Executive Summary / Key Takeaways

• AZZ Inc. has successfully transformed into a pure-play Metal Coatings leader, leveraging its deep expertise, strategic acquisitions like Precoat Metals, and the recent monetization of a significant portion of its AVAIL joint venture to focus on core, high-margin businesses.
• The company's differentiated technology, including Digital Galvanizing System (DGS) and CoilZone, provides quantifiable operational efficiencies, enhances customer service, and contributes to industry-leading margins in both Metal Coatings and Precoat Metals segments.
• A significant cash distribution from the AVAIL JV divestiture in Q1 FY26 enabled substantial debt reduction, dramatically improving the net leverage ratio and providing significant financial flexibility for strategic capital allocation, including M&A and shareholder returns.
• AZZ is well-positioned to benefit from multi-year infrastructure spending trends (bridge/highway, T&D, data centers, reshoring) and secular shifts like the aluminum container conversion, supporting management's positive outlook and guidance for FY26.
• While facing risks from market choppiness, potential tariff impacts on project timing, and commodity price volatility, AZZ's diversified end markets, operational discipline, and strategic investments aim to mitigate these challenges and drive continued profitable growth.

Setting the Scene: A Transformed Leader in Critical Coatings

AZZ Inc., established in 1956, has evolved significantly from its origins, culminating in a strategic transformation to become a focused leader in North American metal coatings. This journey, particularly since fiscal year 2014, has centered on operational excellence and disciplined growth, adding over $1 billion in sales and doubling EBITDA over twelve years. A pivotal moment in this evolution was the 2022 acquisition of Precoat Metals, adding substantial coil coating capabilities and diversifying end markets. Concurrently, AZZ strategically divested the majority of its Infrastructure Solutions business, retaining a 40% interest in the AVAIL joint venture, streamlining its portfolio to concentrate on core coatings expertise.

The industry landscape AZZ operates within is fundamentally tied to infrastructure development, construction activity, and industrial demand across North America. Key market drivers include significant public and private investment in bridge and highway construction, electrical transmission and distribution (T&D), the burgeoning data center market, and a growing trend towards reshoring manufacturing activities. Secular shifts, such as the conversion from plastic to aluminum in food and beverage packaging, also present meaningful growth opportunities. These trends collectively signal a multi-year period of elevated infrastructure spending, providing a strong tailwind for AZZ's services.

In this landscape, AZZ competes with a mix of large, diversified players and more specialized firms. In hot-dip galvanizing, rivals include companies like Valmont Industries (VMI) and Nucor Corporation (NUE), which also have significant steel and infrastructure exposure. Valmont, with a larger global footprint, competes on scale, while Nucor leverages vertical integration for cost efficiency. In coil coating, competition comes from integrated steel mills adding paint lines and other independent coaters. In infrastructure solutions (through the remaining JV interest), AZZ's product offerings overlap with electrical construction specialists like MYR Group (MYRG). AZZ positions itself by emphasizing its specialized expertise, comprehensive service offerings, strategically located North American facilities, and a reputation for quality and customer service built over decades.

Technological Edge and Operational Excellence

Central to AZZ's competitive strategy is its investment in and deployment of proprietary technology aimed at enhancing operational efficiency and customer value. The Digital Galvanizing System (DGS) is utilized across its galvanizing plants, while CoilZone is employed in Precoat facilities. These platforms provide real-time updates and critical business intelligence, enabling management to optimize production efficiencies across its network of 46 Metal Coatings and 14 coil coating locations.

These technologies contribute directly to quantifiable benefits. In the Metal Coatings segment, investments in process control and digital tools are driving zinc productivity levels closer to theoretical maximums. Management did not quantify specific overall percentage improvements across the fleet, but noted that these efforts, combined with training and experienced personnel, are leading to sustained high margins. On the Precoat side, technology and operational focus support efficient coil coating processes that optimize waste through tight film control and improve final product performance, contributing to strong margins when volumes are favorable. The new Washington, Missouri aluminum coil coating facility incorporates advanced capabilities designed to serve the growing aluminum container market efficiently. Specific technological advancements within this new plant were not detailed quantitatively, but its design and support by a long-term contract underscore a strategic investment in a high-efficiency, high-volume process targeting a secular growth trend.

The strategic intent behind these technological investments is clear: to build a durable competitive moat by offering superior service, quality, and efficiency compared to competitors. This differentiation supports AZZ's ability to maintain pricing power and capture market share, even in competitive environments. While competitors like Valmont and Nucor may have scale advantages, AZZ's targeted technological approach aims to deliver a more specialized, higher-value service, particularly in complex or demanding applications.

Financial Performance and Capital Transformation

AZZ delivered a strong start to fiscal year 2026, reporting record quarterly sales, adjusted EBITDA, and EPS for the period ended May 31, 2025. Consolidated sales increased 2.1% year-over-year to $422.0 million. This growth was primarily driven by the Metal Coatings segment, which saw sales rise 6.0% to $187.2 million, largely due to higher processed steel volume. The Precoat Metals segment experienced a slight sales decrease of 0.8% to $234.7 million, impacted by lower coil coating volume and other sales, although this was partially offset by an increase in average price due to mix. Despite the slight top-line dip, Precoat Metals outperformed the overall market, with shipments showing an increase as customers worked through inventory.

