Earnings Call Transcript - AZZ Q2 2025

Operator, Operator

Good day, and welcome to the AZZ Second Quarter 2025 Earnings Conference Call and Webcast. Please note this event is being recorded. I would now like to turn the conference over to Sandy Martin, Three Part Advisors. Please go ahead.

Sandy Martin, Three Part Advisors

Thank you, operator. Good morning, and thank you for joining us today to review AZZ's financial results for the fiscal 2025 second quarter, which ended August 31, 2024. Joining the call today are Tom Ferguson, President and Chief Executive Officer; Jason Crawford, Chief Financial Officer; and David Nark, Senior Vice President of Marketing, Communications and Investor Relations Officer. After today's prepared remarks, we will open the call for questions. Please note the live webcast for today's call can be found at www.azz.com/investor-events. Before we begin, I want to remind everyone that our discussion today will include forward-looking statements made under 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, our 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 annual report on Form 10-K for the fiscal year. 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. Non-GAAP financial measures should be considered supplemental to not a substitute for GAAP financial measures. We refer to the reconciliation from GAAP to non-GAAP measures in today's earnings press release. I would now like to turn the call over to Tom Ferguson.

Tom Ferguson, CEO

Thank you, Sandy. Good morning, and thank you for joining us. Today, I will discuss the second quarter results and cover our outlook for the rest of the year. Jason Crawford will review our detailed financial results, and David Nark will provide an industry update on sales to our end markets. Then we will open up the call for questions. We are pleased this year with the team's emphasis on business execution and productivity improvements, and we continue to focus on what matters most: delighting customers through exceptional service, quality, and innovative solutions. Top line sales momentum continued in the second quarter, and sales grew by 2.6% to $409 million compared to the prior year's quarter. We reported another quarter of expanded EBITDA dollars and margins compared to the prior year. As a result, we generated meaningful cash flow from operations of $119 million for the first half of our fiscal year compared to the prior year's quarter. Metal Coatings sales increased by 1%, and Precoat Metal sales increased by 3.8%, primarily due to market share gains. Organic sales in both segments were almost entirely based on volume due to higher steel and coil coating tonnage processed in the quarter. As Dave will cover in more detail, we benefited from AZZ's diversified end markets and the continued growth in certain markets like construction. The construction-related markets represented 57% of our combined coating sales and were driven by strength related to infrastructure projects, including bridge and highway, transmission and distribution, and renewables. This critical infrastructure spending tracks closely to public sector construction, energy and manufacturing. We are optimistic that Fed actions to lower interest rates may spur greater capital spending into calendar year 2025. Continuing with the summary of our results, Metal Coatings delivered a strong EBITDA margin of 31.7%, exceeding the prior year and our target margin range of 25% to 30%, due to higher volume and improved zinc productivity and cost. Precoat Metals EBITDA margin of 21.1% was also strong due to higher volume, improved operational performance and better mix. This year's strategic objectives for AZZ are to drive revenue growth and improve the company's profitability through maximizing operational efficiencies. Executing our objectives well this year has generated significant cash flow to pay down debt and strengthen the business and our balance sheet. For the first six months of our fiscal year, our growth has been entirely organic, while we continue to evaluate bolt-on acquisitions to add inorganic growth in each segment. We knew that rebuilding our acquisition pipeline would take several quarters as market transactions slowed after we paused to delever and pay down debt. We plan to remain patient while evaluating the best timing, leverage, and target valuations in these markets. Jason will discuss our capital allocation strategy in a moment, but I want to emphasize that we will continue to seek high return on investment projects to drive growth. We will also continue to pay down debt and return capital to shareholders through our cash dividends. We paid down $20 million of debt this quarter and once again repriced our term loan last month to lower interest costs by another 75 basis points. An important investment this year is our construction of the new aluminum coil coating facility in Washington, Missouri. The facility will expand capacity in the aluminum container sector, where we anticipate sustainable long-term growth to occur. We continue to track on schedule and budget and expect to be operational in early fiscal year 2026. As a reminder, this facility's production and capacity will benefit from a long-term contract with one customer committed to 75% of the new site’s capacity. We are excited about the progress of the new plant. With that, I will turn it over to Jason.

