Q2 2024 AZZ Inc Earnings Call

Speaker 1: Good morning and welcome to the AZZ Inc. Second Quarter 2024 Earnings Conference Call. All participants will be in the...

Good morning, and welcome to the AZZ, Inc. Second quarter 'twenty 'twenty four earnings conference call.

All participants will be in listen only mode.

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After todays presentation, there will be an opportunity to ask questions.

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Speaker 1: I would now like to turn the conference over to Sandy Martin, Investor Relations. Please go ahead.

I'd now like to turn the conference over to Sandy Martin Investor Relations. Please go ahead.

Thank you operator, good morning, and thank you for joining us today to review AZZ financial result for the fiscal 2024 second quarter ended August 31st 2023, joining the call today are Tom Ferguson, President and Chief Executive Officer, Philip Sean Chief Financial Officer.

Speaker 1: Thank you, operator. Good morning and thank you for joining us today to review AZZ's financial results for the fiscal 2020 for second quarter ended August 31, 2023. Joining the call today are Tom Ferguson, president and chief executive officer. Philip Schlam, chief financial officer and David Nark, senior vice president of marketing, communications and investor relations.

And David <unk> Senior Vice President of marketing Communications and Investor Relations. After the conclusion of today's prepared remarks, we will open the call for questions. Please note. There's a live webcast for today's call, which can be found at www dot AZZ dot com slash investor Dash events before.

Speaker 2: After the conclusion of today's prepared remarks, we will open the call for questions. Please note there's a live webcast for today's call which can be found at www.azz.com slash investor-events. Before we begin, I would like to remind everyone that our discussion today will include forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

We began I would like to remind everyone that our discussion today will include forward looking statements that are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.

Speaker 2: Forward-looking statements by their nature are uncertain and outside of the company's control. Except for actual results, our comments containing forward-looking statements may involve risks and uncertainties, some of which are detailed from time to time in documents filed by AZZ with the Securities and Exchange Commission, including the annual report on Form 10-K for the fiscal year. These statements are not guarantees of future performance and, therefore, undue reliance should not be placed upon them.

We're looking statements by their nature are uncertain and outside of the company's control except for actual results or comments containing forward looking statements may involve risks and uncertainties. Some of which are detailed from time to time in documents filed by AZZ with the Securities and Exchange Commission, including the annual report on Form 10-K.

For the fiscal year. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them.

Speaker 2: actual results could differ materially from these expectations.

Actual results could differ materially from these expectations. In addition, today's call will include a discussion of non-GAAP financial measures non-GAAP financial measures should be considered as a supplement to and not a substitute for GAAP measures. We refer you to the reconciliations of non-GAAP to the nearest GAAP measure.

Speaker 2: In addition, today's call will include a discussion of non-GAAP financial measures. non-GAAP financial measures should be considered as a Supplement 2 and not a substitute for GAAP measures. We refer you to the reconciliations of non-GAAP to the nearest GAAP measure included in today's earnings press release. I would now like to turn the call over to Tom Ferguson. Tom?

In today's earnings press release, I would now like to turn the call over to Tom Ferguson, Tom. Thank you Sandy good morning, and thank you for joining us to review our fiscal 2024 second quarter results. Today I will give you an overview of our second quarter performance and then pass it to fill up to walk through our detailed financials after that Dave will provide an update.

Speaker 3: Thank you, Sandy. Good morning and thank you for joining us to review our fiscal 2024 second quarter results. Today I will give you an overview of our second quarter performance, then pass it to Philip to walk through our detailed financials. After that, Dave will provide an update on the AZZ's in markets. And then I will cover our full year outlook.

So on Azz's end markets, and then I'll cover our full year outlook and take your questions.

Before we discuss second quarter I first want to say that I am incredibly appreciative of all of our employees dedication that disciplined execution of AZZ strategies and goals this year.

Speaker 3: Before we discuss second quarter, I first want to say that I am incredibly appreciative of all of our employees' dedication and disciplined execution of AZZ's strategies and goals this year.

Speaker 3: Now, turning to our results. As I discussed last quarter, we expected the second quarter's performance to mirror the first quarter's results, and that is essentially what happened.

Now turning to our results as I discussed last quarter, we expected the second quarters performance to mirror. The first quarter's results and that is essentially what happened we.

Speaker 3: We did improve our adjusted EBITDA performance both in terms of dollars and EBITDA margin compared to the first quarter.

We did improve our adjusted EBITDA performance, both in terms of dollars and EBITDA margin compared to the first quarter.

Speaker 3: Total sales were $398.5 million with Metal Coatings delivering another record-setting sales quarter of almost $170 million, up 2.4% versus last year.

Total sales were $398 5 million with metal coatings, delivering another record setting sales quarter of almost $170 million up two 4% versus last year.

Speaker 3: Our metal coatings team continues to demonstrate their ability to drive value by offering consistently great quality and service.

The metal coatings team continues to demonstrates our ability to drive value by offering consistently great quality and service.

As expected due to lower market activity volumes were down in <unk> sales for the second quarter declined by 5% to 229 $229 million versus the second quarter of last year. Let me note that overall construction unit volume. According to the M. B MAA is down about 11% over the past year and the <unk>.

Speaker 3: As expected, due to lower market activity, volumes were down and pre-code sales for the second quarter declined by 5% to 229 million versus the second quarter of last year. Let me note that overall construction unit volume according to the MBMA is down about 11% over the past year. And the pre-code team has been able to defend share without chasing lower margin volume.

<unk> team has been able to defend share without chasing lower margin volume.

Focusing on flexing capacity each of the available volume and driving operating efficiencies has resulted in solid EBITDA margin performance.

Speaker 3: focusing on flexing capacity to the available volume and driving operating efficiencies has resulted in solid EBITDAG margin.

Speaker 3: Despite slightly lower consolidated sales for the quarter, we exceeded our EBIT target margins for metal coatings and performed nicely within the range for pre-coat mount.

Despite slightly lower consolidated sales for the quarter, we exceeded our EBITDA target margins for metal coatings and perform nicely within the range for pre killed metals.

During the second quarter, we grew adjusted earnings per share to $1.27 versus $1 21 per share in the second quarter of last year.

Speaker 3: During the second quarter, we grew adjusted earnings per share to $1.27 versus $1.21 per share in the second quarter of last.

Speaker 3: In addition, we generated a justity bidat of $88 million, or 22.1% of sale.

In addition, we generated adjusted EBITDA of $88 million or 22, 1% of sales our second.

Speaker 3: Our second quarter metal coating is EBITDA Marzen, with 30.4% and our preco metals EBITDA was 20.3%.

Metal coatings, EBITDA margin was 34% and our presale metals EBITDA was 23%.

Speaker 3: We're pleased to have worked through custom remitory issues that impacted the end of last year to achieve margins for both segments that were within or above our targeted range.

We're pleased to have worked through customer inventory issues that impacted the end of last year to achieve margins for both segments, there were within or above our targeted ranges.

Speaker 3: We continue to enhance our digital galvanizing system, or DGS, which is the proprietary technology embedded at our facility.

We continue to enhance our digital galvanizing system or D. G S, which is a proprietary technology embedded at our facilities.

Speaker 3: This critical system not only connects our locations to customers with timely quality engagements, but it also provides real-time visibility for time-sensitive issues that advance production, customer service, and financial results.

This critical system not only connects our locations to customers with timely quality engagements, but it also provides real time visibility for time sensitive issues that advanced production customer service and financial results. We continued to expand the capabilities of D. G S to improve our operations and customer facing interactions Rico metals.

Speaker 3: We continue to expand the capabilities of DGS to improve our operations and customer facing interactions. Preco metals.

Which operates automated continuous flow paint coating lines continues to enhance closeout is proprietary application for managing customer inventory at providing them real time access to their project scheduling and inventory. These technology driven platforms, coupled with our service minded leadership teams position AZZ is a sustainably differentiated melkonian.

Speaker 3: which operates automated continuous flow paint coating lines, continues to enhance CoilZone, is proprietary application for managing customer inventory and providing them real-time access to their project scheduling and images.

Speaker 3: These technology-driven platforms coupled with our servant-minded leadership teams position AZZ is a sustainably differentiated melaconian's business for our customers.

For our customers.

