Q2 2023 AZZ Inc Earnings Call
[music].
Good day and welcome to the AZZ, Inc. Second quarter fiscal year 2023 financial results Conference call.
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I'd now like to turn the conference over to Joe Torre Mayor of Lytham Partners. Please go ahead.
Thanks, Beth good morning, and thank you for joining us today to review AZZ financial results for the second quarter fiscal year 2023 ended August 31 2022.
Joining the call today are Tom Ferguson, Chief Executive Officer, Bill <unk>, Chief Financial Officer, and David <unk>, Senior Vice President marketing Communications and IR after.
After the conclusion of today's prepared remarks, we will open the call for questions.
Please note there is a slide presentation for today's call, which can be found on Azz's Investor Relations page under latest earnings releases presentation at AZZ Dot com.
Before we begin with prepared remarks, I would like to remind everyone. Certain statements made by the management team of AZZ.
During this conference call constitute forward looking statements within the meaning of the private Securities Litigation Reform Act 1995.
Chuck on the statements of historical fact this conference call may contain forward looking statements that involve risks and uncertainties. Some of which are detailed from time to time in documents filed by AZZ, Inc. With the Securities and Exchange Commission, including the annual report on Form 10-K for the fiscal year ended February 28 2022.
Those risks and uncertainties include but are not limited to changes in customer demand and response to products and services offered by the company, including demand by the power generation markets electrical transmission and distribution markets, the industrial markets and the metal coatings markets additional increases in labor cost prices of raw material.
Cost, including zinc and natural gas, which are used in the hot dip galvanizing process coil coating process changes and political stability and economic conditions of the various markets at AZZ serves foreign and domestic customer requested delays of shipments supply chain vendor delays acquisition opportunities.
Currency exchange rates adequate financing and availability of experienced management and employees to implement the company's growth strategies.
In addition, azz's customers and its operations could potentially be adversely impacted by the ongoing COVID-19 pandemic.
Company can give no assurance that such forward looking statements will prove to be correct. These statements are based on information as of the date hereof and AZZ assumes no obligation to update any forward looking statements, whether as a result of new information future events or otherwise with that out of the way, let me turn the call over to Tom Ferguson, Chief Executive Officer of <unk>.
AZZ Tom.
Thanks, Joe.
Welcome to AZZ second quarter fiscal 2023 earnings call. Thank you for joining us this morning.
I'm excited to have the opportunity to share the progress we've made on our strategic commitment to become predominantly a metal coatings company. The actions taken to further de lever the business as well as the first full quarter of combined results of our metal coatings and pre COVID-19 metals segments before I do however, let me take just a moment to recognize and thank everyone involved with the divestiture of the <unk>.
Geordie stake and the infrastructure solutions segment, which we completed on September 30th.
I also want to thank all the employees of <unk> for continuing to focus on the business, taking care of customers and finishing out a nice second quarter with significantly improved results over the prior year.
If we would not have to take to have had to take a discontinued ops AZZ would've had another $107 million of sales for a total of about $513 million in net sales and another $12 million of operating income for the quarter.
I wish all of Aaas folks success as part of the new joint venture with front of my group, which has been rebranded as avail infrastructure solutions.
Next as we dive into the quarterly results I am pleased to say that as a Z as we committed to back in November of 2020 is now a truly focused metal coatings company with leading market positions in both of our segments.
We had a very busy quarter highlighted by our melatonin segment, achieving record level sales, while continuing to post strong profitability.
<unk> metals completed their first full quarter of results as part of AZZ with record sales and also strong profitability.
We are reporting the infrastructure solutions segment as discontinued operations. After the end of the quarter. We closed the sale of my eyes collected the $228 million in proceeds and immediately used $210 million to reduce the term loan b debt with most of the remaining balance used to reduce the revolving credit facility.
Additionally to hedge against rising interest rates, we entered into a floating to fixed rate swap for $550 million of the remaining term loan b debt.
Philip will speak more about this later.
So let's talk about the operational performance of our businesses on a consolidated basis, we generated sales of 407 million, but the AZZ metal coatings segment, posting almost $166 million, which is another record quarter.