Jason Crawford, CFO

Thank you, Tom, and good morning. For the second quarter, we reported sales of $409 million, an increase of 2.6% from the prior year quarter. By segment, our Metal Coating sales increased 1%, and Precoat Metal sales increased 3.8%. The second quarter's gross profit was $103.5 million, or 25.3% of sales, an increase of 90 basis points from 24.4% of sales in the prior year quarter. Gross margins improved in both segments; improved zinc productivity and cost helped to offset labor and other variable cost increases in the Metal Coatings segment, whereas higher volume, improved operational performance and better mix helped offset some headwinds in the Precoat Metal segment. Selling, general and administrative expenses were $35.9 million in the second quarter, or 8.8% of sales, a slight improvement versus the $36.2 million or 9.1% of sales in the prior year quarter. Operating income improved to $67.6 million or 16.5% of sales compared to $61 million or 15.3% of sales in last year's second quarter. Interest expense for the second quarter was $21.9 million compared to $27.8 million in the prior year. This decrease is primarily due to consistently paying down debt and our lower weighted average interest rates from various debt re-pricings, which I will discuss more in a few moments. Equity and earnings of unconsolidated subsidiaries for the second quarter increased to $1.5 million compared to $1 million from the same quarter last year. This increase is due to higher earnings from our 40% JV ownership in AVAIL. Current quarter income tax expenses were $12.2 million, reflecting an effective tax rate of 25.6% compared to 17.4% in the prior year quarter, where we benefited from the reversal of previously provided tax positions related to the acquisition of Precoat Metals. Reported net income from the second quarter was $35.4 million compared to $28.3 million for the prior year quarter. On an adjusted basis, Q2 adjusted net income was $41.3 million compared to $37.2 million, an increase of 11% from the prior year. Second quarter adjusted EBITDA was $91.9 million, or 22.5% of sales, compared to $88 million or 22.1% of sales in the prior year. This 40 basis point improvement in adjusted EBITDA margin was primarily driven by improved earnings and revenue strength in both segments. Turning to our financial position and balance sheet. We generated cash flow from operations of $119.4 million, ahead of last year's $118.3 million after funding capital expenditures for the first six months of $59.5 million; our year-to-date free cash flow was $59.9 million. As Tom mentioned, we are expanding our coil coating capacity by constructing a new 25-acre aluminum coil coating facility in Washington, Missouri, and we anticipate it to be operational in early fiscal year 2026. We expect to spend approximately $63.2 million on this greenfield project this fiscal year, of which we have spent $35.6 million paid in the first half of our fiscal year. Our capital allocation strategy consists of investing in the business for growth, paying down debt, returning cash to our shareholders through dividends, and evaluating potential bolt-on acquisitions. During the second quarter, which ended August 31, we reduced debt by $20 million and now expect total debt repayments to exceed $100 million for the full year. Our current trailing 12-month debt to adjusted EBITDA is 2.7x, which compares favorably to our leverage of 3.4x in the second quarter of last year. On September 24, after our quarter end, we repriced our term loan B down to SOFR plus 2.5%. With the Fed also reducing interest rates around the same time, we expect these actions to have a favorable benefit to our earnings in the second half of the year. Our current interest rate swap agreement fixes our variable interest rate for a notional portion of our debt through September 30, 2025, and we have no debt maturities until 2027. Finally, we paid a cash dividend to common shareholders of $5.1 million in the second quarter. With that, I'll turn the call over to David Nark.

David Nark, SVP of Marketing, Communications and Investor Relations

Thank you, Jason. Good morning, everyone. Sales momentum for the second quarter was mixed across a number of end markets. On the positive side, sales within construction and electrical grew over the prior year same quarter, driven by market share gains as well as continued public sector spending on infrastructure projects, such as bridge and highway, transmission and distribution, and renewables. Sales growth remained somewhat muted in the transportation category, which includes truck and trailer, bus, and recreational vehicles, up slightly as compared with the prior year quarter. By comparison, sales within both consumer and industrial markets were down, driven by lower consumer spending and private investment. This is consistent with what we had communicated last quarter when we said we were beginning to see public and private sector spending trending in opposite directions. As we communicated during our first quarter call, we remain optimistic about public sector spending. Additionally, we believe the recent rate action by the Fed could spur growth in both consumer and private sector spending. We continue to see secular growth trends in re-shoring of manufacturing, the migration to aluminum and pre-painted steel, as well as the conversion from plastics to aluminum in the container space that will continue to benefit our businesses. With that, I'd now like to turn it back over to Tom.

