Full Transcript: AZZ Q2 2027 Earnings Call

On Wednesday, AZZ (NYSE:AZZ) discussed second-quarter financial results during its earnings call. The full transcript is provided below.

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Summary

AZZ Incorporated reported record second-quarter sales of $486.9 million, up 16.7% year-over-year, driven by strong performance in Metal Coatings and Precoat Metals segments.

The company completed the acquisition of Seattle Galvanizing Co., enhancing its presence in the Pacific Northwest, and initiated a new greenfield plant in Tulsa to support infrastructure demand.

AZZ raised its fiscal 2027 outlook, now expecting sales between $1.825 billion and $1.875 billion, adjusted EBITDA of $380 million to $420 million, and adjusted EPS of $7.00 to $7.30.

Operational highlights include a 22.9% sales increase in Metal Coatings and an 11.5% increase in Precoat Metals, with significant contributions from the Washington, Missouri facility.

The company emphasized strategic growth through disciplined acquisitions, organic investments, and leveraging technology to enhance operational efficiency.

AZZ plans to reduce debt by $100 million to $140 million during the fiscal year and continues to focus on shareholder returns through stock repurchases and dividends.

Full Transcript

OPERATOR

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 two.

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.

Philip Cooper, Three Part Advisors

Good morning. Thank you for joining us today to review AZZ's fiscal 2027 second quarter results for the period ended August 31, 2026. Joining the call today are Tom Ferguson, President and Chief Executive Officer; Jason Crawford, Chief Financial Officer; and David Nark, Chief Marketing, Communications and Investor Relations Officer. After today's prepared remarks, we will open the call for questions. Please note that the live webcast of today's call is available at www.azz.com/investor-events.

Before we begin, I would like to remind everyone that our discussion today will include forward-looking statements made in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. By their nature, forward-looking statements are uncertain and outside the Company's control, except for actual results. AZZ's comments containing forward-looking statements may involve risks and uncertainties, some of which are detailed from time to time in documents filed by AZZ with the Securities and Exchange Commission, including 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.

Tom Ferguson, President & CEO

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. Segments achieved record quarterly sales. Metal Coatings 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. Precoat Metals 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 Co., 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 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 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. 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-verticalization 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 Coil Zone platform strengthen 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.

Jason Crawford, SVP & CFO

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 Coatings sales increased 22.9%, reflecting continued momentum in the construction and industrial end markets. Precoat Metals 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 AVAIL JV, as a reminder, our second quarter of the prior year included $59.3 million in total equity in 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 taxes paid by AVAIL on behalf of AZZ. Our JV partner continues to pursue the divestiture of its remaining assets, which operationally now consist 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 on 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 $1.9 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 $0.1 million 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 continued 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 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. 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 trailing twelve-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.

David Nark (Chief Marketing, Communications and Investor Relations Officer)

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 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, 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, supports our positive long-term outlook for many of our end markets. With that, I will turn the call over to Tom.

Tom Ferguson, President & CEO

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 $7.00 to $7.30.

We also expect to reduce debt by $100 million to $140 million during fiscal 2027, further strengthening an already strong balance sheet, and will 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 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 analysts' questions.

OPERATOR

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 Ghansham Panjabi with Baird.

Please go ahead.

Ghansham Panjabi, Analyst at Baird

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 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 to 2Q.

Tom Ferguson, President & CEO

Yeah, a couple of things. This is Tom. One, we're factoring in the acquisition of Seattle Galvanizing that's performing well. So that gave us 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. In Metal Coatings, 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, a 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 are looking. So, 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, you know, zinc LME, so we feel protected on that. Just lots of positives for us.

Ghansham Panjabi, Analyst at Baird

Okay, terrific. And since the last time you reported, you know, obviously interest rates have stepped function 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, 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?

David Nark (Chief Marketing, Communications and Investor Relations Officer)

Ghansham, this is David, and 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. So thus far right now it’s steady as she goes and we feel pretty good.

Tom Ferguson, President & CEO

Yeah, I’d add data centers are still a pretty small portion of our total business. So when we look at got to build out the fixed transmission distribution, there’s 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 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 tailwinds.

Ghansham Panjabi, Analyst at Baird

Perfect. Thank you so much.

OPERATOR

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

Richard Garciana, Analyst at Barclays

Great, thanks. And solid quarter, everybody. My first question is in terms of the 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?

Jason Crawford, SVP & CFO

Yeah, 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.

Richard Garciana, Analyst at Barclays

Okay, great. Some more to look forward to there. And then maybe just in terms of the market environment, you know, we’re seeing still tight steel markets. You know, is that causing issues for your customers obtaining substrate—lead times, you know, eight to ten weeks for some products? How does this maybe impact, and does this maybe actually provide further visibility into next year in terms of strength in the order book?