Speaker 3: As Philip would discuss more in a few moments, we continue to pre-idently manage cash and capital deployments as we grow and build a structurally higher margin profile come.

As Philip will discuss more in a few moments, we continue to prudently manage cash and capital deployments as we grow and build a structurally higher margin profile company.

Speaker 3: As interest expense continues to be a headwind versus our budgets, we remain committed to reducing debt and consequently are not actively pursuing acquisitions for the remainder of this fiscal year.

As interest expense continues to be a headwind versus our budgets, we remain committed to reducing debt and consequently are not actively pursuing acquisitions for the remainder of this fiscal year.

Speaker 3: Also, we continue to be laser focused on value creation, high return on invested capital projects, and initiatives that drive shareholder value.

Also we continue to be laser focused on value creation I return on invested capital projects and initiatives that drive shareholder value.

Speaker 3: Our expectations for growth and profitability have not changed. We will continue to use our industry-leading metal coating services and solutions to capitalize on market opportunities.

Our expectations for growth and profitability have not changed we will continue to use our industry, leading metal coating services and solutions to capitalize on market opportunities.

Speaker 3: We're further leveraging our scale in North America, focusing on margins and generating strong cash flows as we reduce working capital.

We're further leveraging our scale in North America, focusing on margins and are generating strong cash flows as we reduce working capital based on our strategic actions over the last 12 to 18 months, we're generating significantly higher run rate EBITDA and margin. We believe that as these these pure play metal coatings businesses are well positioned to unique.

Speaker 3: Based on our strategic actions over the last 12-18 months, we are generating significantly higher run rate EBITDA and more.

Speaker 3: We believe that AZ's these pure play, metal coatings businesses are well positioned to uniquely serve customers with a fortified competitive mode, created by extensive technical expertise and service capabilities for proprietary production technologies and strategically placed facilities across North America.

We serve customers with a fortified competitive moat created by extensive technical expertise and service capabilities proprietary production technologies and strategically placed facilities across North America.

With that I will turn it over to Philip.

Thank you Tom.

Speaker 3: Thank you, Tom. Good morning. All of the numbers today are referring to results from continuing operation.

Good morning, all of the numbers today are referring to results from continuing operations.

Speaker 3: As Tom earlier mentioned, we reported fiscal year 2024 second quarter sales of 398.5 million. Compared to $406.7 million in last year's second quarter. Total sales declined 2% from a year ago. However, as Tom had mentioned, ACC metal coatings reported record sales for the second quarter, with sales increasing 2.4%.

As Tom mentioned earlier mentioned, we reported fiscal year 'twenty 'twenty four second quarter sales of 398 5 million compared to $406 $7 million in last year's second quarter.

Total sales declined 2% from a year ago. However, as Tom had mentioned ACC metal coatings reported record sales for the second quarter with sales increasing two 4%.

Speaker 4: AZZ medical coatings continue to see some pressure and end-market set included appliance, HBAC, transportation and construction.

AZZ metal coatings continued to see some pressure in end markets that included appliance HVAC <unk> transportation and construction.

Speaker 4: For AZZ, the transportation market does not include any significant automotive work. And the ongoing UAW strike will not have a material impact on our business.

For AZZ the transportation market does not include any significant automotive work and the ongoing UAW strike will not have a material impact on our business.

Gross profit was $97.2 million or 24, 4% of sales compared to $101 million for the second quarter of last year.

Speaker 4: Gross profit was $97.2 million or $24.4% of sales compared to $101 million for the second quarter of last year. Gross margins were impacted by higher year over year zinc costs in the kettles and higher labor costs versus last year.

Gross margins were impacted by higher year over year, zinc costs, and the kettles and higher labor costs versus last year.

And the metal coatings segment.

This pressure was partially offset in prefilled metals, which had lower cost of goods sold on decreased volumes as well as lower freight and storage costs compared to the second quarter of last year.

Speaker 4: This pressure was partially offset in pre-cubed metals, which had lower cost of goods sold on decreased volumes, as well as lower freight and storage costs compared to the second quarter of last year.

Selling general and administrative expenses of $36 2 million in the second quarter included a nonrecurring litigation settlement charge of $5 75 million reported in the infrastructure solutions segment, which related to a legacy infrastructure project, where the matter was retained by the company when we disposed of 60% controlling interest in a I S last year.

Speaker 4: Selling General Administrative Excellences of $36.2 million in the second quarter included a non-recurring litigation settlement charge of $5.75 million reported in the infrastructure solution segment, which related to a legacy infrastructure project where the matter was retained by the company when we dispose the 60% controlling interest in AIS last year.

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Speaker 4: excluding this non-recurring charge, S-GNA expenses for the fiscal 24, second quarter would have been 30 and a half million, or 7.7% of sales for the quarter.

Excluding this nonrecurring charge SG&A expenses for the fiscal 'twenty for second quarter would have been $30 5 million or seven 7% of sales for the quarter.

Speaker 4: Re-reported adjusted EBITDAV $88 million or 22.1% of sales, essentially on par with the $88.7 million of adjusted EBITDAV recorded in second quarter last year. A period that included a gain of $5.1 million from non-recuring items related to a sale of property and insurance proceeds in the metal coating segment.

We reported adjusted EBITDA of $88 million or 22, 1% of sales essentially on par with the $88 7 million of adjusted EBITDA recorded in second quarter last year.

Period that included a gain of $5 1 million from nonrecurring items related to a sale of property and insurance proceeds and the metal coatings segment.

Interest expense for the second quarter was $27 8 million compared to 20 point $28 $1 million in the prior year on lower outstanding debt offset by higher interest rates in a moment I will discuss the repricing of our term loan b.

Speaker 4: Interest expense for the second quarter was 27.8 million compared to 20.28.1 million dollars in the prior year on lower outstanding debt offset by higher interest rates. In a moment, I will discuss the repricing of our term loan B.

Speaker 4: Tax expense in the quarter was $6 million, which reflects an effective tax rate of 17.4% in the quarter, compared to 30.1% in the second quarter of the prior year. In the second quarter, we benefited from the resolution of a previously reserved state tax matter, associated with the pre-fodak position.

Tax expense in the quarter was $6 million, which reflects an effective tax rate of 17, 4% in the quarter compared to 31% in the second quarter of the prior year.

In the second quarter, we benefited from the resolution of a previously reserved state tax matter associated with the preferred acquisition.

Speaker 4: As a result of the current quarter tax benefit, we expect full year effective tax rate to be approximately 23.5% for the fiscal year. With longer term tax rates expected to remain in the 24% rate.

As a result of the current quarter tax benefit we expect full year effective tax rate to be approximately 23, 5% for the fiscal year.

With longer term tax rate is expected to remain in the 24% range.

Adjusted net income for the quarter was $37 2 million compared to $35 $2 million in the prior year up five 5% as Tom had mentioned our adjusted diluted earnings per share of $1 27 was 5% above the adjusted diluted earnings reported of $1 21 in the prior year second quarter.

Speaker 4: Adjusted net income for the quarter was 37.2 million compared to 35.2 million dollars in the prior year up 5.5 percent As Tom had mentioned our adjusted deluded earnings per share of a dollar 27 was 5 percent above the adjusted deluded earnings reported of a dollar 21 in the prior year second quarter

Speaker 4: Since the preferred convertible shares are deluded in both periods presented, the preferred dividends are added back to earnings for the company's EPS computation. Therefore, shares assume a full conversion of the preferred equity.

Since the preferred convertible shares are dilutive in both periods presented the preferred dividends are added back to earnings for the Companys EPS computation, therefore shares assume a full conversion of the preferred equity.

Speaker 4: which resulted in 29.2 million weighted average shares outstanding in the quarter. And for the six months ended August 31st.

Which resulted in $29 2 million weighted average shares outstanding in the quarter and for the six months ended August 31.

Speaker 4: Turning to our financial position and balance sheet. On a year to date basis, we generated strong cash provided by operating activities of $118.3 million. And free cash flow of $75.6 million.

Turning to our financial position and balance sheet on a year to date basis, we generated strong cash provided by operating activities of $118 3 million.

And free cash flow of $75 6 million.

Speaker 4: net of capital expenditures. Free cash flow for the first six months of fiscal year 2024 is three times higher than the comparable period a year ago. Henry Flex Higher margins associated with AZZ metal coatings and AZZ pre-coat metal segments.