And the <unk> metals segment generated $241 million, which is the highest in their history.
Most markets were active in our businesses managed well through the ongoing supply chain delays and labor shortages and continued to operate safely while taking care of their customers.
We generated over $100 million of EBITDA on an adjusted basis, excluding the onetime noncash loss on the sale of I S. Net income and EPS were down on a reported basis due to transaction related expenses, depreciation and amortization and the loss on sale of Aaas, but the business has generated EPS.
$1.24 on an adjusted basis, which is an increase of 63% versus prior year fill up we'll get into the details of these adjustments later.
It gives me great pleasure to congratulate the entire amount of cogent team on another outstanding quarter.
Despite supply chain disruptions and labor shortages that kept our people safe take care of their customers and continue to drive great results.
These results included the impact of the dam and Steele Creek Galvanizing acquisitions, and the addition of tubing from the a S divestiture.
But organic growth was still over 20%.
Operating margins of 27% provided operating income of $50 million, which is a 40% increase year over year.
We did have the benefit of $5 1 million of impact from a real estate sale and insurance settlements. So normalized margins would've been just over 24%.
We continue to see solid demand as we progress into Q3, but are experiencing the rising cost of zinc and our kettles. If we as we have noted previously.
Frequently.
Freak out joined Daisy Z with some momentum and generated sales of $241 million operating income of $36 million or 15% operating margins would have been 17, 8%, but were impacted by 280 basis points due to preliminary purchase price accounting amortization and depreciation.
And also faced about $2 million of impact from other supply chain disruptions and labor shortages one of the key services pre code provides is warehousing steel and aluminum coils for their customers, but due to well publicized supply chain disruptions customers have increased safety stocks of pre coat is experiencing much higher than normal inventory levels.
It is both a blessing and a curse.
Volume bodes well for shipments, but presents challenges to productivity inefficiencies frito generated solid EBIT of almost $50 million or 26%.
We are pleased with how the pre co team settled into AZZ with minimal disruption and it's been a great cultural fit with that I'll turn it over to Philip to discuss our results in further detail Philip Thanks, Tom.
First I'd like to thank our employees and especially our global finance professionals.
For their support and efforts in this year's large acquisitions and divestitures as they require significantly coordination and effort.
As Tom noted in his comments, we classified our infrastructure solutions segment as assets held for sale at the end of the quarter and reported this segment as discontinued operations, which requires us to separate earnings from continuing operations from those of discontinued operations combined sales were $513 million.
Operating income was $79 million at 15, 4% and EBITDA as Tom noted of $100 5 million at 19.6 on a consolidated basis.
I will primarily focus on our continuing operations as we discuss our results for the quarter and the year to date periods.
Second quarter sales from continuing operations were $406 7 million sales included the first full quarter of AZZ Preto metals and excluded infrastructure solutions segment sales now reported in discontinued operations of $106 7 million sales exceeded prior year same quarter sales by $275 million.
We generated gross profit from continuing operations of $101 6 million compared with gross profit of $36 4 million in the second quarter of the prior year. Our gross margin was 25% for the quarter 270 basis points lower than the prior year as the prior year included and reflected the metal coating segment.
While the current year includes higher sales from <unk>, which is a slightly lower margin profile.
Operating profit for the quarter was $64 1 million compared with $20 million in the second quarter of the prior year operating margins from continuing operations was 15, 8% during the current quarter 60 basis points above the prior year operating margin of 15, 2%.
Excluding the effect.
Of the presale purchase accounting quarterly depreciation and amortization expense increases of 2.2 million and $4 6 million, respectively operating margins in our pre co business would have increased from 15% to 17, 8%, we expect the depreciation Amazon take amortization.
Resulting from the pre cut acquisition to continue to impact the quarterly operating profit in the <unk> segment going forward.
Second quarter EBITDA for fiscal year, 2023 was a negative $17 1 million compared to $36 6 million reported in the second quarter of fiscal year 2022.
On an adjusted basis, the current quarter EBITDA was $100 5 million $63 9 million above the prior year.
Our diluted earnings per share reflected a loss of $1 91, compared with EPS of <unk> 76 in the same quarter last year adjusted diluted EPS, excluding the estimated loss on sale of the Aaas JV at $114 9 million.
