Earnings Call Transcript
AZZ INC (AZZ)
Earnings Call Transcript - AZZ Q4 2025
Operator, Operator
Good day, and welcome to the AZZ Inc. Q4 FY 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 of Three Part Advisers.
Sandra Martin, Investor Relations
Thank you, operator. Good morning. Thank you for joining us today to review AZZ's financial results for the fourth quarter and full fiscal year that ended February 28, 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/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, 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 AZZ with the Securities and Exchange Commission, including the annual report on Form 10-K for the fiscal year ended February. 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 as a substitute for GAAP financial measures. We refer investors to the reconciliation from GAAP to non-GAAP measures in today's earnings press release.
Thomas Ferguson, CEO
Good morning, and thank you for joining us. Today, we will discuss AZZ's fiscal 2025 financial results and achievements as well as our outlook for fiscal 2026. Then we will open up the call for questions. I am pleased to report that our Coatings segment delivered record sales and profitability for fiscal 2025 due to a combination of business momentum and disciplined execution of our growth initiatives. Metal Coatings generated fiscal year 2025 sales of $665 million, while Precoat Metals generated $912 million. Strong sales for the full year were largely based on increased volume as we processed higher tonnage in both fabricated steel and coil coating. For the full year, our top line results were primarily driven by infrastructure investments to support community growth, urban expansion, and economic development. More specifically, AZZ's record-breaking performance was driven by growth in bridge and highway construction, including new projects and renovation projects across the U.S. The continued expansion in transmission and distribution, including solar projects, and general construction, which for AZZ includes data centers. Jason will cover our fourth quarter financial results in a moment. But as a reminder, the fourth quarter is typically our weakest season due to the winter holidays and inclement weather that hampers construction activity. During our fourth quarter, which ended February 28, 2025, the construction activity was impacted by significantly more inclement weather days than in a typical year. Collectively, we experienced over 200 days of lost production in the fourth quarter due to adverse weather conditions. David will provide more color on this shortly. In fiscal 2025, Metal Coatings delivered an EBITDA margin of 30.9%, primarily due to better operating leverage on expanding volumes and improved zinc productivity. As discussed previously, we believe our new margin range for AMC of 27% to 32% is sustainable. Precoat Metals' EBITDA margin of 19.6% exceeded its prior year comparable, demonstrating strength based on increased volume, a more profitable business mix, and improved operational performance. Our strong EBITDA generated in fiscal 2025 converted to cash from operations of $250 million. This robust cash generation allowed us to pay down $110 million of debt and fund our new greenfield facility near St. Louis, Missouri, which is currently ramping up commercial production as we speak. This year, we plan to continue to pay down debt and strengthen the balance sheet, while prioritizing other capital allocation strategies, including paying quarterly cash dividends. We also plan to invest in AZZ's enterprise-wide technologies by enhancing our digital galvanizing system in our galvanizing plants and coil coating facilities. These customer-centric technologies continue to elevate service levels and enhance our unique value proposition as well as provide effective business intelligence reporting for better decision-making, particularly in relation to improving operating productivity and efficiency. AZZ's pipeline of acquisition targets continues to grow, and we are carefully evaluating M&A in markets throughout the United States. We focus on synergistic targets that present attractive risk-adjusted returns for enhancing long-term shareholder value. We are disciplined in our approach and decide on acquisitions based on timing, targeted valuation, and appropriate balance sheet leverage. After solely focusing on debt reduction, we anticipate closing the single-site bolt-on galvanizing deal during the first quarter. AZZ continues to differentiate with industry-leading market share positions in both segments. We believe our geographic footprint and scale across the U.S. and Canada as well as technical expertise, reputation for customer service excellence, and long-standing customer relationships create a durable competitive moat for AZZ. Our 3- to 5-year strategy is anchored on organic market share growth as well as inorganic acquisition growth that we are pursuing for both segments. Under the current tariff mandates, we expect demand for coating solutions of both steel and aluminum produced domestically to accelerate. Additionally, in fiscal 2026, we will continue to benefit from our tolling model, which insulates us from commodity risk since we do not take ownership of steel or aluminum processed through our facilities. Currently, our zinc contained supplies have not been affected by the tariffs. With that, I will turn it over to Jason.