Net of capital expenditures free.

Free cash flow for the first six months of fiscal year 'twenty 'twenty four is three times higher than the comparable period, a year ago and reflects higher margins associated with AZZ metal coatings, and AZZ pre cope metals segments.

Speaker 4: We continue to improve operational performance and remain focused on prudently managing work in capital to allow for further debt reduction.

We continue to improve operational performance and remain focused on prudently managing working capital to allow for further debt reduction.

Capital expenditures for the first six months were $42 $7 million, including typical safety maintenance and growth spending as well as approximately 20 million related to the new Washington, Missouri coil coating plant <unk>.

Speaker 4: Capital expenditures for the first six months were $42.7 million, including typical safety, maintenance, and growth spending, as well as approximately $20 million related to the new Washington, Missouri, Coil Coating Plants.

Speaker 4: During the quarter, we made the decision to continue to fund the plant out of the company's operating cash flow. This decision was not made lightly by our management.

During the quarter, we made the decision to continue to fund the plant out of the company's operating cash flow. This decision was not made lightly by our management team.

Speaker 4: We evaluated the economic impact of long-term finance leasing under today's high cap rates, including built-in rent escalators of 2.5 to 3 percent over the next 20 plus years. Compared to the company's ability to utilize its strong balance sheet and cash loads to fund the project.

We evaluated the economic impact of long term finance leasing under today's high cap rates, including built in rent escalators of 2.5% to 3% over the next 20 plus years compared to the company's ability to utilize our strong balance sheet and cash flows to fund the project.

Speaker 4: The new plant build, including equipment, has an estimated payback of under five years.

The new plant build including equipment has an estimated payback of under five years.

In addition, our model return on investment projections considered 75% of the plants future capacity is contractually committed to a customer under a long term contract.

Speaker 4: In addition, our model return on investment projections considered 75% of the plant's feature capacity is contractually committed to a customer owner a long term contract.

Speaker 4: This provides us further confidence in the plant's generation capability for long-term sustainable operating work.

This provides us further confidence in the plant's generation capability for long term sustainable operating margins.

Our capital expenditure projections for full fiscal year 'twenty 'twenty four is now a 125 million increase from 80 million. Previously stated to include the funding for the Washington plant, which remains both ahead of schedule and below budget.

Speaker 4: Our capital expenditure projections for full fiscal year 2024 is now 125 million increased from 80 million previously stated to include the funding for the Washington plant which remains both ahead of schedule and below budget.

Through the first half of the fiscal year, we paid down $60 million of debt with plans to reduce debt by another $15 million to $40 million throughout the rest of the fiscal year for a total of $75 million to $100 million in debt reduction for the full year.

Speaker 4: Through the first half of the fiscal year, we paid down $60 million of debt with plans to reduce debt by another $15 to $40 million throughout the rest of the fiscal year. For a total of $75 to $100 million in debt reduction for the full year.

Speaker 4: In August , we repriced our 1.03 billion term Lombi, reducing interest rates by 50 basis points from SOFR plus 425 to SOFR plus 375 and removed the 10 basis point credits read adjustment as part of the transaction.

In August we repriced, our 1.03 billion term loan b, reducing interest rates by 50 basis points from sulfur plus 425 to sulfur plus $3 75 and removed. The 10 point 10 basis point credit spread adjustment as part of the transaction.

As we enter into is also we entered into a swap arrangement last year to fix roughly half the variable rate debt.

Speaker 4: As we enter into it, also we entered into a swap arrangement last year to fix roughly half the variable rate depth.

Speaker 4: These capital allocation actions are helping us offset the impact of the rising interest rate environment.

These capital allocation actions are helping us offset the impact of the rising interest rate environment.

Speaker 4: We have no debt maturities until 2027, and our confident that cash flow generation will support plans to strengthen the balance sheet and continue to reduce our debt to EBITDA leverage.

We have no debt maturities until 2027 and are confident that cash flow generation will support plans to strengthen the balance sheet and continue to reduce our debt to EBITDA leverage.

Speaker 4: During the first six months of the fiscal year, we paid cash dividends to commission our holders of eight and a half million and seven point two million dollars to our series A for first shareholders. We made no sure we

During the first six months of the fiscal year, we paid cash dividends to common shareholders of eight 5 million and $7 $2 million to our series a preferred shareholders.

We made no share repurchases during the quarter.

Speaker 4: Before turning it over to David to speak about the markets, I want to tend by providing an update in regard to our 40% investment in the avail joint Following a step further in green through every Summary Fund, other community members who including

Before turning it over to David to speak about the markets I wanted to end by providing an update in regard to our 40% investment in the avail joint venture.

Speaker 4: The second quarter equity and earnings of uncontsolidated subsidiaries included purchase accounting adjustments by the JV, that impacted our earnings in the second quarters. We understand their audits have now been completed and we expect that we may see improved earnings from the joint venture during the third quarter, which may be a couple million higher than the run rate thus far.

The second quarter equity and earnings of unconsolidated subsidiaries included purchase accounting adjustments by the JV.

That impacted our earnings in the second quarter we.

And their audits have now been completed and we expect that we may see improved earnings from the joint venture during the third quarter.

Which may be a couple million higher than the run rate thus far.

With that I'd like to pass the call over to David.

Speaker 3: Thank you, Philip. Good morning, everyone. What strengthens our competitive mode that Tom described earlier is our number one market position in post fabrication hot dip galvanizing as well as independent coil coating. AZZ's leading market positions are due, in part, to our strategic footprint across North America.

Thank you Philip and good morning, everyone, which strengthens our competitive moat that Tom described earlier is our number one market position in post fabrication hot dip galvanizing as well as independent coil coating azz's, leading market positions are due in part to our strategic footprint across North America our.

Speaker 5: Our highly differentiated solutions and services attract a wide range of customers that we group into five primary categories including construction, industrial, transportation, electric utility, and consumer. Construction is a broad category that captures non-building projects like bridge and highway work that we see as strong through the balance of the fiscal year. Other construction and markets include the construction of healthcare and education facilities which are expected to grow by mid-single digits over the next two years.

Our highly differentiated solutions and services attract a wide range of customers that we grew up into five primary categories, including construction industrial transportation electric utility and consumer.

Construction is a broad category that captures nonbuilding projects like bridge and highway work that we see a strong through the balance of the fiscal year.

Other construction end markets include the construction of health care and education facilities, which are expected to grow by mid single digits over the next two years.

Speaker 5: And while residential construction has been under pressure this year, we think we've seen the bottom with August showing a 1.9% increase in residential building permit.

And while residential construction has been under pressure. This year, we think we've seen the bottom with August showing a 1.9% increase in residential building permits.

Speaker 5: Projections now point to the highest level of new home starts since October 2022, driven by the supply shortage of homes, while approvals for multi-family segment surged by 15.6% to a three-month high.

<unk> now point to the highest level of new home starts since October 2022, driven by the supply shortage of homes, while approvals for multifamily segment surged by 15, 6% to a three month high.

Speaker 5: We are in the early endings of critical infrastructure projects associated with the AI, J.A. and CHIPSEX that should positively impact the company in late calendar 2023 and 2024. This directly affects our work within our electric utility and market, which includes transmission and distribution projects.

We are in the early innings of critical infrastructure projects associated with the a I J, a and chipsets that should positively impact the company in late calendar 2023 and 2024.

This directly affects our work within our electric utility end market, which includes transmission and distribution projects. We have work underway on a number of key projects. This year and continue to see strong demand for transmission and distribution model Poles and lattice towers. Additionally, solar and renewable projects continued to demonstrate pockets of business strength regionally in the U.

Speaker 5: We have work underway on a number of key projects this year and continue to see strong demand for transmission and distribution of monopoles and lattice powers. Additionally, solar and renewable projects continue to demonstrate pockets of business strength regionally in the U.S.

Operator: Good morning and welcome to the AZZ Inc. 2nd quarter, 2024 earnings conference call. All participants will be in listen only mode. Did you need assistance? Please signify conference specialist by pressing start key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded.

Yes.

Finally, although our business saw softer demand in consumer transportation and residential construction end markets in Q2, nonresidential construction saw strength in warehousing manufacturing and agriculture, we remain encouraged by longer term trends from the source re shoring of manufacturing the migration of prepaid.