And $2 7 million of costs related to the transactions was $1 24, a 63, 2% improvement over the prior year same quarter.
Year to date sales from continuing operations through the second quarter of fiscal year, 'twenty three were $613 $8 million.
35% increase from last year's second quarter year to date sales of $260 7 million.
Fiscal year 2023 year to date net loss, including discontinued ops was $34 5 million was significantly lower than the $41 3 million in the prior year to date.
And was due to the estimated loss on the divestiture net of tax of $89 million.
Cash flows from continuing operations for the six months ended August increased 34% to $42 million compared with $31 3 million reported during the first half last year, primarily on higher earnings.
Cash used in investing activities was $1 3 billion and was primarily attributable to the preferred acquisition, which finalized on may 13th.
Year to date cash provided by financing activities on.
On a year to date basis was 124 5 billion, reflecting the borrowings required to purchase pre COVID-19.
Cash provided by our discontinued operations was $22 8 million or nearly five five times higher than the first six months of the prior year.
The increased cash from discontinued operations reflects stronger overall business conditions.
The company continues to focus on the balance sheet and our capital allocation.
Earlier last week, we announced the consummation of the sale of a 60% interest in the company's infrastructure solutions segment, we received cash in the amount of $228 million with 108 million related to our equity valuation and 120 million that was funded by committed debt financing taken on by the buyer.
We immediately utilized $210 million in cash received to reduce our term loan b paid $15 million on the revolving credit facility and you utilize the remainder on working capital.
Separately, we recently finalized the closing statement working capital true up with regard to the acquisition of <unk> metals and the amount of $15 8 million, we intend to apply these funds against our revolving credit facility to further reduce outstanding borrowings.
During the second quarter, we spent $12 3 million on capital expenditures for continuing operations and $2 9 million on discontinued operations capital investments related to our recent Permian pretax acquisition totaled $8 million in the fourth quarter. We continue to re prioritize projects as we have witnessed delivery delays due to supply chain disruptions.
We invested $18 7 million year to date on Capex, we expect to invest between 40 and $45 million in capital in the current fiscal year.
We did not repurchase shares during the quarter as we continue to focus on a glide path nearer term for continued debt reduction.
Last Friday, we announced our declaration of our dividend at <unk> 17 cents.
During the second quarter, we paid down debt and we Deleveraged from four three times Levered to three six times leverage.
Following the receipt of our shareholder approval at our annual meeting on August 5th we exchanged our 240 million, 6% Blackstone convertible notes into a series a convertible preferred stock now reflected as a component of equity as compared to being reflected in depth at the end of Q1.
Lastly, we recently entered into a $550 million three year Sofer based interest rate swap agreement to reduced floating debt exposure the swap at a fixed rate of four to seven 7% and a yield of about eight 5% and a 40 basis point floor.
<unk> has roughly 50% of our existing term loan b debt.
We continue to focus on reducing outstanding debt and leverage and continuing to invest in strategic projects, which we will believe which we believe will be accretive to future earnings.
Now with that I'll turn it back to Tom for his closing comments.
Thanks, Philip for medical meetings markets remain active and the team folks continues to focus on taking share and expanding our service offerings fabrication activity is solid although customers continue to face some labor labor challenges.
Zinc alami prices have dropped significantly and there continues to be some supply chain delays that we're normally able to cover with our existing inventories Zheng.
Zinc costs in our kit kettles will continue to rise much of this year.
Freak out has seen stable market conditions and is focused on profitable growth, we continued higher than normal levels of customer owned steel and aluminum coil inventory continues to provide production stability, while posing some logistics challenges.
They are experiencing inflationary increases in their costs, including warehousing transportation logistics and labor, but have been able to pass through price increases to its customers to offset the majority of the inflation.
Pain is generally available, but there continues to be some shortages in PV D F.
While the team has been offering a chart, which the team has been offering alternatives for so much like AZZ metal coatings to pre go team is meeting market challenges and overcoming down while generating strong operating results.
Due to the recently completed transaction transactions, we will not be issuing full year guidance. Since we do not want to attempt to estimate equity income from the new avail infrastructure solutions joint venture as the new organization settles in.