Jason Crawford, CFO
Thank you, Tom, and good morning. Starting with a summary of the full year. Reported sales of $1.578 billion, an increase of $2.7 million from the prior year. By segment, Precoat Metal sales increased 3.5% and Metal Coatings sales increased 1.4%, within which the Galvanizing segment increased 2.6%. Gross margins for the year were 24.3%, an increase of 70 basis points compared to a year ago. Net income before the preferred stock dividend and redemption premium in fiscal year 2025 was $128.8 million, an increase of 26.8% compared to the prior year. This was another record year for the company in terms of sales and net income, which speaks to the strength of the businesses and progress made on our strategic initiatives during the fiscal year. Turning to the fourth quarter results. Sales for the quarter were $351.9 million, down 4% from the same quarter in the fiscal year 2024. As Tom mentioned, bad weather impacted our quarter more than normal, which resulted in lost production days for both segments. Despite the lower volumes in the quarter, gross margins improved to 22.4% primarily due to operational improvements. Selling and administrative expenses were $38.3 million or 10.9% of sales compared to $38.8 million or 10% of sales in the prior year quarter. Operating income was $40.4 million or 11.5% of sales compared to $4.3 million in the prior year on a percentage of sales basis. Interest expense for the fourth quarter was $17.4 million, down $7 million from a year ago period. This is due to the lower weighted average debt outstanding and lower interest rates and debt repricings. In addition, on March 3, after our fiscal year-end, we announced a repricing of our $400 million senior secured revolving line of credit that will allow us to continue to lower our interest expenses going forward. The performance and outlook for the business has allowed us to improve our capital structure and reduce interest costs, and we fully anticipate this trend to continue into fiscal year 2026. Equity and earnings of unconsolidated subsidiaries for the fourth quarter was $3.7 million compared to $4.3 million for the same quarter last year. These equity and earnings are from our 40% minority ownership interest in the joint venture. The current quarter income tax expense was $6.1 million, reflecting an interim effective tax rate of 23.2% to support the final full year 2025 tax provision of 24.5%. This was higher than the 2024 effective tax rate of 21.9%, primarily attributable to favorable adjustments in 2024 related to uncertain tax positions, partially offset by higher tax deductions for stock compensation in 2025. Net income from the fourth quarter was $20.2 million compared to $14.3 million for the prior year's quarter. On an adjusted basis, Q4 adjusted net income was $29.6 million, compared to $27.5 million, an increase of 7.9% from the prior year. Fourth quarter adjusted EBITDA was $71.2 million or 20.2% of sales compared to $73.9 million in the prior year, flat on a percentage of sales basis on lower volume. Turning to our financial position and balance sheet. We generated significant cash flows from operations at $249.9 million in fiscal year 2025, ahead of last year's $244.5 million. After funding the company's annual capital expenditures of $115.9 million, which included $52.8 million for our new coil coating facility. Our free cash flow was $134 million. As previously communicated, we have expanded our coil coating capabilities by constructing a new 25-acre aluminum coil coating facility in Washington, Missouri. This new facility contained within our Precoat Metals segment is supported by a contract for approximately 75% of the plant's capacity. During fiscal year 2025, our capital expenditures, as previously stated, were $52.8 million and the remaining final balance of approximately $8 million is scheduled to occur by the end of Q1 in fiscal year 2026. This will bring the project online within our originally stated cost and timelines. Further, we are pleased to announce that the facility has started to ship commercial production as of a few weeks ago and will continue to ramp volumes through the fiscal year. Aligned with our previously stated strategies, our disciplined approach to capital allocation includes paying down debt, investing for growth, and returning value to our shareholders through share repurchases. During the fourth quarter of fiscal year 2025, we reduced debt by $30 million and made debt payments of $110 million for the fiscal year. Our debt to adjusted EBITDA ended the year at 2.5x, which compared favorably to our leverage of 2.9x at the end of fiscal year 2024. From the investments in the new Washington, Missouri facility and our debt to adjusted EBITDA below 2.5x, with overall improvements to our capital structure, we will start to transition our focus to a more balanced capital allocation with greater emphasis on M&A and returning value to our shareholders. Finally, subsequent to the end of the fiscal year, on March 10, we announced that our joint venture partner has entered into a definitive agreement to sell the electric products group to another company for a purchase price of $975 million. This transaction is expected to close in the first half of calendar year 2025, subject to customary closing conditions, at which time we will receive a pro rata portion of the cash proceeds from the sale, which we estimate to be approximately $200 million after accounting for debt repayments, deal costs, and cash retained in the remaining businesses. Post transaction, AZZ will continue to own a 40% interest in the joint venture, which will then consist of industrial lighting and welding solution businesses and will represent approximately 30% of pre-transaction group revenue. With that, I'll turn the call over to David Nark.
