third quarter gross profit was $101.9 million, or 23.9% of sales, compared to $97.8 million or 24.2% of sales in the same quarter of the prior year. Selling, General and Administrative expenses totaled $32.5 million in the third quarter, or 7.6% of sales. This compares favorably to last year's third quarter, which was $39.2 million, or 9.7% of sales, which included costs associated with severance and one-off employee retirement expenses.

Operating income for the quarter was $16.5 million, or 16.3% of sales, a 180 basis point improvement compared with $58.5 million, or 14.5% of sales, in the prior year third quarter, due to operational improvements this year and nonrecurring items included in last year's third quarter results. For the third quarter, we reported a net loss in equity and earnings of $1.4 million. This was after recording $0.6 million post-closing loss adjustment on the previously announced divestiture of the Electrical Products business.

Losses in the quarter from our [indiscernible] joint venture are primarily due to the excess overhead costs resulting from this divestiture. Compared to the third quarter of last year, [ equity in ] earnings were $8.6 million lower. With the sale of WSI in December 31, 2025, and progress in resizing [ Avail's ] overhead costs, we are forecasting equity and earnings from unconsolidated subsidiaries to be [ zero ] for the fourth quarter of this year.

Interest expense for the third quarter was $12.2 million, representing a $7 million improvement from the prior year. Driven by a combination of actions, including debt paydown, debt repricing and the introduction of the receivable securitization facility. The current quarter income tax expense was $14.5 million, reflecting an effective tax rate of 26.1%, compared to 26.5% tax rate in the prior year's third quarter.

We do not expect the One Big Beautiful Bill Act to have any material impact on our income tax expense or effective tax rate for the year. However, it will reduce our cash taxes paid in 2026. Reported net income for the third quarter was $41.1 million, compared to $33.6 million for the third quarter of the prior year. AZZ reported adjusted net income of $46 million, which excludes the amortization of intangible assets of $5.8 million and the [indiscernible] equity loss adjustment of $0.6 million, our adjusted diluted EPS of $1.52. This compares favorably to the prior year's adjusted net income of $41.9 million and adjusted diluted EPS of $1.39, an increase of 9.4% compared to the third quarter of the prior year. Third quarter adjusted EBITDA was $91.2 million, or 21.4% of sales, compared to $90.7 million, or 22.5% of sales, for the same period last year.

Turning to our financial position and balance sheet. Our strategy for deploying cash flow includes investing in high-return organic and inorganic initiatives, paying down debt, returning capital to our shareholders through our quarterly cash dividend and buying back our stock. During the third quarter, we generated cash flow from operations of $79.7 million. Capital expenditures for the quarter were $18.5 million, which included a combination of sustaining and growth capital. Stock repurchases for the third quarter were $20 million, at an average price of $99.28 per share, while cash taxes were higher in the quarter associated with the previously mentioned [ Avail ] joint venture gain offset somewhat by the impact of the One Big Beautiful Bill Act.

We ended the quarter with a net debt position of $534.7 million and $337.1 million in available borrowing capacity, consisting of $336.4 million in the company's revolving credit facility, and $0.6 million in cash and cash equivalents. After paying down $35 million of debt in the quarter, our credit agreement net leverage ratio was 1.6x, which is within our previously announced target range of 1.5 to 2.5x. And finally, as Tom mentioned, over the same period last year, we increased and paid our quarterly cash dividend of $0.20 per share, up from $0.17 per share.

With that, I'll turn the call over to David.

Thank you, Jason. Good morning, everyone. The U.S. infrastructure investment cycle, along with an intense wave of investments in generative AI and machine learning technologies, is in the early stages of driving demand for high-power density and advanced cooling systems. These hyperscale data centers require coatings that extend well beyond just structural steel and transmission poles. For example, these projects require specialized coatings for critical applications, including corrosion protection, aesthetics, functionality, fire safety and regulatory compliance.

Massive data center investments are typically paired by necessity with co-located power generation and grid upgrades, which are multiyear construction projects. We expect these private and public colocation investments will reinforce a positive long-term secular trend benefiting both AZZ Metal Coatings and AZZ Precoat Metals. We also expect solar projects to remain strong as many of our solar customers have backlogs that extend well past the expiration of the current tax credits. These projects are focused on large-scale sites, including data centers being developed commercially that provide power for continuous high load requirements. Excluding data centers, nonresidential construction remains subdued in the quarter primarily driven by interest rate and lingering tariff-related uncertainty while residential construction was also soft.

Despite this, we saw positive trends in the metal residential reroofing market as it continues to gradually take share from the [ asphalt ] roofing market. This helped offset a slower-than-normal storm season as no named hurricanes made landfall in the Continental United States in the current year.

Looking ahead, most forecasts point to flat to regionally selective modest growth in construction through calendar year 2026. Finally, as we progress through our fourth quarter, it's worth noting that last year's fourth quarter was impacted by unusually wet and cold weather. Prolonged temperatures below 40 degrees, and gas curtailment actions by utility providers, led to a record number of lost production days in the prior year quarter, particularly in Texas. Therefore, we anticipate our fourth quarter may present somewhat easier year-over-year comparisons to last year's December through February period.

With that, I will turn the call back over to Tom.

Thank you, Dave. Turning to our fiscal 2026 guidance update. We have narrowed the forecast ranges for total sales, EBITDA and adjusted EPS. We anticipate that our sales will be in the range of $1.625 billion to $1.7 billion. Adjusted EBITDA will be in the range of $360 million to $380 million. And adjusted diluted earnings per share will be in the range of $5.90 to $6.20. And as Dave mentioned, we believe that last year's fourth quarter weather-related impacts will be less severe. Our strong financial and market positions enable us to capitalize on strategic growth opportunities while executing on our broader capital allocation plans. We expect to release fiscal 2027 guidance in the next few weeks for our new year starting March 1.

Consolidation in the industry continues to present compelling opportunities, and we are currently evaluating several strategic tuck-in acquisitions that align with our playbook and expand our market reach in Metal Coatings and Precoat Metals. We continue to take a disciplined approach to M&A, targeting opportunities to drive sustainable growth and generate meaningful value for shareholders.

Finally, I want to sincerely thank our AZZ team for their unwavering dedication, disciplined focus and the pride and passion they bring every day to deliver exceptional quality, service and value creation to our customers and other stakeholders. Now operator, we would like to open the call for questions.

[Operator Instructions] The first question comes from Ghansham Panjabi with Baird.

I guess, first off, on the Metal Coatings segment and also Precoat. Can you just give us a sense as to how your order backlogs have shaped up in context of some of the complications of the operating backdrop with the government shutdown and so on and so forth?

And just specific to the government shutdown, did it have any material impact on you in either of the two segments?