And we are still working purchase price accounting analytics from pre code.
As with AZZ metal coatings pre coats first half is stronger than the second and the third quarter will tend to be somewhat lower than the second quarter.
And with the fourth quarter being the weakest for both segments due to the winter impact on the construction markets. Additionally.
Both have historically proven to be very resilient during previous recessionary cycles. This is due to about 75% of their costs being variable. So they can shed costs quickly.
Finally, I want to end, where I started todays call AZZ has taken the actions necessary to become a pure play metal coatings leader in North America.
Our focus is on expanding our leading market positions in both AZZ metal coatings and AZZ freakout metals.
<unk> AZZ as a leader in both a pre and post fabrication metal coatings markets. Our short term focus continues to be on seamlessly onboarding freak out metals and paying down debt.
We have quickly reduced our leverage and attempted to reduce our interest rate risk, while continuing to pay a dividend.
I believe we have built a stronger more focused and resilient company with market leading positions strong cash generation and we are positioned quite well to deliver value to our shareholders well into the future.
With that we'll open it up for questions.
We will now begin the question and answer session.
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Okay.
Our first question today comes from John Paul with Sidoti and company. Please go ahead.
Hi, good morning, guys and thanks for taking the questions.
I'd like to start out with one of the last things you pointed out about the seasonality and breakout.
Can you kind of quantify how much of a revenue drop of frequency had historically in your.
The fourth fiscal quarter relative to its peak kind of revenue in the in the summer months.
I think.
We're trying to wrestle with a couple of things because the the unusual <unk>.
Price increases from Tate.
Has kind of changed that mix a little bit.
But I'd say generally which is probably around 15% as it falls off in the second half and it trails down third quarter than in the fourth quarter with with winter being the slowest.
Got it.
And going to price increases have you gotten any pushback on price increases in either pre code or a M C.
You know I think if you asked our sales folks they say, it's always a battle.
But.
When all of our customers are experiencing the same inflationary pressures, so labor going up everything from transportation energy utilities transportation feedstocks.
The only difference between the two is the Zip.
Zinc L. On me as we've mentioned has been going down, but offset by spot market premiums being up considerably.
Versus paint, which just continues to go up so.
We pass through the paint with a with a markup and so.
That's generally.
The difference, whereas Zika is just a feedstock and and we priced separately of that.
Got it and just one more if I could sneak it in.
You mentioned that pre COVID-19.
Manage the inventories for its customers which is.
Both the positive and the negative.
Does that mean, it's kind of resistance to any kind of shut downs in that.
Temporary shutdowns I would say in steel production or anything like that you don't see it immediately or can you just kind of walk me through the dynamics, what's going on maybe in the steel market is a little bit clearer.
Yeah. It's it's a that's one of those interesting things and that's why to me, it's like a machinist with pallets of.
Stuff sitting there to be processed.
So were you know were carrying I'd say normally we carry 300000 tons in and we're carrying probably 20% to 25% more than that so so that's the abnormality.
And it varies by plant, but for the most part that gives us the stability.
Yeah, basically we got four or five months backlog so to speak sitting in in our warehouses waiting to be processed so yeah.
While that could be delayed in terms of when it gets processed it is going to get processed.
And a lot of it's a you know it varies between how much is imported and how much is from domestic steel and aluminum suppliers. So.
That's why I say, we like the fact that it's there because we know it is going to get painted.
And that's our primary business on the other hand, we've got we've got an awful lot of it. So it's a you know it.
So it's a little bit above.
I tried.
Around logistics, and forklifts and drainage to get things moved around in <unk>.
And stored so so that's the incremental cost but on the other hand, it's.
It's good to have it there.
Got it thanks, a lot Tom let's talk about Q.
Yeah.
Your next question comes from Noelle Dilts with Stifel. Please go ahead.
Hi, Thanks.
And just on the legacy metal coatings business I was just <unk>.
Looking back on it at back in to that.
Yes, early two thousands and it seemed fairly inconsistent as to whether or not you know the third quarter is stronger than the second quarter. It seems like about 50 50.