David Nark, Chief Marketing Communications and Investor Relations Officer
Thank you, Jason. Good morning, everyone. During fiscal 2025, customer demand in key industries drove annual sales growth, primarily in our largest category, construction and in meaningful end markets that include industrial and electrical sectors. Smaller categories at AZZ also experienced growth in fiscal 2025, and those were related to HVAC and container industries. As Tom and Jason mentioned, the demand environment for overall construction was weaker in the fourth quarter due to inclement weather. We believe that both wet and cold conditions, meaning temperatures below 40 degrees, impacted construction days throughout our final quarter of the fiscal year. To put this in perspective, for December, the number of wet days increased 13% versus the same month a year ago. In January, the number of warm days available for construction were down 29% year-over-year. Finally, in February, the number of wet days increased by 10%, while the number of warm days available for construction were down 27% year-over-year. For the full year, organic top-line growth was 2.6% over the prior year. Looking into fiscal 2026, we expect a continuation of infrastructure spending related to the AIIJA program. We expect public and private investment to continue to remain resilient with infrastructure spending from planned projects and recent natural disasters. Also, as Tom mentioned, growing populations and urbanization will continue to support the need for infrastructure-related projects, especially bridge and highway, transmission and distribution, and airport construction. In addition, we know that prepainted aluminum and steel will continue to play a critical role in many reshoring projects, and the conversion of plastics to aluminum in food and beverage industries will continue to be a longer-term secular trend. With that, I'd now like to turn the call back over to Tom.
Thomas Ferguson, CEO
Thank you, David. To summarize our fiscal 2025, we posted record results for revenue, operating income, adjusted EBITDA, adjusted earnings per share, and adjusted net income. Our sales expansion grew to almost $1.6 billion, consisting of 100% organic volume growth which speaks to our market-leading segments and service-driven culture. Our ability to improve margins demonstrates our emphasis on value-added service to our customers and disciplined focus on operating quality, efficiency, and productivity. We improved our capital structure by eliminating the preferred equity, continuing to reduce debt, and improving our net leverage ratio to below 2.5x. Looking ahead to fiscal 2026, we anticipate delivering above-market growth while completing some bolt-on acquisitions. Importantly, we will be sticking to the disciplined approach to investments, capital allocation, and growth that has made us so successful. Today, we are reiterating our fiscal year guidance for 2026, which reflects our confidence in the company's strategic execution, operational resilience, and market positioning. Starting with sales, our best estimates given market conditions and sentiment are $1.625 billion to $1.725 billion, adjusted EBITDA of $360 million to $400 million, and adjusted earnings per share of $5.50 to $6.10. The midpoints of these ranges demonstrate business expansion ahead of any future M&A activity. We look forward to completing the divestiture of the electrical platform so that we can utilize the cash to reduce debt and invest in growth. For this reason, we're leaving our EPS estimates unchanged. Also, capital expenditures for the fiscal year are expected to be $60 million to $80 million, and debt paydowns are expected to exceed $165 million. This amount excludes any additional debt reduction from the joint venture sale proceeds as well as any capital used for acquisitions. Additionally, we are off to a good start in the first quarter and have not seen any significant impact from the tariffs, particularly in our Metal Coatings segment. I am proud to recognize AZZ's 38th consecutive year of growth and profitability from continuing operations. This accomplishment was due to the dedicated efforts of our employees. I sincerely thank them for their hard work and continuing commitment to excellence. Finally, we are excited to announce that we will host an Analyst Day on August 14. The event will be held in St. Louis, Missouri, and will include management presentations from our Precoat headquarters and a tour of our new aluminum coatings plant. I encourage the analyst community to contact our Investor Relations team if you are interested in participating later this year. With that, operator, I would like to open up the call for questions.
