Good day and welcome to the AZZ Incorporated Second Quarter Fiscal Year 2027 Earnings Conference Call and Webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then 2. 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 AZC's fiscal 2027 second quarter results for the period ended August 31st, 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 forward slash investor dash 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 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 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, Philip, and good morning. We delivered record second quarter sales up 16.7% from the prior year. Reflecting strong execution, a resilient business model, and the strength of our growth strategy. Our performance and market demand continue to validate the investments we made to expand capacity, strengthen customer partnerships, and enhance our market positions. Our segments achieved record quarterly sales. Metal coating sales increased 22.9%, driven by higher volumes across the construction, industrial, infrastructure, and transportation end markets. along with inflationary price increases passed through by our team. Segment adjusted EBITDA margin remains strong at 30.7%, benefiting from operating leverage on record sales and volume. While LME Zinc prices have increased, our pricing model and associated surcharge mechanisms continue to mitigate raw material price volatility. Preco metal sales increased 11.5%, driven by volume growth from the continued ramp of our Washington, Missouri facility, and value-added pricing initiatives, primarily to offset inflationary pressures on paint and other items. Segment-adjusted EBITDA margin expanded 100 basis points to 21.2%, reflecting higher throughput and solid operational execution. During the second quarter, we completed the acquisition and integration of Seattle Galvanizing Company, establishing AZZ's presence in the Pacific Northwest. This acquisition expands our position in an attractive region that is experiencing favorable demand in the infrastructure, industrial, and construction markets. The acquisition has a high-quality multi-site platform, including the region's largest hot-dip galvanizing kettle and a new spin galvanizing facility, extending our footprint into a new five-state region. Our growth strategy balances disciplined acquisitions with value-accretive organic investments that strengthen our competitive position. In metal coatings, we continue to expand capacity where demand fundamentals remain strong and returns are attractive. Our recently expanded Crowley, Texas facility is providing additional capacity in a strong growth market, reinforcing our ability to capture demand and generate attractive returns on invested capital. We'll discuss USN market demand in more detail in a moment. We have also initiated a new greenfield hot dip galvanizing plant in the Tulsa area linked to a major Anchor customer. We have other greenfields in the works and hope to be able to discuss those in more detail later this fiscal year. The strength in infrastructure and the long-term outlook is creating opportunities for us to partner with major customers as they expand their capacity. We also continue to advance strategic business development initiatives through our de-fragilization opportunities. These partnerships allow manufacturers to divest non-core galvanizing and coal coating operations while securing a long-term relationship with AZZ. These opportunities offer AZZ a capital-efficient pathway to expand capacity, deepen customer relationships, and gain market share. Our pipeline remains active and provides a meaningful opportunity for future value creation. At Pre-Coat Metals, the Washington, Missouri facility continues to ramp as planned. We remain on track to reach targeted utilization levels with our strategic partner while commercializing the remaining capacity. The facility has already achieved its expected contribution margin targets for the year, and performance within the beer and beverage packaging category remains solid. Washington has already become an important contributor to PreCode's future earnings growth, and we look forward to its continued progress. Technology remains a key enabler of our strategy. We are leveraging AI and proprietary digital tools to enhance productivity, improve operational efficiency, and scale our businesses more effectively. By integrating AI into our enterprise platforms, we are streamlining software development and operational workflows while accelerating better data-driven decisions. Across both segments, our digital platforms are increasing visibility and improving operational consistency. Our metal coatings digital galvanizing system and Precoke Metals' CoilZone platform strengthen the customer experience while reinforcing our competitive advantages and operational excellence. We will continue investing in value-accretive opportunities, allocating capital with discipline, expanding our market leadership and delivering exceptional customer service. With a strong balance sheet, differentiated capabilities and a proven operating model, we believe we have the right platform to benefit from the long-term investment trends shaping our end markets. These trends provide a meaningful opportunity to drive profitable growth and create long-term shareholder value. With that, I'll turn it over to Jason.