Tom Ferguson, CEO

Thank you, David. As I communicated last quarter, we are optimistic about our business prospects this year. And again, I want to remind you that our business typically sees more activity during the first and second quarters as the spring and summer months align with peak construction activity. As David mentioned, we see signs that public and private sector spending are trending in opposite directions. We also know that weather events, such as hurricanes, and macroeconomic changes can impact our business. Therefore, we remain prepared for potential volatility if it arises. We have achieved what we set out to do in the first half of the year and look forward to continuing to execute our plans for the remainder of this year. As expected, the second half of fiscal 2025 will be lower than the first half due to the normal seasonal slowdown in construction activity, as well as holiday weather impacts. Additionally, recall that we are up against tougher sales comparisons in last year's fourth quarter when we reported total sales increased 8.9%. Precoat sales in last year's fourth quarter delivered strong double-digit sales growth, rising over 13% from the previous year. While public sector spending focused on infrastructure remains strong, private sector spending has slowed, and we anticipate that the Fed's recent monetary policy easing will stimulate growth over time. All this to say that we plan to be conservative with our annual guidance. Today, we are maintaining our fiscal year sales guidance unchanged at $1.525 billion to $1.625 billion, narrowing our EBITDA guidance and raising our EPS expectations to reflect the strong first half and lower interest costs for the balance of this fiscal year. We are narrowing our adjusted EBITDA guidance to $320 million to $360 million, and increasing our adjusted EPS guidance to $4.70 to $5.10. Our guidance reflects our best estimates given anticipated market conditions for the full year, lower interest rates, and an annualized effective tax rate of 24%, excluding any federal regulatory changes that may emerge. Capital expenditures for the current fiscal year are expected to remain unchanged at $100 million to $120 million, including approximately $63 million related to the new greenfield plant. Debt pay-down is now expected to exceed $100 million, compared to our previous range of $60 million to $90 million. We will continue to prioritize debt reduction while evaluating bolt-on acquisition opportunities that are beginning to build in our pipeline. Our executive team and I recently met to update our strategic plan and evaluate our SWOT analysis. Based on a thorough and collaborative assessment of AZZ's internal strengths and weaknesses, as well as our external opportunities and threats, we believe we are well positioned for sustained success for many years. We remain excited about our status as a leading provider of metal finishing solutions, providing aesthetic and corrosion-protective hot-dip galvanizing, coatings, and other value-added services for large and diverse end markets throughout North America. We will continue to focus on profitable growth by investing in people, processes, facilities, and technologies that benefit AZZ's Metal Coating and Precoat Metal's customers. Our culture fosters opportunities for individual development, and we believe our deep bench of talent positions us well for long-term success. I am confident that we will continue to excel in the marketplace by prioritizing the customer with disciplined implementation of our strategic initiatives, targeting sales growth, operational excellence, margin enhancements, and working capital improvements. We believe the successful execution of our current year plan and our longer-term strategic initiatives will deliver significant free cash flow and maximize shareholder value for all AZZ stakeholders. I am proud of the work and dedication of our teams in both segments and our corporate headquarters. I want to extend my gratitude to them for their commitment to excellence in everything they do. Our value-added, lower-risk tolling business provides customers with a best-in-class experience, supported by our 65 years of experience and a legacy of exceptional customer service. Our Board, leadership team, and segment teams are fully aligned to execute our near-term objectives for this year and longer-term strategic growth plans. With that, operator, I would like to open the call for questions.

Operator, Operator

The first question today comes from Lucas Pipes with B. Riley Securities. Please go ahead.