I think as we've discussed typically on the Metal Coatings side, we really don't have much backlog. We've got -- but we do have a good forward look from our sales organization in terms of what our customers are -- what their outlooks are. So we feel really good at this point as we look at finishing the year. That's why unless weather gets really, really ugly as it did last year, we think Metal Coatings has the momentum and opportunities to have a really good finish to the year. So feeling really good about that, and it's both as we've mentioned, the big projects, lot of opportunities, whether it's data centers, whether it's solar plants, transmission distribution, a lot of the pulp business and towers. It's just all really active, particularly in a lot of the areas that we've got good capacity.

On the Precoat side, much more of a mixed bag. I think -- didn't feel anything from the government shutdown to speak of on either side just to get that out there. But on Precoat, yes, they're more challenged with residential, commercial construction. They are getting -- benefiting from some of the data centers, a lot of painted metals on those. But -- and then in terms of roofing, it's more of the conversions as houses are putting new roofs on. They're more and more of them are moved into metal, which is good for us, but it's not enough to offset the market -- call it the market headwinds. So -- and they don't really have backlog either, but they do have a lot of bare metal, and the bare metal is lower than at this time last year. So they're chasing stuff that's going to be quicker turn to maintain their sales levels.

Got it. And then specific to Precoat. I mean, obviously, a lot of distortions in order patterns last year with tariffs and the adjustments in imports and so on and so forth. Is the underlying operating environment worsening as we head into fiscal year into calendar year '26? Or is it just at a low point and there's no recovery on a consolidated basis given the ups and downs you -- across the business as you called out?

No. I think you got a couple of things going on, some of which is in our control, some of which isn't. But I think we believe the markets have pretty much bottomed and stabilizing. And so we're seeing opportunities. And of course, we're going after more. We're winning some market share that's out there to offset the market softness.

But -- and then we've got the Washington plant ramping up, and that is one of the areas where we are seeing opportunities in the container. And as we continue to talk about plastics converting to aluminum, that's just -- we probably couldn't have opened up new capacity for the container business at any better time.

So we get pretty excited looking at next year and having a full year of run rate production at the new Washington site. Not to mention we've made some investments and are going to continue making investments at the St. Louis container site. So that's where we are excited, and we're chasing all of that we can find and have a good partner on [ Washmo ] and then other opportunities with other customers there. So that's where our focus is and then doing everything we can to convince customers to go with us instead of the competition.

Okay. Just one final one on -- I know you'll give fiscal year '27 guidance formally in a few weeks. But any sneak preview you can share with us as it relates to the variances that we should keep in mind as we finalize our estimates for next year?

No, I think -- I think as I alluded to, Metal Coatings, we look at them finishing strong for the balance of this fiscal year. And even though they don't have backlog, they're stacking up some pretty good opportunities as we kick off going into next year. So we're feeling real good about that. Obviously, we've got a budget to get approved by our Board. So we'll do that in about 3 -- well, 2 weeks at this point, and then communicate as soon as we can put something together and get new guidance out.

But yes, feeling really good. I like where we're positioned. I like what our teams are doing. I like the leadership teams we've got in place. And I like what they're focusing on. So I'm pretty enthusiastic.

The next question comes from Nick Giles with B. Riley Securities.

Congrats on the strong results. It's especially nice to see both the buybacks and the debt reduction, but I wanted to go back to M&A. And I was just curious if you could give us some additional color around what kind of opportunities you're seeing out there today? Is it Metal Coatings versus Precoat? Single site or multisite?

Yes, that's a great question. I think the M&A pipeline is very active. It's predominantly bolt-ons onesie-twosies, which is kind of -- I'd like to say it's in our sweet spot. We acquired [ Canton ] and just ramped it right up. It's our typical integration playbook, and bring it right up to our fleet margin levels and go grow it. So those are the kind of things we've got in the pipeline.

I don't see us getting anything closed by the end of this fiscal year. It's just too many things going on and not that we're not focused on it and got some good -- the teams are active. But I'll be really shocked if I'm sitting here on this call at this time next year without a couple of wins on the board in talking about those onesie, twosie bolt-ons, which just -- we'd like to get a couple of them in the camp, or in the family so to speak.

Got it. Well, Tom, that's good to hear. Maybe switching gears. You talked about plastics to aluminum and Washington was extremely well-timed on that front. But aluminum prices have reached all-time highs in the U.S. And I know you don't directly feel the impact of that. You have the [indiscernible] model. But your customers might feel that impact. So I was curious if you've seen any changes in demand on that basis? Or if you feel the Precoat business has a sensitivity to aluminum prices?

Yes. Thanks, Nick. This is Dave. I'll take that one. We don't think that there's going to be much sensitivity to the aluminum just because when you look at the container market, in particular, there has been the secular shift to aluminum driven largely by people's more reluctance to drink things out of plastics, in particular, and the concern around microplastics.

When you look at in the quarter, in particular, I think it's underpinned by the results of the segment. Our Consumer segment in particular, was up 11%. And when you take a look at the disaggregated sales. So we feel really good about what we're seeing. [indiscernible] is ramping nicely, as Tom mentioned. We've got a great partner there and a lot of long-term prospects that continue to come our way.

The next question comes from Eric Boyes with Evercore.

Maybe first, how impactful to Precoat segment margins might the Washington, Missouri ramp, the 75% exit rate in fiscal 4Q B? And when might we hear about remaining capacity allocation there?

Yes. Eric, it's Jason here. I can take that one up. Certainly, as we've previously communicated the margins that we expect from the Washington facility just based on the math of the equation of that product that we're selling are going to be [ complementary ]. So it is going to add a lot but tailwind to the margins that we see at Precoat.

In terms of the additional capacity, we're solely focused on our partner at the moment, and ramping up capacity for that partner is coming through the cycle. And we're very pleased with where we're at, but we still got a lot of work to do and certainly a lot of work to achieve here in Q4. So it's really going to be into the early part to the mid part of next year before we really start to focus on bringing additional customers to that facility.

Okay. Appreciate that. And then maybe second, and Dave, I think you alluded to it in the prepared remarks, but can you help us with how we should think about kind of quantifying the benefit of the favorable weather comp in fiscal 4Q?

Yes. As we mentioned, on a high level, when you look at last year, it was unseasonably cold and wet. We had mentioned last year, I think that we lost around 200 days of production collectively in the quarter. So I don't have the specifics in front of me right now, but we do believe that we're seeing better weather so far in the fourth quarter. Today, in Texas, it's going to be 80 degrees. So a far cry better than it was last year at this time. But we can follow up maybe after the call, and I can see if I can get you more detail.

The next question comes from Adam Thalhimer with Thompson Davis.

Congrats on the record sales quarter. Can you update us on pricing in the Metal Coatings segment? I'm curious also how price might be impacting margins in that segment?