Thank you, Tom. We delivered record quarterly sales of $486.9 million, up 16.7% year-over-year, with double-digit growth in both operating segments. Gross margins expanded 80 basis points, adjusted diluted EPS increased 29%, and we generated 102.2% $8 million of operating cash flow. By segment, metal coating sales increased 22.9%, reflecting continued momentum in the construction and industrial end markets. Pre-coat metal sales increased 11.5%, driven by higher coil coating volume, the continued ramp-up of the Washington, Missouri facility, and pricing actions in response to higher material input costs. These gains were partially offset by softer volume in the HVAC and appliance end markets. From a profitability standpoint, gross profit was $122.1 million, or 25.1% of sales, representing an 80 basis point improvement year over year. This reflects favorable mix, pricing discipline, and improved operational execution. SG&A expenses were $38.3 million, are 7.9% of sales, which was flat against last year's quarter. However, excluding this year's $2.8 million in acquisition-related costs, mostly associated with the Seattle galvanizing transaction, SG&A as a percentage of sales improved to 7.3%, reflecting operating leverage on higher revenue. Operating income increased to $83.8 million, are 17.2% in sales, an improvement of 80 basis points versus the prior year, reflecting strong operational execution and leverage on higher volumes. Turning briefly to the Vale JV, as a reminder, our second quarter of the prior year included $59.3 million in total equity and earnings, a substantial portion of which was attributable to the remaining gain recorded on the divestiture of the electrical products group. During this year's second quarter, we recorded $7.3 million of equity in earnings related to the sale of the lighting business. Separately, we received an $18.2 million cash distribution as part of the avail divestitures, which netted to $15.7 million in our cash flow statement after accounting for less taxes paid by avail on behalf of AZZ. Our JV partner continues to pursue the divestiture of its remaining assets, which operationally now consists of the Welding Solutions Brazil business. Interest expense improved to $10.8 million, down $2.9 million from the prior year, driven by deliberate debt reduction and capital market initiatives discussed in more detail in our SEC filings. The lower interest expense reflects our continued focus on managing our overall cost of capital, and strengthening our balance sheet. The second quarter's income tax expense was $21.3 million, which reflects an effective tax rate of 26.7% compared to 21.9% last year. Last year's lower tax rate was due to an increase in R&D tax credits attributable to the technology spend and the new-build Washington, Missouri facility. GAAP net income was $58.5 million, and adjusted diluted EPS was $2, up 29% year over year. The increase reflects the combination of revenue growth, margin expansion, and lower interest expense. Consolidated adjusted EBITDA was $110.9 million, or 22.8% of sales. Infrastructure Solutions adjusted EBITDA moved from a loss of $2.3 million in the prior year's second quarter to a small income of $0.1 million in the current quarter, further reflecting the impact of divestitures in their Vale JV. Metal coatings adjusted EBITDA margins remained strong at 30.7%, while pre-coat metals adjusted EBITDA margin improved to 21.2%, supported by operational performance, and product mix from our Washington, Missouri facility. Volumes at the facility continue to ramp in line with expectations and we remain on track for it to continue to contribute meaningfully to segment revenue and profitability in the second half of fiscal 2027. Turning to our cash flow and balance sheet, AZZ generated $102.8 million of operating cash flow during the quarter. demonstrating the fundamentals of our business model in converting EBITDA into cash and strong working capital execution. As of August 31st, our total available liquidity was $376.4 million, providing ample flexibility to fund both organic and inorganic growth opportunities. As noted, we completed the acquisition of Seattle Galvanizing during the quarter, Establishing our metal coatings presence in the Pacific Northwest. This transaction expands our geographic coverage and customer service capabilities while providing a premier platform for future growth. We continue to evaluate a healthy acquisition pipeline across both segments against our strategic and financial criteria. Our balance sheet remains a distinct competitive advantage During the quarter, we reduced debt by $15 million and ended the quarter with a net leverage of 1.3 times the trailing 12-month adjusted EBITDA. Capital expenditures for the quarter totaled $18.5 million, with a growing focus on high-return organic investments. Capital allocation priorities continue to include returning capital to shareholders while investing for future growth. During the quarter, we repurchased $20 million of stock at an average price of $146.71 per share, increased our quarterly dividend to $0.24 per share, and completed the Seattle galvanizing strategic acquisition. These actions demonstrate the strength of our cash generation, the flexibility of our balance sheet, and our commitment to creating long-term shareholder value. Overall, the quarter reflected strong execution, margin expansion, cash generation, and disciplined capital deployment. With that, I will turn the call over to David.