Lucas Pipes, Analyst

Thank you for the introduction. Good morning, everyone. My first question is about the current opportunities for mergers and acquisitions. I would like to hear your thoughts on your readiness for acquisitions, particularly any bolt-on opportunities that may be appealing and what the timeline might look like. Additionally, I am curious about your geographic focus. I remember that in the past you explored paint lines with some of your customers or competitors. Does that still seem viable? I appreciate your insights on the M&A landscape. Thank you.

Tom Ferguson, CEO

Yes, Lucas. We are becoming active in the pipeline again. There are many opportunities in the galvanizing sector, especially in the Northwest Rocky region and the Southeast, where we currently don't have a significant presence. We are open to considering unique opportunities that may come up where we have spare capacity. There are various one-off opportunities and some multisite options, and we would be very engaged if they become available. At this time, I don’t expect to finalize anything before we meet again at the end of the third quarter. On the Precoat side, we see potential through customer conversions and are actively pursuing them, though the process does take a few months. We have a strong list of opportunities for this year and into next year. It's important to mention that while we would announce a galvanizing acquisition, the specifics regarding customer conversions may not be disclosed; we would simply announce the completion of one. I hope that addresses your question.

Lucas Pipes, Analyst

That is very helpful. Thank you for that context. In terms of M&A for the business, post Missouri ramp, where do you think it would level out on a steady state?

Tom Ferguson, CEO

In terms of overall capital spending?, I think we've discussed this before. Each segment requires about $25 million to $30 million in maintenance and includes some growth capital. So, around $60 million between the two segments, along with a little bit for corporate IT and other items. We do not have any other greenfield projects in the pipeline. Hence, $60 million should be a reasonable average annual figure, excluding acquisitions. As we approach our planning process for next year, I anticipate requests for several opportunities.

Lucas Pipes, Analyst

Got it. Excellent. I appreciate all the color. To you and the team, best of luck. I'll turn it over for now.

Tom Ferguson, CEO

Thank you, Lucas.

Operator, Operator

The next question comes from John Franzreb with Sidoti. Please go ahead.

John Franzreb, Analyst

Good morning, everyone, and thanks for taking the questions.

Tom Ferguson, CEO

Sure, John.

John Franzreb, Analyst

I'd like to start with something you mentioned in the last conference call and you actually talked about in years past, and that's reconstruction following hurricanes. I guess two questions. One, I know you have a facility in South Carolina and one in Virginia. Can that adequately address some of the lean construction? But you don't have anything in the southeast, as you just pointed out. Can the Mississippi facilities address what's going on in Florida? Just kind of curious about that and also the timing when that happens?

Tom Ferguson, CEO

Yes. Great question. First, our thoughts and prayers go out to the folks affected in the areas. We do have one facility in Tampa, which we were able to close and evacuate staff. However, there was some property damage. We also have a facility in Virginia, one in South Carolina, and we operate in Alabama, Tennessee, and Mississippi. Regarding hurricanes, the fabrication that occurs to support these efforts will largely happen nearby since facilities in places like Florida may be damaged. Therefore, we will support the relocation of resources to address project needs, with our facilities stretched across affected regions. As we enhance our service capabilities, our focus will be on rescue and recovery in the initial months, and a lag of about three to six months is typical before rebuilding projects ramp up.

John Franzreb, Analyst

Thanks for addressing the Precoat side because it was going to be one of my follow-ups, but I appreciate it to find out that they also participate in that reconstruction. Second question, I guess, I'm kind of curious about your thoughts about the volatility we're seeing in zinc prices and how that's helping or hurting the current pricing environment? The swings in the past six months have been shocking to me, I guess, just curious about your thoughts there? And what should we think about that on a go-forward basis? I know you're going to face some tough comps in coming quarters.

Tom Ferguson, CEO

Yes. Our zinc moves through our kettles with about a six- to eight-month lag from the LME. Therefore, we expect our zinc costs to continue decreasing through the rest of the year. While volatility in the pricing impacts premiums, the LME cost influences our overall price. A few years back, premiums ranged between $0.32 and $0.35; currently, they are at about $0.18 to $0.19. We've worked to disconnect aggregate pricing from underlying zinc costs. With volatility, there’s often an opportunity to move prices up as competitors face varied conditions in what they buy. We monitor this closely, as we've seen prices surge beyond $2 in past years, which drives the overall price level of galvanizing up, yet remains a minor aspect of total project costs. Currently, it does not cause us major concern, but we know that we’re approaching annual negotiations with zinc suppliers during the November-December timeframe, where premiums and volumes for next year are set. Hence, some volatility is to be expected during this time.