Yes. We talked a lot about -- we try not to talk directly about pricing, since we do have some competitors on these calls. But when we're chasing large projects and when we talk about transmission, distribution, and solar, and data centers, they tend to be bigger projects, and so it just attracts more competition. So it will -- that's when we're talking about the mix because you're going to have -- not significantly, but you're going to have marginally lower margins on those big projects. And so they formed a bigger piece of our business. And we had opened up to that because we had decided that we were pushing the top end of our margins. And so we've kind of opened up the opportunities.

Let's chase some [indiscernible] chasing the volume. But let's be more open to taking some of that -- those opportunities. And I think it's been good for us because we've got capacity. That's going to help us the balance of this quarter. It definitely helped us in the third quarter. But we're not getting out of control. It's -- we got a tightly controlled process on how we price projects.

A couple of things others that hasn't been talked about, but we do have zinc continuing to go up in our kettles. We tend to push price as those costs go up. And we price it 41 plants on every given day. So I think the teams have demonstrated great discipline and yet going after opportunities with customers to build sustainable momentum. And -- so we're pretty excited at this point about what that team is doing.

And -- either Tom or David could address this. But I am curious, you guys aren't the only ones talking about the data center is getting bigger in 2026 versus 2025. Just curious if you could flesh that out a little bit for us, and why you're focused more on it today?

Yes. I think as you look at the data centers and in my remarks, I was talking about, we're really excited about the number of opportunities within a data center that we touch. So it goes just beyond structural steel that's used for building foundations, and the structure or envelope of the building, and then the related power coming into it.

We do believe that Precoat will see some opportunities as those projects move further along. We've got customers on the Precoat side that make insulated wall panels for instance. And then there's a lot of coat specific work that's driving the need for increased metal and coated metal, whether it's galvanized or prepainted. So that's why we're bullish on the segment. It's a big segment. It's a growing segment and our share within it is expanding as well.

Good. And last one for me. David, you brought up the metal roofing opportunity. Do you have any idea today what the share of metal roofing is for new construction and repair and remodel versus [indiscernible]?

Yes, we do have some data on that. When you look at sort of the breakout in residential between new construction and replacement, it's just shy of 5% of the new construction market, is now embracing metal roofing. It's gone up about a point, a full point since 5 years ago. And so we think that trend is going to continue.

And then on the replacement side, it's a larger impact there. It's about 14% of the replacement market today. And growing at a faster rate, driven by a few things. One of them is building coats. It is more resistant to storm damage over time than [ asphalt shingle ] and also [ HOAs ], which have historically been a little reluctant to embrace different types of roofing material other than asphalt are now loosening up their standards and embracing that as well. So we're very excited about it.

The next question comes from Daniel Rizzo with Jefferies.

Just to follow up on that last comment. Is there a particular region in a country where metal reroofing is more prevalent? You mentioned HOAs, I don't know when I think HOAs, I think of where my parents live, which is a kind of retirement places in Florida and Arizona. Is there any regional mix that's relevant?

Absolutely, Daniel. Yes, we're seeing a stronger concentration of that through the south in the areas that you mentioned. So Florida, in particular, as well as here in Texas, and all the way over to Southern California and Arizona are all markets that generally have a higher concentration of metal roof than in the northern climates.

Okay. And I may have asked this before, but -- sorry, go ahead, I'm sorry, you said something?

No, I was just going to say yes, they do well where we got more of a corrosive environment, or you've got a lot of sun. So they tend to hold up better.

Okay. Okay. No, that makes sense. And then for the just kind of traditional nonresi construction, and maybe I've asked this before, but what's the lag between when you start to see some easing in credit towards a [indiscernible] resi starting to rebuild and it kind of translates to demand for you guys. Is it immediate? Or is it like a 6-month lag? Or how should we think about it?

Yes. When you look at it and again kind of taking a look at just some of our sales data, we have seen -- in my prepared remarks, I talked about subdued construction on the non-resi side, and then the residential being down a little more significantly. So I think that as you move forward through the end of this year and into next year, the fact that there's been some rate movement already should be a positive for the market, and we should start to see the benefit of that sometime here and as we enter into calendar 2026 and our FY 2027.

And I'd add on the residential side, it's more tracking to mortgage rates. But it's going to -- on a lot of these capital projects, it's a 6- to 9-month lag time in general. So -- and -- but it's looking at the forward curve. So we're hearing more optimism out there, I guess, I'd leave it at that.

The next question comes from Mark Reichman with NOBLE Capital Markets.

Just focusing on the Metal Coatings business for a minute. So the second quarter, the sales growth was 10.8% relative to the prior year quarter, and 15.7% third quarter year-over-year. And we did see the gross margin go down a little bit, 30% in the second quarter versus -- what was it, 30.9% and 29.8% versus 30.9%. You mentioned chasing these bigger projects, but could you maybe get a little more specific -- are there specific large contracts that kind of drove the big sales increase, and might you expect in 2027, maybe a little more moderation in the sales growth, but maybe a tick up in the margin? Or do you think these big projects are just going to continue?

No, I think there's a couple of things here. So if you take typical transmission distribution, big poles, towers, it's -- it depends on where it hits -- which plants the project activities act. Some of our plants are built for big poles when projects come in different sections of the -- so this is a very temporary kind of thing. And we've invested a lot in our capabilities and capacities. So yes, as we get into next year, I expect that you'll see those margins hopefully improve as we've got some operational improvement activities.

We've invested in [ cattle ] capacity. We've invested in specific things that will help us run some of these kinds of projects, or the bigger projects better. And then we've added more trucking so that we can move things in between our customers and our plants. And pivot things to the plants that are going to be more capable of running certain projects. So a lot of things that we've been doing this year to -- which is one of the reasons we did open it up, and we want to want to continue with that momentum going into next year.

So yes, I would not expect to see double-digit growth quarter-over-quarter going in as we get into next year. I expect growth, and also expect us to be able to handle it with the margin profile, that kind of where we're at plus.

Then -- so you've done a great job reducing debt and repurchasing shares. Just on the dividend policy, have you kind of announced at a precedent with the increase in the first quarter dividend? I mean, is that kind of what investors kind of expect is maybe one increase per year?

It's certainly, obviously, with the realignment of our debt in the [indiscernible] transaction in the summer. It gives us the luxury to readdress that and [ whether ] it be an annual basis or such like. It's certainly something that's on our radar. It's certainly something that we continue to consider and continue to take a look at. So given that profile, then it's certainly something that we will look at come up for this next cycle.

Yes. And we are committed to being more regimented about looking at it consistently each year and -- and as we -- this is the time where we are putting the budget together, the plans together and talking about these things with our Board. So the timing is good, as Jason said, but we're committed to evaluating this annually and not having to go several years like it did this last time before we have an increase.

The next question comes from Gerry Sweeney with ROTH Capital.

