AZZ Inc.

Good day and welcome to AZZ's second quarter fiscal 2026 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 touchtone 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 Sandy Martin of Three Part Advisors. Please go ahead.

Good morning. Thank you for joining us today to review AZZ's second quarter fiscal 2026 results for the period ended August 31st, 2025. Joining the call today are Tom Ferguson, President and Chief Executive Officer, Jason Crawford, Chief Financial Officer, and David Nark, Chief Marketing, Communications, and Investor Relations Officer. After today's prepared remarks, we will open the call for questions. Please note that the live webcast for today's call can be found at www.azz.com slash investor dash events. Before we begin, I would like to remind everyone that our discussion today will include forward-looking statements made in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. By their nature, forward-looking statements are uncertain and outside the company's control. Except for actual results, AZZ's comments containing forward-looking statements may involve risks, and uncertainties, some of which are detailed from time to time in documents filed by AZC with the Securities and Exchange Commission, including the latest annual report on Form 10-K. These statements are not guarantees of future performance. Therefore, undue reliance should not be placed upon them. Actual results could differ materially from these expectations. In addition, today's call will discuss non-GAAP financial measures, which should be considered supplemental and not as a substitute for GAAP financial measures. We refer our shareholders to our reconciliations from GAAP to non-GAAP measures contained in today's earnings press release. I would now like to turn the call over to Tom Ferguson.

Thank you, Sandy. Good morning, and thank you for joining us to review AZZ's financial results today. We delivered solid second quarter results. Total sales increased by 2%, adjusted earnings per share rose 13.1%, and operating cash flow improved by 23%, underscoring our disciplined execution in a highly dynamic environment. Metal Coatings achieved a strong double-digit sales growth supported by higher volumes and sustained momentum related to robust infrastructure project activity. Metal cutting margins of 30.8% were down slightly as our mix of solar and transmission distribution increased, and these tend to be slightly lower margin markets. We remain confident in the strength of our core markets and the growth potential ahead for galvanized steel in construction, industrial, and electrical utility projects this year. Similar to others in the industry this quarter, pre-code metals faced some mixed market conditions, particularly in relation to tariffs, but focused on protecting margins while pursuing market share opportunities. While pre-code benefited from the tariff impact on pre-painted imported metal, they faced headwinds due to softer building construction that extended to HVAC and appliance end markets. Looking ahead, We are encouraged by Precote's new customer wins, which are generating market share gains. This is primarily due to a strong focus on key markets impacted by reduced access to imported pre-painted metal, including the aluminum container market. Our container and beverage results continue to reach new highs during the quarter, indicating that the shift from plastic to aluminum is gaining momentum as we ramp production at the new facility in Washington, Missouri. However, The overall demand outlook remains mixed for pre-code's end markets, so we are maintaining a cautious outlook as ongoing tariffs have contributed to customer hesitation on non-infrastructure-related projects. Dave will provide more details on industry trends and AZZ's end markets shortly. Consolidated adjusted EBITDA for the quarter was $88.7 million, reflecting a margin of 21.3%. The divestiture of the electrical products group through the Avail joint venture created a modest EBITDA headwind in the quarter, which Jason will address shortly. At our new Washington, Missouri facility, sales continue to increase and operating leverage is improving as we ramp up production. We remain confident in achieving gross margin improvements as volumes grow at the new site through the second half of the year. AZZ's proprietary technology continues to set us apart. We continue to pursue technology upgrades ranging from updating system applications, continuing to migrate data systems to Oracle, exploring AI opportunities, and developing new galvanizing and coding processes to drive operational efficiencies across our broad network of facilities. As is normal for our metal coatings team, they quickly integrated the newly acquired Ohio facility onto Oracle and DGS, which is our proprietary digital galvanizing system.

