Earnings Call Transcript - WOR Q2 2026

Operator, Operator

Good morning, and welcome to the Worthington Enterprises Second Quarter Fiscal 2026 Earnings Conference Call. This conference is being recorded at the request of Worthington Enterprises. If anyone objects, you may disconnect at this time. I'd now like to introduce Marcus Rogier, Treasurer and Investor Relations Officer. Mr. Rogier, you may begin.

Marcus Rogier, Treasurer and Investor Relations Officer

Thank you, Regina. Good morning, everyone, and thank you for joining us for Worthington Enterprises Second Quarter Fiscal 2026 Earnings Call. On the call today are Joe Hayek, our President and Chief Executive Officer; and Colin Souza, our Chief Financial Officer. Before we begin, I'd like to remind everyone that certain statements made during today's call are forward-looking in nature and subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied. For more information on these risks and uncertainties, please refer to our earnings release issued yesterday after the market closed. This is available on the Investor Relations section of our website. Additionally, our remarks today will include references to non-GAAP financial measures. Reconciliations of these measures to the most comparable GAAP measures can also be found in the earnings release. Today's call is being recorded, and a replay will be made available later on our website at www.WorthingtonEnterprises.com. With that, I'll turn the call over to Joe for opening remarks.

Joseph Hayek, President and CEO

Thank you, Marcus, and good morning, everyone. Welcome to Worthington Enterprises Fiscal 2026 Second Quarter Earnings Call. We had a strong Q2, which is a credit to our teams who continue refining and executing our strategies. I want to thank all of my colleagues for their efforts, focus, growth mindset and for having an unwavering commitment to each other, our company, our customers and our shareholders. In the quarter, despite market conditions that continue to be mixed, we again delivered strong year-over-year growth in revenue, adjusted EBITDA and earnings per share. Our revenue in Q2 was up over 19% from last year. Excluding revenues from recently acquired Elgen, revenues increased by over 10% year-over-year. Our adjusted EBITDA grew by 8% year-over-year. And in the last 12 months, our adjusted EBITDA is now $284 million, up $49 million from where it was a year ago, despite a $15 million negative swing in our equity earnings from ClarkDietrich in that same period. In the last 12 months, our adjusted EBITDA margin is now almost 23% versus 20% a year ago. This strong performance gives us confidence that we are successfully navigating the current environment, gaining share and positioning ourselves for long-term outsized growth when end markets improve. Our strategy is to optimize our business by growing both organically and through strategic acquisitions while increasing our margins. We're making progress on each of these strategic pillars. We achieved 19% revenue growth in Q2, while our SG&A expenditures declined by 320 basis points as a percentage of sales. Excluding Elgen, we grew revenues by 10% and held SG&A flat. Our EBITDA grew by $4.3 million as we continue driving value for our customers through innovative products and solutions. We continue to focus on acquiring companies in niche markets with sustainable competitive advantages. Yesterday, we announced our planned acquisition of LSI, a market leader in metal roofing components. LSI is a great company with an outstanding culture that we believe will enhance our position in engineered building systems, add resilient and retrofit-driven revenue and create long-term value for shareholders. I'll share more details on LSI a bit later. As we optimize and grow Worthington, we will continue to leverage the Worthington Business System and its three growth drivers: innovation, transformation, and M&A to maximize both our near- and long-term success. We've generated a lot of momentum with new product launches and our reputation with customers continues to provide us opportunities to grow. For example, our innovation around large ASME water tanks that help