AZZ Inc. (AZZ) Q2 2027 Earnings Report, Transcript and Summary

Good day, and welcome to the AZZ Incorporated Second Quarter Fiscal Year 27 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 0. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Phillip Kupper, with 3-Part Advisors. Please go ahead.

Good morning. Thank you for joining us today to review AZZ's fiscal 27 second quarter results for the period ended 08/31/2026. Joining the call today are Tom Ferguson, President and Chief Executive Officer Jason Crawford, Chief Financial Officer 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/investorevents. 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 2000. 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 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 enhance our market positions. Segments achieved record quarterly sales. Our Metal Coatings sales increased 22.9% driven by higher volumes across the construction, industrial, infrastructure transportation end-markets. Along with inflationary price increases passed through by our team. Segment adjusted EBITDA margin remained 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. Our Precoat 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 adds a high quality multi site platform, including the region's largest hot dip galvanizing kettle a new spin-galvanizing facility. Extending our footprint into a new 5 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 will discuss U.S. end-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. 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-equalization opportunities. These partnerships allow manufacturers to divest non core galvanizing and coil 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 Precoat 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 Precoat'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 Precoat Metals CoilZone platform strengthened 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 will 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 $102.8 million of operating cash flow. By segment, metal coating sales increased 22.9% reflecting continued momentum in the construction and industrial end-markets. Our Precoat 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 or 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 or 17.2% of 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 on 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 $2.00 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 second quarter to a small income of $100 thousand in the current quarter. Further reflecting the impact of divestitures in the Avail JV. Metal Coatings adjusted EBITDA margins remained strong at 30.7% while Precoat 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 27. 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 and converting EBITDA into cash and strong working capital execution. As of August 31, 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. 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 1.3x the trailing 12 months 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, 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 a 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 Spark initiative. Representing a $5.25 billion investment focused on transmission upgrades, reconducting and grid enhancing technologies. These projects are expected to unlock more than 23 GW 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, 1 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, David. As you have 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, electronics 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 27 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 $7.20 to $7.30. We will also expect to reduce debt by $100 million to $140 million during fiscal 27. Further strengthening an already strong balance sheet, and we will continue to opportunistically purchase shares of AZZ stock. Looking ahead, we remain confident in our outlook and focused on executing our 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 moat, ample cash flow generation, attractive organic and acquisition opportunities, and favorable secular demand trends, we remain confident in our ability to deliver sustainable earnings growth and increasing shareholder returns over the long term. I want to thank our employees for their continued dedication to serving our customers and delivering outstanding operational performance. With that, operator, we are ready to take analyst questions.

We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. If any time your question has been addressed, and you would like to withdraw your question, At this time, we will pause momentarily to assemble our roster. The first question today comes from Ghansham Panjabi with Baird. Please go ahead.

Yes. Thank you, operator. Good morning, everybody. I guess, first off, going back to the second quarter and the upside, if you could give us more color as to what drove that upside Clearly, you raised the guidance for the full year, so Q2 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 to 2Q.

Yes, a couple of things. This is Tom. 1, we are factoring in the acquisition of Seattle Galv that is performing well. so it gave us confidence. We got off to a good start with it. So we have rolled that in. Second, both segments are operationally performing with the volumes and the demand they have. Metal Coatings feeling real good about infrastructure spend, industrial in many parts of the country, so we felt good about that. Think the uncertainty for us is always 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, a hard freeze difficult storms, we lose working days. But and so until we get closer and can see how winter is looking, which will be after the third quarter, puts us into January, that is when we have a really good look at how's things looking. So we are still somewhat conservative. But we feel good in both segments, both segments being up Pricing has flowed through. We have got surcharges attached on you know, 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 step functioned significantly higher. Construction is almost 60% of your end market exposure, and you know, data centers have been a very fast growing sort of vertical for you. But there seems to be, you know, more public backlash against them, moratoriums including where we live in Texas, etcetera. So how are you sort of thinking about those factors as it relates to the outlook, you know, as we not just the back half, but certainly, into your fiscal year 2028?

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

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

Perfect. Thank you so much.

The next question comes from Mark La Reichman with Barclays. Please go ahead.