Most of my questions have been answered, but I just had one quick question on Precoat. You implied that you think the segment has bottomed, but we also talked about some prepayment imports that are being at surplus. Are you able to bracket out how much that surplus was a headwind for the segment, and what we should be thinking about that on a go-forward basis?

Yes, certainly. The thought process around about the prepainted metal imports is really correlating the data that we can see internally. So we can see internally the [indiscernible] imports coming in and get a feeling for that and then translate it back into what prepainted import material is out there in the pipeline. So we've seen that filter through our system and filter through our customer systems to the point where less prepainted metal imports historically, up to this point in time, have not necessarily had any impact on our business. And our anticipation going forward is we start to see some of that benefit filter through.

If you think about that prepainted metal import market, it's around about 10% of the U.S. market is fulfilled through that supply chain. It's down around about 35% this year, but it's gaining momentum in terms of how much it's down, obviously, it's down more as you get to the third quarter versus the first quarter. So it creates that market opportunity. And really, if you look at that prepainted metal import market, and who can serve that market, then there's only a couple of players that can really serve that market. And obviously, AZZ Precoat is one of the names [indiscernible]. So it creates a nice opportunity for us as we start to look at our opportunities for next year.

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

Thank you, operator. And thank you for joining us this morning. As you can tell, we're pleased with our results for the Q3. Feeling good about the full year. And then it's early, but getting excited about fiscal 2027, looking forward to announce some guidance for fiscal 2027, and then announcing our results in a few months. So happy new year. Thank you for joining us.

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

Good day, and welcome to AZZ's Second Quarter Fiscal 2026 Earnings Conference Call and Webcast. [Operator Instructions] 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.

Good morning. Thank you for joining us today to review AZZ's Second Quarter fiscal 2026 Results for the period ended August 31, 2025. Joining the call today are Tom Ferguson, President and Chief Executive Officer; Jason Crawford, Chief Financial Officer; and David Nark, Chief Marketing Communications and Investor Relations Officer. After today's prepared remarks, we will open the call for questions.

Please note that the live webcast for today's call can be found at www.azz.com/investor-events. Before we begin, I would like to remind everyone that our discussion today will include forward-looking statements made in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

By their nature, forward-looking statements are uncertain and outside the company's control. Except for actual results, AZZ's 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 latest annual report on Form 10-K. 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, which should be considered supplemental and not as a substitute for GAAP financial measures.

We refer our shareholders to our reconciliations from GAAP to non-GAAP measures contained in today's earnings press release. I would now like to turn the call over to Tom Ferguson.

Thank you, Sandy. Good morning, and thank you for joining us to review AZZ's financial results today. We delivered solid second quarter results. Total sales increased by 2%, adjusted earnings per share rose 13.1% and operating cash flow improved by 23%, underscoring our disciplined execution in a highly dynamic environment.

Metal Coatings achieved a strong double-digit sales growth, supported by higher volumes and sustained momentum related to robust infrastructure project activity. Metal Coating margins of 30.8% were down slightly as our mix of solar and transmission distribution increased, and these tend to be slightly lower margin markets. We remain confident in the strength of our core markets and the growth potential ahead for galvanized steel in construction, industrial and electrical utility projects this year.

Similar to others in the industry this quarter, Precoat Metals faced some mixed market conditions, particularly in relation to tariffs, but focused on protecting margins while pursuing market share opportunities. While Precoat benefited from the tariff impact on pre-painted imported metal they faced headwinds due to softer building construction that extended to HVAC and appliance end markets.

Looking ahead, we are encouraged by Precoat's new customer wins, which are generating market share gains. This is primarily due to a strong focus on key markets impacted by reduced access to imported pre-painted metal, including the aluminum container market. Our container and beverage results continue to reach new highs during the quarter, indicating that the shift from plastic to aluminum is gaining momentum as we ramp production at the new facility in Washington, Missouri.

However, the overall demand outlook remains mixed for Precoat's end markets So we are maintaining a cautious outlook as ongoing tariffs have contributed to customer hesitation on non infrastructure-related projects. Dave will provide more details on industry trends and AZZ's end markets shortly.

Consolidated adjusted EBITDA for the quarter was $88.7 million, reflecting a margin of 21.3%. The divestiture of the Electrical Products Group through the AVAIL joint venture created a modest EBITDA headwind in the quarter. which Jason will address shortly. At our new Washington, Missouri facility, sales continued to increase and operating leverage is improving as we ramp up production.

We remain confident in achieving gross margin improvements as volumes grow at the new site through the second half of the year. AZZ's proprietary technology continues to set us apart. We continue to pursue technology upgrades ranging from updating system applications, continuing to migrate data systems to Oracle, exploring AI opportunities, and developing new galvanizing and coding processes to drive operational efficiencies across our broad network of facilities.

As is normal for our Metal Coatings team, they quickly integrated the newly acquired Ohio facility onto Oracle and DGS which is our proprietary digital galvanizing system. With that, I will turn it over to Jason.

Thank you, Tom. For the second quarter, we reported sales of $417.3 million, representing a 2% increase from $409 million in the prior year period. Growth was led by our Metal Coatings segment, where sales increased 10.8% over the prior year's quarter driven by higher volumes and supported by infrastructure-related spending across our largest verticals.

In contrast, Precoat Metal sales declined 4.3% and due to a weaker market environment, reflecting lower volumes in building construction, HVAC and appliance end markets. As Tom mentioned, Precoat continues to win market share in a competitive and dynamic marketplace. The second quarter gross profit was $101.3 million or 24.3% of sales compared to $103.5 million or 25.3% of sales in the same quarter of the prior year.

The Precoat Metals segment margins were impacted by customer buying patterns and the introduction of our new aluminum [ colo ] coating facility, which when combined, contributed to a small drag on margins. Whereas in the Metal Coatings segment, product mix was slightly unfavorable in comparison to the prior year quarter. Selling, general and administrative expenses totaled $32.8 million in the second quarter or 7.9% of sales.

This compares favorably to last year's second quarter, which was $35.9 million or 8.8% of sales. Operating income for the quarter was $68.5 million or 16.4% of sales compared with $67.6 million or 16.5% of sales in the prior year second quarter, reflecting the strength in operational execution on lower volumes. As noted last quarter, Fernweh, our 60% joint venture partner on [indiscernible] divested the majority of its electrical products business in the quarter.

For the second quarter, this transaction resulted in accounting adjustments to record an additional gain on the sale. Combined with other adjustments and operating performance of the remaining businesses we reported equity in earnings of $59.3 million in the quarter. On an adjusted basis, our quarterly equity in earnings reflected a loss of $2.3 million from continuing operations.