John Franzreb, Analyst

Got it. And one last question if I could sneak it in. The JV income for the quarter was down sequentially from recent trends, but you left your JV guidance unchanged. I'm just curious if that is a timing issue. Maybe any color behind that? What are you getting out of the JV?

Tom Ferguson, CEO

Yes. That was just a timing issue. I think that we will see that bounce back nicely in Q3 based on what we know at this time. So I'm comfortable stating that our guidance range of $15 million to $18 million remains intact, and I expect we will hit or exceed that midpoint this year.

John Franzreb, Analyst

Great. That's good to hear. Thanks for taking my questions. I'll get back in the queue.

Tom Ferguson, CEO

Sure, thanks.

Operator, Operator

The next question comes from Matthew Krueger with Baird. Please go ahead.

Matthew Krueger, Analyst

Hi, good morning, everyone. Thanks for taking my questions. I wanted to delve a little deeper into price-cost dynamics. What was the specific impact from price-cost during the quarter? Could you include any impact from fluctuations in zinc prices? Also, could you provide insights on first half versus second half price-cost perspectives and their influence on EBITDA? How does that compare to your fiscal '25 budget?

Tom Ferguson, CEO

Yes, I'll start. Jason may want to add specifics later. In my observation, the first-quarter prices were solid compared to last year and even rose. However, in the second quarter, prices were down slightly year-over-year, primarily related to product mix. Price pressures are fairly consistent, notably in the galvanizing sector, particularly in the Southeast region, where capacity has slightly outpaced demand. The impacts from hurricanes are expected to shift that balance. Zinc constitutes around 20% of our sales cost profile, and we utilize diverse procurement strategies to manage it. Prices are trending down. On the paint front, we’re observing that paint prices rarely decrease. While our total costs are influenced, we are focused on achieving the best final price. We’ve accounted for various external factors, particularly public sector infrastructure spending versus the current economic pressures affecting consumer spending. We believe that our forecast for the remainder of the fiscal year remains optimistic, with expectations for the second half exceeding last year's performance, barring any exceptional circumstances. I'm not sure I’ve covered all your points, but we observed that pricing dynamics mainly relate to product mix, with our margins remaining robust due to operational improvements.

Jason Crawford, CFO

Tom covered most of that well. The general takeaway is that any changes in pricing are largely related to product mix rather than market fluctuations. We expect that pattern to continue into the end of the year. Price pressures within our supply chain have returned to more normative levels, aligning with our expectations and budget projections. With our productivity gains, we’re able to mitigate many challenges, allowing us to maintain the strong margins we have seen.

Tom Ferguson, CEO

I'd like to add that with fluctuating zinc costs as we head into the next fiscal year, we anticipate that market demand recovery from storm rebuilding may actually provide opportunities for increased prices alongside the rising zinc market. Clients tend to expect price adjustments with fluctuating zinc costs, which we believe may both benefit us and support our operational gains in demand.

Matthew Krueger, Analyst

That's really helpful. That's great detail. And just for my second question, can you provide additional insights on the sustainability of current margins in light of recent demand fluctuations? Is our present operating environment sufficient to support over 30% and 20% EBITDA margins respectively for Metal Coatings and Precoat, or do we need to see recovery to mid-single-digit growth for sustainability?

Tom Ferguson, CEO

That's a crucial question. We've demonstrated that, despite the fact that volumes on the galvanizing side weren't dramatically up, our team on the Metal Coatings side showcased the discipline of prioritizing value over volume. While volumes may shift, we commit to bringing our facilities back into robust operation with the target EBITDA margins we anticipate for the coming quarters. In light of the anticipated seasonality, we expect some reduction below the benchmark of 30% in Q4 due to winter slowdown and weather impacts. Our commercial focus has remained consistent, targeting sustainable growth and maintaining necessary margins. For the Precoat side, maintaining margins is quite dependent on driving volumes. We believe that 20% EBITDA is achievable, barring significant downturns. Periodically, the fourth quarter may see some retraction, but we maintain a strong focus on volume and mix.