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

Yes. To it is Jason here. Very little came from the acquisition. As you think of the acquisition, really only contributed 1 month in the quarter. As you look at their overall growth, then it is all fundamental to the underlying business.

Okay. Great. So more to look forward to there. Then maybe just in terms of the market environment, the market environment, we are seeing obviously still tight steel markets. Is that causing issues for your customers obtaining substrate lead times 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 strength in terms of the order book?

Yes, I will answer the first part, maybe Jason, let's take the shot at that. Second part. But substrate is affecting us primarily on the Precoat side. it is they have got a lot of customers that just cannot get it in the timeframe they need. So and of course the costs are up. So it is it is made the opportunities a little tighter. And as they look at things, we are obviously trying to work to take market share where we can. And we are trying to help our customers find some So, we formed a team now that helps them with logistics, helps them find. Obviously, the tariffs do not help with the imports, but we are still trying to help customers find stuff, whether it is import or domestic. And working the service center. Inventory is really hard. So I think that is how we are partnered with our customers. it is what we do, and we are doing more of it. Actually dedicating resources to it instead of just as we used to through our normal customer service. So I think it is it definitely has an effect. We would love to see it free up. If it does, I think there is more opportunities out there for us.

Yes. And I think in the kind of medium term visibility as much as it is a very dynamic market out there, that is changing very quickly and as Tom highlighted, the import scene is not necessarily helping us today. 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, 4 to 6 3 months worth of inventory in our warehouses, We have got a reasonable visibility through the end of the year where that is coming from. And we will 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, Thanks for taking my question. So you mentioned the backlog and you talked about this a little bit. You said it is up to 45%. Just kind of provide color on how that works? What does that mean in terms of dollars? And I mean, is there what is the lag to flow through? How should we think about it?

Yes. And just to be clear on that 1, Daniel, that is 1 of our big customers, on the metal coating side who has that backlog increase. So we, of course, at AZZ do not have a backlog. Our business is more short cycle. But what we do is we use customer backlog, like that 1 and others as a proxy for what we can expect in the future going forward. So that is 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 will continue to monitor that looking forward into next year.

And you mentioned 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?

Yes, it is. there is some others up there and having an anchor facility, if you will, or anchor 2 facilities that gives us the--we love to have capability in a region or in an area so that we can always provide great customer service whether a kettle is down for maintenance or for whatever might be going on. So there is opportunities up there. there is other companies, other facilities and that is part of our pipeline.

The next question comes from Timna Tanners with Wells Fargo. Please go ahead.

Yes. Hey, good morning. Wanted to follow-up on the earlier question about steel availability. The largest buyer, 1 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 is helpful to hear about your 3 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. Sorry. Substrate supply. Just because it just seems like a huge topic. That does not 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 just if you could elaborate more on your strategy for substrate availability.

Yeah. I think, you know, it is--so it is our customers. We do not buy any ourselves. So the inventory we have in our warehouses is customer inventory that we are warehousing for them until they need to paint it, or we are warehousing it for them after we have painted it. So, you know, that for us, that is why our teams work with distributors, suppliers, service centers, we even keep tabs on the mills. So 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 is 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 our customers with available substrate. But it is tight. We see it every day. Particularly galvanized sheet metal. it is difficult. So and but we have been facing that now for a while. This is this is not new. I think it is just now hitting the news more broadly, but we have been facing that all year. And we have dealt with it and helped our customers. it is 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 they can be competitive on projects. And fulfill the projects that they have already committed to. I do not know if David wants to add anything to that.

Yeah, I would just add a couple of things. it is it is been a tight market. it is it is 1 of the tightest substrate markets since 2021. Section 32 running at 50% is not certainly helping things. it is taken out, you know, a lot of steel out of the market. You know, 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, you know, the galvanized lead times, on some of the stuff coming from the mills, not, you know, not our galvanized product, but, again, flat roll. it is looking like those are now out around 9 weeks and have been running that kind of 9 week lead time for over 7 months, which, again, is kind of along the lines of what we saw in 2021. So, you know, summing that up, I would say, what Tom said, it is a tight market. Things do not look to be getting, any better, but you know, we are out there, making sure that, working with our customers to find anything that we can

Okay. Helpful. Yep.