cool data centers has led to increasing opportunities and several new orders. We're excited about the growth prospects we have in this space going forward. We also recently expanded our capabilities to include the refurbishment of large-format propane tanks, an increasingly important service as our customers are utilizing a hybrid portfolio of new and refurbished tanks as part of their asset and cost management strategies. In addition, the innovation engine in our celebrations business continues to drive additional placement with retailers, and you'll soon be able to buy our Balloon Time products in Costco stores nationwide. Our teams continue to embrace AI in their work, and our transformation mindset provides a framework for how we consider, conceptualize and implement tools that help transform our business. The 80/20 initiative in our water business has had a positive impact on how we approach that business and our business globally, and we're making changes both commercially and operationally as a result. We've continued our integration of Elgen, which we acquired in June. Elgen's results in Q2 reflect our reset of those operations. Our focus on safety, the additions of new equipment and attracting and retaining the best workforce possible temporarily limited our ability to ship to demand, which impacted Elgen's revenues and margins in the quarter and ultimately impacted our consolidated gross margins. We now have the team in place that we think will take that business to new heights, and we believe that our efforts and investment for the long term positioned Elgen exceptionally well to grow profitably moving forward. I mentioned how excited we are about our planned acquisition of LSI earlier, and we're happy to provide a few more details about what we think is a great business that will enhance our position in engineered building systems. LSI is a leading U.S. manufacturer of standing seam metal roofing clips, components, and retrofit systems. It's a business we've known for some time, and it fully aligns with our strategy of adding leaders in niche markets with attractive margins, resilient demand profiles, and core manufacturing competencies that reflect our own. LSI's products are engineered into OEM-certified roof systems, creating meaningful requalification requirements and high switching costs. The business also benefits from long-standing customer relationships, its reputation for quality and reliability and a domestic manufacturing footprint. We believe LSI is a best-in-class operator in this category. The purchase price is approximately $205 million. LSI has a strong financial profile and in the last 12 months ended September 30, they reported adjusted EBITDA of approximately $22.4 million and net sales of $51.1 million. We expect LSI will be accretive to our adjusted EBITDA margins, adjusted EPS and free cash flows. The transaction is expected to close in January of 2026, and we look forward to welcoming the LSI team to Worthington when it does. Cautious consumers, muted construction activity, and the sluggish housing market can create challenging market conditions. But our people, their talent, resilience, and creativity are enabling us to navigate the current environment very well and gain share as we grow organically and leverage our strength to make strategic acquisitions. People are our most important asset, and we're pleased that our team continues to be recognized by others. For instance, this month, we were recognized by Computerworld as one of the Best Places to Work in IT for 2026. Newsweek again named us one of America's Most Responsible Companies. And entering our country's America 250 celebration, we are honored to receive VIQTORY Media's Military Friendly designation with a gold rating for the 11th consecutive year. We're very proud of our people and the work they continue to do, taking care of our customers and each other. We're executing well and entering 2026, we're positioned to continue growing Worthington and creating meaningful value for all of our stakeholders. I will now turn over to Colin, who will take you through some details related to our financial performance in the quarter.