Speaker 5: Finally, although our business saw softer demand in consumer, transportation, and residential construction and markets in Q2, non-residential construction saw strength in warehousing, manufacturing, and agriculture. We remain encouraged by longer-term trends from the source reshoring of manufacturing, the migration of pre-painted steel, and aluminum, and a movement in the container category from plastics to aluminum throughout North America.

Didn't have steel and aluminum and a movement in the container category from plastics to aluminum throughout North America.

Speaker 5: Our metal coatings and pre-coat metals teams are also actively pursuing share gain activities for hot-dip galvanizing as well as pre-painted coil conversions with key customers. With that, I would now like to turn the call over to Tom.

Our metal coatings and pre Cup metals teams are also actively pursuing share gain activities for hot dip galvanizing as well as pre painted coil conversions with key customers with that I would now like to turn the call over to Tom.

Sandy Martin: I would now like to turn the conference over to Sandy Martin, investor relations. Please go ahead. Thank you operator.

Sandy Martin: Good morning and thank you for joining us today to review AZZ financial results for the fiscal 2024 second quarter ended August 31st, 2023. Joining the call today are Tom Ferguson, president and chief executive officer, Philip Schlom, chief financial officer and David Nark, senior vice president of marketing, communications and investor relations. After the conclusion of today's prepared remarks, we will open the call for questions. Please note, there's a live webcast for today's call, which can be found at www.azz.com slash investor dash events.

Speaker 3: Thank you, Dave. A few comments on our business outlook. Although our end markets are impacted by seasonality, especially in the fourth quarter, when weather can impact construction activities, we continue to be focused on increasing value to our customers and improving our operations in all our facilities.

Thank you Dave.

A few comments on our business outlook, although our end markets are impacted by seasonality, especially in the fourth quarter when weather can impact construction activities. We continue to be focused on increasing value to our customers and improving our operations at all our facilities.

Speaker 3: For mental coatings, our fabrication customers are continuing to site solid backlogs due to increased activity in the end markets that they've just discussed. Additionally, labor availability has improved since last year. We have several working capital initiatives underway that provide us more opportunities to adjust the inventories of paint and zinc as demand shifts due to weather or other macroeconomic impact.

For metal coatings, our fabrication customers are continuing decided solid backlogs due to increased activity in the end markets that Dave just discussed. Additionally, labor availability has improved since last year.

We have several working capital initiatives underway that provide us more opportunities to adjust inventories of paint zinc as demand shifts due to weather or other macroeconomic impacts.

Sandy Martin: Before we begin, I would like to remind everyone that our discussion today will include forward looking statements that are made pursuant to the safe harbor provisions of the private security litigation reform act of 1995. Forward looking statements by their nature are uncertain and outside of the company's control, except for actual results are comments containing forward looking statements may involve risks and uncertainties, some of which are detailed from time to time in documents followed by AZZ with the securities and exchange commission, including the annual report on form 10k for the fiscal year. These statements are not guarantees of future performance and therefore undo reliance should not be placed upon them actual results could differ materially from these expectations.

Speaker 3: We are progressing with the construction of our aluminum coil coating facility, and we are on schedule and continuing to track within budget. This is an exciting project for us, and we will keep you updated each quarter on the progress.

We are progressing with the construction of our aluminum coil coating facility and we are on schedule and continuing to track within budget.

This is an exciting project for us and we will keep you updated each quarter on progress.

As Dave mentioned, most of our segments benefit from diverse end market activity and growing industries. We are carefully monitoring the demand environment and economic trends, which we have used to develop our guidance given the operational improvements a freak out and improved customer inventory situation, we anticipate a stronger second half as compared to the second half.

Speaker 3: As Dave mentioned, both of our segments benefit from diverse and market activity and growing industries. We were carefully monitoring the demand environment and economic trends.

Speaker 3: which we have used to develop our guidance. Given the operational improvements of PRECAT and improved custom-reimetry situation, we anticipate a stronger second half as compared to the second half of the last year.

Over the last year.

Speaker 3: Our preco teams demonstrate their ability to drive operational efficiencies to sustain their margins while maintaining quality and service levels in spite of the weaker volume demand.

Our pre Coe teams demonstrated their ability to drive operational efficiencies to sustain their margins, while maintaining quality and service levels in spite of the weaker volume demand.

Sandy Martin: In addition, today's call will include a discussion of non gap financial measures, non gap financial measures should be considered as a supplement to and not a substitute for gap measures. We refer you to the reconciliations of non gap to the nearest gap measure included in today's earnings press release.

So nothing has materially changed this year or in our outlook that would make us adjust our estimates at this time all that to say I am confident with our previously issued annual guidance I'm pleased that the second quarter results were in line with our expectations. We will continue to strategically drive growth through market expansion of long term supply agreements with blue chip customer.

Speaker 3: So, nothing has materially changed this year or in our outlook that would make us adjust our estimates at this time. All that to say, I am confident with our previously issued annual guidance and pleased that the second quarter results were in line with our expectations. We will continue to strategically drive growth, remarket expansion, and long-term supply agreements with Blueshift customers.

Tom Ferguson: I would now like to turn the call over to Tom Ferguson, Tom. Thank you, Sandy.

Speaker 3: We are reaffirming our fiscal 2024 sales guidance of $1.4 to $1.55 billion. Adjusted EBITDAG guidance of $3 to $300 to $325 million, and adjusted EPS guidance of $3.85 to $4.35. And as Philip mentioned, our capital expenditures for fiscal 2024 now $125 million, which includes $70 million related to the Washington, Missouri, Greenfield, Quill Coating Plan.

We are reaffirming our fiscal 2024 sales guidance of one $4 billion to $1.55 billion adjusted EBITDA guidance of $3 to $300 million to $325 million and adjusted EPS guidance of $3 85 to $4 35, and as Philip mentioned.

Tom Ferguson: Good morning and thank you for joining us to review our fiscal 2024 second quarter results. Today, I will give you an overview of our second quarter performance, then pass it to Philip to walk through our detailed financials. After that, Dave will provide an update on AZZ and markets and then I will cover our full year outlook and take your questions.

Our capital expenditures for fiscal 2024, now 125 million, which includes $70 million related to the Washington, Missouri, Greenfield coal Coke coating plant.

Tom Ferguson: Before we discuss second quarter, I first want to say that I am incredibly appreciative of all of our employees' dedication and discipline execution of AZZ strategies and goals this year. Now, turning to our results. As I discussed last quarter, we expected the second quarter's performance to mirror the first quarter's results and that is essentially what happened. We did improve our adjusted EBITDA performance both in terms of dollars and EBITDA margin compared to the first quarter.

Speaker 3: And we remain fully committed to achieving our $75 to $100 million of debt reduction targets this year.

And we remain fully committed to achieving our $75 million to $100 million of debt reduction target this year.

Speaker 3: Our minority ownership in the AIS Joint Venture is not included in the full year guidance as we are not forecasting at this point.

Our minority ownership in the AI S. Joint venture is not included in the full year guidance as we are not forecasting that at this point.

Speaker 3: We believe a veil is progressing well on his business plan and we will provide an outlook on our 40% equity portion when it makes sense.

We believe that Vale is progressing well on its business plan and we will provide an outlook on a 40% equity portion when it makes sense.

Tom Ferguson: Total sales were 398.5 million with metal coatings delivering another record setting sales quarter of almost 170 million of 2.4% versus last year. Our Metal Coaties team continues to demonstrate their ability to drive value by offering consistently great quality and service. As expected, due to lower market activity, volumes were down and pre-code sales for the second quarter declined by 5% to 229 million versus the second quarter of last year. Let me note that overall construction unit volume according to the MBMA is down about 11% over the past year.

Speaker 3: In summary, I am proud of the team's execution of our fiscal 2024 plans, and I am confident that we are well positioned for growth and success. We are committed to driving further growth, improving profitability, and generating a significant cash flow with a focus on discipline, capital allocation.

In summary, I am proud of the team's execution of our fiscal 2024 plans and I'm confident that we're well positioned for growth and success. We are committed to driving further growth improving profitability and generated significant cash flow with a focus on disciplined capital allocation.