Sorry, Timna. The only thing I would add on top of that is 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, the spot opportunities and as you highlighted, imports is a little bit tight at the moment. But there is windows where it opens up and, you know, given our warehousing capabilities, then that is where our customers take advantage of our business model.

Well, that is helpful. More imports seem to be on the way. So appreciate that color. Just on gross profit margins in the second half, first half, steady as kind of typical quarter over quarter holding up nicely, but should 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? Or are there any other factors we should be considering for the cadence there?

Yes. I would add, as you think you are setting top margins and more specifically Q4 we believe some momentum there just by leverage of our fixed cost basis. Volumes are down just in that--that weaker construction season. For us, it is December, January, February. Certainly, Q3 and Q2 we are on--on our Q2, we should relative to very strong margins and continue that. The only thing to note 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 have been seasonally historically.

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

Okay. Thank you.

The next question comes from Adam Thalhimer with Thomas Davis. Please go ahead.

Hey, good morning guys. Nice quarter. Hey, you mentioned the Tulsa Greenfield and then you said there were other greenfield galvanizing opportunities I am curious if you can elaborate on those and if there is an underlying trend that is driving those opportunities?

Yes. A couple of things. 1, I probably should refer to 1 up around Tulsa as a brownfield because it is adjacent to existing--1 of our existing facilities. So even less risk because we have got a team already there. But, you know, it is coming about because of the increased capacity to the high demand on infrastructure. So this is not so much to serve existing capacity. it is where some large customers, particularly in the infrastructure industrial side, are adding capacity and we are aligning ourselves with them. And that is why it is relatively new. it is the kind of thing that as we came into this year, we were not seeing those kinds of opportunities. But we have got several of our major customers are either looking at or that are expanding their capacity. And we have been partnered with them. So we have got the 1 that we have announced and got the real estate and all that for. And then we have I do not want to commit too much right now. We are still working on 2 or 3 other opportunities. We. We would 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 are 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 are going to be making. So it gives us the capability to be more efficient, more productive, have a design that keeping 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. Commitments as we did in WashMo, where we had the anchor customer for 75% of the volume. These are not quite as extensive. Having an anchor customer allows us to ramp up with confidence in that we are going to have the demand available instead of having to go find it and chase it.

And then can you remind us what the investment is? I feel like it is relatively modest It is.

It is. it is, oh yes, by far. it is $35 million to $50 million depending on whether it is going to go in for a structural large structure plant or whether it is a more of a general use plant, you can use the $35 million to $50 million. It also depends on what the real estate values turn out to be. So that is the range.

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

Yeah. We are working on some. I think David had said it, but yes, our pipeline is full. We are very active. They are all bolt ons. All in our strategic for the most part middle of the fairway. Love to see us close 1. They are so hard to predict. But, yeah, we are working on. We have got 3 that I would consider active. I am not gonna try to prognosticate on whether they are high probability by the end of the year or even if we can close them. But that gives you an idea. We are we are in active discussions on 3 different deals of 3 different significantly different sizes. And that is just the market out there. there is consolidation opportunities. there is we are we are always looking I should not say that. There was a period where we were just paying down debt and were not looking at deals. For the last year, obviously, we have been more active in completing the Canton deal and now the Seattle Galv. So I think the team feels like we have got a good pace going. We have got active discussions. I would love to see us close 1 by the end of the year, but I am not going to--I will hedge that statement, so.

Fair enough and good color. Thanks, Tom.

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

Yeah. Hey, guys. Congrats on a strong quarter. I just wanted to clarify, I am 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?

Yeah. it is a 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 Avail in the quarter either. So net, there is $40 million that was not in our original prediction there.