With that, I will turn it over to Jason. Thank you, Tom. For the second quarter, we reported sales of $417.3 million, representing a 2% increase from $409 million in the prior year period. Growth was led by a metal coating segment where sales increased 10.88% over the prior year's quarter, driven by higher volumes and supported by infrastructure-related spending across our largest verticals. In contrast, Precote metal sales declined 4.3% due to a weaker market environment, reflecting lower volumes in building construction, HVAC and appliance end markets. As Tom mentioned, Precote continues to win market share in a competitive and dynamic marketplace. The second quarter's gross profit was $101.3 million, or 24.3% of sales, compared to $103.5 million, or 25.3% of sales, in the same quarter of the prior year. The pre-coat metal segment margins were impacted by customer buying patterns and the introduction of our new aluminum coil coating facility, which when combined contributed to other small drag-in margins. whereas in the metal coating segment, product mix was slightly unfavourable in comparison to the prior year quarter. Selling, general and administrative expenses totaled $32.8 million in the second quarter, or 7.9% of sales. This compares favourably to last year's second quarter, which was $35.9 million, or 8.8% of sales. Operating income for the quarter was $68.5 million or 16.4% of sales, compared with $67.6 million or 16.5% of sales in the prior year second quarter, reflecting the strength in operational execution on lower volumes. As noted last quarter, Fernway, our 60% joint venture partner on Avail, divested the majority of its electrical products business in the quarter. For the second quarter, this transaction resulted in accounting adjustments to record an additional gain on the sale. Combined with other adjustments and operating performance of the remaining businesses, we reported equity and earnings of $59.3 million in the quarter. On an adjusted basis, our quarterly equity and earnings reflected a loss of $2.3 million from continuing operations. The loss in the quarter is primarily due to the excess overhead costs resulting from the divestiture of the electrical products business and the traditionally weaker summer season from Avail's welding solution business. Looking ahead, regarding our 40% ownership interest in the remaining Avail business, which now consists of welding services, lighting and some international joint ventures, we are forecasting equity and earnings from unconsolidated subsidiaries to be zero for the remainder of the year. Interest expense for the second quarter was $13.7 million, representing a significant improvement of $8.2 million from the prior year due to a combination of debt pay down, debt repricing and the accounts receivable securitisation facility introduced in the quarter. The accounts receivable facility has a borrowings limit of $150 million and is accounted for as secured borrowings with an interest rate of one month so far plus 95 basis points. Create an expected annual interest savings of $1.4 million versus current borrowings on the term loan. During the quarter, 100% of the proceeds received from this facility were used to pay down existing debt. The current quarter's income tax expense was $25 million, reflecting an effective tax rate of 21.9%, compared to the 25.6% tax rate in the prior year's quarter. The tax rate reduction in the quarter is due to an increase in RMD tax credits attributable to technology spend and our new-build Washington, Missouri facility. Reported net income for the second quarter was $89.3 million, compared to $35.4 million for the prior year quarter. Since our non-GAAP measure for adjusted net income excludes, amongst other items, equity and earnings from the availed divestiture of $61.6 million, AZZ reported adjusted net income of $46.9 million, or adjusted diluted EPS of $1.55. This compares favourably to the prior years adjusted net income of $41.3 million or adjusted deleted EPS of $1.37, an increase of 13.1% compared to the same period of the prior year. Second quarter adjusted EBITDA was $88.7 million or 21.3% of sales compared to $91.9 million or 22.5% of sales in the prior year. Excluding the impact of equity and earnings, our adjusted EBITDA for the second quarter would have been $91 million or 21.8% compared to $90.4 million or 22.1% in the same quarter last year. Turning to our financial position and balance sheet, for the second quarter we generated cash flow from operations of $58.4 million. Consistent with our capital allocation strategy, In the quarter, we invested $19.3 million in capital expenditures for the businesses, invested a further $30.1 million in the acquisition of our new galvanizing facility in Canton, Ohio, and increased our dividend payments to shareholders over prior year. With a slight pay down of debt in Q2, combined with our continued financial performance, our credit agreement net leverage ratio remained at 1.7 times, compared to 2.7 times in Q2 of last year. As communicated, we continue to maintain a disciplined approach to our capital allocation strategy, transitioning our focus to investments in organic growth and strategic M&A, while returning value to our shareholders through cash dividends and share buybacks. and maintaining our debt leverage in the target range of 1.5 to 2.5 times. With that, I'll turn the call over to David.

