AZZ Inc.'s Q2 2026: Contradictions Emerge on Precoat Metals Market Share, Segment Outlook, and Washington Facility Revenue

The above is the analysis of the conflicting points in this earnings call

Date of Call: October 9, 2025

Financials Results

• Revenue: $417.3M, up 2% YOY (vs $409.0M prior year)
• EPS: Adjusted diluted EPS $1.55, up 13.1% YOY (vs $1.37 prior year)
• Gross Margin: 24.3%, compared to 25.3% in the prior year quarter
• Operating Margin: 16.4%, vs 16.5% in the prior year quarter

Guidance:

• FY26 sales reiterated at $1.625B–$1.725B.
• Adjusted EBITDA expected in the lower half of the $360M–$400M range due to lack of Avail equity income.
• Adjusted diluted EPS guided to $5.75–$6.25 (+10%–20% vs FY2025 adjusted EPS).
• Equity earnings from unconsolidated subsidiaries (Avail) forecast ~0 for the remainder of FY26.
• Washington, MO coil coating facility to turn positive in H2; ramp toward ~50% capacity in Q3–Q4.
• Maintain net leverage target of 1.5x–2.5x; continue dividends, buybacks, and pursue bolt‑on M&A.

Business Commentary:

* Strong Financial Performance in Q2 2026: - AZZ Inc. reported sales of $417.3 million for Q2 2026, representing a 2% increase from the previous year. - The company's adjusted earnings per share rose 13.1%, and operating cash flow improved by 23%. - The growth was driven by disciplined execution in a dynamic environment and strong performance in Metal Coatings and Precoat Metals segments.

• Metal Coatings Segment Growth:
• The Metal Coatings segment saw sales increase by 10.8%, driven by higher volumes and robust infrastructure projects.
• This growth was supported by strong demand in infrastructure-related spending across various sectors, including solar, transmission, and distribution projects.

• The segment achieved a margin of 30.8%, although slightly lower due to the mix of solar and transmission projects.

• Precoat Metals Segment Challenges:

• Precoat Metals experienced a 4.3% decline in sales due to weaker end market conditions, particularly in building construction, HVAC, and appliance markets.
• The decline was partially offset by market share gains resulting from reduced access to imported prepainted metal due to tariffs.

• Despite challenges, the segment remains well-positioned to capitalize on opportunities in markets impacted by tariffs, such as the aluminum container market.

• Impact of Avail Divestiture:

• The divestiture of the Electrical Products Group through the Avail joint venture created a modest EBITDA headwind in Q2 2026.
• However, AZZ expects no equity and earnings from unconsolidated subsidiaries for the remainder of the fiscal year, indicating a refocusing of resources on core operations.

Sentiment Analysis:

• Management reported sales up 2% and adjusted EPS up 13.1%, strong cash flow, and reiterated FY26 sales, EBITDA and EPS guidance. They cited a strong project pipeline, multiyear infrastructure tailwinds, and Metal Coatings strength (30%+ margins), while noting caution that Precoat’s demand outlook is mixed due to tariffs and softer construction.

Q&A:

• Question from Ghansham Panjabi (Baird): Can you provide more color on Precoat market share gains given volumes were down?
  Response: Tariffs cut prepainted imports ~10%, and Precoat captured ~3%–4% share at normal margins, offsetting broader market declines and positioning gains to persist.

• Question from Ghansham Panjabi (Baird): For Precoat H2, are share gains and Washington the key offsets to weak construction/HVAC/appliance?
  Response: Yes—tariff-driven share gains should hold, Washington is ~20% utilized and ramping, aluminum containers are strong, and construction shows signs of bottoming.

• Question from Nick Giles (B. Riley Securities): What would push EBITDA toward the higher end and how much could Washington add as it ramps?
  Response: Loss of Avail equity income is the main headwind; upside drivers include interest savings, potential M&A, volume recovery, and Metal Coatings holding ~30–31% margins; Washington was a ~$2M Q2 drag but turns positive as it ramps to ~50% capacity by Q3–Q4.

• Question from Nick Giles (B. Riley Securities): Update on coil coating margin expansion projects and timing?
  Response: No single step-change; multiple incremental projects across both segments are underway, providing steady efficiency and margin benefits.

• Question from Timna Tanners (Wells Fargo): Is the import displacement opportunity early or mostly realized?
  Response: Early innings with months of runway left; it may slightly pressure mix/margins due to smaller, quick-turn orders, but should support share gains.

• Question from Timna Tanners (Wells Fargo): Any impact to Washington from reduced substrate after the Oswego fire?
  Response: No; ramp is ahead of plan with ample material on hand.

• Question from Timna Tanners (Wells Fargo): How is the M&A pipeline shaping and is the economy affecting sellers’ appetite?
  Response: Pipeline is healthy (~9 active opportunities); pursuing galvanizing bolt-ons with one in process and aiming to close at least one deal this year, though large multisite assets haven’t come to market.

• Question from Adam Thalhimer (Thompson, Davis): How do tariffs both help and hurt Precoat?
  Response: Prepainted imports down ~23% help share, but bare Galvalume imports down ~50% reduce volumes; tariff uncertainty and higher rates are delaying non-infrastructure projects.

• Question from Adam Thalhimer (Thompson, Davis): Confidence in no further Avail losses and timeline to monetize remnants?
  Response: Guiding ~0 equity income; Q3 risk skews slightly negative, Q4 minimal; lighting and JV could transact this year while WSI likely takes longer; overhead being realigned post-TSA.

• Question from Mark La Reichman (NOBLE Capital Markets): Interest expense outlook for FY26 after Q2 actions?
  Response: Q2 captured benefits late; Q3–Q4 interest should improve from repricing and securitization, with further debt paydown expected absent M&A/buybacks.

• Question from Mark La Reichman (NOBLE Capital Markets): How should we model SG&A as a percent of sales?
  Response: Around 8% is representative; treat largely as fixed dollars in H2 with seasonal volume effects on percentage.

• Question from John Franzreb (Sidoti & Company): What drove better Precoat performance in September?
  Response: Stronger shipments tied to customer inventory patterns and peak construction season, suggesting customers anticipate a healthy seasonal finish.

• Question from John Franzreb (Sidoti & Company): Can you quantify Washington’s revenue in guidance?
  Response: Not breaking it out; ramp is on track with some load balancing to a sister plant; guidance already reflects expected contributions.

• Question from John Franzreb (Sidoti & Company): Thoughts on rising zinc prices and margin implications?
  Response: Gradual LME increases aid pricing; minimal FY26 margin impact due to 6–8 months kettle inventory, but it factors into next year’s planning.

• Question from Jon Braatz (Kansas City Capital Associates): What was Canton’s Q2 contribution?
  Response: $2M revenue and a few hundred thousand of contribution margin over two months; a full-quarter impact starts next quarter.

• Question from Jon Braatz (Kansas City Capital Associates): Can Metal Coatings sustain higher EBITDA margins than the low end of prior range?
  Response: Yes; confident sustaining 30%–32% this year and may tighten the range upward given consistent performance.