Colin Souza, CFO

Thank you, Joe, and good morning, everyone. We delivered solid financial results in Q2, reporting GAAP earnings of $0.55 per share compared to $0.56 per share in the prior year period. The current quarter included $0.10 per share of unique items, primarily losses related to a divestiture that occurred within our SES JV and the related revaluation of the marketable securities received as consideration, both of which are included in miscellaneous expense. The prior year quarter included $0.04 per share of restructuring and other expenses. Excluding these items in both periods, adjusted earnings were $0.65 per share, up from $0.60 per share in the prior year quarter. As a reminder, Q2 is typically our seasonally weakest quarter, and we are pleased to deliver year-over-year growth in adjusted earnings per share, adjusted EBITDA, and free cash flow as our teams continue to execute well, leveraging the Worthington Business System to navigate the current environment. Consolidated net sales for the quarter were $327 million, up over 19% compared to $274 million in the prior year quarter. The increase was primarily driven by higher volumes in Building Products and the inclusion of Elgen following our acquisition of that business in June. Gross profit increased to $85 million, up from $74 million last year, with gross margin at 25.8% compared to 27% in the prior year quarter. Adjusted EBITDA was $60 million, up from $56 million in Q2 of last year, and adjusted EBITDA margin was 18.5%. On a trailing 12-month basis, adjusted EBITDA now stands at $284 million. This performance reflects the resilience of our differentiated portfolio and our continued focus on the things we can control, even in a softer macro environment characterized by mixed consumer sentiment and subdued commercial construction activity. Turning to our cash flow and capital allocation. We continue to invest in our operations while maintaining a disciplined and balanced approach. Capital expenditures totaled $12 million in the quarter, including $6 million for the last of our planned facility modernization projects. We also returned capital to shareholders through $10 million in dividends and the repurchase of 250,000 shares of our common stock for $14 million at an average price of $54.87 per share. Our joint ventures once again delivered, providing $34 million in dividends during the quarter, which equates to a 118% cash conversion rate on equity income. Operating cash flow for the quarter was $52 million and free cash flow was $39 million. On a trailing 12-month basis, free cash flow totaled $161 million, representing a 96% free cash flow conversion rate relative to adjusted net earnings. This trailing figure still reflects elevated capital expenditures from our facility modernization projects, which totaled roughly $30 million over the same period. We have approximately $30 million of modernization spend remaining, with most of that expected to occur over the next 3 quarters. As this project is completed, we expect capital expenditures will return to more normalized levels, and we'll see further improvement in free cash flow conversion over time. Turning to our balance sheet and liquidity. We closed the quarter with $305 million in long-term funded debt and $180 million in cash. Our leverage remains extremely low with ample liquidity supported by a $500 million revolving credit facility that was fully undrawn and available at quarter end. Net debt was $125 million, resulting in a net debt to trailing adjusted EBITDA ratio of approximately 0.4x, providing significant financial flexibility. Regarding capital deployment, if completed as planned, the pending acquisition of LSI that Joe discussed earlier should close in January and will be funded primarily with cash on hand, supplemented by modest revolver borrowings. Following the transaction, we expect to maintain a conservative leverage profile and solid liquidity position, supported by healthy cash generation from our businesses. Yesterday, our Board of Directors declared a quarterly dividend of $0.19 per share payable in March 2026. We haven't talked about our SES joint venture performance in a while. They had $1.5 million in losses flow through equity income this quarter. We've completed a divestiture in the quarter of some of the loss-making assets and believe the business is better positioned moving forward and the financial impact on our results should be minimal. Let me now turn to our segment performance. In Consumer Products, net sales in Q2 were $120 million, up 3% compared to the prior year quarter as continued positive momentum in our celebrations category helped offset modestly lower volumes. Adjusted EBITDA was flat at $15 million with a 12.7% margin compared to 13.3% in Q2 last year, reflecting stable performance in a cautious consumer environment and the impact of higher conversion costs on lower volumes. As we move into the back half of our fiscal year, typically a seasonally stronger period for this business, we are well positioned with a portfolio of affordable and essential products that support improving everyday experiences and outdoor living, celebrations, and home improvement. Our consumer team remains focused and disciplined as we navigate the current environment and as we continue to gain new placement and market share, we are positioned to outgrow the market as conditions improve. In Building Products, Q2 net sales grew 32% year-over-year to $208 million. Growth was driven by higher volumes and contributions from the Elgen acquisition, which closed in June and contributed $25 million in net sales. Excluding Elgen, net sales were up 16% year-over-year, reflecting broad-based strength across multiple categories, including heating and cooking, water, and in particular, cooling and construction, where our market-leading product portfolio is enabling wider adoption of more environmentally friendly refrigerants. Adjusted EBITDA for the quarter was $53 million compared to $47 million in the prior year quarter with an adjusted EBITDA margin of 25.5%. The $6 million increase was primarily driven by volume growth in our wholly owned businesses, partially offset by lower combined equity earnings from the joint ventures. WAVE continued to perform well, contributing $26 million in equity earnings, while ClarkDietrich results were lower in a challenging market environment, contributing $4 million in equity earnings compared to $10 million last year. Overall, Building Products delivered another solid quarter, and the team continued to execute well. We expect LSI will be another great addition to the portfolio, adding more exposure in attractive end markets with a market leader where we can deploy the Worthington Business System to create and enhance value. In summary, this quarter marks the fifth consecutive quarter of year-over-year growth in adjusted earnings per share and adjusted EBITDA for Worthington Enterprises, demonstrating the consistency and resiliency of our businesses and positioning us for continued success as we head into our seasonally strongest quarters. At this point, we're happy to take any questions.

