Executive Summary / Key Takeaways

• Strategic Transformation and Focus: AZZ has successfully transitioned into a pure-play Metal Coatings and Precoat Metals leader, leveraging a history of strategic acquisitions and divestitures to optimize its core businesses and capitalize on North American infrastructure megatrends.
• Robust Financial Performance and Deleveraging: The company delivered solid Q2 Fiscal 2026 results with a 2.0% increase in total sales and a 13.1% rise in adjusted diluted EPS, driven by strong Metal Coatings growth and significant debt reduction, bringing its net leverage ratio to an impressive 1.7x.
• Technological Differentiation and Efficiency: Proprietary technologies like the Digital Galvanizing System (DGS) and Coil Zone are critical competitive advantages, enhancing operational efficiency, zinc productivity, and customer service, contributing directly to sustained high margins.
• Infrastructure Tailwinds and Growth Initiatives: AZZ is well-positioned to benefit from multi-year tailwinds in infrastructure spending, energy transition, and data center expansion, complemented by strategic bolt-on acquisitions and the ramp-up of its new Washington, Missouri coil coating facility.
• Disciplined Capital Allocation: Management's commitment to debt reduction, increased dividends, and opportunistic share repurchases, alongside targeted investments in organic growth and M&A, underpins a balanced and shareholder-focused capital allocation strategy.

Introduction: A Foundation in Protection and Progress

AZZ Inc. (NYSE:AZZ), established in 1956, has evolved into a preeminent independent provider of hot-dip galvanizing and coil coating solutions across North America. The company's journey has been marked by a strategic transformation, particularly since fiscal year 2014, to become a focused Metal Coatings entity. This pivot involved a series of calculated acquisitions and divestitures, culminating in the 2022 acquisition of Precoat Metals, a move that has "outperformed expectations". This strategic clarity positions AZZ to capitalize on significant industrial and infrastructure megatrends shaping the North American landscape.

The company's core business revolves around two primary segments: AZZ Metal Coatings and AZZ Precoat Metals. The Metal Coatings segment offers vital corrosion protection through hot-dip galvanizing, spin galvanizing, powder coating, anodizing, and plating for the steel fabrication industry. Meanwhile, AZZ Precoat Metals specializes in aesthetic and corrosion-protective coatings for steel and aluminum coil, serving diverse end markets such as construction, appliances, HVAC, containers, and transportation. This dual-segment focus, combined with a disciplined operational approach, has enabled AZZ to maintain a strong competitive stance.

Broad industry trends are providing substantial tailwinds for AZZ. The Infrastructure Investment and Jobs Act (IIJA) is a significant driver, with 73% of its Department of Transportation funds and 77% of Department of Energy funds already committed to projects as of August 2025. This translates into elevated demand for AZZ's services, particularly in utilities, solar, transmission and distribution, and data center projects. The ongoing re-industrialization of the U.S., fueled by the AI boom and cloud expansion, is driving massive data center and infrastructure development, further bolstering demand for AZZ's protective coatings. Management anticipates these trends will create a "multi-year tailwind in infrastructure spending".

Technological Edge and Operational Excellence

AZZ's competitive advantage is deeply rooted in its proprietary technology and a relentless pursuit of operational excellence. The company leverages its Digital Galvanizing System (DGS) across all galvanizing plants and its Coil Zone system in Precoat facilities. These technologies provide customers with real-time updates and offer management critical business intelligence, significantly enhancing production efficiencies across AZZ's extensive network of 46 Metal Coatings and 14 coil coating facilities.

The tangible benefits of this technological differentiation are evident in operational metrics. For instance, the Metal Coatings team is "nearing the theoretical zinc efficiency levels" in its galvanizing operations. This achievement is a direct result of integrating digital tools, comprehensive training, experienced personnel, and meticulous management of operational details. Such efficiency not only reduces material costs but also contributes to superior product quality and faster turnaround times, reinforcing AZZ's value proposition. Furthermore, the company continues to invest in technology upgrades, including migrating data systems to Oracle (ORCL), exploring AI opportunities, and developing new galvanizing and coating processes. These initiatives are aimed at driving further operational efficiencies and maintaining a technological lead. For investors, this technological moat translates into sustained high margins, enhanced pricing power, and a resilient competitive position against rivals.