Thank you, Jason. Let me begin with an update on the Infrastructure Investment and Jobs Act. As of August of this year, the Department of Transportation reported that 73% of IIJA program funds totaling $319 billion had been committed to specific projects. with approximately $177 billion already outlaid. Similarly, according to the Department of Energy website, 77% or $74.9 billion had been obligated to certain projects. Both agencies are expected to continue to announce awards or initiatives throughout the balance of this year. We believe that because the current legislation is scheduled to expire in 2026 and requires projects such as utility-grade solar to be completed by the end of next year, IIJA-related spending is having a positive effect on demand for our metal coating segment. We expect multi-year tailwinds associated with IIJA spending and will continue to monitor discussions regarding potential reauthorization beyond 2026 once the government reopens. During az second quarter we continue to see infrastructure non building and civil works projects as a bright spot offset by softness and non residential and residential building construction. reported and market sales for az were up, including utilities up 19% consumer up 7.6% while construction sales were up by less than 1% as compared to the same quarter last year. As noted today and in prior quarters, end market growth in utilities is elevated due to IIJA-related project spending, particularly solar, transmission and distribution, and data center projects. As Tom mentioned, the transition to aluminum packaging in both the food and beverage sectors remains a significant growth driver for AZZ. Our container end market has sustained strong momentum this year, supported by continued ramp-up of the production at our new Greenfield facility in Washington, Missouri, and recent share gain activity. While we have seen increased opportunities from tariffs associated with imported pre-painted aluminum and steel, weakness in both non-residential building, particularly commercial office and retail construction, as well as residential building has created some divergence in our construction and market sales. However, our teams remain well positioned to execute through the balance of the fiscal year, and we are approaching calendar year 2026 with measured optimism. With that, I will now turn the call back over to Tom.

Thanks, Dave. We continue to see a strong pipeline of project-related activity driven by megatrends such as energy transition and the growing demand for electricity generation to support the rapid growth of data centers. Grid modernization, transmission line expansion, and the integration of multiple energy sources will fuel further demand at our plants. As the country continues its journey to reindustrialize, the AI boom and cloud expansion are driving massive data center projects and infrastructure development. With higher interest rates lasting longer than anticipated, new housing development and related supporting projects remain muted. Public infrastructure spending tends to be less sensitive to interest rate fluctuations, as it is often funded through grants, bonds, or supported by subsidies. Overall, we anticipate and have planned for a multi-year tailwind in infrastructure spending, particularly in energy and power generation capacity, despite the potential for continued pressure on residential construction. For our 2026 fiscal year, we are reiterating guidance for total sales EBITDA and adjusted EBS. We anticipate that our sales will be in a range of $1.625 billion to $1.725 billion. Adjusted EBITDA will be within the lower half of the range of $360 million to $400 million due to the lack of availed equity income as they continue to transition without the electrical products businesses. Adjusted diluted earnings per share will be in a range of $5.75 to $6.25, which translates to an increase of between 10% to 20% over the fiscal 2025 adjusted earnings. Although markets may be choppy in the second half of our current fiscal year, which extends through February 2026, our numbers are supported by strengthened projects and structural steel demand forecasts. We continue to strengthen our operational performance and maintain disciplined execution at each of our facilities. Our liquidity position and balance sheet are strong and flexible with a low debt to EBITDA ratio, especially given our cash generation capabilities. We remain well positioned to pursue strategic growth opportunities, including our other capital allocation strategies, as we have already discussed. Finally, industry consolidation presents ongoing opportunities for our company, and we're actively evaluating bolt-on acquisitions that are strategically aligned fit our integration playbook, and extend our market leadership in metal coatings. Our M&A pipeline is healthy, and we plan to remain disciplined in pursuing only high-quality opportunities that create long-term accretive value for our shareholders. As always, I would like to express my gratitude to our hardworking and highly talented team for executing AZZ's shared vision of growth, profitability, and operational excellence. Our mission is to create superior value within a culture where our people can grow and traits matter. Our culture is built on providing outstanding quality and services directed within our servant leader mindset. These principles continue to shape our path forward and underpin our success. I am proud of our team's execution of the fiscal 2026 plan so far this year and remain confident we are positioned for continued growth and success. We are committed to driving top line growth, enhancing profitability, and generating robust cash flow, all of which are supported by a disciplined capital allocation philosophy. Through the successful execution of our strategic priorities, we believe we will continue to deliver sustainable value for all of our stakeholders. Now, operator, we would like to open up the call for questions.