Thank you, Jason. Good morning, everyone. Our consolidated year-over-year sales growth of 16.7% reflects broad-based strength across our end markets. Sales related to construction grew 15.5%, driven by manufacturing projects including semiconductor and large data centers. While industrial sales increased by 39.6% on strong utility-scale power demand, infrastructure sales grew 7.2% supported by electrical and transmission and distribution activity, and transportation, namely bus and semi-trailer activity, increased approximately 4%. Container sales rose 153%, benefiting from the performance at our Washington, Missouri facility. Somewhat offsetting these gains were HVAC and appliance markets, which remained soft in the quarter, collectively declining 10% due to the continued weakness in new residential construction. Looking ahead, industry forecasts and customer activity continue to support constructive outlook for investment across our end markets over the coming years. Projections call for approximately $1.3 trillion of U.S. utility capital investment between 2026 and 2030 including more than $500 billion dedicated to transmission and distribution infrastructure. Reinforcing this trend, the Department of Energy recently announced 31 grid modernization projects across 26 states under its SPARC initiative, representing a $5.25 billion investment focused on transmission upgrades, reconductoring, and grid enhancing technologies. These projects are expected to unlock more than 23 gigawatts of additional capacity while accelerating the modernization of the nation's electric grid. We continue to see investments translate into tangible customer demand. For example, one major utility structure customer has reported that backlog growth has accelerated from approximately 35% earlier this year to 44% in its most recent quarter. This momentum along with sustained order activity throughout the grid infrastructure value chain support our positive long-term outlook for many of our end markets. With that, I will turn the call over to Tom.

Thank you, Dave. As you've heard today, our record second quarter performance reflects the strength of our business model, the benefits of our strategic investments, and the exceptional execution by our employees across AZZ. We continue to see healthy demand across our core construction, industrial, and infrastructure markets, supported by powerful long-term trends in grid modernization, electrification, manufacturing expansion, and domestic infrastructure investment. Combined with our expanding geographic footprint, growing capacity, digital capabilities, and strong customer relationships, we believe AZZ is well positioned to capitalize on these opportunities and extend its market leadership. Reflecting our strong first half performance and confidence in the underlying fundamentals of the business, We are raising our fiscal 2027 outlook. We now expect sales of $1.825 billion to $1.875 billion, adjusted EBITDA of $380 million to $420 million, and adjusted diluted EPS of $7 to $7.30. We will also expect to reduce debt by $100 million to $140 million during fiscal 2027, further strengthening an already strong balance sheet and we'll continue to opportunistically purchase shares of AZZ stock. Looking ahead, we remain confident in our outlook and focused on executing strategic priorities which remain clear. Execute safely and efficiently, serve our customers, drive profitable growth, allocate capital with discipline and create long-term value for our shareholders. With a differentiated market position, strong competitive mode, Thank you for joining us.

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

Thank you, operator. Good morning, everybody. I guess first off, you know, going back to the second quarter and the upside, if you could give us more color as to what drove that upside. You know, clearly you raised the guidance for the full year, so 2Q came in above, but you also left the back half relatively intact versus certainly what we had originally. So just curious as to what drove the upside of 2Q.

Yeah, a couple of things. This is Tom. You know, one, we're factoring in the acquisition of Seattle Golf that's performing well, so... I gave his confidence. We got off to a good start with it, so we've rolled that in. Second, both segments are operationally performing with the volumes and the demand they have. Metal Coating's feeling real good about infrastructure spend, industrial, in many parts of the country. So we felt good about that. I think the uncertainty for us is always, you know, how does winter turn out in the fourth quarter? That tends to be our softest, well, call it our softest opportunity. If we get, as we did a while back, we get hard freeze, difficult storms, we lose working days. And so until we get closer and can see how winter's looking, which will be after the third quarter, puts us into January, that's when we have a really good look at how things look. We're still somewhat conservative, but we feel good in both segments, both segments being up. Pricing has flowed through. We've got surcharges attached on Zinc LME, so we feel protected on that. Just lots of positives for us.

Okay, terrific. And since the last time you reported, obviously interest rates have stepped function significantly higher. Construction is almost 60% of your end market exposure, and Data centers have been a very fast-growing sort of vertical for you, but there seems to be more public backlash against them, moratoriums, including where we live in Texas, et cetera. So how are you sort of thinking about those factors as it relates to the outlook as we, not just the back half, but certainly into your fiscal year 28?

Gonchum, this is David. I think we continue to monitor that situation. Obviously, interest rates going up is never good for construction overall. However, our customers and what we're seeing in the backlog with our customers gives us really good confidence, as Tom mentioned, for the outlook for the remainder of the year and as we head into next year. Thus far, we've not heard of any cancellations or delays. Thus far, right now, it's steady as she goes and we feel pretty good.