Competitive Landscape and Market Positioning

AZZ operates in a competitive environment, but its specialized focus and operational discipline allow it to maintain a strong market position. In the Metal Coatings segment, key competitors include larger, diversified players like Valmont Industries (VMI) and steel producers such as Nucor Corporation (NUE), as well as other regional galvanizers. Valmont, with its global reach and diversified infrastructure offerings, often competes on scale and breadth of services. Nucor, a major steel producer, leverages its cost leadership in steel production and integrated operations. AZZ differentiates itself from these larger entities through its specialized expertise in engineered services and its proprietary coating technologies, which provide superior corrosion protection and customer-specific solutions. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, AZZ's consistent growth and strong margins in Metal Coatings suggest effective market penetration and customer loyalty.

In the Precoat Metals segment, competition comes from other coil coaters and integrated steel mills. The segment has recently faced headwinds from a "50% drop" in the Bayer Galvalume market due to tariff impacts. However, AZZ has demonstrated resilience and gained market share, picking up an estimated "3% or 4%" from reduced pre-painted imports, which were down 23% year-over-year in Q2 Fiscal 2026. This highlights AZZ's agility and ability to adapt to changing trade dynamics, converting demand for domestic supply. Compared to competitors like Powell Industries (POWL), which specializes in electrical distribution equipment, AZZ's strength lies in its integrated metal coating solutions and its ability to combine these with electrical services, offering end-to-end solutions for clients.

Barriers to entry in AZZ's industries, such as stringent regulatory compliance, the need for specialized expertise, and capital-intensive operations, help protect its market share. These barriers, while favoring larger rivals in some aspects, also allow AZZ to solidify its position by limiting new entrants and fostering long-term customer relationships. AZZ's strategic response to competitive forces includes continuous investment in its facilities, expanding its service offerings, and pursuing bolt-on acquisitions that align with its operational playbook.

Segmental Performance and Strategic Initiatives

AZZ's recent financial performance underscores its strategic effectiveness across its operating segments.

AZZ Metal Coatings

The Metal Coatings segment continues to be a strong performer, driven by robust infrastructure demand. For the second quarter of fiscal year 2026, the segment reported sales of $190.0 million, marking a significant 10.8% increase year-over-year. Operating income for the segment also grew by 8.4% to $51.7 million. The adjusted EBITDA margin for Metal Coatings stood at an impressive 30.8% in Q2 Fiscal 2026, demonstrating its ability to sustain high profitability. This performance is largely attributable to higher volumes of steel processed, particularly for solar, transmission, and distribution projects, which, while sometimes slightly lower margin, contribute substantially to overall volume. The acquisition of Canton Galvanizing, LLC for approximately $30.1 million on July 1, 2025, further expanded AZZ's geographical footprint in the Midwest, immediately contributing to the segment's capacity and profitability.

AZZ Precoat Metals

The Precoat Metals segment faced mixed market conditions in Q2 Fiscal 2026, with sales decreasing by 4.3% to $227.3 million. This decline was primarily due to softer demand in certain end markets, including building construction, HVAC, and appliances. Despite these headwinds, the segment's adjusted EBITDA margin remained solid at 20.2%. A key strategic highlight is the successful ramp-up of the new 25-acre aluminum coil coating facility in Washington, Missouri, which became operational in Q1 Fiscal 2026. This facility, supported by a take-or-pay contract for approximately 75% of its output, is expected to transition from a "slight drag on margins" in the first half of the year to a positive contributor in the second half. The growing trend of plastic-to-aluminum conversion in the food and beverage sectors is also a significant growth driver, with container and beverage results reaching new highs.

AZZ Infrastructure Solutions (AVAIL JV)

AZZ's 40% non-controlling interest in the AVAIL JV experienced significant changes. In May 2025, AVAIL completed the sale of its Electrical Products Group (EPG) for $975 million, from which AZZ received a substantial cash distribution of $273.2 million. This transaction resulted in a $165.8 million gain recognized in Q1 Fiscal 2026. However, in Q2 Fiscal 2026, an impairment charge of $45.9 million was recorded on the remaining AVAIL JV investment, reducing its carrying value to $60.2 million. This impairment reflects a reduction in AVAIL's projected future earnings following the divestiture. The remaining AVAIL business, comprising welding services (WSI), lighting, and some international joint ventures, is now expected to contribute "zero" to equity in earnings for the remainder of fiscal year 2026, primarily due to excess overhead costs and seasonal weakness in the WSI business.