We will now begin the question and answer session. To ask a question, you may press star then one 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 two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Ganshan Pindrabi with Baird. Please go ahead.

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

Yeah, I think a couple of things there. One, we picked up share gain because the – and we referenced it. The prepainted imports, because of the tariffs, are down significantly. So that's been transitioning to domestic supply, and we're painting, you know, at least as much as our share. But if you take that, it's probably, David, what, about 10% on imports. So we've, you know, picking up our share of it, so we've picked up 3% or 4%. to offset the roughly 9%, 10% market decline. So it's just offsetting, but it's also positioning us, depending on what happens with tariffs, hopefully to sustain that market share and be able to take advantage of it as we go forward. as we're picking up new customers, new applications, converting that. And that's pretty much at our normal margin profile, so it's not like we've had to go aggressively discount to take that share, which is why I'm also confident that those margins will continue to flow through going forward post-market softness, if you will. Sure.

And so sticking with pre-code, so some of the challenges that you called out, you know, building construction, HVAC, appliances, they all seem sort of, you know, aligned towards the same theme. It doesn't seem like there's any short-term catalyst for those end markets in terms of reversing that weakness. Would it just be the share gains and then the, you know, the Washington, Missouri facility that are the positive offsets? And how do you think that nets out for segment volumes as we think about the back half of the year for pre-codes?

Yeah, I'll start and then Jason can probably add some additional color. Yeah, I think you pretty much summed it up. So we're going to continue to, assuming the tariffs stay in place, which looks like they will, then we should be able to sustain those market share gains from picking up the past imported pre-painted metal. Two, we do have the Wash Mo site. It's still... I think we're saying it's running about 20% of its capacity or some number thereabouts. So it's still got a ramp to it as the next six months go on and pretty significantly. So that's opportunity and that is where there's strong demand in that aluminum container market. That's our sister facility to WashMo, which is the St. Louis, which has two lines, is doing really well because of the high demand in that market. So, you know, as I look at it, I think, well, and then the third piece is we're also aggressively going after other conversions and chasing things. So any kind of rebound in construction, and I think we're seeing some signs of that. We had a big customer, well, we had a lot of customers at our annual golf tournament. And they generally feel like things have bottomed and starting to come back up in certain areas of the country particularly. So we feel good about what we're doing. And I'd also commend the Preco team. They've adjusted their operating and shifts and times and capacity. You know, we're retaining capacity. for the upturn that we hope to have as the year goes on. But also, as we talk about our variable cost structure, they've been able to adjust that pretty quickly. And I know this is about pre-code, but I'd say the metal coating side has done that outstandingly well during that same time period.

Okay, very good. Thank you.

Jason, did you want to add anything?

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

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

Fantastic. Thank you so much.

Thank you.

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

Thank you, operator. Good morning, everyone. It's still a very solid quarter here, and I wanted to just turn in on the guidance for a second. So you've reiterated your adjusted EBITDA guidance, and, you know, just curious, Really, what would take you to the higher low end of the range at this point? I mean, how much is end market driven versus operational? And then, you know, how much EBITDA could Washington incrementally contribute as volumes continue to ramp? Thank you.