Speaker 3: We believe the successful execution of our strategic plans will build momentum and drive sustainable value creation for all of our stakeholders. I want to thank our shareholders and the board for their continued support.

We believe the successful execution of our strategic plans will build momentum and drive sustainable value creation for all of our stakeholders I want to thank our shareholders and the board for their continued support.

Speaker 3: Now, we will have the operator open up the call for questions.

Now we will have the operator open up the call for questions.

Tom Ferguson: And the pre-code team has been able to defend share without chasing lower margin volume. Focusing on flexing capacity to the available volume and driving operating efficiencies has resulted in solid EBITDAG margin performance. Despite slightly lower consolidated sales for the quarter, we exceeded our EBITDAG target margins for metal coatings and performed nicely within the range for pre-code metals. During the second quarter, we grew adjusted earnings per share to $1.27 versus $1.21 per share in the second quarter of last year.

We will now begin the question answer session.

Speaker 1: To ask a question, you may press star then one on your telephone t-pad.

To ask a question you May press Star then one on your telephone keypad.

Speaker 1: If you are using a speaker phone, please pick up your handset before pressing the key. To withdraw your question...

If you are using a speakerphone please pick up your handset before pressing the key.

To withdraw your question. Please press Star then two.

Speaker 1: At this time we will pause no materially to assemble our roster.

At this time, we will pause momentarily to assemble our roster.

And our first question comes from John <unk> of Sidoti <unk> Co. Please go ahead.

Speaker 1: In our first question comes from John Planthrow's of Sedodianco. Please go ahead. Good morning.

Tom Ferguson: In addition, we generated adjusted EBITDAG of $88 million or 22.1% of sales. Our second quarter metal coatings EBITDAG margin was 30.4% and our pre-code metals EBITDAG was 20.3%. We're pleased to have worked through customer inventory issues that impacted the end of last year to achieve margins for both segments that work within or above our targeted ranges. We continue to enhance our digital galvanizing system or DGS, which is the proprietary technology embedded at our facilities.

Good morning, everyone and thanks for taking the questions.

Speaker 6: Good morning. Good morning. Well, I guess I want to start with your commentary about the second half of the year, not only being better than a year ago, but in context with what we saw in the pre-cope markets, do any of the three that you highlighted HVAC, transportation or construction, are they already improved maybe cadence than we saw the new you expecting maybe as you're going into the second half of the year this year?

Good morning morning.

Well I guess I wanted to start with your commentary about the second half of the year.

Only being better than a year ago, but in context with what we saw in the pre called markets do any degree and you highlighted H B C transportation construction are they already.

Ooh, maybe cadence then then we saw that with the new you expecting maybe as you go into the second half of the year this year.

Tom Ferguson: This critical system not only connects our locations to customers with timely quality engagements, but it also provides real-time visibility for time sensitive issues that advance production, customer service, and financial results. We continue to expand the capabilities of DGS to improve our operations and customer facing interactions. Pre-code metals, which operates automated continuous flow, paint coating lines, continues to enhance quail zone. His proprietary application for managing customer inventory and providing them real-time access to their project scheduling and inventory.

Yeah. John This is Dave I think as you look at it.

Speaker 5: John , this is Dave. I think as you look at it, as I mentioned in my commentary, some of the end markets are seeing the bottom residential being one of them. We think that HVAC and the plants are certainly tied to that. As you look forward, some of the

And as I mentioned in my commentary the.

Some of the end markets are seeing the bottom residential being one of them and we think that HVAC.

H back in appliance are certainly tied to that.

As you look forward are some of the custom.

Speaker 5: customers that we've talked to in both the HVAC and appliance and markets are seeing the bottom and filling optimistic about the balance of the year. So, you know, we'll see how things go with them. But we think it's certainly going to be improved over the prior year.

Customers that we've talked to in both the HVAC and appliance end markets are seeing the bottom in filling optimistic about the balance of the year. So.

Tom Ferguson: These technology-driven platforms coupled with our servant-minded leadership team's position AZZ is a sustainably differentiated metal coatings business for our customers. As Philip would discuss more in a few moments, we continue to frequently manage cash and capital deployments as we grow and build a structurally higher margin profile company. As interest expense continues to be a headwind versus our budgets, we remain committed to reducing death and consequently are not actively pursuing acquisitions for the remainder of this fiscal year.

We will see how things go with with them and but we think it certainly is going to be improved over the prior year.

Speaker 6: Okay, fair enough. And with the change in the financing plans on the new facility, how should we be thinking about debt levels in the near term? Can you just kind of give us some thoughts there?

Okay fair enough and with the change in the financing plans on the new facility.

How should we be thinking about debt levels in the near term.

Just kind of give us some thoughts there.

Yeah, John is as we spoke.

Speaker 4: Yeah, John , as we spoke, you know, during our prepared comments, we've paid down $60 million in debt this year. We're committed to both funding the new facility as well as continuing to drive our working capital health, help reduce debt further through the year.

During our prepared comments, we paid down $60 million in debt. This year, we're committed to both funding.

Tom Ferguson: Also, we continue to be laser focused on value creation, high return on invested capital projects, and initiatives that drive shareholder value. Our expectations for growth and profitability have not changed. We will continue to use our industry leading metal coating services and solutions to capitalize on market opportunities. We're further leveraging our scale in North America, focusing on margins and on generating strong cash flows as we reduce working capital. Based on our strategic actions over the last 12 to 18 months, we are generating significantly higher run rate EBITDA and margin.

The new facility as well as continuing to drive our working capital health suite to help reduce debt further through the year.

Speaker 6: I'm just curious with the low overseas now and second half of the adhesive, the working capital requirements come down the second half of the year. Just made some current working capital.

I'm, just curious with the lowest seasonality second half the year as working capital requirements come down in the second half of the year, just maybe some color on working capital.

Speaker 3: Yeah, absolutely. I think I'd mentioned it. We will continue to be able to drive paint inventories and some of the sink inventories down. The other thing I'd comment on is the cost in our kettles for our sink is going to continue to come down. So that inventory level will reduce as the year plays.

Yeah, absolutely that.

I think I'd mentioned it.

We will continue to be able to.

Drive paint inventories and some of the zinc inventories down the other thing I'd comment on is the cost in our kettles four hours I think is going to continue to come down so that inventory levels will reduce.

Tom Ferguson: We believe that AZZ's pure play metal coatings businesses are well positioned to uniquely serve customers with fortified competitive moat, created by extensive technical expertise and service capabilities, proprietary production technologies, and strategically placed facilities across North America. Marko.

As the year plays out.

Great and just one last question on clarification.

Speaker 6: And just one last question on clarification. I think you mentioned that there might be a change of a couple million dollars on JV income. Just is that a one time change or that what do you thought, fam? Why was that tossed into the prepared remarks?

I think you mentioned that there might be a change of a couple million dollars on JV income.

Philip Schlom: With that, I will turn it over to Philip. Thank you, Tom.

Is that a one time change or is that what are your thoughts there and why was that cost into the prepared remarks.

Philip Schlom: Good morning. All of the numbers today are referring to results from continuing operations. As Tom earlier mentioned, we reported fiscal year 2024 second quarter sales of 398.5 million compared to $406.7 million in last year's second quarter. Total sales declined 2% from a year ago. However, as Tom had mentioned, the ACC Medical Coatings reported record sales for the second quarter with sales increasing 2.4%. AZZ Medical Coatings continue to see some pressure in end markets that included appliance, HBAC, transportation, and construction.

John That's a good question you know we've not forecasted the equity in earnings for avail because of the.

Speaker 4: John , that's a good question. We've not forecasted the equity and earnings for avail because of the nature of the...

Nature of the transaction.

Them standing up their business and in the cyclicality within their business. So.

Speaker 3: them standing up their business and in the sickle call the within their business so we see them post their audit that completed in the end of July uh... stabilizing and then we should see a better run rate going for so hopefully it will be able to at some point forecast that business going for and i'd had now that they have ought to be a completed the audit on their books uh... you know get getting the passed adjustments out of the way so that they can just forecast based on uh...

We see them post their audits that completed at the end of July stabilizing and then we should see a better run rate going forward. So hopefully we'll be able to at some point forecast that business going forward, yeah, and I'd I'd add now that they have completed the audit on their books.