Financial Strength and Capital Allocation

AZZ's financial position is robust, characterized by strong cash flow generation and a disciplined approach to capital allocation. In fiscal year 2025, the company generated $249.9 million in cash flow from operations, enabling $110 million in debt reduction and funding for strategic growth initiatives. This strong performance continued into Q2 Fiscal 2026, with cash provided by operating activities reaching $58.4 million, a 23% increase year-over-year.

The company's net leverage ratio has significantly improved, standing at 1.7x as of August 31, 2025, down from 2.7x in the prior year period and well within its target range of 1.5 to 2.5 times. This deleveraging was accelerated by the $273.2 million cash distribution from the AVAIL JV, with management realistically targeting approximately $300 million in total debt reduction for fiscal year 2026. This substantial debt paydown is expected to generate significant interest savings, partially offsetting the loss of equity income from the divested AVAIL EPG. The Term Loan B was repriced on August 5, 2025, reducing the interest rate margin by 75 basis points to SOFR + 1.75%, resulting in annual interest savings of approximately $3.3 million. Additionally, a new $150 million Receivables Securitization Facility was established, with proceeds used to further reduce the Term Loan B.

AZZ is committed to returning value to shareholders, as evidenced by the Board's approval of a 17.6% increase in the quarterly cash dividend, from $0.17 to $0.20 per share. The company also plans opportunistic share repurchases under its existing $100 million program, with $53.2 million remaining, viewing its stock as "undervalued at nine to ten times forward EBITDA". Capital expenditures for fiscal year 2026 are projected to be between $60 million and $80 million, split roughly 50-50 between Metal Coatings and Precoat Metals, supporting both maintenance and growth projects, including the final payments for the Washington, Missouri facility.

Outlook and Risks

AZZ has reiterated its fiscal year 2026 guidance, reflecting confidence in its strategic execution despite anticipated market choppiness. The company expects total sales to be in the range of $1.625 billion to $1.725 billion. Adjusted EBITDA is projected to be in the lower half of the $360 million to $400 million range, primarily due to the absence of AVAIL equity income. Adjusted diluted EPS is forecast to be between $5.75 and $6.25, representing a robust 10% to 20% increase over fiscal 2025 adjusted earnings. These projections are underpinned by strengthened project pipelines and structural steel demand forecasts.

While the outlook is positive, several risks warrant consideration. Tariff uncertainty continues to create "customer hesitation on non-infrastructure related projects", particularly impacting the Precoat Metals segment. The Bayer Galvalume market, for example, has seen a significant downturn due to tariffs. Although AZZ mitigates commodity price exposure through fixed premium agreements and price adjustments, secondary supply items like wire additives and chemicals have seen inflationary pressures. The remaining AVAIL JV businesses, particularly WSI, are subject to seasonality and are currently carrying excess overhead post-divestiture, posing a potential "slightly negative" risk to equity income in Q3 Fiscal 2026. Furthermore, AZZ's concentration in domestic markets could expose it to U.S.-specific economic downturns, though the current infrastructure tailwinds are expected to mitigate this.

Conclusion

AZZ Inc. stands at a pivotal point, having successfully transformed into a focused leader in metal coatings and coil coating solutions. The company's disciplined strategic execution, underpinned by proprietary technologies and a commitment to operational excellence, has driven robust financial performance and significant deleveraging. With a strong balance sheet and a clear capital allocation strategy, AZZ is well-positioned to capitalize on the multi-year tailwinds from infrastructure spending, energy transition, and the burgeoning data center market.

While market choppiness and tariff uncertainties present challenges, AZZ's ability to gain market share, drive efficiencies, and strategically invest in growth initiatives like the Washington, Missouri facility, reinforces its investment thesis. The company's technological leadership, particularly in zinc efficiency and digital platforms, provides a durable competitive moat against rivals. As AZZ continues to execute its strategy of organic growth, selective bolt-on acquisitions, and shareholder returns, its trajectory suggests sustained value creation for discerning investors.