I'll answer the first part of that, and then Jason can opine on Washington. You know, I feel like when it comes to – And I don't know if this got missed or not. We've talked about it a few times. But you look at the $14, $15 million of avail EBITDA impact from last year versus we've signaled zero for Q2, Q3, and Q4 for avail. And so that's the biggest impact in terms of our EBITDA guidance. And I'd say that was, you know, harder for us to predict until now we can see with primarily WSI as the main asset left in a veil. And they had just gone through this summer's obvious week because, you know, there's just not turnarounds and outages during the summer. So we felt that. And going forward, though, they do come back into – So in terms of the upside, hopefully they do have a strong fall season, which is back to how turnarounds and outages run. I think interest savings is going to continue. We've paid down the debt. We continue, even after acquiring Canton, we paid down some debt. And interest rates have finally moved a little lower. And we've done that through our own actions in terms of repricing and the securitization. so you know we feel good about that it's it's mostly embedded in our in our outlook but you know there's upsides to that and then uh hopefully we get a deal or two done on the particularly on the galvanizing side that uh before the end of the year and have some some impact there and because obviously the assets we're buying are going to be good galvanizing assets that we hope to improve as well i think those are all the kind of pieces pre-coats uh performing well i think they're driving uh you know, to sustain those margins over 20%. And given the volume fall off, so as volumes pick up at all, that could also be upside to us. And then we do believe the metal coatings folks are driving hard to sustain that 30, 31% margin profile while taking advantage of the higher than expected growth driven partly by regulatory changes and the threat that solar is going to go away. So we're seeing lots of solar and and poll transmission distribution kind of activity, which is we signal maybe slightly lower margin than on balance, but it's really, really good volumes. So we like that stuff a lot. And then Jason on Washington.

Yeah, certainly Washington, as we previously communicated, would be a drag in margins in the first half of the year and then start to turn positive in the second half of the year. And we're very much in line with that. It was around about $2 million of a hit to margins in Q2, essentially. uh from a contribution margin point of view the the business is contributing with the volume that's flowing through there uh we know that's ramp up volume uh but obviously you've got the the fixed costs associated with that facility and largely the fixed costs are driven by depreciation uh of the 125 million dollars so it's very much in line with the expectations uh as you start to look at the second half of the year then uh q3 q4 it starts to ramp and you know we we're very much in line with the expectation of that ramp profile. We'll start to hit capacity towards the 50% arena through Q3, going into Q4, and then really see that start to pop in Q4. So very much aligned with expectations and very much built into original guidance and where we sit here today.

Jason, I really appreciate all that detail. Maybe just Back on the COIL coding side, I mean, you've obviously deployed meaningful growth capital to expand capacity with Washington. But, you know, in the past, I think you have spoken about there could be some, you know, margin expansion opportunities on the COIL coding side that could require some capital. Can you just remind us how you're thinking about that opportunity today? What would be the timing around, you know, kind of a project like that? And how many quarters would something like that undertake? Thank you.

Yeah, and to be fair, I don't think there's any one big silver bullet out there. I think there's multiple projects that we've started to kick off coming through the summer programme. that we'll start to incrementally see some benefits and we're seeing them start to kick in. To be fair, that's applicable to both sides of the business. As we've highlighted, our capital allocation is looking outside and inside and some of the projects that sat on the sidelines are now getting turned into execution. Again, I don't think there's got to be a big boost in terms of a step function, but we're going to continue to drive the opportunities that we see in front of ourselves.

Guys, thanks again. Keep up the good work. Thank you.

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

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

Pardon me. We have Timna Tanners with Wells Fargo. Please go ahead.

Hey, Timna.