Philip Schlom: For AZZ, the transportation market does not include any significant automotive work, and the ongoing UAW strike will not have a material impact on our business. Gross Profit was $97.2 million or $24.4% of sales compared to 101 million for the second quarter of last year. Gross margins were impacted by higher year-over-year zinc costs in the kettles and higher labor costs versus last year in the metal coating segment. This pressure was partially offset in pre-cove metals, which had lower cost of goods sold on decreased volumes, as well as lower freight and storage costs compared to the second quarter of last year.

Getting the past adjustments out of the way so that they can just forecast based on.

Speaker 3: actual income going forward. So I think we will get into a cadence here shortly. Philip and I are both on that available board. So as we're able to do that, I'm hopeful that we'll be able to give some actual guidance around it.

Actual income going forward. So I think we will get into a cadence here shortly Philip and I are both on that avail board. So as we're able to do that.

You know I'm hopeful that we'll be able to give.

Some actual guidance around it and.

And provide more more color on a quarterly basis.

Speaker 3: and provide more color on a quarterly basis. Great. Thanks Tom. That appreciate.

Great. Thanks, Tom I appreciate you guys, taking my questions.

Thanks, Sean.

The next question comes from Adam Thalheimer of Thompson Davis. Please go ahead.

Speaker 1: The next question comes from Adam Fowheimer of Plumson Davis. Please go ahead.

Philip Schlom: Selling general administrative expenses of $36.2 million in the second quarter included a non-recurring litigation settlement charge of $5.75 million reported in the infrastructure solution segment, which related to a legacy infrastructure project where the matter was retained by the company when we disposed the 60% controlling interest in AIS last year. Excluding this non-recurring charge, SGNA expenses for the fiscal 24 second quarter would have been $30.5 million or 7.7% of sales for the quarter.

Hey, good morning, guys, congrats on a nice quarter.

Speaker 7: Thank you. Thank you. Good morning. Hi, level. Can you talk about back half of the year revenue growth? I'm just kind of curious if the trends we saw in Q2 is kind of in line with what you're thinking for the back half. Little bit down and pre-code a little bit up in metal code.

Good morning. Thanks.

A high level can you talk about back half of the year revenue growth I'm, just kind of curious if I'm. The trends. We saw in Q2 is kind of in line with what you're thinking for the back half a little bit down in pre COVID-19, a little bit up in metal coatings.

Speaker 3: Yeah, I think that's going to continue as we look forward. Now, on the pre-code side, that we're laughing a pretty weak, particularly pretty weak fourth quarter.

Yes, I think that's going to continue as we look forward now on the pre code side, though we're lapping a pretty weak.

Particularly a pretty weak fourth quarter.

Philip Schlom: Re-reported adjusted EBITDA of $88 million or $22.1% of sales, essentially on par with the $88.7 million of adjusted EBITDA recorded in the second quarter of last year. A period that included a gain of $5.1 million from non-recurring items related to a sale of property and insurance proceeds in the metal coating segment. Interest expense for the second quarter was $27.8 million compared to $28.1 million in the prior year on lower outstanding debt offset by higher interest rates.

Speaker 3: So even though we've sustained our sales down 5% on significant lower volume in the first half.

So even though we've we've sustained our sales down 5% on significantly lower volume in the first half.

Speaker 3: We don't look for those volumes to continue down. We're seeing that as David talked about.

We don't look for those volumes to continue down.

We're seeing that as David talked about the construction markets.

Speaker 3: the construction markets and other markets are stabilizing. So...

Other markets are stabilizing so we look for pre code to.

Speaker 3: You know, we look for pre-cote to, you know, perform well on a comparative basis in the second half from a sales perspective.

Performed well on a comparative basis in the second half from a sales perspective.

Speaker 3: And then our metal coatings folks, as I've joked at times, they wake up and fight 45 battles across their 45 plants every day and continue to win a significant majority of those battles. So.

And then our metal coatings folks.

As I've joked at times, they they they wake up and fight forty-five battles across their 45 plants every day and continue to win.

Philip Schlom: In a moment, I will discuss the repricing of our term loan B. Tax expense in the quarter was $6 million, which reflects an effective tax rate of 17.4% in the quarter compared to 30.1% in the second quarter of the prior year. In the second quarter, we benefited from the resolution of a previously reserved state tax matter associated with the pre-fed acquisition. As a result of the current quarter tax benefit, we expect full year effective tax rate to be approximately 23.5% for the fiscal year.

A significant majority of those battles. So you know we just look for them to continue providing that outstanding service that that earns a customer's business. So yeah.

Speaker 3: You know, we just look for them to continue providing that outstanding service that earns their customers business. So, you know,

It should be another good half for them.

Speaker 7: Great. And then one thing that struck me as really positive was the pricing in pre-code. I think it's that plus 7%.

Okay, Great and then one thing that struck me is really positive was the pricing in pre Covid I think you said plus 7%.

Speaker 7: Is that kind of a one-off this year? How should we think about pricing, probably for...

Is that kind of a one off this year or how should we think about pricing.

Philip Schlom: With longer term tax rates expected to remain in the 24% range. Adjusted net income for the quarter was $37.2 million compared to $35.2 million in the prior year, up 5.5%. As Tom had mentioned, our adjusted deluded earnings per share of $1.27 was 5% above the adjusted deluded earnings reported of $1.21 in the prior year, second quarter. Since the preferred convertible shares are diluted and both periods presented, the preferred dividends are added back to earnings, for the company's EPS computation. Therefore, shares assume a full conversion of the preferred equity, which resulted in 29.2 million weighted average shares outstanding in the quarter, and for the six months ended August 31st.

Probably for both segments going forward.

Well I think part of the price on pre code is the underlying since paints there by far their largest cost component and we had talked about that in previous quarters, where the paint suppliers that continued to increase price. So.

Speaker 3: Well, I think, you know, part of the price on pre-coded is the underlying sense of paints they're, you know, by far their largest cost component.

Speaker 3: And we had talked about that in previous quarters where the paint suppliers had continued to increase price. So, you know, that's really the flow through is what you're seeing, the flow through on that paint cost, price relationship, plus driving the pricing value on MIPS. So...

That's really the flow through is what youre seeing the flow through on that paint cost price relationship plus driving the pricing value on an.

On mix so.

Speaker 3: So I think we continue to see that in terms of the metal coating side, they provide just outstanding value for their customers. So I think they'll defend their price levels based on providing continued outstanding service and quality. And I do think we also...

So I think we continue to see that in terms of.

The metal coatings side, you know there they they provide just outstanding value for their customers. So I think they.

Philip Schlom: Turning to our financial position and balance sheet, on a year to date basis, we generated strong cash provided by operating activities of 118.3 million, and free cash flow of 75.6 million, net of capital expenditures. Free cash flow for the first six months of fiscal year 2024 is three times higher than the comparable period a year ago, and reflects higher margins associated with AZZ metal coatings and AZZ pre-coat metal segments. We continue to improve operational performance and remain focused on prudently managing working capital to allow for further debt reduction.

They will defend their price levels based on providing continued outstanding service and quality and I do think we we also.

Speaker 3: You know, when you have 45 plants, you've always got some of them you're working on and they're continuing to do that and drive better value realization in those certain operations. So, yeah, I think it's...

You know EBIT when you have 45 plants, you've always got some of them youre working on and there continue to do that and drive better value realization and in those certain operations. So.

So yeah I think it's I think it's defendable.

Speaker 7: And then some of my clients are stressed out about where rates are.

Okay.

And then your you know some of my clients are kind of stressed out about where rates are and.

Speaker 7: Electric utility stocks have gotten hit. But from where you said it doesn't sound like you're seeing any impact of, I mean you said T and D still strong, renewables still strong. And I think you mentioned on the metal coating side that you're still getting good feedback from your customers on backlog and expectate.

Electric utility stocks have gotten hit.

Philip Schlom: Capital expenditures for the first six months were $42.7 million, including typical safety, maintenance, and growth spending, as well as approximately 20 million related to the new Washington, Missouri Coil Coating Plant. During the quarter, we made the decision to continue to fund the plant out of the company's operating cash flow. This decision was not made lightly by our management team. We evaluated the economic impact of long-term finance leasing under today's high cap rates, including built-in rent escalators of two and a half to three percent over the next 20 plus years, compared to the company's ability to utilize its strong balance sheet and cash flow to fund the project.