So I was hoping you could dig into your expectations, a little bit more for the back half of the year. You know obviously you had pretty nice growth in the second quarter in terms of metal pounds that you processed could you just speak to which I think of as sort of a proxy for volume. So could you just speak to your volume expectations.
And the third and fourth quarter and and.
And also if you could touch on.
You know kind of the key.
Market drivers, how youre thinking about the relative strength and in some of the key.
Metal coatings markets in the back half of beer.
Yes, that's a good question Noelle.
Medical needs tends to third quarter can can be relatively strong.
So you know it.
They tend to be more balanced across a quarter is what we are seeing.
Of course as I think the.
The headwinds for us is that rising cost of zinc and our kettles.
So we've gotten our prices up.
In.
And been able to maintain that with our high service levels, but.
Now our cost are catching up to.
And in terms of what's in our kettles and what's going to remain in our kettles and then that starts to flip over probably towards the end of the year.
So while the volumes are going to be solid and look to be solid through the third quarter.
Generally.
We will have some margin impact so so we're talking more about the the income side.
Not that they're going to.
Fall dramatically off of what the band, but we you know we've consistently said that at some point they do return to that 21% to 23% operating margin range and and we would anticipate that as we get into the second half.
Hey, thanks.
In the 'twenty one to 'twenty go ahead.
So that would be so that's sort of what you're thinking okay. Yes, yeah, yeah, we're not talking about fallen off the cliff.
And then in terms of markets.
Sadly out of Hurricanes, you do get some opportunity in Houston, but that tends to take baldor to manifest itself.
To construction activity.
Made solid for the most part.
Stoller continuing to do well.
Things that have slowed up recreation, obviously the people brought their docs back in so we get things like that that have slowed up to normal summer.
Activity has gone away.
But transportation trailers.
Bridge and highway infrastructure, you know that spend is still coming in and we're seeing more of it.
Sure.
This is Nathan PND 80 system, Yeah, T&D still strong so most of the markets are outside of the recreation and some of the AG is a is pretty solid.
Okay.
And then kind of in the concluding comments you talked about both metal coatings and pre coke being pretty resilient in downturns, but emphasize more of the cost piece of that because of the.
The 75% of cost being variable could you talk about you know I guess, how you're thinking about.
Demand patterns in a weaker economic environment, you know it seems like for pre coat in particular, you started puppies.
Factors that are driving increased penetration.
But at the same time the market that could be impacted sort of net net can you give us some thoughts on and just generally how you're thinking about how long you might trend.
In a weaker economic environment.
Yes, I think I'll speak to the metal coatings side, and then David can talk to the pre coat side.
Metal coatings traditional stuff I mean, it's we we continue to see the infrastructure spend because theres just catch up that has to happen still.
And then the utility spend is going to continue as well because we're behind and so renewables are continuing to come into the market. So.
Even in a in a more recessionary environment, while that may slow, it's not going to stop.
And so we the discretionary part becomes more of the recreational.
Residential construction and industrial some of the industrial construction stuff, but.
So that's why I say, it's pretty resilient.
And the part that tends to be the.
The stuff, we well we like all of it so I don't I don't want to I don't want to say, we don't like any of our customers but.
But yes, the stuff that tends to absorb a lot of hours at our facilities tends to remain.
Pretty resilient so.
It's going to fall off seven, 810%, which which we can usually absorb.
In terms of the number of shifts we're going to run and how much labor we bring to bear.
And that's that's just as you look around the country, we tend to be situated more in the south Midwest.
Upper Midwest, and then of course out towards Arizona, Nevada, Colorado So.
Tend to be in.
Areas that are still growing from a population standpoint, so still need infrastructure still need construction.
Yeah on the pre coat side Noelle.
Their biggest market that they continue to serve as the general construction market and within there.
A couple of bright spots in particular for them has been the manufacturing sector in the warehousing sector within the broader construction markets, which had been holding up really well.
So I think we'll we'll continue to see a focus there.
Of course, as Tom mentioned in the call seasonal slowdown.
And then as we look about recessionary trends and the other thing too to point out is that we do have in our investor deck.
Slide that talks about how both businesses pre coat and.