Operator, Operator
The first question comes from the line of Adam Thalhimer with Thompson, Davis.
Adam Thalhimer, Analyst
Tom, I was hoping to start off by asking what you are seeing in the May quarter and what kind of bounce back you have seen from the bad winter weather.
Thomas Ferguson, CEO
Yes, that's a great question. In April, we recovered the shortfall from the fourth quarter for Metal Coatings and likely exceeded it. We're expecting a very strong first quarter for Metal Coatings, and they are performing exceptionally well. March was excellent, and April remains solid. The outlook for May is also promising. On the Precoat side, the situation is similar. They were affected by the weather, but in a different way. Instead of experiencing many lost production days, it was more about customers being closed and not taking delivery of some finished goods. Therefore, we anticipate a solid first quarter for Precoat as well. Jason will likely want to add to my comments, but we have a lot happening in the first quarter for Precoat. The new site is ramping up, which is great news for us, and production is underway. We're also focusing more on growing our market share. Compared to last year, although our markets were generally down, we managed to grow in both segments.
Jason Crawford, CFO
Yes. I mean the only other thing I would add in Precoat is about their inventory and the seasonality ramp that we would normally see with the good weather coming out of January and February would impact our Q4, and we've never seen that. We carried a little bit more inventory from Q3 into Q4. And that happens in relation to where steel prices are at. And obviously, as we kind of enter Q4, there was a lot of uncertainty around the administration and how that was going to impact. Essentially, if you go back 8 years ago, how it impacted us was around supply and price. So to be fair, our customers stocked up a little bit, and we carried that. So that was probably the main impact in Q4, and then we'll see that get back out of the system as we go into Q1 here.
Adam Thalhimer, Analyst
Okay. Great color. And then, Jason, what's in the guidance for the Avail JV?
Jason Crawford, CFO
Yes. I mean, if you look at the Avail JV, and obviously, the guidance that Tom reiterated, there is no impact. And the reason we look at no impact is $15 million to $18 million in the guidance for the JV. And as Tom highlighted, there's around about 30% of that JV continues after the sale. So it comes down to a fairly nominal level once we complete the sale of the Electrical Products division.
Operator, Operator
The next question is from the line of John Franzreb with Sidoti & Company.
John Franzreb, Analyst
I guess I'd like to start with a little question about the tempo of the order book. I know you had some catch-up from weather. But have you seen any change in momentum based on the current macroeconomic environment, be it positive or negative?
Thomas Ferguson, CEO
Yes. Interestingly enough, we spend a lot of time going through our weekly reports from the field. And the optimism is positive. So projects are going forward. Customers are confirming we've got capacity. And so I'd say, generally, while there's always concern further out in the year, the short-term outlook over the first and second quarter is more positive than I think we would have expected. So I think, like I said, mostly checking our capacity, making sure we've got shifts to run infrastructure. Jason can probably comment on Precoat a little better. We already alluded to the fact of the finished goods inventory. But generally, it's positive there too. And the construction season was a little slow to get started, but now it's getting off well.
Jason Crawford, CFO
Yes. John, the only other thing I'd add is if you look at the couple of industry forums that we've been doing at the start of the year, the general sentiment in those forums and conferences is relatively upbeat. So at this point, obviously, there's a lot of turmoil outside. But within the walls of our business, we're not necessarily seeing it at the moment.
John Franzreb, Analyst
Great. That's good to hear. I guess the second thing I wanted to touch on was zinc. The U.S. doesn't produce an awful lot of zinc. A lot of it comes from China and South America. I'm just curious, how should we be thinking about zinc in this current tariff environment? Any kind of color you could provide would actually be very helpful.