But from where you said it doesn't sound like you're seeing any impact of I mean, you said T&D still a strong renewable is still strong and I think you mentioned on the metal coatings side.

We're still getting good feedback from your customers on on backlog and expectations.

Speaker 3: Yeah, for the most part, we're seeing, you know, customers, and it is the diversity of the markets, infrastructure, a lot of these projects is, you know, it's like here in Texas, you've got all sorts of, you can't drive around very far without seeing region highway projects, new utility projects, growing population.

Yeah for the most part we're seeing.

You know customers and it is just the diversity of the markets infrastructure allowed these projects as you know it's like you're in Texas, you've got all sorts of you can't drive around very far without C. N Bridge and highway projects, new utility projects grow in population.

Speaker 3: So a lot of infrastructure, whether it be on the T&D, the solar front or on bridge and highway, things like that. So, you know, we do, as Dave said, we believe a lot of that spending is still in the early innings, but, you know, you've got to have clean water, got to have improved roads, got to have transportation. So, help.

So a lot of infrastructure, whether it be on the T&D solar front or on bridge and highway things like that so you know we do is as Dave said, we believe a lot of that spending is still in the early innings, but.

Philip Schlom: The new plant build, including equipment, has an estimated payback of under five years. In addition, our model return on investment projections considered 75 percent of the plant's future capacity is contractually committed to a customer under a long-term contract. This provides us further confidence in the plant's generation capability for long-term sustainable operating merchants. Our capital expenditure projections for full fiscal year 2024 is now 125 million, increased from 80 million previously stated, to include the funding for the Washington plant, which remains both ahead of schedule and below budget.

You know you've got to have clean water gotta have improve ROE that's got a half transportation so.

We feel comfortable with that and <unk>.

Speaker 3: you know, we feel comfortable with that. And back to, we have a great spread of our facilities. So whether the projects are going on in the east and contractors are in the west, we're able to service them on both sides of that, depending on where they decide to buy from. So we view that as a significant advantage given our portfolio. Thank you.

Back to we have a great spread of our facilities. So whether the projects are going on in the eastern and contractors are in the west we're able to service them on both sides of that depending on where they decide to buy from them. So we view that as a significant advantage given our portfolio.

Philip Schlom: Through the first half of the fiscal year, we paid down $60 million of debt with plans to reduce debt by another $15 to $40 million throughout the rest of the fiscal year, for a total of $75 to $100 million in debt reduction for the full year. In August, we repriced our 1.03 billion term loan fee, reducing interest rates by 50 basis points from SOFR plus 425 to SOFR plus 375, and removed the 10 basis point credits spread adjustment as part of the transaction.

Great. Thank you guys.

Okay.

The next question is from Mike Heim of Noble capital markets. Please go ahead.

Speaker 1: Next question is from Mike Heim of Noble Capital Market. Please go ahead.

Thanks for taking my question with the jump up in capital expenditures. It looks like we've got maybe $80 million more to spend for the rest of the year can you just talk a little bit about how you see that falling between the third and fourth quarter.

Speaker 8: Thanks for taking my question. With the jump up in capital expenditures, it looks like we've got maybe 80 million more to spend for the rest of your. Can you just talk a little bit about how you see that following between the third and fourth quarter?

That's your fault pretty evenly between the two quarters the.

Speaker 4: That should fall pretty evenly between the two quarters. The...

Philip Schlom: As we enter into it, also we entered into a swap arrangement last year to fix roughly half the variable rate debt. These capital allocation actions are helping us offset the impact of the rising interest rate environment. We have no debt maturities until 2027, and are confident that cash flow generation will support plans to strengthen the balance sheet and continue to reduce our debt to EBITDA leverage. During the first six months of the fiscal year, we paid cash dividends to comment shareholders of $8.5 million, and $7.2 million to our Series A preferred shareholders. We made no-show repurchases during the quarter.

Washington, Missouri project has been ramping up so quarter two was doubled.

Speaker 4: Washington Missouri project has been ramping up so quarter two was

Double quarter, one that as we go through Q2 and Q Q.

Speaker 4: Double quarter one as we go through Q2 and Q3 and Q4 should be pretty well balanced between the two quarters. Maybe a little heavier on the floor.

Q3, and Q4 should be pretty well balanced between the two quarters, maybe a little heavier in the fourth.

Speaker 8: Okay, and then Phil, you talked about the lower tax rate in the quarter and just wonder if you could repeat and maybe expand upon the reasoning, I believe you referred to something with the pre-code acquisition. Yeah, without getting a-

Okay, and then help you you talked about the a the lower tax rate in the quarter and just wondering if you could repeat maybe expand.

The reopening I believe you referred to something with the pre quota acquisition.

Yeah without getting into too much in.

Speaker 4: During the acquisition of pre-code metals, we had during our due diligence taken reserves related to some state tax exposures. We were able to address those post acquisition and resolve them self-so during the quarter we were able to reduce.

The act was during the acquisition of Presale metals, we had during our due diligence taken reserves related to some state tax exposures, we're able to address those post acquisition and resolve themselves. So during the quarter, we were able to reduce.

Philip Schlom: Before turning it over to David to speak about the markets, I wanted to end by providing an update in regard to our 40% investment in the Avail Joint Venture. The second quarter equity and earnings of unconsolidated subsidiaries included purchase accounting adjustments by the JV, that impacted our earnings in the second quarter. We understand their audits have now been completed and we expect that we may see improved earnings from the joint venture during the third quarter. Which may be a couple million higher than the run rate thus far.

The most significant portion of our reserve for state taxes, and we're still working through a couple of other states.

Speaker 4: the most significant portion of a reserve, poor state taxes, and we're still working through a couple other states.

Okay, and then finally as we kind of talk about some of the adjustments to our GAAP.

Speaker 8: And then finally, as we kind of talk about some of the adjustments to gap that you've provided, I assume that the legal settlements probably one time in nature, what about the amortization of the intangible to, can you just talk about the ongoing nature of that?

You provided I assume that the legal settlements probably a one time in nature, what about the amortization of the intangible but can you just talk about the ongoing nature of that.

David Nark: With that, I'd like to pass the call over to David. Thank you, Philip.

David Nark: Good morning, everyone. Which strengthens our competitive mode that Tom described earlier is our number one market position in post fabrication hot dip galvanizing as well as independent coil coding. AZZ leading market positions are due in part to our strategic footprint across North America. Our highly differentiated solutions and services attract a wide range of customers that we group into five primary categories, including construction, industrial, transportation, electric utility, and consumer. Construction is a broad category that captures non-building projects like bridge and highway work that we see as strong through the balance of the fiscal year.

Speaker 5: Yeah, the amortization and tangibles directly related to acquisition and purchase accounting that we hold at corporate because it doesn't impact the segment operations. So we've excluded that consistently from our addbacks. And you're right, the legal settlement was related to the business we sold and we see that as a one time non-recurring item. OK, thank you very much.

Yeah, the amortization of intangibles directly related to acquisition and.

And purchase accounting that we hold at corporate because it doesn't impact the segment operations and so we've excluded that.

Consistently from our add backs and you're right. The legal settlement was related to the business, we sold and we see that as a onetime nonrecurring item.

Okay. Thank you very much.

Thank you thanks, Mike.

Speaker 9: The next question comes from Lucas Pipes of Be Ryle's Security. Please go ahead. Thank you very much operator. Good morning everyone. Good job on the quarter and also a good job on keeping the Washington Project ahead of schedule and budget. That's not something I hear very often these days.

The next question comes from Lucas pipes of B Riley Securities. Please go ahead.

David Nark: Other construction and markets include the construction of healthcare and education facilities which are expected to grow by mid-single digits over the next two years. And while residential construction has been under pressure this year, we think we've seen the bottom with August showing a 1.9% increase in residential building permits. Projections now point to the highest level of new home starts since October 2022 driven by the supply shortage of homes while approvals for multi-family segment surge by 15.6% to a three month high.

You very much operator, good morning, everyone and good job on the quarter and also a good job on.

Keeping the Washington project ahead of schedule and budget, that's not something I hear very often these days.

Uh huh.