Operator, Operator

Our first question will come from the line of Kathryn Thompson with Thompson Research.

Kathryn Thompson, Analyst

I wanted to revisit your acquisition of LSI, which follows a similar strategy to Elgen. Could you elaborate on the growth strategy going forward as you integrate both into the Worthington network? Additionally, I'm interested in how you perceive growth from both a complementary perspective and in terms of top-line opportunities, not just cost savings, as you expand within the system.

Joseph Hayek, President and CEO

Thank you, Kathryn. There are a few points to discuss, and we'll address them together. When we consider mergers and acquisitions, one of the distinguishing features of the Worthington Business System is how well the different elements complement each other. For us, M&A involves not just finding and acquiring market leaders in niche areas with sustainable competitive advantages, but also leveraging our manufacturing expertise that begins with steel coils and proceeds through processes like stamping or roll forming. Acquiring companies that have supply chains and manufacturing capabilities that align with ours opens up further opportunities. We plan to apply our transformation playbook to all companies in our portfolio, including those we acquire. The actions we've taken at Elgen reflect this playbook, focusing on safety, machine guarding, adding new equipment, and optimizing the workflow of certain production cells, which significantly enhances our capabilities. Moreover, innovation is a key component of the Worthington Business System. Although we are limited in what we can say about LSI since the transaction hasn't closed yet, we believe that innovation is integral to their identity as well. Therefore, we look forward to driving innovation at Elgen and are eager to explore the innovation strengths of LSI as we learn more about them.

Colin Souza, CFO

Yes. I'll elaborate a bit more on LSI. We've previously shared our acquisition criteria, and Joe mentioned that we look for market-leading positions in niche markets, higher growth and higher-margin opportunities, lower capital intensity, and companies that can show a sustainable competitive advantage. LSI fits all these criteria, which makes us very enthusiastic about this opportunity. They are a prominent player in the commercial metal roofing clip segment, serving an attractive and niche market driven by strong demand in the commercial sector and the reroofing cycle for metal roofs, along with robust margins and financial health. Joe noted their EBITDA of $22 million and revenue of $51 million. As we learned more about the company, we realized there are significant value creation opportunities by integrating them into the Worthington Business System. Additionally, we found them to be a great cultural fit, and we look forward to collaborating with them once the transaction is finalized.

Kathryn Thompson, Analyst

I have a follow-up question. I appreciated the details on water tanks, which you have previously mentioned in earnings calls and public forums as areas where you gain from data centers and overall reindustrialization. Can you explain other opportunities you are pursuing that are centered around data centers?

Colin Souza, CFO

Sure. So Kathryn, it's Colin. I'll take a shot at that one. And I know Joe shared a little bit with our water tanks and how they solve or provide solutions for liquid cooling in data centers. And we're excited about that opportunity. That's one example across our portfolio. And it's probably not well understood where all we play and have exposure to data centers, like you suggested, WAVE and ClarkDietrich both provide products that end up in data centers, WAVE with its structural grid and then the DCR acquisition that they did previously, ClarkDietrich with some of their products end up in data centers as well. Elgen, the business we acquired in June, serves data centers with their HVAC components and struck products. And then the acquisition we announced the signing of yesterday, LSI also serves data centers as there's a number of data centers that have metal roofing and require clips and components there. So in data centers overall demand, it's not a significant portion of any of our businesses. But in the aggregate, across our portfolio, it is meaningful and is an opportunity of growth for us.

Kathryn Thompson, Analyst

And in terms of meaningful, is it percentage of sales that you can estimate that it may contribute?

Colin Souza, CFO

It would probably be less than 10% of kind of the businesses that I mentioned, but it is one of the faster-growing areas within those businesses.