Matthew Krueger, Analyst

That’s helpful. I'll turn it over.

Operator, Operator

The next question comes from Timna Tanners with Wolfe Research. Please go ahead.

Timna Tanners, Analyst

Hi, good morning. Thanks for including me. I wanted to ask about the comment on productivity and market share gains and wonder, what inning are we in? How much more could we see in productivity and market gains?

Jason Crawford, CFO

I think there are a couple of factors. On the galvanizing side, from a productivity viewpoint, we are utilizing our digital galvanizing system alongside opportunities for advancements in AI. We're continuing our investments in our equipment, but I see us midway to late innings in the galvanizing segment while still having a few more years to realize further operational productivity improvements. There always exists a bottom quartile of facilities that require focus to match the performance of our top-performing plants. Therefore, we have time to improve productivity across the board. For Precoat, it's a similar insight; while operational excellence is crucial, several of our locations are running near peak operational output. We continue to see productivity enhancements through advanced systems as we further consolidate operational consistency across our sites.

Tom Ferguson, CEO

Absolutely, we can see considerable potential for market share growth. In galvanizing, there's opportunity for increasing penetration in construction and architecture within the U.S. compared to Europe. Our approach of remaining disciplined for profits is key. We hope to sustain the 35% market share while pursuing modest increases. However, the Precoat side holds more potential for capturing market share. We strive to convert customer processes from in-house paint applications to our services, which would enhance our market position.

Timna Tanners, Analyst

That's helpful for the productivity part of the question. But on the market share side, do you think there's room to also continue to take some market share?

Tom Ferguson, CEO

Sure, there are great opportunities ahead. The conversion of customer processes signifies market share gain, and on the Precoat side, we're especially keen to closely monitor these potentials in the upcoming seasons. I’d say we're in the fourth inning regarding these goals.

Timna Tanners, Analyst

Okay. Super. Thanks. One last question, regarding capital allocation. I know you've had a steady dividend. Any insights into what could prompt that to increase or what conditions might lead to considering buybacks, in addition to dividends?

Tom Ferguson, CEO

I think certain factors inspire this decision. Our priority remains debt reduction, aided by reducing debt service costs. Concentrating on achieving a target of around 2x leverage remains pivotal. While we are contemplating dividend adjustments, it's primarily reliant on the acquisition pipeline and the value we can derive from investments. We prefer executing acquisitions under favorable leverage conditions over making immediate changes to our dividend structures. We will provide guidance for the upcoming fiscal year and next year's plans in late January or early February.

Timna Tanners, Analyst

Okay, great. Thank you very much.

Operator, Operator

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

Mark Riechman, Analyst

Thank you. I was wondering if you could discuss how revenue will ramp up from the new Washington, Missouri facility. If I remember correctly, it's expected to generate revenue of $50 million to $60 million, so given that fiscal year 2026 starts in February, should we expect to fully realize that in fiscal year 2026? Also, what does the ramp-up look like?

Tom Ferguson, CEO

I'll let Jason take that question.

Jason Crawford, CFO

Sure. We view this as a gradual process throughout this fiscal year with ramping operations starting in fiscal year 2026, around the March timeframe you mentioned. We aim to reach peak revenue in that first year, going slow to ensure operational execution is intact. Thus, expect to hit lower revenue figures in year one with gradual increases thereafter.

Mark Riechman, Analyst

Okay. So just to reiterate, the ramp-up takes how long to reach peak run rate?

Jason Crawford, CFO

For the first year, we expect a gradual build-up, possibly reaching around half of that $50 million to $60 million estimate. It will be subject to operational readiness and customer commitments.

Mark Riechman, Analyst

Great. My second question is what do you see as the wildcards that could make us come in at the low end or the high end of sales and EBITDA guidance? Is it more related to sales or margins? You seem quite comfortable with margins.

Jason Crawford, CFO

Considering the recent hurricanes have the potential to positively influence our future. If numerous facilities had been affected negatively, that would have changed our stance significantly. Currently, our concerns for sales and EBITDA are lessened, and we are witnessing positive results from Q3, which projects well into October for our sales outlook. This renewed confidence brings us to believe our forecast remains intact, trending towards the higher end of our guidance range.