The loss in the quarter is primarily due to the excess overhead costs resulting from the divestiture of the electrical products business and is a [indiscernible] weaker summer season from our build welding solutions business. Looking ahead, regarding our 40% ownership interest in the remaining avail business, which now consists of welding services, lighting and some international joint ventures we are forecasting extent earnings from unconsolidated subsidiaries to be 0 for the remainder of the year.

Interest expense for the second quarter was $13.7 million represent a significant improvement of $8.2 million from the prior year due to a combination of debt paydown, debt repricing and accounts receivable securitization facility introduced in the quarter. The accounts receivable facility has a borrowing limit of $150 million and is accounted for secured borrowings with an interest rate of 1 month so far plus 95 basis points.

Create an expected annual interest savings of $1.4 million versus current borrowings on the term loan. During the quarter, 100% of the proceeds received from this facility were used to pay down existing debt. The current quarter's income tax expense was $25 million, reflecting an effective tax rate of 21.9% compared to 25.6% tax rate in the prior year's quarter.

The tax rate reduction in the quarter is due to an increase in R&D tax credits attributable to technology spend on our new build Washington, Missouri facility. Reported net income for the second quarter was $89.3 million compared to $35.4 million for the prior year quarter. Since our non-GAAP measure for adjusted net income excludes amongst starter items, equity and earnings from the available divestiture are $61.6 million AZZ reported adjusted net income of $46.9 million or adjusted diluted EPS of $1.55.

This compares favorably to the prior year's adjusted net income of $41.3 million or adjusted diluted EPS of $1.37, an increase of 13.1% compared to the same period of the prior year. Second quarter adjusted EBITDA was $88.7 million or 41.2% of sales compared to $91.9 million or 22.5% of sales in the prior year.

Excluding the impact of equity and earnings, our adjusted EBITDA for the second quarter would have been $91 million or 21.8% compared to $90.4 million or 22.1% and in the same quarter last year. Turning to our financial position and balance sheet. For the second quarter, we generated cash flow from operations of $58.4 million.

Consistent with our capital allocation strategy, in the quarter, we invested $19.3 million in capital expenditures for the businesses, invested a further $30.1 million in the acquisition of our new galvanizing facility in Canton, Ohio and increased our dividend payments to shareholders over prior year.

With a slight pay down of debt in Q2, combined with our continued financial performance, our credit agreement net leverage ratio remained at 1.7x compared to 2.7x in Q2 of last year. As communicated, we continue to maintain a disciplined approach to our capital allocation strategy transition our focus to investments in organic growth and strategic M&A while returning value to our shareholders through cash dividends and share buybacks and maintaining our debt leverage in the target range of 1.5x to 2.5x.

With that, I'll turn the call over to David.

Thank you, Jason. Let me begin with an update on the Infrastructure Investment and Jobs Act. As of August of this year, the Department of Transportation reported that 73% of II JA program funds totaling $319 billion have been committed to specific projects.

With approximately $177 billion already outlaid. Similarly, according to the Department of Energy website, 77% or $74.9 billion had been obligated to certain projects. Both agencies are expected to continue to announce awards or initiatives throughout the balance of this year. We believe that because the current legislation is scheduled to expire in 2026 and requires projects such as utility-grade solar to be completed by the end of next year, IIJA-related spending is having a positive effect on demand for our Metal Coatings segment.

We expect multiyear tailwinds associated with IIJA spending, and we'll continue to monitor discussions regarding potential reauthorization beyond 2026 once the government reopens. During AZZ's second quarter, we continue to see infrastructure, nonbuilding and civil works projects as a bright spot, offset by softness in nonresidential and residential building construction.

Reported end market sales for AZZ were up, including utilities, up 19%, consumer up 7.6%, while construction sales were up by less than 1% as compared to the same quarter last year. As noted today and in prior quarters, end market growth in utilities is elevated due to IIJA-related project spending, particularly solar, transmission and distribution and data center projects. As Tom mentioned, the transition to aluminum packaging in both the food and beverage sectors remains a significant growth driver for AZZ.

Our container end market has sustained strong momentum this year supported by a continued ramp-up of the production at our new greenfield facility in Washington, Missouri, and recent share gain activity. While we have seen increased opportunities from tariffs associated with imported pre-painted aluminum steel.

Weakness in both nonresidential building, particularly commercial office and retail construction as well as residential building has created some divergence in our construction end market sales. However, our teams remain well positioned to execute through the balance of the fiscal year and we are approaching calendar year 2026 with measured optimism. With that, I will now turn the call back over to Tom.

Thanks, Dave. We continue to see a strong pipeline of project-related activity driven by megatrends such as energy transition and the growing demand for electricity generation to support the rapid growth of data centers. Grid modernization, transmission line expansion and the integration of multiple energy sources will fuel further demand at our plants.

As the country continues its journey to reindustrialize the AI boom and cloud expansion are driving massive data center projects and infrastructure development with higher interest rates lasting longer than anticipated, new housing development and related supporting projects remain muted. Public infrastructure spending tends to be less sensitive to interest rate fluctuations as it is often funded through grants bonds or supported by subsidies.

Overall, we anticipate and have planned for a multiyear tailwind and infrastructure spending particularly in energy and power generation capacity despite the potential for continued pressure on residential construction. For our 2026 fiscal year, we are reiterating guidance for total sales, EBITDA and adjusted EPS.

We anticipate that our sales will be in the range of $1.625 billion to $1.725 billion. Adjusted EBITDA will be within the lower half of the range of $360 million to $400 million due to the lack of available equity income as they continue to transition without the Electrical Products businesses.

Adjusted diluted earnings per share will be in a range of $5.75 to $6.25 which translates to an increase of between 10% to 20% over the fiscal 2025 adjusted earnings. Although markets may be choppy in the second half of our current fiscal year, which extends through February 2026 our numbers are supported by strengthening projects and structural steel demand forecasts.

We continue to strengthen our operational performance and maintain disciplined execution at each of our facilities. Our liquidity position and balance sheet are strong and flexible with a low debt-to-EBITDA ratio, especially given our cash generation capabilities. We remain well positioned to pursue strategic growth opportunities, including our other capital allocation strategies as we have already discussed.

Finally, industry consolidation presents ongoing opportunities for our company, and we are actively evaluating bolt-on acquisitions that are strategically aligned, fit our integration playbook and extend our market leadership in metal coatings. Our M&A pipeline is healthy, and we plan to remain disciplined in pursuing only high-quality opportunities that create long-term accretive value for our shareholders.

As always, I would like to express my gratitude to our hard-working and highly talented team for executing AZZ's shared vision of growth, profitability and operational excellence. Our mission is to create superior value within a culture where our people can grow and traits matter. Our culture is built on providing outstanding quality and services directed within our servant leader mindset.