Operator, Operator

Our next question will come from the line of Daniel Moore with CJS Securities.

Dan Moore, Analyst

I want to follow up on Kathryn's question regarding LSI. Looking at the margin profile, it's clearly very strong with an adjusted EBITDA margin over 40% for the last 12 months. Can you explain what drives that and how sustainable it is? Additionally, could you discuss the key factors contributing to the projected 3% to 5% growth in the market? Also, I have a follow-up on that.

Joseph Hayek, President and CEO

Sure. And Dan, again, it's Joe. Thank you. We're a little bit limited. Obviously, the transaction is expected to close in January. But as Colin mentioned, LSI is a terrific company. They are in a business that really is driven by kind of, I'll call it, resilient retrofit. They don't count on new construction for a lot of their growth. They're a market leader. They've been at it for a long time. They have a great reputation with their customers. They're very reliable. They're very creative. And they have really three kind of go-to-market buckets. The first is what Colin has been talking about, which is the standing seam metal roofing clips. They do some work around transportation, but then they also have a business that is really retrofit where you can actually put a new metal roof on top of an existing metal roof that has a lot of great attributes from a cost and value perspective and also from a structural integrity perspective. Metal roofs a long time ago, people figured out that drilling holes and using screws in the different kinds of fasteners was a pretty bad idea from a long-term leak perspective. And so LSI is a market leader. They have a great culture, and we're really excited about the prospects of them becoming part of Worthington in the next few weeks.

Dan Moore, Analyst

The switching gears, Building Products, really solid growth, mid-teens on an organic basis. Maybe just talk about how much of that is pricing versus volume? And then you mentioned some of the end markets that obviously are driving that growth maybe as we get into the seasonally stronger period, your confidence that those demand drivers will continue here in the near to midterm.

Colin Souza, CFO

Yes, Dan, it's a good question. In the Building Products segment, we saw strong volume contributions across the portfolio. Several value streams, including heating and cooking, water, cooling, and construction, experienced year-over-year growth. The only area that was somewhat weaker is the European market, which remains challenging. Despite that, we are optimistic about the demand and drivers within the portfolio, and this is reflected in the margins of the business as well. EBITDA margins for the wholly owned business increased by almost 300 basis points year-over-year. We believe, as we've stated before, that the targets are still intact, and we expect this to be a low teens EBITDA margin business over time.

Joseph Hayek, President and CEO

Yes. And Dan, it's really a credit to our teams because it is more volume than anything else. And it's because we've been gaining share. We've done a really nice job with innovation, and we've done a really nice job commercially and from an operational manufacturing perspective. So it's a really great story that we continue to see that kind of momentum in really broad swaths across that business.

Dan Moore, Analyst

Very helpful. Maybe 1 or 2 more. ClarkDietrich. Obviously, contribution hit kind of a new post-pandemic low for the quarter. Talk about what you're seeing there? How much of it was just top line versus maybe costs? And what steps can be taken to kind of protect margins from here, so we don't see that dip further?

Joseph Hayek, President and CEO

Sure. ClarkDietrich's a great business. They are a market leader and they're operating in a pretty tough environment, but it's an environment that will improve over time as market conditions allow. I mean, Colin, I think, has a bit more of the details.

Colin Souza, CFO

Yes. In ClarkDietrich, Joe is right, led by a really great team there, they've seen some margin compression as a result of the challenging new construction environment, and that's led to some increased competition in their spaces, particularly from smaller players. So they continue to be a market leader in that space and continue to focus as well on cost savings initiatives. Their mix has shifted over the last year, 1.5 years because of their breadth and scale of their offering, they can compete better on larger projects. If you think about stadiums, data centers, hospitals, where some of the smaller competitors can't do that. So the mix has shifted, but the profitability levels in those areas are less than their traditional drywall studs space. So they're doing the right things to take care of their customers. We do expect no worse than flat sequential performance moving forward there. And despite the tough environment, they're performing at pre-COVID levels. And as we see green shoots in construction in the future, they're very well positioned to benefit.