Profitability remained robust. Consolidated operating income was $69.5 million. Metal Coatings operating income increased 5.8% to $50.7 million, benefiting from higher sales volume, though partially offset by increased costs, including $3.8 million in restructuring charges related to the Surface Technologies platform. Precoat Metals operating income decreased 1.8% to $39.4 million, primarily reflecting the lower sales volume. Adjusted EBITDA for the quarter was $106.4 million, representing a strong margin of 25.2%, a 240 basis point improvement year-over-year. Segment-level adjusted EBITDA margins were particularly impressive, reaching 32.9% for Metal Coatings and 20.7% for Precoat Metals, demonstrating the effectiveness of operational improvements and cost management.

A transformative event in the quarter was the cash distribution from the AVAIL JV. Following the sale of AVAIL's Electrical Products Group, AZZ received $273.2 million. This resulted in a significant $165.8 million gain recognized in equity in earnings of unconsolidated subsidiaries, contributing substantially to the reported net income of $170.9 million. On an adjusted basis, excluding this gain and other items, adjusted net income increased 22.2% to $53.8 million, translating to adjusted diluted EPS of $1.78.

This influx of cash dramatically strengthened AZZ's financial position. The company used $285.4 million of the proceeds, combined with free cash flow, to pay down debt. This action significantly improved the credit agreement net leverage ratio to a healthy 1.7x as of May 31, 2025, down from 2.8x in the prior year quarter. This deleveraging provides substantial financial flexibility for future capital allocation decisions.

Strategic Capital Allocation and Outlook

With a strengthened balance sheet, AZZ is pursuing a balanced capital allocation strategy. Debt reduction remains a focus, with a target leverage closer to 2x, and FY26 debt paydowns are expected to exceed $165 million (excluding additional AIS sale proceeds). The company is actively investing in organic growth, including the completion and ramp-up of the new Washington, Missouri facility, which became operational in Q1 FY26. This plant, supported by a 75% take-or-pay contract, is expected to ramp volume through FY26, with gross margins turning positive in the second half and reaching its peak revenue opportunity of around $60 million in its second year of operation.

Strategic bolt-on acquisitions are also a priority. The recent acquisition of Canton Galvanizing for $30.1 million is an example of this approach, immediately accretive and expanding the Metal Coatings footprint. AZZ is actively evaluating a pipeline of potential acquisitions in both segments, aiming for synergistic targets that enhance long-term shareholder value.

Returning value to shareholders is another pillar of the strategy. The board approved a 17.6% increase in the quarterly cash dividend to $0.20 per share and plans to pursue opportunistic share repurchases under the existing authorization ($53.2 million remaining).

Management provided positive guidance for fiscal year 2026, reiterating sales expectations of $1.625 billion to $1.725 billion and adjusted EBITDA of $360 million to $400 million. Adjusted diluted EPS guidance was raised to $5.75 to $6.25, reflecting confidence in operational performance and the favorable impact of lower interest expense following debt reduction. This guidance is supported by strengthened demand forecasts in key end markets and anticipated contributions from strategic initiatives and operational efficiencies.

Risks and Challenges

Despite the positive outlook, AZZ faces several potential risks. Fluctuations in customer demand across its diverse end markets, particularly in response to macroeconomic conditions or changes in private sector spending, could impact sales volume. Increases in the cost of key raw materials like zinc and natural gas, or supply chain delays, could pressure margins, although the tolling model and operational efficiencies help mitigate some of this risk. Weather, as demonstrated in Q4 FY25, can disrupt production and project timing.

Tariff uncertainty, while showing some signs of easing with falling prepainted imports, could still create choppiness in project decision-making or impact steel availability and cost, potentially delaying projects. Public projects, a significant demand driver, can face delays due to complex approval processes across different government levels. While management believes it has strong defenses in its legal proceedings and does not expect material adverse effects from environmental liabilities, these represent potential contingent liabilities. The ramp-up of the new Washington facility, while on track, carries inherent risks associated with bringing a large, complex plant to full production.

Conclusion

AZZ Inc. has successfully navigated a period of strategic transformation, emerging as a focused and financially strengthened leader in the North American metal coatings industry. By divesting non-core assets and acquiring complementary businesses like Precoat Metals, AZZ has sharpened its focus on high-margin, critical services essential to infrastructure and industrial markets. The recent monetization of a portion of the AVAIL JV has provided significant capital, enabling substantial debt reduction and enhancing financial flexibility for future growth investments and shareholder returns.

Leveraging its proprietary technology, operational discipline, and market-leading positions, AZZ is well-positioned to capitalize on favorable long-term trends in infrastructure spending, reshoring, and material conversions. While challenges such as market volatility and potential project delays exist, the company's diversified end markets, flexible cost structure, and strategic capital allocation framework support a positive outlook. The successful ramp-up of the new Washington facility and the disciplined pursuit of bolt-on acquisitions are key factors to watch as AZZ aims to sustain its growth momentum and continue delivering value to shareholders.