These principles continue to shape our path forward and underpin our success. I am proud of our team's execution of the fiscal 2026 plan so far this year and remain confident we are positioned for continued growth and success. We are committed to driving top line growth, enhancing profitability and generating robust cash flow, all of which are supported by a disciplined capital allocation philosophy.

Through the successful execution of our strategic priorities, we believe we will continue to deliver sustainable value for all of our stakeholders. Now operator, we would like to open up the call for questions.

[Operator Instructions] Our first question comes from Ghansham Panjabi with Baird.

I guess first off, on the Precoat market share gains that you called out, Tom, can you just give us a bit more color on that dynamic and maybe dimensionalize the boost for AZZ. And I'm just asking because obviously, volumes were down in the quarter, you cited some of the obvious in terms of construction and so on and so forth. How should we think about the contribution from the share gain piece?

Yes. I think -- so a couple of things there. One, we picked up share gain because the -- and we referenced it. The pre-painted imports are because of the tariffs are down significantly. So that's been transitioning to domestic supply, and we're painting at least as much as our share. But if you take that, it's probably, David, what about 10% on imports.

So we've picking up our share of it. So we've picked up 3% or 4% to offset the roughly 9%, 10% market decline. So it's just offsetting. But it's also positioning us depending on what happens with tariffs. Hopefully, to sustain that market share and be able to take advantage of it as we go forward.

As we're picking up new customers, new applications, converting that. And that's pretty much at our normal margin profile. So it's not like we've had to go aggressively discount to take that share which is why I'm also confident that those margins will continue to flow through going forward post market softness, if you will.

Sure. And so sticking with Precoat, so some of the challenges that you called out, building construction, HVAC, appliances, they all seem sort of aligned towards the same theme. It doesn't seem like there's any short-term catalyst for those end markets in terms of reversing that weakness. Would it just be the share gains?

And then the Washington Missouri facility that are the positive offsets? And how do you think that nets out for segment volumes as we think about the back half of the year for Precoat.

Yes, I'll start and then Jason can probably add some additional color. Yes, I think you pretty much summed it up. So we're going to continue to -- assuming the tariffs stay in place, which looks like they will, then we should be able to sustain that market -- those market share gains from picking up the past imported pre-painted metal.

Two, we are -- do have the [indiscernible] site. It's still I think we're saying it's running about 20% of its capacity or some number thereabouts. So it's still got a ramp to it as the next 6 months go on and pretty significantly. So that's opportunity. And that is where there is strong demand in that aluminum container market that's our sister facility to [indiscernible] which is the St. Louis which has 2 lines is doing really well because of the high demand in that market.

So as I look at it, I think -- well, then the third piece is we're also aggressively going after other conversions and chasing things. So any kind of rebound in construction. And I think we're seeing some signs of that. We had a big customer -- well, we have a lot of customers at our annual golf tournament. And they generally feel like things have bottomed and starting to come back up in certain areas of the country, particularly.

So we feel good about what we're doing and also commend the Precoat team. they've adjusted their operating and shifts and times and capacity. We're retaining capacity for the upturn that we hope to have as the year goes on. But also, as we talk about our variable cost structure, they've been able to adjust that pretty quickly.

And I know this is about Precoat, but I'd say the Metal Coatings side has done that outstandingly well during that same time period. Jason, did you want to add anything?

No. I think the only other thing you could potentially add there is when you think about the construction, it certainly have an impact on the H5 appliance, but very minimally so if you look at those 2 businesses, they're actually doing reasonably well. And quarter-to-quarter, there's an impact in terms of inventory levels and model changes, et cetera. So I don't necessarily see them as being as much of a drag in comparison to the construction market.

I'll also add in. We had a good solid September. So we feel good as we've kicked off the third quarter. So kind of in line with the fact that a lot of the Precoat customers are feeling like things are starting -- the corner is starting to turn.

The next question comes from Nick Giles with B. Riley Securities.

It's still a very solid quarter here. And I wanted to just turn it on the guidance for a second. So you've reiterated your adjusted EBITDA guidance. And just curious really what would take you to the high or low end of the range at this point? I mean how much is end market-driven versus operational? And then how much EBITDA could Washington incrementally contribute as volumes continue to ramp?

I'll answer the first part of that, and then Jason can opine on Washington. I feel like when it comes to -- and I don't know if this has got missed or not, we've talked about it a few times. But you look at the $14 million, $15 million of avail EBITDA impact from last year versus we've signaled 0 for Q2, Q3 and Q4 for Aval. And so that's the biggest impact in terms of our EBITDA guidance.

And I'd say that was harder for us to predict until now you can -- we can see with primarily WSI as the main asset left in avail. And they had just gone through this summer is obvious weak because there's just not turnarounds and outages during the summer. So we felt that -- and going forward, they do come back into -- so in terms of the upside, hopefully, they do have a strong fall season, which is back to how turnarounds and outages run.

I think interest savings is going to continue. We've paid down the debt. We continue, even after acquiring Canton, we paid down some debt. So and interest rates have finally moved a little lower. And we've done that through our own actions in terms of repricing and the securitization. So we feel good about that. It's mostly embedded in our outlook, but there's upsize to that.

And then hopefully, we get a deal or 2 done on the -- particularly on the galvanizing side that before the end of the year and have some impact there because obviously, the assets we're buying are going to be good galvanizing assets that we hope to improve as well. I think those are all the kind of pieces. Precoat performing well. I think they're driving to sustain those margins over 20%. And given the volume fall off as volumes pick up at all, that could also be upside to us.

And then we do believe the metal coatings folks are driving hard to sustain that 30%, 31% margin profile while taking advantage of the higher-than-expected growth, driven partly by regulatory changes and the threat that solar is going to go away. So we're seeing lots of solar in pole transmission and distribution kind of activity, which is we signal maybe slightly lower margin than on balance, but it's really, really good volumes. So we like that stuff a lot.

And then Jason, on Washington.

Yes. Certainly, Washington, as we've previously communicated, would be a drag in margins in the first half of the year and then start to turn positive in the second half of the year. And we're very much in line with that. Around about $2 million of a hit to margins in the first -- in Q2 essentially. From a contribution margin point of view, the business is contributing to the volume that's flowing through there. We know that's ramp up volume.

But obviously, you've got the fixed costs associated with that facility and largely the effect costs are driven by depreciation of the $125 million. So it's very much in line with expectations as you start to look at the second year than Q3, Q4, it starts to ramp. And we're very much in line with the expectation of that ramp profile. We'll start to hit capacity towards the 50% arena through Q3 and then really see that start to pop in Q4. So very much aligned with expectations and very much built into original guidance and where we sit here today.

Jason, really appreciate all that detail. Maybe just back on the coating side. I mean, you've obviously deployed meaningful growth capital to expand capacity with Washington. But in the past, I think you have spoken about there could be some margin expansion opportunities in the coil coating side that could require some capital.