Dan Moore, Analyst

Maybe last, just in terms of capital allocation that bought back some stock in the quarter at levels a little higher than where the stock has indicated this morning, still only a turn of leverage on a pro forma basis following LSI. So from here, would you prefer to delever? Or are you comfortable continuing to opportunistically return cash to shareholders and continue to explore tuck-in M&A?

Joseph Hayek, President and CEO

Yes, great question. And I would say yes, yes and yes, Dan. We'll continue to think about our capital structure. We'll continue to opportunistically look at strategic M&A and returns of capital to shareholders. But our formula is such that we talk about it on a regular basis. And so we'll continue to be balanced with a bias toward growth.

Operator, Operator

Our next question will come from the line of Susan Maklari with Goldman Sachs.

Susan Maklari, Analyst

My first question is talking about the momentum that you are seeing on the consumer side of the business. You mentioned that Balloon Time is now going to be available in Costco. Can you just give us a bit more color on some of these new partnerships that you're getting into that you're having success with? How much more maybe there is to go there? And then how we should think about the upside from all of this as we do get into the busier spring and summer next year?

Joseph Hayek, President and CEO

Susan, thank you. So yes, you're right. There is a lot of focus on health of the consumer generally right now. And there's certainly no doubt that consumers are cautious and they're being impacted by economic conditions and prices. I do a couple of things that are unique about our consumer business, for one, some of our Consumer Products end up being used by the pro or contractors. And so that user base is proving to be less impacted than by economic conditions than consumers overall. But relative to consumers generally, remember, our products that are geared toward consumers are pretty affordable. We do not traffic in consumer durables, for instance. And our products are used in a wide swath of activities and experiences. Sometimes those experiences are instead of or are replacing more expensive experiences. And so demand tends to be a bit more resilient than in other categories. But to your question specifically, our innovation engines are really opening new doors for us, and we think that we're gaining share. I think about the Costco win, additional placement for Sherwin-Williams and Home Depot. We've talked in previous quarters about CVS, Staples, Walgreens. Our store count is actually up overall 63%. And so that innovation is really what's driving that growth and the placement. And so it's helping us navigate the current environment really well. And we think it also positions us for additional growth as conditions improve and people have a bit more disposable income. And then maybe finally, if you look at the last couple of years in consumer, our revenues and EBITDA are relatively flat in what many would describe as a pretty down market and in the face of some modest tariff headwinds. And so that gives us confidence that we're doing a lot of the right things there.

Susan Maklari, Analyst

That's great color. Good to hear all that. And then maybe switching to the COGS side of the business, you've done a really nice job on SG&A in the last several quarters. Can you talk a bit about the further opportunities there, where we are just as it relates to the Worthington Business Systems and any other upside either in SG&A or actually even in the COGS side of the business as well?

Joseph Hayek, President and CEO

Sure. I'll address the gross margin aspect of your question, Susan. You're correct, and I appreciate your observation. We experienced a decline of 320 basis points from an SG&A standpoint as a percentage of sales. Additionally, our gross margin decreased by 120 basis points compared to a year ago. The primary reason for this decline is linked to Elgen and the dynamics I previously discussed. However, part of the decline is also related to our growth investments. Specifically, we've brought on approximately 40 new employees in some of our facilities to meet rising demand, which will take time for them to become fully productive. We're pleased to have identified and onboarded these individuals who we believe will be valuable team members for the long term. We did see a slight dip in volumes in a few of our value streams seasonally, as winter arrived later this year than last, resulting in higher conversion costs in those businesses. Nevertheless, the SG&A side, as you mentioned, reflects a strong story for us, Colin.