Got it? Okay. Thanks for that, Jason. And then maybe just to circle back up on how you are 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 have 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 are by far our number 1 priority. Obviously, return the greatest returns for us. So we continue to look at them, evaluate them and prioritize them. there is only so much that the business is gonna absorb at any given point in time. So we continue to feed the pipeline there. Above and beyond that is, you know, I think as Tom had just kind of outlined there, M&A is very much a strategic priority for us. We need 2 people to come to the table there. And, you know, as you look at the Seattle acquisition then, it took a little bit longer than what we would originally anticipated. So hence, you know, Tom's hedge in terms of further for this year. But certainly, we have got the capability that when they become available that we can go execute on them. And then obviously, introduction in this quarter is the greenfield brownfield opportunities that we are seeing. And 1 that is come to fruition and others that are in the pipeline. If you look at our capital available, then, you know, all of the above very much fits within our, you know, strategic plans and included within that is further returning capital to our shareholders as we have outlined previously. So I do not think we are necessarily changing anything that we have spoke about previously. Other than, you know, the slight introduction of a the greenfield facility.

Well, I would add that we have we mentioned some expansion. So we have expanded a kettle in Crowley, we are expanding in Kansas City, we are expanding ground light coating in Reno. So we have got several of those at any given time. Team's got 3 to 6 of those kind of things. They are sub-$10 million investments, but they are almost immediately accretive because there is existing demand as soon as we get them started up, which is what happened in Crowley. So that is we have 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. We are--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 are 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 Franzreb with Sidoti and Company. Please go ahead.

Good morning, everyone, and thanks for taking the questions. I just like 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 some sub period in the quarter. And also, what is the operational contribution profile like of the business compared to the legacy metals coatings business?

It was a like I said, there is--I think we noted there is actually 2 facilities. The main facility which fits probably in the top third of the fleet in terms of size and contribution. We usually do not give specifics. But yes, consider it in the top third of the average fleet size, if you will. And from a contribution perspective, it is above somewhat a little bit above the fleet average margin. So and we will continue to improve that. We have as we do, we jump in with things like digital galvanizing system, our playbooks. And it was a great facility before, and we hope we can with our sales efforts and the ability to invest in the site, make it even greater and that they had built a pretty much a new spin plant. We like the spin work that is the smaller components. High quality, high volume, And so we are looking to get that filled up fairly soon. So that is just pure new opportunity.

And the revenue run rate?

I mean, at this point, we do not necessarily give out the revenue run rate or the financials to the specific acquisitions.

The Okay. Just trying to get Yeah.

$57.5 million acquisition essentially never included the land and building. As Tom mentioned, if you think about facilities, it is at the premier end in terms of volume and margins.

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

Again, think we go into the details in terms of breaking out the revenue and how much of that is price from volume mix. Certainly contributed to both businesses I think we previously highlighted and from a galvanizing point of view, we have got some premiums just in association with the increase in zinc pricing. And then from a precoat point of view, the pass through of the paint prices, the pain price increases that we have seen at the start of the year play a part. But what I would say for both businesses is volume is the stronger 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 it 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 take--to 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 Precoat side, we would had to put price increases through earlier because of higher prices on paint. So that is more embedded in the Precoat side.

And I guess 1 last question and I know this might be a nothing burger considering your tolling model, but does high diesel costs come into play regarding customer demands or impact you in any way?

It does. it is we have our own a lot of our own trucks and so we feel it on that, but then we are passing that through to the customers. In terms of I think it works for our model because customers do not 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 is how it plays out for us. Customers are going to put stuff on trucks. They are but they want to send it to the site that is as close as they can to minimize the fuel cost.

Got it. Thanks for taking my questions.

Sure thing.

Next question comes from Mark La Reichman with Noble Capital, Marc. 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 the underlying volume growth and which end markets do you think offer the stronger opportunities through fiscal year 2028?

I will answer the first part of it and David may want to chime in on the market side. Continuing at 20% growth clip or whatever, I would not expect that. We will start to lap tougher comps in terms of quarter over quarter as we get later in this year. On the other hand, base growth and those volumes, we do not see those declining. We just at some point, it is going to be a lower growth rate, but still with the volume. So we have got capacity available. We are running all out in a handful of our locations. We are running really solid in most. So we have got the capacity to continue to take the volume. In spite of the other than where there is new capacity that is 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 in investing in new capacity. Yes.

You know, just speaking of that, on the new capacity, in terms of the capital expenditure guidance, I mean, what. what is the split between maintenance and growth? Maintenance capital versus growth capital. And I would I--I would categorize it expansion as growth.