Can you just remind us how you're thinking about that opportunity today? What would be the timing around kind of a project like that? And how many quarters would something like that undertake

Yes. And to be fair, I don't think there's any one big silver bullet out there. I think there's multiple projects that we've started to kick off through the summer program. That we'll start to incrementally see some benefits, and we're seeing them start to kick in. And to be fair, that's applicable to both sides of the business.

There's -- as we've highlighted, our capital allocation is looking at outside and inside in some of the projects that [indiscernible] sidelines are now getting turned into execution. So again, I don't think there's going to be a big boost in terms of our stent function, but we're going to continue to drive the opportunities that we see in front of ourselves.

Yes. Keep up the good work.

The next question comes from Adam Faltenheimer with Thompson Davis.

Adam, we can't hear you. You might be on mute.

Pardon me, we have Timna Tanners with Wells Fargo.

Import opportunity. Is that fully played out? Or are we still in somewhat early innings? I know that imports only really started to drop off more recently. So I'm just wondering if we could see a bit more share gains still to come.

Yes, it's really early innings. I think probably a couple of months of that. So and that should have a good tail to it. It just -- it takes time to ramp up the domestic capacity change project sourcing and things like that. So we feel good about that, the balance of the year. I'm not sure it's fully embedded in our forecast.

Jason, would probably disagree with me, probably it is fully embedded. But I'm probably more of the optimist in so -- Yes. I look forward to that because it's -- we're engaging with some new customers and able to demonstrate our value-add capabilities in terms of quality service and particularly responsiveness and it does impact our -- I would say, it does have a slight negative impact on our margin profile because we -- a lot of these are smaller orders, and we're winning them because we can turn them quickly and give them whatever kind of color combination that they want.

So we really look forward to that continuing to grow and be able to sustain it regardless of whether the imports come back up or not

Got you. Okay. On the Washington ramp-up, are you seeing any impact of reduced substrate because of the Oswego fire?

No, no. I mean, certainly not from our point of view at this point. Obviously, there's one customer supports that facility. And quite frankly, our production ramp is ahead of plan and we're executing with the material were out at the facility a couple of weeks ago and it's really starting to look like a coil quota facility versus a short piece that the analysts that saw a couple of, I guess, 6 weeks ago or so.

So I think we're in very good shape from that executing through the end of the year.

Yes, there's a lot of aluminum sitting in that -- on that floor now. So.

Got you. Okay. All right. And then final one for me, if I could. I wanted to just probe a little bit more the M&A pipeline? Any updated thoughts on the economy having any impact on more or less appetite to sell to you at this juncture?

Yes. I think there's -- we're working on a couple of typical bolt-ons for galvanizing. And it's One of them was actually a process. So we know that when we go forward. We can never quite predict -- we tend to believe we're always going to be a strong contender for those.

And then we've got a good game plan once we do acquire them as we just did with Canton almost immediately ramping it up to our margin profile. So I look forward to that, and we're going to be as aggressive as we need to be. Not seeing a whole lot shake loose because of it, which is actually a little bit surprising. We were hoping to see maybe one of these multisite galvanizers decide to go on the market, but we haven't gotten any indication of that at this point.

And then on the precode side, there's a couple of things out there. I think it's probably as much in our control as they can be. But once again, the market hasn't seemed to cause them to want to move any faster than they were before. So it's a good pipeline. I think we've got 9 good opportunities that are in various stages, not to mention a long list of other ones that we remain in contact with.

So I'm hopeful we get something done before the end of the year and maybe more than one.

The next question comes from Adam Thalhimer with Thompson Davis.

Can you hear me now?

We can.

Great. First one, within pre-code, I think there's also a negative impact from tariffs that possibly offsets the positive impact I was just curious if you could walk through that, Tom.

I'll let David do it.

As you look at the overall market for imported steel, Adam. We know that the pre-painted imports are down 23% this year. That has been a bright spot or a tailwind for pre- because that means there's less competitive pre-painted steel coming in. But offsetting that, the bar [ Galvalume ] market has been down about 50% due to the tariff impacts.

So that's really the difference in the numbers and why Precoat was having some headwinds as this year because normally, that imported bear is volume that they would be the natural source to be selected to and coat that product. So -- but as Tom mentioned, we think that our customers are telling us things have bottomed out.

They did buy ahead and placed orders ahead of the tariffs and have been working through the inventory that they've had on the shelf. And we look forward to things turning around later on.

Yes. And I'd add that the tariff impact is really driven, as David mentioned, it's just the uncertainty. So you've got projects being deferred, delayed. And I'd say it's a combination of tariffs as well as the lower interest expectations as we had noted.

Interest rates have stayed higher from the Fed longer than I think a lot of people anticipated and now with the government shutdown, who knows what the next step is. So I think that's just created hesitancy on non-infrastructure projects versus what you see on the Metal Coatings side, where those infrastructure projects are going forward.

And if anything, on the solar stuff, it's accelerated. So on one segment, it's a positive on the other segment, it's mixed, as you said, and probably more negative than positive in the aggregate for Precoat.

Okay. That makes sense. And then second question for me. I was curious on your confidence in no further losses from the veil. I'm just curious if -- just to be conservative, if we should model a slight loss in Q3 and then where they are in the process of monetizing the remaining businesses?

Yes. And we are very much aligned that now you got a subscale piece of business, which is really 3 pieces. WSI forming by far, the largest in terms of sales, but not in terms of contribution margin. Then you got a lighting business, which is a nice little business that I think they'll get that transacted hopefully this year.

And then there's a Chinese joint venture, high-voltage bus business that once again, I'd hope that they could get that transacted this year. WSI is a tougher one because it's a little more impacted in -- from a market perspective in terms of refinery turnarounds and things like that. So that's probably -- we prefer not, but it's probably a longer-term piece.

In terms of the Q3, you could -- I'd say it's hard for us to predict because Q3 should be typically is the fall season and tends to be a stronger one for WSI. On the other hand, as Jason alluded to, they are carrying more overhead that they can't get at while the TSAs within Venor running. So on balance, I think we're pegging it at 0.

And I'd say it's more likely slightly negative in -- the risk is probably more negative in Q3 than the upside. And then Q4, they go into the winter, but hopefully, some of these other things transact.

And the other thing I would add on top of that, Adam, is they've started to digest the TSA and started to accommodate the infrastructure that they need to support that. So are starting to see some moves in terms of realigning their corporate overhead costs. So you should get that pickup into the second half. And then as Tom mentioned, the seasonality impact of the WSI business.

[Operator Instructions] Our next question comes from Mark La Reichman with Noble Capital Markets.

Just a couple of questions. On interest expense, when we published at the end of September, we took our interest expense numbers down. I think we were kind of landing around $49 million, $50 million for the year. And of course, the second quarter came in a little higher than our revised estimate.