David Nark, Chief Marketing Communications and Investor Relations Officer
Yes, John, this is Dave. Regarding zinc, the important point to note is that it is listed on the ANCI exemption list from the administration. While the U.S. is a net importer of zinc, most of what we use comes from North American sources. Therefore, it won't have an impact on us because it is exempt from the tariffs.
Thomas Ferguson, CEO
Yes. And I'd add. Talking to all of our suppliers, they don't have any concerns at this point. So supply is good. We'd actually taken on some inventory at the end of the year just as a cushion, but it doesn't look like we're going to need that extra inventory.
Operator, Operator
The next question comes from Mark Reichman with NOBLE Capital Markets.
Mark Reichman, Analyst
By my calculations, it seems like you would need to reduce debt about $300 million to offset the impact from the sale of the JV transaction. And I was just wondering, with that $200 million that you're expected to receive, could you just maybe elaborate on your debt reduction goals and how you might look at that from a capital allocation standpoint? I know you still have about $50 million left on your repurchase authorization. So just some clarity regarding the debt reduction goals would be helpful.
Jason Crawford, CFO
Yes, I can address that. We haven't fully determined how to allocate the $200 million yet. However, the loss impact from the joint venture income does not factor into our calculation of the 2.5% we ended the year with, so it's not included in that calculation. When considering opportunities for mergers and acquisitions or ways to return value to shareholders through dividends or share buybacks, all options are being considered. If we find there are no viable opportunities, we'll focus on reducing our debt. Our target is to maintain a comfort zone of 2.5%. If we dip slightly below that, we will prioritize accordingly.
Mark Reichman, Analyst
Okay. Just to clarify, you'll see the equity and earnings from unconsolidated subsidiaries adjust from 15% to 18% down to 4.5% to 5.4%. To compensate for this, you will need to reduce some additional debt to lower your interest expenses. You have already indicated a plan to pay down more than $165 million. My question is whether expecting $300 million in debt repayment for fiscal year 2026 is unrealistic.
Thomas Ferguson, CEO
That's very realistic.
Jason Crawford, CFO
Yes, I don't think it's unrealistic. I think the math is correct.
Mark Reichman, Analyst
That's what I'm assuming. So I am hopeful.
Jason Crawford, CFO
I mean the math is correct, yes.
Thomas Ferguson, CEO
Yes, absolutely. And that still leaves us room for buying back stock to offset the dilution from equity compensation and similar matters. We fully intend to use a portion of that remaining buyback authorization alongside the debt reduction that you just mentioned.
Mark Reichman, Analyst
Okay. And then just a second question, a final question. The fiscal year 2026 capital expenditures of $60 million to $80 million. What's the split between Metal Coatings and Precoat Metals? I mean we have a pretty good history of a normalized run rate for Metal Coatings, but maybe not so much for Precoat Metals. So I just was kind of curious about the normalized spending budget for each of those segments.
Jason Crawford, CFO
Yes. And I would say it's roughly close to a 50-50 split. I think you can look at the lower end of that as a normal year. And then the upper end of that is where maybe we're investing in some projects. I think we've highlighted historically there's some projects that have sat on the sidelines as we focused on paying down debt, and they start to come into play in terms of returns.
Thomas Ferguson, CEO
Yes. And I would just add to Jason's point, which is yes, $30 million each for the two segments. And then we did have some carryover on the new Washington facility that just builds to pay carried into this year. So that's part of it. Also, we have a couple of nice new investments that will give us new capabilities in certain facilities. So we'll always look at some increment for growth capital.
Operator, Operator
The next question comes from Ghansham Panjabi with Baird.
Ghansham Panjabi, Analyst
If you covered it, I missed it, but what do you estimate the impact from weather was on your fourth quarter fiscal year '25 quarter? And is that lost sales just add to the future backlogs? And is that in effect what you're seeing in the first quarter thus far?