Colin Souza, CFO

Yes. As Joe mentioned, SG&A decreased by 320 basis points year-over-year. We continue to prioritize cost controls and leverage technology where possible. Transformation is an integral part of our business system, not limited to just customer-facing areas but also within the back office. Our goal is to manage costs effectively and create operating leverage to enhance our SG&A performance. We have set targets for gross margin, which has been running in the high 20s, and we believe we can achieve a consistent 30% gross margin over time while also reducing SG&A to 20%. We remain optimistic about these objectives. There is some temporary cost impact for the quarter affecting gross margin, as Joe noted, but we have been mitigating that through our SG&A efforts, and more improvements are expected.

Susan Maklari, Analyst

It's great to see how well WAVE is performing in this environment. Can you share some insights about what they're experiencing in that business and any important updates regarding the outlook?

Colin Souza, CFO

Yes, Susan. So WAVE up $2 million year-over-year from a contribution standpoint. Their end markets remain generally stable, though performance varies by sector within there. And as you know, they're driven a little more by repair and remodel activity as well. So education, healthcare, transportation, and data centers have all been strong for them, while retail and office markets have been weaker, but steady. So they continue to find ways to really enhance margin by ultimately recognizing pain points of their end consumers, so contractors and ultimately delivering enhanced value to those contractors. And that's really valued by those contractors in the market. And looking ahead, as commercial construction volumes could benefit over time, either as rates decline or just as the market adjusts to current levels, the team at WAVE just continues to do a terrific job and are very well positioned moving forward. So we're not surprised. They're up another quarter from a contribution standpoint and are pleased with kind of where they're at and where they're going.

Operator, Operator

Our next question will come from the line of Walt Liptak with Seaport Research.

Walter Liptak, Analyst

And looks like a good quarter with just a couple of things outside of your control. So Colin, I think you mentioned just at a high level, mix and construction being weaker. And I think on the construction side, you're referring more to ClarkDietrich, but what were you referring to on the mix side?

Colin Souza, CFO

Yes. So on the construction side, Walt, ClarkDietrich specifically driven by new construction. They're on the very front end, and they're getting intense competition there just as the volumes declined a bit. So that's really what I was referring to, how it was subdued and trickling through to our earnings.

Joseph Hayek, President and CEO

Yes. Walt, that's actually a bit different from other areas of our construction business, which focus more on repair, remodeling, and maintenance. Our cooling and construction business continues to show strong performance and great growth potential. So currently, it feels like there are two distinct construction markets. New construction remains somewhat sluggish, but the repair and remodel sector is quite healthy.

Walter Liptak, Analyst

I just wanted to make sure I wasn't missing something there. And then on the mix, too, I'm not totally sure I understand the pluses and minuses there because the mix sounds, especially in Building Products, like it was pretty good.

Joseph Hayek, President and CEO

Yes. I think from a mix perspective, if you're talking specifically about ClarkDietrich, their mix has tended to be more towards the large, large projects, stadium infrastructure projects, which is good business, but maybe a bit lower margin profile than more of the traditional slightly smaller drywall stud business. That's, I think, what Colin was referring to around ClarkDietrich.

Walter Liptak, Analyst

And then just a follow-up on a previous question about ClarkDietrich. Are they getting into like a seasonally stronger period like these EBITDA levels? I think I heard you say is kind of stable. But then if it's seasonally stronger, do you get a lift going into the back half of the year for ClarkDietrich?

Colin Souza, CFO

Yes. So I mentioned, Walt, just no worse than sequentially flat is the expectation there. Seasonality, it's not too pronounced in ClarkDietrich. Obviously, if it's colder out and they can't get to job sites, that has an impact. But the earnings contribution are impacted by some of the other factors that we've been talking about, whether it's steel pricing or mix of projects as well.

Walter Liptak, Analyst

In the third quarter last year, I recall there were smaller gas containers used for heating that performed well. Should we expect a tougher comparison this year due to the colder weather we've experienced recently? Will those small containers significantly affect the third quarter results?