AZZ metal coatings business held up through the last recessionary cycle.
Again, I think that.
You know as you look at that and our investors look at that that gives them some type of indication and that's what we're looking at as well on how we expect to perform as we enter into another cycle.
Okay. Thank you.
Thanks.
The next question comes from Jon Braatz, with Kansas City Capital. Please go ahead.
David a question back to back to you on pre code.
I believe they had.
Some exposure or exposure to the residential market I thought maybe it was like 15%.
And in the end you know home construct home homebuilding market is sort of shut down.
Are they seeing an impact on that end market.
We're seeing some impact on the residential side, John and Yeah. There is a the overall exposure is is yes about what you would you had anticipated we kind of group it.
Collectively within the construction market in general and within that within construction, it's about 20% of the the overall construction business that we see okay, okay, Okay and Phil.
Back to your back to the debt on your on your balance sheet.
Obviously, you paid some down now.
Some additional debt down and you're I think you're around about $1 billion and you know with your swap what what are we talking about in terms of you know all in.
Cost of that that debt at this time.
Assuming.
Obviously, it's going to go up when the when the fed raises rates, but where do we stand at this time.
Yeah on the half $550 million, that's hedged is running about eight five and the balance of that debt funding and about seven five.
So as.
And when rates further increase.
Protected on a portion of that is that we may see some increase on the floating piece. Okay did you say oh about half is protected.
Yes, we have about five.
Entered into a floating rate swap for $450 million and we've got about 1 billion one sitting on just under 1 billion once the government looks to that okay, alright, alright. Thank you very much.
Thanks, John .
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The next question comes from Brett Kearney with Gabelli.
Please go ahead.
Hi, guys. Congrats on the continued strategic momentum and thank you for clarifying how solid the results were this quarter on a combined company basis.
Thank you.
Question I had I know, it's early days, but as you have kind of gotten together with the pre co team more I'm curious Tom at this point you know opportunities you guys are are uncovering in terms of best practice. So you guys have at AZZ as well as what Kurt and the team are doing on the pre code side and Youre seeing to kind of cross pollinate some of those ideas.
Going forward.
Yes, its interesting ive been been able to get out to all of the pre coke plants and also our.
Go to some of their sales events and then I think we see a couple of different opportunities one from.
Sales opportunity perspective.
I'd have to say that our sales team to get along really well.
And so we see upside potential just talking to some of the large customers that can that either use both galvanizing and pre painted metal.
Finding more ways to work with them and and increase our presence across both sides is we we havent quantified that yet.
But theres quite a few of those opportunities as we talked about some of our large customers that they may do business with one side, but not the other currently and.
And may or may not have been aware of that.
Other side, even existed until recently, so so I think that's a.
That's almost seamless, but we're still working on identifying those opportunities and making sure we have that kind of outreach and that our sales folks understand what the.
While the benefits of hot dip galvanizing is too.
Two customers and our our metal coatings folks understand what what pre coat brings to bear so.
So we're really excited about that because those are future growth opportunities and leveraging our network, which tends to overlap.
From an operating standpoint, I think this is a you know we.
We look at the fact, we.
EHS is a is kind of opportunity to share best practices, we we deal with furnaces and ovens and.
And we handle materials, so we move stuff.
I think we're still in the early days, we've got a set of set of meetings teed up over the next several weeks to really work on some of those issues now that we've been able to visit each other's plants and we'll continue doing that.
We our board has requested we start quantifying this in cataloging. It then so we're well we're going to get on that effort, but.
I think it's going to be more significant than what we originally teed up and and especially from a from a customer growth perspective. So we're excited about that and especially the fact that we pretty much speak the same language when it comes to coatings material handling and and how we deal with our process.
<unk>.
Terrific. Thanks, so much guys.
Sure. Thanks.
The next question comes from Bill Baldwin with Baldwin Anthony Securities. Please go ahead.
Yeah, Good morning, and thank you for taking my question.
Just wanted to see what kind of color or insight you can offer on your capital spending allocations for for this year as far as the nature of the types of projects.
You know most of what we've we had underway for metal coatings and freak out interestingly kind of kind of similar.
Mostly on the material handling.