Yeah, I'd add, you know, data centers is still a pretty small portion of our total business. So when we look at, got to build out the fixed transmission distribution, we're still lots of rebuilding of the electrical grid going on, lots of power generation that still has to come in where people are moving to. So, you know, we look at it, we see the opportunities, we like them when we see them in our plants. But we're not really that dependent on it in the overall. It's been nice, you know, nice tailwinds.

Perfect. Thank you so much.

The next question comes from Richard Garcharena with Barclays. Please go ahead.

Great. Thanks, and solid quarter, everybody. My first question is in terms of the – Impact of the sale galvanizing on metal coatings. Can you break out how much of the growth in that segment came from the acquisition versus organic growth?

To be fair, it's Jason here. Very little came from the acquisition. As you think of the acquisition, it really only contributed one month in the quarter. As you look at their overall growth, then it's all fundamental to the underlying business. Okay, great.

Some more to look forward to there. And then maybe in terms of the – in the environment, the market environment, you know, we're seeing still tight steel markets. You know, is that causing issues for your customers obtaining substrate? You know, lead times, you know, 8 to 10 weeks for some products. How is this maybe an impact? And does this maybe actually provide further visibility into next year in terms of –

I'll answer the first part. Maybe Jason, let's take a shot at the second part. Substrate is affecting us primarily on the pre-code side. They've got a lot of customers that just can't get it in the timeframe they need, and of course the costs are up. It's made the opportunities a little tighter. As they look at things, we're obviously trying to work to take market share where we can, and we're trying to help our customers find substrate. We formed a team now that helps them with logistics, helps find. Obviously, the tariffs don't help with the imports, but we're still trying to help customers find stuff, whether it's import or domestic, and work in the service center inventory is really hard. I think that's how we're partnered with our customers. It's what we do, and we're doing more of it, actually dedicating resources to it instead of just as we used to through our normal customer service. I think it definitely has an effect. We'd love to see it free up. If it does, I think there's more opportunities out there for us.

Yeah, and I think in the kind of medium term visibility, you know, as much as it's a very dynamic market out there that's changing very quickly. And as Tom highlighted, the import scene is not necessarily helping us today. You know, the idea and hope is, you know, that starts to free itself up a little bit. But at the moment, you know, given that we probably carry, you know, plus or minus three months worth of inventory in our warehouses, We've got a reasonable visibility through the end of the year and where that's coming from, and we'll stay close to it as we get into our next fiscal year. Thank you.

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

Hey, guys. Thanks for taking my question. So you mentioned the backlog, and you talked about this a little bit. You said it's up to 45%. Can you just kind of provide color on how that works? What does that mean in terms of dollars? And I mean, what's the leg flow through it? How should we think about it?

Yeah, and just to be clear on that one, Daniel, that's one of our big customers on the metal coating side who has that backlog increase. So we, of course, at AZZ don't have a backlog. Our business is more short cycle. But what we do is we use customer backlog data. like that one and others as a proxy for what we can expect in the future going forward. So that's how we look at it. We spend a lot of time with the teams on our weekly calls on both sides of the segment to get updates on the demand outlook in each of our end markets. But as Tom mentioned on the call, I think we feel very comfortable this year, you know, throughout the balance of the fiscal year. And, you know, as Jason said, we'll continue to monitor that looking forward into next year.

And you mentioned, you know, doing the acquisition in Seattle. Is the Pacific Northwest an area where we can maybe look to also increase density further? I mean, is that a ripe opportunity for some more consolidation or just acquisitions?

Yeah, it is. There's some others up there and having an anchor facility, if you will, or anchor two facilities. That gives us the, you know, we love to have capability in a region or in an area so that we can always provide great customer service, you know, whether a kettle's down for maintenance or for whatever might be going on. So, you know, there's opportunities up there. There's other companies, other facilities, and, you know, that's part of our pipeline.

Thank you very much.

The next question comes from Tina Turners with Wells Fargo. Please go ahead.

Yeah, hey, good morning. I wanted to follow up on the earlier question about steel availability. The largest buyer, one of the largest buyers of flat rolled last week said they were not able to get enough steel to meet customer demand. So granted, it's helpful to hear about your three months of inventory, but can you just elaborate a little bit more on any mechanisms to ensure that you have sufficient galvanized supply? Because this is just I'm sorry, substrate supply, just because it just seems like a huge topic that doesn't seem to be getting better in the short term. And also, can you explain if you are importing, because imports have fallen pretty sharply on flat rolled, but trending back up on hot rolled. So just if you could elaborate more on your strategy for substrate availability.