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

Yeah, it's really early innings. I think probably a couple of months of that. And that should have a good tail to it. It just takes time to ramp up the domestic capacity, change project sourcing and things like that. So we feel good about that, the balance of the year. I'm not sure it's fully embedded in our forecast. Jason would probably disagree with me. He probably believes it is fully embedded. But I'm probably more the optimist. And so, yeah, I look forward to that because we're engaging with some new customers and able to demonstrate our value-add capabilities in terms of quality service and particularly responsiveness. And it does impact our – I would say it does have a slight negative impact on our margin profile because, you know, a lot of these are smaller – smaller orders, and we're winning them because we can turn them quickly and give them whatever kind of color combination that they want. So we really look forward to that continuing to grow and be able to sustain it regardless of whether the imports come back up or not.

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

No, certainly not from our point of view at this point. Obviously there's one customer that supports that facility and quite frankly our production ramp is ahead of plan and we're executing with the material and we were out at the facility a couple of weeks ago and it's really starting to look like a coil coating facility versus a showpiece that a lot of the analysts had saw a couple of, I guess, six weeks ago or so. So I think they're in very good shape from that execution through the end of the year.

Yeah, there's a lot of aluminum sitting on that floor now.

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

Yeah, I think there's, you know, we're working a couple of the typical bolt-ons for galvanizing, and one of them is actually a process, so we know that one will go forward. we can never quite predict. We, we tend to believe we're always going to be a strong contender for those. And, uh, and then we've got a good, good game plan once we do acquire them as we just did with Canton, almost immediately ramping it up to our margin profile. Um, so I look forward to that and, and we're going to be as aggressive as we need to be. Um, not, not seeing a whole lot shake loose because of it, which actually a little bit surprising. We were hoping to see maybe one of these multi-site galvanizers, uh, You decide to go on the market, but we haven't gotten any indication of that at this point. And then on the pre-code side, there's a couple of things out there. I think it's probably as much in our control as they can be. But once again, the market hasn't seemed to cause them to want to move any faster than they were before. But it's a good pipeline. I think we've got nine good opportunities that are in various stages, not to mention a long list of other ones that we remain in contact with. So I'm hopeful we get something done before the end of the year and maybe more than one.

Okay. Thanks again.

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

Morning, guys. Can you hear me now? We can. Great. First one, within pre-code, I think there's also a negative impact from tariffs that possibly offsets the positive impact. I was just curious if you could walk through that, Tom.

I'll let David do it.

Yeah, you know, I think as you... But you're right. As you look at the overall market for imported steel, Adam, you know, we... We know that the pre-painted imports are down 23% this year. That has been a bright spot or a tailwind for Precote because that means there's less competitive pre-painted steel coming in. But offsetting that, the bare galvalume market's been down about 50% due to the tariff impacts. So that's really the difference in the numbers and why Precote was having some headwinds this year. because normally that imported bears is a volume that they would be the natural source to be selected to quote and coat that product. But as Tom mentioned, we think that our customers are telling us things have bottomed out. They did buy ahead and placed orders ahead of the tariffs and have been working through the inventory that they've had on the shelf. And we look forward to things turning around later on.

Yeah, and I'd add that the tariff impact has really driven, as David mentioned, it's just the uncertainty. So you've got projects being deferred, delayed. And I'd say it's a combination of tariffs as well as the lower interest expectations, as we had noted. Interest rates have stayed higher from the Fed longer than I think a lot of people anticipated. And now with the government shut down, who knows what the next step is. So I think that's just created hesitancy on non-infrastructure projects versus what you see on the metal coating side where those infrastructure projects are going forward. And if anything, on the solar stuff, it's accelerated. So on one segment, it's a positive. On the other segment, it's mixed, as you said, and probably more negative than positive in the aggregate for pre-coating. OK.