Thomas Ferguson, CEO
Yes, we experienced lost revenue on the Metal Coatings side estimated between $8 million and $12 million. Almost all of this has been recovered in March and April. On the Precoat side, as Jason mentioned, we faced some weather-related impacts along with a build-up of finished goods inventory. This resulted in approximately 200 lost production days, primarily from mid-January through February. We were unable to make up for this during weekends due to storms, icy weather, and customers not shipping products. However, we quickly ramped up operations in March and worked many weekends to meet our customers' needs.
Ghansham Panjabi, Analyst
Okay. Got it. And then relative to when you initially gave your fiscal year '26 guidance back in February, I mean, obviously, there's more uncertainty as it relates to the macroeconomic backdrop, tariffs and also mixed indicators and construction, including from the homebuilders, you're reiterating guidance for the year, obviously. Are there any incremental positives for fiscal year '26 relative to your view back in February that's sort of underpinning your confidence? And then also, how should we think about sequencing of earnings for fiscal year '26?
Thomas Ferguson, CEO
I'll address the first part of your question, and then Jason can provide insights on the sequencing. We have seen strong momentum in the first quarter, especially in Metal Coatings. While we previously had some concerns related to the weather, those have now been resolved. Additionally, we plan to complete at least one acquisition this quarter and another later this year, both of which will enhance our margins compared to our initial outlook in January. We are also adjusting our prices due to inflationary pressures, not specifically from the zinc and paint sectors, but from other factors such as tariffs and supplier pricing strategies. We believe in the value we provide and want to maintain our commitment to our customers. This is the basis for my optimism as we progress into the year, supported by positive feedback from our sales team and our customers.
Jason Crawford, CFO
Yes. In terms of the seasonality, I would say it's going to be a normal seasonality pattern that we've seen historically other than two things. In regards to the Metal Coatings division, we are going to see a little pop in Q1 as we've seen the negative side in Q4, which is going to be nice for the quarter. And then as Tom highlighted, if we execute on the acquisition, then Q3, Q4 should provide that additional level boost for that division. From our Precoat view, business is as normal from a seasonality, other than bringing on the new facility. We highlighted in Q1, we're starting to see commercial production. Obviously, it's a brand-new asset. So it's got to be a little bit of a drag, not materially so, but certainly, it's got to be a drag before you really see that start to pop in the second half of the year. So other than those three factors, at this point, we're not really seeing anything major in terms of seasonality for the fiscal year.
Ghansham Panjabi, Analyst
Okay. Great. And then just one final one. Your capital position, your balance sheet is already quite strong and clearly, you're going to get more proceeds post the JV asset sale. As it relates to acquisitions going forward, should we sort of be thinking about slightly larger deals than maybe you originally envisioned just given balance sheet flexibility? And just more holistically, what does the pipeline look like for acquisitions at this point?
Thomas Ferguson, CEO
Yes, the pipeline is looking really good. I think we've got deals we could do the one-off galvanizing, those are just slam dunk. That's kind of our history. What we do is normal routine. So we've got, I think, active at the moment, one close to fruition. The two others that hopefully we can get done later this year. And then on the Precoat side, they're just generally going to be bigger. I'd say there's active deals that we could act on, but we're taking a wait-and-see approach to see how the tariffs impact those businesses. And but they're in our pipeline, active, good, solid relationships, things that if we can get the right value for them and the timing is right, we’ll prove out what happens to some of these businesses with tariffs because generally, galvanizers are like our metal coatings have not been affected too much because they're focused on infrastructure and construction spend that's going to go forward. But on the Precoat side, there are going to be bigger deals.
Operator, Operator
Our next question is from Nick Giles with B. Riley Securities.
Nick Giles, Analyst
Maybe just as a follow-up to the last question there. as you think about other potential bolt-on opportunities, I mean, what geographies are most compelling? And how does end-market exposure come into the decision matrix?