Yeah, I think it's our customers. We don't buy any substrate ourselves. The inventory we have in our warehouses is customer inventory that we're warehousing for them until they need to paint it or we're warehousing it for them after we've painted it. For us, that's why our teams work with distributors, suppliers, service centers. We even keep tabs on the mills. We try to help direct our customers to where we find substrate available, which they also have their own resources doing that in many cases. So that's where we play in the value chain is we contact, we obviously have contacts with a lot of service centers, a lot of distribution, and all the mills. So we kind of play in that gap of trying to connect Thank you for joining us. more broadly, but we've been facing that all year and we've dealt with it and helped our customers. It's part of our value add for our customers is being able to do that for them and try to connect them so that they can be competitive on projects and fulfill the projects that they've already committed to. I don't know if David wants to add anything to that.

Yeah, I would just add a couple of things. It's been a tight market. It's one of the tightest substrate markets since 2021. 232 running at 50% is not certainly helping things. It's taken out a lot of steel out of the market. I think domestic mills have added some, but not enough. Some of that is going to more pipe and tube customers as well. And then when you look at just the galvanized lead times on some of the stuff coming from the mills, not our galvanized product, but again, flat roll, It's looking like those are now out around nine weeks and have been running that kind of nine-week lead time for over seven months, which again is kind of along the lines of what we saw in 2021. So summing that up, I'd say what Tom said, it's a tight market. Things don't look to be getting any better, but we're out there making sure that we're working with our customers to find anything that we can.

Okay, helpful. Yep.

Sorry, Tim. The only thing I'd add on top of that is, you know, when substrate does come available, then Preco's business model allows us to store our customers' materials. So, you know, at any given point in time, there's a spot of opportunities. And as you highlighted, imports is a little bit tight at the moment, but there's windows where it opens up. And, you know, given our warehousing capabilities, then that's where our customers take advantage of our business model.

Well, that's helpful. More imports seem to be on the way, so appreciate that color. Just on gross profit margins in the second half, you know, first half steady as kind of typical quarter over quarter holding up nicely. But so we assume like a similar cadence into the second half from the first half as in past years in terms of like the seasonal impact on gross margins. Are there any other factors we should be considering for the cadence there?

I would add, as you think of your second half margins and more specifically Q4, we lose some momentum there just by leverage of our fixed cost basis. Volumes are down just in that weaker construction season. For us, it's December, January, February. Certainly Q3 and Q2, mirroring off Q2, we should have relative to very strong margins and continue that. The only thing to know above and beyond that is the impact of the Washington facility. It certainly had an impact in Q2, and as we highlighted in our commentary, it will continue to have a greater impact going forward. So we get the tailwind of that, but certainly Q4 should be relatively in line with where we've been seasonally historically.

And I'd also add, because we've pushed through price increases due to the inflation, that those price increases have taken effect and so we'll feel that even more so in the back half of the year for metal coatings particularly.

Okay, thank you.

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

Hey, good morning guys. Nice quarter. Hey, Tom, you mentioned the Tulsa green field and then you said there were and other greenfield galvanizing opportunities. I'm curious if you can elaborate on those and if there's an underlying trend that's driving those opportunities.

Yeah, a couple of things. One, I probably should refer to the one up around Tulsa as Brownfield because it's adjacent to one of our existing facilities. So even less risk because we've got a team already there. But it's coming about because of the increased capacity to address the high demand on infrastructure. So this is not so much to serve existing capacity. It's where some large customers, particularly in the infrastructure industrial side, are adding capacity. And we're aligning ourselves with them. And that's why it's relatively new. It's the kind of thing that, as we came into this year, we were not seeing those kinds of opportunities. But we've got several of our major customers either looking at or that are expanding their capacity. And we've been partnered with them. So we've got the one that we've announced and got the real estate and all that for. And then, you know, I don't want to commit too much right now. We're still working two or three other opportunities. We'd love to be able to talk about those as the year goes on. In some cases, they would be in new area for us. In some cases, they're where we already have capacity, but this will be more fully committed to the new customer capacity coming online. The other thing to keep in mind is this is new, state-of-the-art, best facilities we're going to be making. It gives us the capability to be more efficient, more productive, have a design that Keep in mind, the last time we built, well, we built a couple of plants, but the last greenfield we built was Reno. But obviously, we know how to construct plants. We know how to maintain them. We understand all of the technology that goes into them. So we feel real good about this. We feel real good about making commitments, as we did in Washmo, where we had the anchor customer for 75% of the volume. These aren't quite as extensive, but having an anchor customer allows us to ramp up with confidence in... We're going to have the demand available instead of having to go find it and chase it.