Yes, yes. And to be clear, the expansions have also factored through into our forecast. Obviously, the recently announced greenfield is the capital comes along later in the cycle. As you look at our forecast, as we commented, we are turning more of it to investments and returns. there is still a sustaining part there that is. You know, you pick a number, it is it is somewhere between 50 and $60 million. But there is a fine line between sustaining and developing as you bring in new technology, then you are getting the return and increased productivity. So classifying in between left and right bucket gets a little bit gray. But in a normal year, spending $50 million is what we expect just to maintain our technology levels.

that is helpful. And then just lastly, you know, you know, we are kind of in this interest rates are going up Yeah. The Fed seems to be kind of in a in a hiking cycle. The economy seems a little more uncertain. And I am 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 3 to 5 years kind of what you are expecting kind of an organic growth rate and what you perceive as maybe needing to accelerate growth with acquisitions?

Yes, great question. I think as we are talking about, so we completed the Washington facility, which is with $125 million capital investment. And brought that in and of course ramped it up and it is 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 are talking about brownfield and greenfields, is they take about 18 months to construct and bring them into production. So as we layer in those, you know, we would love to see them ramping up and having an impact basically every year, so that we have got that new capacity coming on. And then in terms of these other investments, as I mentioned, they are they are relatively quick hits when we are expanding kettles, adding ground line coating, adding on the Precoat side. It could be adding a blend cell. So that is bringing in other services or expanding our service offering. And we have been focused on that. If anything, that is that is just as Jason just said, we are going to ramp that up even further and be more aggressive with it. Because we put the resources in place to support it without taxing our day to day operations. So but on the other side, I think we will be doing acquisitions. We have got the cash available for the capital available for it. We will stick to far as we are concerned right now, we are going to stick to what we know well, which is coil coating and hot dip galvanizing and keep our focus around that as, you know, we love the idea of helping a customer taking over their galvanizing so that they can de-vertically disintegrate, if you will. Then. So I think that plays into we are going to be active on there for good opportunities. We are not going to chase bad deals. I think we have 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 are going to be aggressive with that. So we. We have got a team focused. Well, both segments are focused on it. And then as here, from the corporate side. So I think that will play a bigger and bigger part as you talk about 3 to 5 years out, and we get those deals done the next couple of years. And then you know, and then grow them.

that is very helpful. Thank you very much.

All right. Our pleasure.

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

Good morning, and thank you. First question on metal coatings 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 is it more than that? And I have a follow-up. Thank you.

Yes, great question. When you look at it, it is probably to your kind of outline, near mid single digits. When you look at it, we have got 43 facilities and some facilities have multiple kettles, expanding and adding the kettle. Certainly addresses some opportunities that we have in those specific geographies. Across our fleet. Then we are still somewhere between 60% and 70% capacity utilization. So with plenty of opportunity for growth, this is really just specifically addressing growth within individual geographies.

that is great. Thank you. And then my second 1 is on the Precoat 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 time line? Thank you.

Yes. Yes. Q2 is a solid quarter for the Washington facility, it was solid quarter for the business in total. We spoke about previously, we were challenging ourselves to get to that 75% anchor customer get them ramped up. Obviously, in the quarter, we are well within that path and will get there by the end of the year. We are certainly from a sales point of view, much closer as you look at it from profitability point of view, the facility continues to improve phenomenally quarter-on-quarter, month-on-month. there is still some more opportunity there. I think as we have commented historically, we are now actively working that other 25% when the right opportunity comes in, then we will start to bleed that in. But certainly, could be in the same path, you know, as you look at this facility, there is there is a lot to it. And we are certainly being very cautious that as we work that facility, then we certainly do not take any steps backwards and, you know, touch wood. We have not been there up to this point, and we continue through this.

1 of the things I will add is if it continues at this pace and we have no reason to expect it not to, it is probably going to be the fourth largest site in our fleet, as we hit the end of the year and go into the next year. So we feel really good about it. And kudos to the team for being able to ramp up such a complex project and in some cases with we had not done a prep line in any of our other facilities. We have been able to ramp that up there, which gives us confidence that maybe we can do that in other places. So it is created some opportunities for us to look at and then provide additional growth just because of the things we have 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 have heard from us is we are pleased with our results year to date. We are 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.