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

Yeah, we're very much aligned that now you've got a subscale piece of business, which is really three pieces. WSI forming by far the largest in terms of sales, but not in terms of contribution margin. Then you've got a lighting business, which is a nice little business that I think they'll get that transacted hopefully this year. And then there's a Chinese joint venture high-voltage bus business that, once again, I'd hope that they could get that transacted this year. WSI is a tougher one because it's a little more impacted from a market perspective in terms of refined returns around, turnarounds and things like that. So that's probably, we'd prefer not, but it's probably a longer term piece. In terms of the Q3, you know, you could, I'd say it's hard for us to predict because Q3 should be typically is the fall season and tends to be a stronger one for WSI. On the other hand, as Jason alluded to, they are carrying more overhead that they can't get at while the TSAs with Inven are running. So, you know, on balance, I think we're pegging it at zero. And I'd say it's more likely slightly negative in Q3. The risk is probably more negative in Q3 than the upside. And then Q4, they go into the winter, but hopefully some of these other things transact.

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

Good color. Thanks, guys. Sure.

Again, if you have a question, please press star then 1. Our next question comes from Mark Raichman with Noble Capital Markets. Please go ahead.

Thank you. Just a couple of questions. On interest expense, when we published at the end of September, we took our interest expense numbers down. I think we were kind of landing around 49, 50 million for the year. And of course, the second quarter came in a little higher than our revised estimate. So I was just kind of curious, your guidance hasn't changed. But, you know, in the past, your guidance had included 55 to 65 million of interest expense. You know, what would your expectations be for interest expense for the full year of 2026, for the fiscal year of 2026?

Yeah, I mean, I think the part in terms of the interest and the picking up some favourability given that we've reduced our total debt through the avail transaction. As you look at our interest expense in the quarter, then we certainly picked up some favourability, but it was more towards the back end of the quarter, given the repricing, the term loan and the introduction of the securitisation. So obviously, as you look at our quarter in Q2, that's got to improve in Q3 and Q4, obviously through the cost of debt. And then we will continue to pay down debt through the second half of the year, excluding any impact from M&A or any shared repurchases.

And the second question is that SG&A in 2020-25 ran about 9% of sales. It was 8.2% I think in the May quarter, but dipped down to 7.9% this quarter. What are your kind of your expectations for the, well, I guess, you know, is a percentage of sales the right way to look at it? Or what would you kind of your expectations be for the remainder of the year and maybe kind of an ongoing, you know, percentage?

Yeah, I mean, I think that 8% number is fairly representative. Obviously, seasonality kicks in in the back half of the year, certainly in Q4, where obviously SD&A is a little bit more of a fixed cost. So the number that you're seeing in Q2, there really isn't any great pluses or minuses away from that through the end of the year. So it's got to be more of a fixed number versus a fixed percentage as you look at Q3 and Q4.

Okay, and just one follow-up to Adam's question on the equity and earnings of unconsolidated subsidiaries. So we originally had like $1.4 million in the third quarter and I think $774,000 in the February quarter. So what I heard from you is basically zero in the third quarter and kind of maybe modestly positive or close to neutral in the fourth quarter for that. And that would be a fail, obviously. Okay.

Yeah, yeah. I mean, our guidance is zero for both. And, you know, I think some of the discussions that we've been having is there's certainly a sensitivity round about that. We've got to get it wrong. We've got to get it slightly wrong in the upside or the downside. I would say in Q3, it's probably... If anything, it's slightly wrong in the upside and then slightly wrong in the downside. The seasonality for the WSI business has got to kick in in Q4, so the determining factor in Q4 is going to be how quickly they can ramp the overhead costs to realign to the current business. But really, as you look at the numbers, then In theory, in Q3 and Q4, it should be a very minimal plus or minus, right, about zero.

Okay, that's very helpful. Thank you very much. Sure. Thank you.

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

Good morning, guys, and thanks for taking the questions. I actually want to go back to one of your responses to an earlier question about pre-code doing better in September. Do you have any idea or can you give us any color as to what's driving maybe the recovery and pre-code during that month?