Can you remind us what the investment is? I feel like it's relatively modest.

It is. Oh, yeah, by far. It's $35 to $50 million, depending on whether it's going to go in for a large structural plant or whether it's more of a general use plant. So you can use the $35 to $50 million. It also depends on what the real estate values are. turned out to be, so that's the range.

Okay, and my follow-up was more on the M&A side, if you're still focused on that, and if there's a potential for something else before fiscal year end.

Yeah, we're working on some, I think David had said it, but yeah, our pipeline's full, we're very active, they're all bolt-ons, all in our strategic, for the most part, middle of the fairway, Love to see us close one. They're so hard to predict. But yeah, we're working on it. We've got three that I would consider active. I'm not going to try to prognosticate on whether they're high probability by the end of the year or even if we can close them. But that gives you an idea. We're in active discussions on three different deals of three different, significantly different sizes. That's just the market out there. There's consolidation opportunities. We're always looking – well, I shouldn't say that. There was a period where we were just paying down debt and weren't looking at deals. For the last year, obviously, we've been more active in completing the Canton deal and now the Seattle gulf. I think the team feels like we've got a good pace going. We've got active discussions. I'd love to see us close one by the end of the year, but I'm not going to – I'll hedge that statement.

Fair enough and good color. Thanks, Tom.

The next question comes from Nick Giles with B. Reilly Securities. Please go ahead.

Yeah. Hey, guys. Congrats on a strong quarter. I just wanted to clarify, if I'm not mistaken, the debt reduction target was reduced from 130 to 170 to 100 to 140. Is that just a function of cash being used for the acquisition or just maybe preserving cash for other opportunities?

It's 100% the former in relation to the acquisition that we just made. If you look at that, it was $57.5 million and slightly to materially offset by We equally did not have in our cash flow the cash that we received from availing the quarter either. So, net-net, there's $40 million. That was not in our original prediction there.

Got it. Okay. Thanks for that, Jason. And then maybe just to back up on how you're prioritizing capital allocation. I mean, shareholder returns have increased. Sounds like the M&A pipeline continues to be active. Where do kind of some of the organic growth opportunities that you've outlined in the past fit into that, whether it be asset optimization or margin expansion opportunities and what could the capital intensity of those be? Thank you.

Yeah, I mean, to be fair, they're by far our number one priority. Obviously, they return the greatest returns for us. So we continue to look at them, evaluate them and prioritise them. There's only so much that the businesses can absorb at any given point in time. So we continue to feed the pipeline there. Above and beyond that, I think as Tom had just kind of outlined there, M&A is very much a strategic priority for us. We need two people to come to the table there and if you look at the Seattle acquisition then it took a little bit longer than what we'd originally anticipated so hence Tom kind of hedging in terms of furthers for this year but certainly we've got the capability that when they become available that we can go execute on them and then obviously the introduction in this quarter is the Greenfield stroke Brownfield opportunities that we are seeing and and others that are in the pipeline. If you look at our capital available, then all of the above very much fits within our strategic plans and included within that is further returning capital to our shareholders as we've outlined previously. I don't think we're necessarily changing anything that we've spoke about previously other than the slight introduction of the greenfield facility.

Well, and I would add that we mentioned some expansion, so we've expanded a kettle in Crowley. We're expanding in Kansas City. We're expanding groundline coating in Reno. So we've got several of those. At any given time, the team's got... Three to six of those kind of things, they're sub-$10 million investments, but they're almost immediately accretive because there's existing demand as soon as we get them started up, which is what happened in Crowley. So we've got a lot of focus on that. The metal coatings folks put a team in place to help facilitate that. to make us more efficient at it and to be able to move capacity increases more quickly. So we feel very good about our structure for it. We feel real good about the team and the capabilities. And just we're going to continue to move quickly and, if anything, accelerate some of that.

Very good. Thanks, guys. Keep up the good work.

Thank you.

The next question comes from John Frenzreb with Sidoti and Company. Please go ahead.