Thomas Ferguson, CEO
Sure. For us on the galvanizing front, almost any location is favorable. Regardless of whether we have plants nearby, we are interested in opportunities, whether it's one site or several. This is where we excel. We have a solid strategy and believe we can enhance value and increase margins with nearly every acquisition in this area. So whether it's in the U.S. or Canada, we’re keen on those markets. We also maintain connections with galvanizers located outside the U.S. and Canada, though that’s not part of our immediate plans. On the Precoat side, our focus is entirely on the U.S. market. Therefore, the relevant geographies are probably limited to the U.S. and Canada, as the end markets largely align with those we serve. I’m not sure if Jason or David has anything to add, but I don’t think there’s any region that would deter us from exploring opportunities within the U.S. and Canada.
Jason Crawford, CFO
Yes, I would agree. And in terms of the markets, both businesses are the #1 player within the market. We cover all end markets. Really, all you would see the acquisition is a little bit more concentration and something bigger than what we have today. So there's not any new markets out there that we could take galvanizing or coil coating to; it would just be a greater presence within those spaces.
Nick Giles, Analyst
That's helpful. And working capital management was a key contributor to strong cash flow in '25. So are there any working capital considerations you'd highlight as we think about cash flow in 2026? Or could we see further improvement?
Jason Crawford, CFO
Yes, I believe there is room for further improvement. Tom mentioned the need to increase our zinc levels beyond our optimal targets, which we have addressed. Looking at our finished goods and contract assets on the balance sheet for our Precoat division, there are definitely opportunities for enhancement. We finished just under 11% in working capital, and our strategic goal is to reduce that to single digits. While there is some progress, we aim to achieve the level of success we experienced with our blockbuster products from two years ago.
Thomas Ferguson, CEO
I would also mention that as we ramp up the new Washington coil coating facility, there will be some additional working capital associated with that. This is why we expect working capital to remain relatively flat overall this year, even with the addition of a new location.
Nick Giles, Analyst
Got it. No, that's helpful. And then one more, if I could. As we think about margin cadence over the year, should we be thinking about margins that could be closer to the high end as far as Precoat as Washington ramps?
Jason Crawford, CFO
Yes. I think as we've previously stated, Washington definitively comes in at the higher end just by the product, just the margin profile of that product. And then above and beyond that, just the leverage of the fixed costs that are within that business unit. So certainly, once we ramp the Washington facility and get it fully capable and producing, then we should see an overall bump to the Precoat margins that we've been operating at.
Operator, Operator
The next question comes from Timna Tanners with Wolfe Research.
Timna Tanners, Analyst
I had a few follow-ups, if I could, on tariffs broadly. So I just wanted to try to be pedantic on this, but on the last quarterly call, you said that there could be some project delays due to tariff uncertainty. So at this time, there is no mention. So were there no project delays and are you not hearing anything about tariff uncertainty from your customers anymore?
Thomas Ferguson, CEO
I think as we examined the Metal Coatings side, there were some concerns, but we observed that steel and metal were available. As long as those materials were accessible for construction, the projects continued as planned with previously agreed price levels. We experienced some weather delays in the fourth quarter, but the first quarter has started off strong. There is some apprehension regarding the potential spike in construction costs, but I believe the main issue is not the availability of construction materials but rather the increased project costs. If costs rise significantly, it could impact the viability of some projects later this year. Overall sentiment remains positive, but we will see how things unfold as we approach the end of the year. Regarding the Precoat side, it seems to be similar; construction was slightly delayed due to weather, but it is now ramping up well.
Jason Crawford, CFO
Yes. To be fair, the only other thing I would add is three months ago, it was all very new. And certainly, we're a little bit cautious and maybe even speculating what could happen versus three months later, we've engaged with our customers. As I mentioned, we've been at the industry forums, et cetera, and we're not hearing that same sentiment that's going to impact us.
Operator, Operator
The next question is from Timna Tanners with Wolfe Research.
Timna Tanners, Analyst
Okay. Continuing on that topic, you mentioned that the availability of paint was not affected by tariffs. We've already discussed zinc. Are you or your customers experiencing any challenges with materials needed for your business due to tariffs? Additionally, are you or any of your customers gaining any advantages from the downstream tariffs on steel and aluminum? I'm trying to understand how this could potentially benefit you on that side.