So I was just kind of curious, your guidance hasn't changed. But in the past, your guidance had included $55 million to $65 million of interest expense what would your expectations be for interest expense for the full year of 2026 for the fiscal year 2026.

Yes. I mean I think the part in terms of the interest and just picking up some favorability given that we've reduced our total debt through the bail transaction. As you look at our interest expense in the quarter, then we certainly picked up some favorability, but it was more towards the back end of the year. Sorry, the back into the quarter given the repricing the term loan and the introduction of the securitization.

So obviously, if you look at our quarter -- that's what improved in Q3 and Q4, obviously, through the cost of debt. And then we will continue to pay down debt through the second half of the year, excluding any impact from M&A or any share repurchases.

And then the second question is SG&A in '25, ran about 9% of sales, that was 8.2%, I think, in the May quarter, but dipped down to 7.9% this quarter. What are kind of your expectations for the -- well, I guess is as a percentage of sales the right way to look at it? Or what would you kind of your expectations be for the remainder of the year and maybe kind of an ongoing percentage?

Yes. I mean I think that 8% number is fairly representative. Obviously, seasonality kicks in the back half of the year or certainly in Q4, we are -- obviously, SG&A is a little bit more of a fixed cost. So the number that you're seeing in Q2, there really isn't any great pluses or minus fees away from that through the end of the year. So it's got to be more of a fixed number versus a fixed percentage as you look at.

Okay. And just one follow-up to Adam's question on the equity and earnings of unconsolidated subsidiaries. So we originally had like $1.4 million in the third quarter and I think $774,000 in the February quarter.

So what I heard from you is basically 0 in the third quarter and kind of maybe modestly positive or close to neutral in the fourth quarter for that, and that would be a male obviously.

Yes, yes. I mean our guidance is 0 for both. And I think some of the discussions that we've been having is certainly a sensitivity around about that. We don't get it wrong. We've got to get it slightly wrong in the upside or the downside.

I would say in Q3, it's probably -- if anything, it's slightly wrong in the upside and then slightly wrong in the downside. The seasonality for the WSI business has got to kick in Q4. So the determining factor in Q4 is going to be how quickly they can ramp the overhead cost to realign to the current business.

But really, as you look at the numbers then in Q3 and Q4, it should be a very minimal plus or minus a.

Okay. That's very helpful.

The next question comes from John Franzreb with Sidoti & Company.

I actually want to go back to one of your responses to an earlier question about Precoat doing better in September. Do you have any idea or can you give us any color as to what's driving maybe the recovery in Precoat during that month?

The only thing I would add is there's certainly fluctuations month-to-month and inventory by buying partners plays a part into that. And we're still coming through our strong construction season. So shipments versus -- or sorry, building inventory versus depleting inventory year you ended that time period where you're starting to look at the end of the season and accommodate your inventory for that.

And again, quite frankly, in September, we've seen a lot of bot strength to our customers. If you take that one single data point, our customers are looking for a healthy end to the season. would be my takeaway.

Okay. Great. And it also sounds like that maybe demand in the Washington facilities is maybe a little bit better than you expected. Can you kind of remind us or update us as to what the revenue contribution is in Washington that's embedded in your full year revenue guidance?

Yes. To be fair, we've not went into that level of detail. And there's still a lot of variations to take place. And quite frankly, we've got a sister facility in the [indiscernible] area, and we'll use some of the volume from that to help ramp, et cetera.

So it's not a black and white just looking at that single facility and how it's going to play into the overall results. They start a lot to play out here. We are we started the production in April, and we're certainly progressing very, very well. But equally, we're cautious just in terms of what could be around the corner.

So really not a specific numbers around about it, but what we have built into the guidance, we're certainly very comfortable with those numbers.

Okay. Fair enough. And one last question, if I may. The zinc prices have rebounded sharply from their bottoms early in the spring. Just maybe some thoughts or commentary on what you're seeing in the zinc market that might be helpful for us?

Sure. Yes. First thing is -- yes, we have seen that, which usually makes opportunities for not that we based our price off of cost. We were very value pricing oriented. But usually, when zinc's going up on the LME customers understand that's going to start to affect prices.

So that create some opportunities. Two, we've got 6 to 8 months of inventory in our kettles. So it doesn't have much impact on our margin profile, the balance of the year, our cost of zinc, the balance of the year. But clearly, that will start to color how we look at next year and as we're entering the process to put our plans and budgets together for the next fiscal year.

But generally, I think it's going to continue up but I'm not sure -- I'm not sure we're going to -- usually when things start to change when you see some spikes, and this has been more of a gradual increase. And generally, that's very manageable for us.

So yes, minor impact on our outlook in metal coatings for this year, clearly, as we start to put our plans together, it will be a talking point as we talk about however, we end up guiding for the next fiscal year.

Great. Makes sense.

The next question comes from Jon Braatz with Kansas City Capital.

Tom, a couple of questions. On the Metal Coatings business, you completed the Canton acquisition, I think, July 1. How much of a contribution did Canton have in terms of revenues in the quarter?

It's -- revenues in the quarter. $2 million. Yes, and a few hundred thousand of contribution margin.

Okay. Okay. Good.

It was 2 months in the quarter. So we'll see a full quarter here going forward.

That's right.

Okay. And secondly, on the margin profile for the metal coating business, it's been very, very good over the last couple of years. And absent any significant change in zinc prices or the economy and so on. Is that range that you provided in terms of adjusted EBITDA margin for that segment.

Is that -- that low -- at lower end of the range, is that still relevant? Is there a point where maybe you feel comfortable raising that lower end and getting closer to the 30% to 32%, something like that, absent -- again, absent any significant economic changes.

Yes. We tend to -- yes, we haven't seen that -- the low end of that or even very much, I think one quarter, we were below 30%, which was last winter. We had a rougher than normal in Q4 last year. So that was probably the only time in a while we've seen below 30%.

But yes, I think we're pretty confident in this -- where we're at is 30% to 32%. We'll look at that as we go into the planning process. We just completed our strategic plan and we'll be rolling out some communication on that as we go forward. But Yes, we're pretty comfortable with their margin profile at holding in the 30-plus percent range, the balance of this year. So yes, we might get comfortable to guide to a tighter range on that.

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

Yes. Just a couple of things. I don't think we got any questions on share buybacks. Jason alluded to it, but we had kind of guided that we'd be buying -- well, we issued a 10b5-1 that for $20 million at a couple of price points. I think we're going to -- I'm confident we will get $20 million of our shares bought in over the next perhaps a few weeks to a couple of months.

And look forward to doing that and -- because we think we're still a great high-value stock and business with an outstanding outlook, particularly as we kind of finish out the choppiness of this year and look forward to next year. So thank you for joining us. We look forward to talking to you after our third quarter results.

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