Good morning, everyone, and thanks for taking the questions. I just have to circle back on the Seattle acquisition. And I might have missed this, but what was the revenue run rate on an annual basis before you acquired the company? You mentioned it's a sub-period in the quarter. And also, what's the operational contribution profile like of the business compared to the legacy Meadows Coatings business?

You know, it was, like I said, I think we noted there's actually two facilities. The main facility, which fits probably in the top third of the fleet in terms of size and contribution. We usually don't give specifics. But yeah, consider it in the top third of the average fleet size, if you will. And from a contribution perspective, it's above... and many more. They had built pretty much a new spin plant. We like the spin work. That's the smaller components, high quality, high volume. And so we're looking to get that filled up fairly soon. So that's just pure new opportunity.

And the revenue run rate?

I mean, at this point, we don't necessarily give out the revenue run rate or the financials to the specific acquisitions. The $5 million acquisition, that essentially never included the land and buildings. So as Tom mentioned, as you think of our facilities, it's at the premier end in terms of volume and margins.

OK, fair enough. And regarding the price increases, what was the impact on revenues in the second quarter for the price increases to reflect higher inflation?

Again, I don't think we go into the details in terms of breaking out the revenue and how much of that is priced from volume mix. Certainly, it contributed to both businesses, as I think we previously highlighted. And from a galvanizing point of view, we've got some premiums just in association with the increase in sink pricing. and then from a pre-quote point of view, you know, the pass-through of the paint price increases that we've seen at the start of the year play a part. But, you know, what I would say for both businesses is volume is the strongest contributor to the increasing sales numbers.

Yeah, and I would add, so on the metal coating side, they put their zinc, because zinc has been moving up and had reached the level, they, in the quarter, in the second quarter, They put the surcharges in place. So those are still just now starting to show any real effect, along with the base price increase to just deal with a lot of the inflation that had already been flowing through on everything other than zinc. And as Jason said, on the pre-code side, they'd had to put price increases through earlier because of higher prices on paint. So that's more embedded in the pre-code side.

And I guess one last question, and I know this might be a nothing burger considering your towing model, but does high diesel costs come into play regarding customer demands or impact you in any way?

You know, it does. We have a lot of our own trucks, and so we feel it on that, but then we're passing that through to the customers. In terms of, I think it works for our model because Customers don't want trucks sitting on highways or going on highways any longer than they have to. So the closer they are to our facility, the better. And because of our large network of facilities, they can pick an AZZ site and not have to spend as much on those high transportation costs because of diesel. So that's how it plays out for us. Customers are going to put stuff on trucks. But they want to send it to the site that's as close as they can to minimize the fuel costs.

Got it. Thanks for taking my questions.

Sure thing.

The next question comes from Mark Reichman with Noble Capital Markets. Please go ahead.

Yeah, within metal coatings, I mean, you already kind of talked about the organic volume growth, the pricing, and the acquisitions. But how sustainable is is the underlying volume growth, and which end markets do you think offer the strongest opportunities through fiscal year 2028?

I'll answer the first part of it, and David may want to chime in on the markets. Continuing at a 20% growth clip or whatever, I wouldn't expect that. We start to lap tougher comps in terms of quarter over quarter as we get later in this year. On the other hand, that base growth and those volumes, we don't see those declining. At some point, it's going to be a lower growth rate, but still with the volume. We've got capacity available. We're running all out in a handful of our locations. We're running really solid in most. So we've got the capacity to continue to take the volume in spite of the other than where there's new capacity that's going to be coming online with some of our customers, which is related to the brownfields and greenfields. So we feel real good about that or we want to be investing in new capacity.

Yeah, you know, just speaking of that on the new capacity, In terms of the capital expenditure guidance, I mean, what's the split between maintenance and growth? Maintenance capital versus growth capital. And I would categorize an expansion as growth.

Yeah, yeah. And to be fair, the expansions have still to factor through into our forecast. Obviously, the recently announced greenfield is the capital comes a little bit later in the cycle. As you look at our forecast, as we commented, we're turning more of it to investments and returns. There's still a sustaining part there that's, you know, you can pick a number, it's somewhere between $50 and $60 million. There's a fine line between sustaining and developing. As you bring in new technology, then you're getting the return and increased productivity. So classifying it between left and right bucket gets a little bit grey, but In a normal year, spending $50 to $60 million is what we expect just to maintain our technology levels.