Jason Crawford, CFO
Yes. I think it's hard to believe that there's any company out there that's not been impacted by tariffs. And certainly, our biggest inputs are zinc and paint. As we've highlighted, we are not seeing any impact to them. But you go to the great population on the goods that we're procuring and some of them in terms of production supplies, et cetera, are being impacted. And obviously, we have been very customer-conscious in terms of pushing back on those, but some of those are stacking. So in terms of margin accountability, then we're driving appropriate from a pricing point of view. So that's something that we continue to stay on top of. Obviously, it's the smaller part of our input cost but at the same extent, every penny counts, and we just stay on top of that and continue to monitor it.
Thomas Ferguson, CEO
Yes. That would be things like wire additives, chemicals, assets. So those secondary supply items in both segments have been impacted. But like I said, we're trying to push price and also negotiate. And in a lot of cases, we're still fairly large customers for certain of those items. So in a reasonably good position and have not seen much negative impact at this point, if any.
Operator, Operator
Okay. The next question comes from Jon Braatz with Kansas City Capital.
Jon Braatz, Analyst
Tom, now that Washington has reached the commercialization stage, and maybe along with the prior question and maybe some additional imports looking for domestic sources. Any reason to believe that Washington's ramp up might go better than expected, and we might see something more positive out of Washington here in this fiscal year?
Thomas Ferguson, CEO
Yes, that's always the hope. It's a big complex project and it's been managed well. The team has done a great job of addressing any issues with equipment deliveries and increasing production. We're looking forward to the Analyst Day in August. They're definitely working towards a more aggressive plan than what we have predicted in our guidance. If they achieve this more ambitious plan, which the team has shown they can do so far, we could see some significant upside this year. Some team members might be questioning this, but they are committed to it, and this will become evident as they reach capacity midyear. By the third quarter, they will be operating at full capacity. We've even heard from at least one customer that they're anticipating higher demand, which is encouraging. Assuming everything goes well with the facility coming online, which we are seeing positive signs of, we are looking at a strong year ahead.
Jon Braatz, Analyst
Okay. If I'm correct, the initial revenue expectation is around $40 million to $50 million for this year. Is that correct?
Thomas Ferguson, CEO
I think it's a little lower than that.
Jason Crawford, CFO
So the revenue for this year is not $50 million or $60 million. The revenue once we get to ramp, we've previously stated is that kind of $60 million opportunity. And that's obviously a variable number. There's filings within that facility. There's, I'd say, a pre-slit lining and a coating lining in an overall slitting line. So there's a lot of variables in that equation in terms of the type of product. But as you look at our models, the full capacity is around that $60 million number.
Jon Braatz, Analyst
Okay. And one last question. David, you spoke about the 200 days of lost production. Was the inclement weather mostly impacting your southeastern locations? Or was it pretty much across the board?
David Nark, Chief Marketing Communications and Investor Relations Officer
Yes. We saw it pretty much across the board in the areas where we operate. The South in particular was definitely impacted more than it was a year ago as well as the upper Midwest and some of the Eastern operations.
Thomas Ferguson, CEO
Yes. Texas has not experienced this since 2022, and even then, we didn't have as many down days. One reason was the natural gas curtailment in North Texas. With our large furnaces, we essentially had everything running on a slow pace. These significant events affected our major facilities. However, everything has started to ramp back up in Q1.
Operator, Operator
This concludes our question-and-answer session. I would now like to turn the conference back over to Tom Ferguson for any closing remarks.
Thomas Ferguson, CEO
Thank you, operator. I want to thank everybody for joining us. And as we've implied on this call, we think the fundamentals of our business are outstanding and pretty much unchanged in spite of a lot of the tariff uncertainty. We focused on providing outstanding value, which allows us to take market share. We've made great investments in adding capacity, whether it's spin lines on the Metal Coatings side or whether it's slitting lines on the Precoat side. We have added other services that are flowing through into our revenue line and look forward to continuing to do that, getting some deals done, and announcing some additional positives as this quarter goes on. And then talking to you all at the end of the first quarter. Thank you very much.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.