Joseph Hayek, President and CEO

When we consider this, it's mainly about seasonality. In the Midwest or Northeast, December has been quite cold. Our strongest seasonal quarters are typically Q3 and Q4. This aligns with several factors: the winter and the additional heat our products offer during exceptionally cold periods, instances of burst pipes, and other cooking and heating needs. Additionally, people start thinking about the spring construction season and related activities. Seasonally, Q3 last year performed well, and I don't anticipate significant differences in seasonality this year compared to last year.

Operator, Operator

Our next question comes from the line of Brian McNamara with Canaccord Genuity.

Brian McNamara, Analyst

My first one on gross margin, you pretty much answered already, but I'm curious what the gross margin would have looked like ex Elgen. And then when you would expect to see the benefit from the recent headcount additions on the gross margin line?

Joseph Hayek, President and CEO

The impacts from Elgen accounted for the majority of the 120 basis points. There were a few other factors as well. However, we anticipate that the investments we've made in hiring and in operations at Elgen will begin to yield results in Q3 and beyond.

Brian McNamara, Analyst

And then there's a lot of, obviously, noise in the gross margin lines, very seasonal, very lumpy. So how should investors think about that line item in the back half of the year?

Joseph Hayek, President and CEO

Sure. I don't think it should be seasonally that different than it's been from a trend perspective in, call it, in our fiscal 2025. One of the things that's a little unique this year versus last year has been tariffs. And there's a lot that continues to be discussed around tariffs. But from our perspective, we still think that we're a net beneficiary of the tariffs that are announced and in place out there. So because the level playing field is a good thing for us. We believe we've gained share in multiple of our value streams. I mentioned the 40 or so heads that we've hired since the beginning of June to ramp up demand. But more when it comes to the tariff mitigation, what we've talked about this, but I think it's worth revisiting, there are three primary levers that we can pull to mitigate some of those negative impacts on us. The first is asking our suppliers to help us offset some of that additional cost. We've certainly done that. The second is taking cost out of our own supply chains everywhere that we can, and we've certainly done that. But the third is pricing actions. And so those mitigants can take time to implement and to finalize, but we are pleased that as of early December, we've gotten to a point where we feel like we are where we need to be in all three of those areas as we balance our own profitability goals with being a good long-term partner to our customers. But we do feel good about where we are now.

Brian McNamara, Analyst

You anticipated my question regarding tariffs. Given that you primarily manufacture domestically, one would expect a cost advantage concerning tariffs compared to some competitors with substantial sourcing from China. However, while you've mentioned gaining market share, it seems this advantage hasn't yet materialized fully. I'm interested in your observations about the market, particularly in terms of competitive pricing and the value your products are offering.

Joseph Hayek, President and CEO

Yes. I think so it depends on the markets that we're participating in. In some markets, it's a bit more evident that imported products are just simply more expensive. And in other markets, it's a bit more nuanced. There are people, I mean, look at Europe, for instance, the European economy is struggling more than maybe the domestic economy. I think it's in part because of the tariff situation here, a lot of those products are landing in Europe and so the European manufacturers are effectively facing more of that competition. But from us, from our perspective, we feel really good about where our value is. We focus really hard on innovation and on doing things that aren't just a price increase for a price increases' sake, but we're adding value and we're partnering with our customers, be they distributors, contractors, or retailers understanding where they're at. I mean, it's been a tough row for these retailers since the spring to really understand all these things. And so we try really hard to add value and lead with data and lead with value. And as you can see in some of our increased placements and our gaining market share, that's paying off. It doesn't manifest itself over a 2-week period. But from our perspective, and keep in mind that we're a long-term focused company, we feel really good about our ability to continue doing what we need to while being a good partner in the long term for our customers.

Operator, Operator

And that will conclude our question-and-answer session. I will now turn the call back over to Joe Hayek for any closing comments.

Joseph Hayek, President and CEO

Regina, thank you, and thank you, everyone, for joining us this morning. Have a great week, and have a wonderful holiday season. Hope you're surrounded by friends and family and people that you love. We look forward to speaking to everybody soon.

Operator, Operator

This concludes today's conference call. Thank you all for joining. You may now disconnect.