That's helpful. And then just lastly, we're in kind of this interest rates are going up. The Fed seems to be kind of in a hiking cycle. The economy seems a little more uncertain. and I'm just wondering, do you think that AZZ can sustain above market organic growth while expanding margins or do you think that you might become a little more active on the acquired growth front? Just kind of your view on kind of over the next three to five years, kind of what you're expecting, kind of an organic growth rate and what you perceive as maybe needing to accelerate growth with acquisitions.

Yeah, great question. You know, I think as we're talking about, so we completed the Washington facility, which is with a $125 million capital investment, and brought that in and, of course, ramped it up, and it's a highly complex, modern site with lots of new technology, and we feel real good about our ability to do that. On the galvanizing side, when we're talking about brownfields and greenfields, it's They take about 18 months to construct and bring them into production. So as we layer in those, we love to see them ramping up and having an impact basically every year so that we've got that new capacity coming on. And then in terms of these other investments, as I mentioned, they're relatively quick hits when we're expanding kettles, adding ground line coating, adding on the pre-code side. It could be adding a blend cell. That's bringing in other services or expanding our service offering. We've been focused on that. If anything, as Jason just said, we're going to ramp that up even further and be more aggressive with it because we've put the resources in place to support it without our day-to-day operations. But on the other side, I think we will be doing acquisitions. We've got the cash available for it, the capital available for it. We'll stick to, as far as we're concerned right now, we're going to stick to what we know well, which is cool coating and hot tip galvanizing and keep our focus around that as we, you know, we love the idea of helping a customer taking over their galvanizing so that they can de-vertically disintegrate, if you will. So I think that plays in, too. But, yeah, we're going to be active on there. Good opportunities. We're not going to chase bad deals. I think we've demonstrated our history is we tend to chase the deals that make sense to us, that we can bolt on, that we can operate, that we can bring value to. And we're going to be aggressive with that. So we've got a team focus. Well, both segments are focused on it. and then it's supported here from the corporate side. So I think that'll play a bigger and bigger part as you talk about three to five years out and we get those deals done over the next couple years and then, you know, and then grow them.

That's very helpful. Thank you very much. All right. Our pleasure.

The next question comes from Eric Boyes with Evercore ISI. Please go ahead.

Good morning and thank you. First question on metal coating capacity. I appreciate the comments on the expansions at Crowley and Kansas City and Reno. But maybe rough order of magnitude, can you give us some sense on how much these are expanding capacity? Are we talking like mid-single digit percentage? Is it teens? Is it more than that? And I have a follow-up. Thank you.

Great question. When you look at it, it's probably to your kind of outline there, mid-single digits. When you look at it, we've got 43 facilities, and some facilities have got multiple kettles, so expanding and adding a kettle certainly addresses some opportunities that we have in those specific geographies. Across our fleet, then, we're still somewhere between 60% and 70% capacity utilization, so So plenty of opportunity for growth. This is really just specifically addressing growth within individual geographies.

That's great. Thank you. And then my second one is on the pre-code side. You mentioned that WashMo is on track, but maybe could you just expand on where it sits today kind of in terms of utilization and remind us on the remaining ramp timeline? Thank you.

Yeah, Q2 was a solid quarter for the Washington facility. It was a solid quarter for the business in total. As we spoke about previously, we're challenging ourselves to get to that 75% anchor customer, get them ramped up. I would say in the quarter, we are well within that path. We will get there by the end of the year. We're certainly from a sales point of view, much closer. As you look at it from a profitability point of view, the facility continues to improve phenomenally quarter and quarter, month and month. There's still some more opportunity there. I think as we've commented historically, we're now actively working that other 25%. When the right opportunity comes in, then we'll start to bleed that in. Certainly that could be in the second half but as you look at this facility there's a lot to it and we're certainly being very cautious that as we work with that facility then we certainly don't take any steps backwards and touch wood we've not been there up to this point and we continue to progress.

One of the things I'll add is if it continues at this pace and we have no reason to expect it not to, it's probably going to be the Thank you for joining us. and in some cases we had not done a prep line in any of our other facilities and we've been able to ramp that up there which gives us confidence that maybe we can do that in other places. So it's created some opportunities for us to look at that provide additional growth just because of the things we've been working with our partner on at the Washington site. So exciting on multiple levels from our perspective.

Great, encouraging. Thank you.

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

Thank you for joining us this morning. Hopefully what you've heard from us is we're pleased with our results here today. We're confident about the future and look forward to talking to you after the third quarter. Have a great day.

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