Tom Ferguson, President & CEO

Yeah, I’ll answer the first part—maybe Jason will take a shot at the second part. But, you know, substrate is affecting us primarily on the Precoat 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, so it’s made the opportunities a little tighter. And 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.

So, you know, 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. So 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.

Jason Crawford, SVP & CFO

Yeah. And I think in the kind of medium-term visibility, 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. The idea and hope is that it starts to free itself up a little bit. But at the moment, given that we probably carry plus or minus three months’ worth of inventory in our warehouses, we’ve got 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.

Richard Garciana, Analyst at Barclays

Thank you.

OPERATOR

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

Daniel Rizzo, Analyst at Jefferies

Hey, guys. Thanks for taking my question. So you mentioned the backlog and you talked about it 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 lag of flow-through? How should we think about it?

David Nark (Chief Marketing, Communications and Investor Relations Officer)

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 big backlog. Our business is more short cycle. But what we do is we use customers’ backlog 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 throughout the balance of the fiscal year. And as Jason said, we’ll continue to monitor that looking forward into next year.

Daniel Rizzo, Analyst at Jefferies

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 more consolidation or just acquisitions?

Tom Ferguson, President & CEO

Yeah, it is. There are 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, whether a kettle’s down for maintenance or for whatever might be going on. So, you know, there are opportunities up there. There are other companies, other facilities, and, you know, that’s part of our pipeline.

Daniel Rizzo, Analyst at Jefferies

Thank you very much.

OPERATOR

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

Tina Turners, Analyst at Wells Fargo

Yeah, hey, good morning. 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—sorry, substrate supply.

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.

Tom Ferguson, President & CEO

Yeah, I think, you know, it’s—so it’s our customers. We don’t buy any substrate ourselves. And so 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. So, you know, for us, that’s 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’s where we play in the value chain—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’s tight. We see it every day, particularly galvanized sheet metal. It’s difficult, but we’ve been facing that now for a while. This is not new. I think it’s just now hitting the news 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.

David Nark (Chief Marketing, Communications and Investor Relations Officer)

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. You know, Section 232 running at 50% is not certainly helping things. It’s taken 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—you know, 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, you know, summing that up, I’d say, you know what Tom said: it’s a tight market, things don’t look to be getting any better. But, you know, we’re out there making sure that we’re working with our customers to find anything that we can.

Tina Turners, Analyst at Wells Fargo

Okay, helpful.

Jason Crawford, SVP & CFO

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

Tina Turners, Analyst at Wells Fargo

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: first half steady as kind of typical, quarter over quarter holding up nicely. But should we assume a similar cadence into the second half from the first half as in past years in terms of the seasonal impact on gross margins, or are there any other factors we should be considering for the cadence there?

Jason Crawford, SVP & CFO

Yes, I would add as you think about 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 off Q2, we should have relatively 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’ve been seasonally historically.

Tom Ferguson, President & CEO

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.

Tina Turners, Analyst at Wells Fargo

Okay, thank you.

OPERATOR

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

Adam Thaumheimer, Analyst at Thompson Davis

Hey, good morning, guys. Nice quarter.

Tom Ferguson, President & CEO

Hey, thank you.

Adam Thaumheimer, Analyst at Thompson Davis

Tom, you mentioned the Tulsa Greenfield, and then you said there were 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.

Tom Ferguson, President & CEO

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 you know, 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 a 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, you know, best facilities we're 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 as we did in Washmill 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 that we're going to have the demand available instead of having to go find it and chase it.

UNKNOWN Analyst

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

Tom Ferguson, President & CEO

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

UNKNOWN Analyst

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.

Tom Ferguson, President & CEO

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, you know, 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—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. And that's just the market out there. There's consolidation opportunities. We're, you know, 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 Galv.

So 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 gonna—I'll hedge that statement.

UNKNOWN Analyst

So fair enough and good color. Thanks. Thanks Tom.

OPERATOR

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

Nick Giles, Analyst at B. Riley Securities

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

Jason Crawford, SVP & CFO

It's 100% the former, in relation to the acquisition that we just made. If you look at that, it was $57 and a half million dollars and slightly to materially offset by we equally did not have enough cash flow—the cash that we received from Avail in the quarter—either. So net-net there's $40 million that was not in our original prediction there.

Nick Giles, Analyst at B. Riley Securities

Got it. Okay. Thanks for that, Jason. 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.