Mark Riechman, Analyst

Just one follow-up on that AVAIL. It did have a strong second half last year; would you expect a similar split in the third to fourth quarters? Or is it a little too early to predict that?

Jason Crawford, CFO

Yes, exactly. They possess reliable order backlogs and, therefore, are likely to replicate a strong second-half performance similar to last year. We foresee a parallel trend for the third quarter.

Mark Riechman, Analyst

Well, thank you very much. Much appreciated.

Jason Crawford, CFO

Sure.

Operator, Operator

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

Adam Thalhimer, Analyst

Hi, good morning, guys. Nice quarter.

Tom Ferguson, CEO

Hi, Adam. Thanks.

Adam Thalhimer, Analyst

Can you talk about visibility on the electrical T&D side? What are you seeing there?

Tom Ferguson, CEO

We're continuing to see really strong momentum. The demand for poles, towers, and associated structures remains robust, enhanced by ongoing public sector investments. Data centers are also crucial to our continuing success. Our projections for the electrical segment over the foreseeable future remain favorable.

Adam Thalhimer, Analyst

You actually touched on my follow-up question, which was data centers. And I think last quarter, you talked about a data center benefit at Precoat.

Tom Ferguson, CEO

Absolutely, we're seeing significant opportunities in data center projects. They involve painting the panels and represent a promising growth vector. The construction of additional data centers is a growing segment with immense potential that we are excited to engage in further.

Adam Thalhimer, Analyst

Great. And then just for Jason quickly on interest expense. What are you using for the back half?

Jason Crawford, CFO

We refinanced our term loan B there in September and lowered our overall interest rates as well. We are currently above 50% fixed for our Term Loan B. The upfront reduction of 75 basis points is factored into our guidance for the back half. Given the forward curves, there isn't a significant change in interest rates forecasted. We've utilized our interest rate swap management tactics effectively.

Adam Thalhimer, Analyst

Okay. Good. I'll turn it over. Thank you.

Tom Ferguson, CEO

Thank you.

Operator, Operator

The next question comes from Lucas Pipes with B. Riley Securities. Please go ahead.

Lucas Pipes, Analyst

Thank you for allowing me to ask a follow-up question. You briefly mentioned this earlier in the call. Considering that the EBITDA guidance suggests approximately a 16% decline in the second half compared to the first half, could you elaborate on the main drivers for this change? How much of it is due to seasonal factors versus changes in the mix, such as shifts between public and private spending? Thank you for providing additional insight.

Tom Ferguson, CEO

Great question. I believe it is 100% seasonal. Considering our strong start in Q3, we anticipate that the second half of this year will be slightly better than last year. Clarifying, the primary driver for our EBITDA decline will be the normal seasonal impact in construction volumes, seen primarily during Q4. The indications toward margin strength remain stable, so our assessment reflects expectations of an improvement in revenue over the second half of fiscal 2025.

Lucas Pipes, Analyst

Very helpful. I appreciate that information. Regarding the overall demand situation with the recent rate cuts, how quickly do you think this will have an effect? Have you noticed any changes in specific areas of demand? Thank you.

Tom Ferguson, CEO

At present, we have not seen significant changes in demand resulting from these actions. Much of our customer base has taken a wait-and-see position concerning upcoming elections and subsequent interest rate movements. Thus far, the immediate effects of recent rate cuts remain modest, but discussions about potential projects have become more frequent as local budgets are finalized for next year. Each client might adjust their CapEx differently based on these factors. As we develop our fiscal year budget, we're prepared for anticipated shifts in project activities and capital expenditures next year.

Lucas Pipes, Analyst

I really appreciate the additional color. Best of luck.

Tom Ferguson, CEO

Thank you. With that, I will conclude the call. We appreciate your participation in our second quarter earnings call. We look forward to continuing the successes we've achieved thus far, focusing on excellent execution, and taking care of our customers — our priority for the rest of the year. We’re eager to speak again at the end of a successful third quarter.

Operator, Operator

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