One of the bigger ones on the pre code side was just finishing up.
But one of the St. Louis facilities, which was an expansion in adding a drive three bay just to to Debottleneck, It and give it a I think 10000 square feet.
Probably even more than that of additional warehousing space.
And so that project is just finishing up.
So most of the capital that's already been deployed on it.
The one thing that we're struggling to get spent it.
Is the capital on forklift the lead times on those as well.
<unk> 56 weeks, so some of Thats going to get a rollover into next year and that get deployed this year.
What else Philip.
That's the Big thing is I mean, obviously, we're looking at just normal.
Ongoing maintenance of our facilities Kettle changes.
Equipment for processing on metal cost.
Yes, we did have quite a few kettle changes through the summer and I think we got a lot of those knocked out. So so we're in pretty good shape going into the end of the year.
But yes with 40 47 capitals out there I think.
Somewhere in there. So yeah, you get you get eight to 10 catalyst changes every year.
And so just keeping up with that keeping up with the on the <unk> side Theres. Some controls vision controls things that they've been investing in and.
A lot of that has been deployed and continuing to get deployed so just improving.
Productivity efficiencies.
Normal normal stuff and.
And also now the additional Capex that's been deployed for some of the warehousing.
Call. It Debottlenecking, if you will to take care of the incremental inventory.
But fairly normal and.
And the biggest project being that expansion up in St. Louis is wrapping up.
Do you have.
I feel right now going forward, what do you think kind of your level of maintenance Capex will be for the combined operation now.
Our plan is for maintenance Capex.
Yes.
$25 million.
Okay.
And are there further opportunities for increased investment in productivity and automation, our software or whatever to increase productivity of our.
Of either operation, neither metal coatings or pre coat.
Yeah.
Yes.
I'm sorry, Tom go ahead, absolutely yeah.
Yeah, no absolutely I think on the metal coatings side, we've you know for the most part between the digital galvanizing system, which is implemented.
Pretty much everywhere.
And continuing to expand its capabilities.
From a maintenance production standpoint facilities are in good shape. So.
I think we've got the spin plan expansion going on in Arizona.
Pretty much normal stuff on the on the metal coatings side and.
And then R&D, which are you know we've ramped that up and we've got some nice things coming out of R&D on the on the hot dip galvanizing side.
So, but those those are actually relatively small with with big benefits that come out of them on the pre coat side I think continuing to invest in advanced controls.
Improving productivity, helping drive throughput.
We've got a slit or that are ready to be installed up in one of the St. Louis plants.
So, adding those services to give us a.
No.
Those value add services that tend to provide us additional sales volume, but also incremental profitability. So theres. There are several of those opportunities as we as we get into our normal annual planning process and start laying that in for next year. So just on my tour through the facilities great teams out there.
Doing a lot of a lot of good things take care of their customers and in some cases, they just need a little more room to.
To be able to handle more and in some cases they need to expand.
They're they're warehousing space to be able to drive another 510 $15 million of throughput through through an already existing.
High performing facility so.
So I think those are the kinds of things that we're looking at and that will we will have opportunities to invest in and then this not huge amounts of capital but.
But a nice returns.
This concludes our question and answer.
And our next question comes from Noah Kaye.
Paul Please go ahead.
Just.
Again to make sure we're all thinking about this correctly.
For pre Covid margins obviously.
You called out sort of that headwind in the quarter and.
Ongoing around inventory.
Is that kind of 2 million headwind that you discussed the same sort of level. We should think about as we get into the November and February quarters, or do you expect to get it to get a little bit better I'm, just trying to get a sense of you know.
The rate again range of maybe how to think about pre coat EBITDA margins.
In the back half of the year and even into 'twenty four.
Yes, I think the target for <unk> is still going to be above the 20% EBITDA in the short term as we come into.
The lower volumes in the second half of the year I think we will face that those headwinds we would hope to overcome.
We can overcome the purchase price accounting impact that we can over.
We will be working to overcome.
The efficiencies the productivity to do a better job of managing inventory and AR.
And getting getting it located better.
So while I see I don't see that changing much in the third quarter, but I see us working to get that rectified and move in the right direction as we as we get into the to the <unk>.