Jason Crawford, SVP & CFO

Yeah, I mean, to be fair, they're by far our number one priority. Obviously the return—the greatest returns—for us. So we continue to look at them, evaluate them and prioritize 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 as 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 further 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/brownfield opportunities that we are seeing, and one that's came to fruition 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. So I don't think we're necessarily changing anything that we've spoke about previously, other than the slight introduction of the greenfield facilities.

Tom Ferguson, President & CEO

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 ten-million-dollar 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 that is—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, you know, we're going to continue to move quickly and, if anything, accelerate some of that.

Nick Giles, Analyst at B. Riley Securities

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

Tom Ferguson, President & CEO

Thank you.

OPERATOR

The next question comes from John Friendsreb with Sidoti and Company, please go ahead.

John Friendsreb, Analyst at Sidoti & Company

Good morning everyone and thanks for taking the questions. I'd 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 sub-period in the quarter. And also what's the operational contribution profile like of the business compared to the legacy metals coatings business?

Tom Ferguson, President & CEO

You know, it was a—like I said, there's—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—somewhat a little bit above—the fleet average margin. So—and we'll continue to improve that 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 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.

John Friendsreb, Analyst at Sidoti & Company

And the revenue run rate,

Jason Crawford, SVP & CFO

I mean at this point we don't necessarily give out the revenue run rate or the financials to the specific acquisitions. $57.5 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.

John Friendsreb, Analyst at Sidoti & Company

Okay, 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?

Jason Crawford, SVP & CFO

Again I don't think we go into the details in terms of breaking out the revenue and how much of that is price from volume mix. Certainly it contributed to both businesses as I think we previously highlighted. From a galvanizing point of view, we've got some premiums just in association with the increase in zinc pricing. And then from a Precoat point of view, the price pass-through of the paint price increases that we've seen at the start of the year play a part.

But what I would say for both businesses is volume is the strongest contributor to the increasing sales numbers.

Tom Ferguson, President & CEO

Yeah. And I would add, so on the metal coating side, because zinc has been moving up and it reached the level 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 Precoat side they'd had to put price increases through earlier because of higher prices on paint.

So that's more embedded in the Precoat side.

John Friendsreb, Analyst at Sidoti & Company

And I guess one 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?

Tom Ferguson, President & CEO

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. 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, you know, 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.

John Friendsreb, Analyst at Sidoti & Company

Got it. Thanks for taking my questions.

Tom Ferguson, President & CEO

Sure thing.

OPERATOR

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

Mark Reichman, Analyst at Noble Capital Markets

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 strongest opportunities through fiscal year 2028?

Tom Ferguson, President & CEO

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. We just, at some point, it's going to be a lower, you know, lower growth rate but still with the volume. So, you know, 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, 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.

Mark Reichman, Analyst at Noble Capital Markets

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.

Jason Crawford, SVP & CFO

Yeah, yeah. And to be fair, the expansions are still to factor through into our forecast. Obviously, the recently announced greenfield is that 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 pick a number, it's somewhere between 50 and 60 million dollars. 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 gray. But, you know, in a normal year, spending 50, 60 million dollars is what we expect just to maintain our technology levels.

Mark Reichman, Analyst at Noble Capital Markets

That's helpful. And then just lastly, you know, you know, 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?

Tom Ferguson, President & CEO

Yeah, great question. 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 brownfield and greenfields, they take about 18 months to construct and bring them into production.

So as we layer in those, you know, we love to see them ramping up and having an impact basically every year so that we've got that new capacity coming on for. 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 precoat side, it could be adding a blin cell. So that's bringing in other services or expanding our service offering. And 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 coil coating and hot-dip 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, then.

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 focused. 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.

Mark Reichman, Analyst at Noble Capital Markets

That's very helpful. Thank you very much.

Tom Ferguson, President & CEO

All right, our pleasure.

OPERATOR

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

Eric Boyes, Analyst at Evercore ISI

Good morning and thank you. First question on metal coatings capacity. 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.

Tom Ferguson, President & CEO

Great question. You know, 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 still got plenty of opportunity for growth.

This is really just specifically addressing growth within individual geography.

Eric Boyes, Analyst at Evercore ISI

That's great, thank you. And then my second one 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 timeline. Thank you.

Jason Crawford, SVP & CFO

Yeah, yeah. Q2 was a solid quarter for the Washington facility. 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, obviously, 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-on-quarter, month-on-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. But 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 as we work with that facility. 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.

Tom Ferguson, President & CEO

Yeah. 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 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, 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, you know, exciting on multiple levels from our perspective.

Eric Boyes, Analyst at Evercore ISI

Great. Encouraging. Thank you.

OPERATOR

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

Tom Ferguson, President & CEO

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

OPERATOR

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

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