The only thing I would add is there's certainly fluctuations month to month and inventory buying patterns plays a part into that and obviously we're still coming through our strong construction season so building inventory versus depleting inventory you're into that time period where you're starting to look at the end of the season and accommodating your inventory for that and you know, again, quite frankly, in September, we've seen a little bit of strength. So our customers, you know, if you take that one single data point, our customers are, you know, looking for a healthy end to the season would be my takeaway.

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

Yeah, to be fair, we've not went into that level of detail. And, you know, there's still a lot of variations to take place. And uh you know quite frankly we've got a sister facility in the simplest area and you know we'll use some of the volume from that to to help ramp etc so it's it's not a black and white just looking at that single facility and how it's going to play into the the overall results uh there's still a lot to play out here you know we're you know we started the the production in in april and We're certainly progressing very, very well, but equally we're cautious just in terms of what could be around the corner. So really don't want to put specific numbers around about it, but what we have built into the guidance, we're sitting here very comfortable with those numbers.

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

Sure. Yeah, first thing is, yeah, we have seen that, which usually makes opportunities for Not that we base our price off of cost. We're very value pricing oriented. But usually when zinc's going up on the LME, customers understand that's going to start to affect prices. So that creates some opportunities. Two, we've got six to eight months of inventory in our kettles. So it doesn't have much impact on our margin profile, the balance of the year, our cost of zinc, the balance of the year. Yeah, but clearly that will start to color how we look at next year and as we're entering the process to put our plans and budgets together for the next fiscal year. But generally, yeah, I think it's going to continue up, but I'm not sure, yeah, I'm not sure we're going to, usually when things start to change, when you see some spikes, and this has been more of a gradual increase and And generally, that's very manageable for us. So, yeah, minor impact on our outlook in metal coatings for this year, clearly, as we start to put our plans together. It'll be a talking point as we talk about however we end up guiding for the next fiscal year.

Great. That makes sense. Thanks for taking my questions. Appreciate it. Sure thing. Thanks, John.

The next question comes from John Bratz with Kansas City Capital. Please go ahead.

Good morning, everyone. Good morning, John. Tom, a couple questions. On the metal coating business, you completed the Canton acquisition, I think July 1st. How much of a contribution did Canton have in terms of revenues in the quarter?

You know, it's revenues in the quarter, $2 million, yeah, and a few hundred thousand of contribution margin. Okay, okay, good.

It was two months in the quarter, so we see a full quarter going forward. That's right.

Okay, and secondly, on the margin profile for the metal coating business, it's been very, very good over the last couple of years, and absent any... significant change in zinc prices and the economy and so on. Is that range that you provided in terms of adjusted EBITDA margin for that segment, is that lower end of the range, is that still relevant? Is there a point where maybe you feel comfortable raising that lower end and, you know, getting closer to the, you know, 30% to 32%, something like that, again, absent any significant economic changes.

Yeah, we tend to, yeah, we haven't seen the low end of that or even very much. I think one quarter we were below 30%, which was last winter. You know, we had a rougher than normal Q4 last year. So, you know, that was probably the, Only time in a while we've seen below 30%. But yeah, I think we're pretty confident in this. Where we're at is 30 to 32%. We'll look at that as we go into the planning process. We just completed our strategic plan and we'll be rolling out some communication on that as we go forward. But yeah, we're pretty comfortable with their margin profile at holding in 30 plus percent range. the balance of this year. So, yeah, we might get comfortable to guide to a tighter range on that.

Okay. All right. Thank you very much.

Sure thing.

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

Yeah, just a couple of things. I don't think we got any questions on share buybacks. Jason alluded to it, but we had questions kind of guided that we'd be buying, well, we issued a 10B51 for $20 million at a couple of price points. I think we're going to, I'm confident we will get $20 million of our shares bought in over the next perhaps few weeks to a couple of months. And I look forward to doing that because we think we're still a great high value stock and business. with an outstanding outlook, particularly as we kind of finish out the choppiness of this year and look forward to next year. So thank you for joining us. We look forward to talking to you after our third quarter results.

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