Towards the end of the year and then obviously as we go into next year first quarter.
Tends to be a really really strong quarter for <unk>.
And as we pick that up we'd look we.
We definitely want to be efficient and productive.
Hopefully pick up the 2 million plus plus so as we as we get into the new fiscal year.
Okay. So yes, we're not on the 20 <unk> margins.
Okay.
And then I know you mentioned you don't want to.
Estimate infrastructure solutions contribution from given the transactions ongoing but I guess, just a few thoughts there given your continuing ownership.
You know historically the November quarter, it's been pretty strong just given fall turnaround work.
What are you seeing that continue our backlog.
Backlog looked pretty good in the quarter could you kind of give us some directional.
Thoughts on just Directionally, how we should think about the back half of the year.
Sure.
We left of course were still 40% owners. So yes, we left him with a strong backlog.
And helped build that Oh, we do have their results in our numbers for September fully.
Uh-huh fall turnaround season was strong.
You know good activity, some international activity, which usually bodes well.
The electrical the battery energy storage activity was was was really good switch gear was was.
Backlog was strong the businesses were performing pretty well in general.
I think the issue of course is just you've got some some new.
The owner the ownership for and what folks are great.
So you know, we're only kind of alluding to the.
The natural changeover as a new CEO comes in and gets acclimated and as they adjust and we also have the TSA. So that the transition service agreements to to deal with which are.
Which I think we've set up.
A really good way so.
I am sure. They think it's a profit center for US we think it's just a cost. So you know these are all things. We just I just want to be cautious because this is that these first couple of months are all trends.
In addition, Harry and.
And as we deal with that and get into the fourth quarter and probably have our first board meeting, we'll get a better handle on that outlook, but from a pure backlog and operating perspective.
As we talked about they had a great second quarter.
Dramatic improvement over the second quarter prior year, and we're set up for a very nice third quarter.
Okay. Thank you.
Uh-huh.
The next question comes from Chris Rogers with Quest, but please go ahead.
Hi, Thanks for taking my question and congratulations on the results.
I guess just to state the obvious looking at the market reaction I mean, there is a disconnect here between the results.
<unk> and your communication of those results.
I mean, I think a lot of it comes around your guidance and your lack of that I mean I understand the answer to your last question, how you wouldn't want to.
Certainty with.
Providing guidance George.
Venture, but is there a way we can get a better sense of what those earnings would be I mean, the deal you've worked on for quite some time and this is why why do we need to wait to the end of the year before it gets some.
Better guidance with this with the year.
We generate.
Yeah, I think you bring up a really good point and I think as we look at it in hindsight, we needed to have communicated much better.
What about the discontinued ops and what that was going to mean and that's a that's a miss on our side.
I think we've got to do some analytic work.
We have a relatively.
I hate to sound like I'm, making excuses, we got a small <unk>.
Finance accounting team has been working on two massive transactions to closure.
Aif and transitioning that the the accounting work on pre coat.
Which yeah, we've had it for for a quarter, but we've been working on the purchase price accounting and obviously had some adjustments at the very end, including over this weekend.
So we are we will get to our analytics.
<unk>.
And an issue at lease sales and EBITDA guidance as suite or an outlook as soon as we can.
Particularly given the market reaction to our lack of doing so.
But I also don't want to put anything out there that's just going to be off.
And so we've got some work to do and I think.
I don't want to peg a date, but as soon as we can get comfortable.
That we've got an EBITDA outlook for.
For the balance of Q3 and in Q4.
We would love to put it out there.
And get our boards concurrence on that.
So those are the things we need to work on.
The moving pieces are the things are around just getting the analytics done and getting comfortable.
And having our first board meeting with new partners.
Fern wall.
And.
Talking about the Vale infrastructure solutions outlook so.
Who are the moving pieces that we have.
Yeah.
Okay. Thanks.
But can we taken.
This concludes our question answer session I would like to turn the conference back over to Tom Ferguson for any closing remarks.
Alright, well, thank you very much for being on the call. We do look forward to communicating the outlook for the year as well as.
Our Q3 results are if that's the next time, we do communicate thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.