Speaker 9: I wanted to ask about the kind of project more broadly, kind of what you're given what you're seeing in the market with demand, seemingly really resilient despite higher rates of such. How do you think about organic growth if you have a pipeline of

I wanted to ask about kind of project more broadly kind of what youre, given what you're seeing in the market with with demand.

Lead really resilience, despite higher rates and such.

David Nark: We are in the early endings of critical infrastructure projects associated with the AIIJA and chips X that should positively impact the company in late calendar 2023 and 2024. This directly affects our work within our electric utility and market which includes transmission distribution projects. We have worked underway on a number of key projects this year and continue to see strong demand for transmission and distribution monopoles and lightest powers. Additionally, solar and renewable projects continue to demonstrate pockets of business strength regionally in the U.S.

How do you think about organic growth do you have a pipeline of similar projects to the Washington, One and if so what geographic region are you most focused on and what markets are you focused on them and in what stages with dose potential Greenfield project.

Speaker 9: similar projects to the Washington one and if so, what geographic region are you most focused on, what markets are you focused on, and what stages with those potential Greenfield projects be today, early planning, middle planning, late planning would really appreciate your color on that. Thank you.

<unk> today.

Early planning Middle planning late planning would really appreciate your color on that thank you.

Speaker 3: Yeah, we actually don't have any green fields we've done. This is actually the second one since I've been here. The first one was galvanizing plant in Reno.

We actually don't have any yeah greenfields. We've done. This this is actually the second one since I've been here.

David Nark: Finally, although our business software demand and consumer transportation and residential construction and markets in Q2, non-residential construction saw strength in warehousing, manufacturing, and agriculture. We remain encouraged by longer term trends from the source reshoring of manufacturing, the migration of pre-painted steel and aluminum and a movement in the container category from plastics to aluminum throughout North America. Our metal coatings and pre-coat metals teams are also actively pursuing share gain activities for hot dip galvanizing as well as pre-painted coil conversions with key customers.

The first one was galvanizing plant in Reno.

Speaker 3: about five years ago and then this one in Washington, Missouri. Usually...

About five years ago, and then than this one and in Washington, Missouri.

Usually we're we've tended on the galvanizing side to buy up.

Speaker 3: We've tended on the galvanized inside to buy up one-off competitors where they were adjacent and provided new territory reach for us.

One off competitors were where they were adjacent and provided new territory reach for us.

Speaker 3: So we've tended to find that has been the better way right now that pipeline is

We've tended to find that has been the better way right now that pipeline is.

Speaker 3: I'll call it quiet, which is in line with our desire not to do any acquisitions until we get through this cash flow hump on the Washington Coal Cutting Facility.

Yes, I'll call. It quiet now which is in line with our desire not to do any acquisitions until we get through this cash flow.

Tom Ferguson: With that, I would now like to turn the call over to Tom. Thank you, Dave.

Hump on on.

On the Washington quote cutting facility.

Tom Ferguson: A few comments on our business outlook. Although our end markets are impacted by seasonality, especially in the fourth quarter when weather can impact construction activities, we continue to be focused on increasing value to our customers and improving our operations in all our facilities. From metal coatings, our fabrication customers are continuing to site solid backlogs due to increased activity in the end markets that Dave just discussed. Additionally, labor availability has improved since last year.

Speaker 3: So we're always looking at new opportunities. One of the things we are doing on the pre-code side is we are working with customers to, I'll call it buy out their existing lines so to de-vertically integrate them. And we've had some success. I'm not going to mention the specific customers we've got, you know, NDAs in place.

So we're always looking at new opportunities what are the things we are doing on the <unk> side is we are working with customers too.

I'll call it buy out their existing line, so so to the vertically integrate them.

And we've had some success are not going to mention the specific customers. We've got NDA is in place.

Speaker 3: But we have had some success with that. So that allows us to utilize our capacity better without having to add it, but also take out capacity out of the market. So those have been our two strategies between the two businesses.

But we have had some success with that so that allows us to utilize our capacity better without having to add it.

Tom Ferguson: We have several working capital initiatives underway that provide us more opportunities to adjust inventories of paint zinc as demand shifts due to weather or other macro economic impacts. We are progressing with the construction of our aluminum coal coating facility, and we are on schedule and continuing to track within budget. This is an exciting project for us, and we will keep you updated each quarter on the progress. As Dave mentioned, both of our segments benefit from diverse and market activity and growing industries.

But also take out capacity out of the market. So so those have been our two strategies between the two businesses as.

Speaker 3: as we get in, you know, we just completed our strategic plan. And there is going to be demand capacity to man increase, particularly on the cold coating side going forward. We did not make any.

As we get in we just completed our strategic plan.

And there is going to be demand capacity demand increase, particularly on the coal coating side going forward.

We did not make any any.

Speaker 3: and he specific commitments as to the need for building another green field. But continuing to look at, you know, how can we squeeze capacity out of our existing footprint?

Vic commitments as to the need for building another greenfield, but continuing to look at how can we squeeze capacity out of our existing footprint.

Tom Ferguson: We are carefully monitoring the demand environment and economic trends, which we have used to develop our guidance. Given the operational improvements of pre-cut and improved customer inventory, we anticipate a stronger second half as compared to the second half of the last year. Our pre-cut teams demonstrate their ability to drive operational efficiencies to sustain their margins on maintaining quality and service levels in spite of the weaker volume demand. So, nothing has materially changed this year, or in our outlook, that would make us adjust our estimates at this time.

Speaker 3: So that's an ongoing exercise every year and...

So that's an ongoing exercise every year and but yeah, we're very comfortable with with the facilities. We have right. Now we think we can drive organic growth just by continuing to add services to what we do <unk>.

Speaker 3: But yeah, we're very comfortable with the facilities we have right now. We think we can drive organic growth just by continuing to add services to what we do. Supply chain solutions is what we call it for pre-code. We do we have similar opportunities with the mental coding side. So, you know, just continue to take share with our current business.

Supply chain solutions is what we call it for pre coat, we do we have similar opportunities with the metal coatings side. So yeah, just continued to take share with the with our current businesses.

Tom Ferguson: All that to say, I am confident with our previously issued annual guidance and pleased that the second quarter results were in line with our expectations. We will continue to strategically drive growth, remarket expansion, and long-term supply agreements with blue chip customers.

That is very helpful. Thank you quick follow up on this.

Speaker 9: That is very helpful. Thank you. Quick follow up on this, the, the, the, the, the, the integration of the vertical capacity, some of your customers. What would be the kind of the, the pitch to customers? What do you think you would add the most value in, in such a buyout?

The D var to call.

The integration of vertical.

Some of your customers.

What would be the kind of debt to pitch to customers wait what do you think you would add the most value in such a buyout.

Tom Ferguson: We are reaffirming our fiscal 2024 sales guidance of $1.4 to $1.55 billion, adjusted EBITDA guidance of $325 million, and adjusted EPS guidance of $3.85 to $4.35. And as Philip mentioned, our capital expenditure is for fiscal 2024, now $125 million, which includes $70 million related to the Washington, Missouri, Greenfield, coal-coating plan. And we remain fully committed to achieving our $75 to $100 million of debt reduction target this year. Our minority ownership in the AIS joint venture is not included in the full-year guidance as we are not forecasting at this point. We believe a veil is progressing well on its business plan, and we will provide an outlook on our 40% equity portion when it makes sense.

Yes, I think for US. It's this is what we do for a living so our lines are going to tend to be faster than theirs. If they've got really really old technology. It may be run it at a quarter to a third of the line speed, we can give them.

Speaker 3: Yeah, I think for us, this is what we do for a living. So our lines are going to tend to be faster than theirs. If they've got really, really old technology, it may be rendered at a quarter to a third of the line speed we can give them. We also can do a better job of providing them different color schemes. We've got our own color blending capability.

We also can do a better job of providing a different color schemes, we've got our own color blending capability.

Speaker 3: And just quite frankly, we're operating 13 plants, 15 lines, they're operating one, and it's not their core business.

And just quite frankly, where we're operating 13 plants 15 lines, they're operating one and it's not their core business.

Speaker 3: You know, so taking those assets and we're not talking about large amounts of money, but we are to take those assets off their books.

So taking those those assets and we're not talking about large amounts of money, but we are.

Two to take those assets off their books.

Speaker 3: But it is the kind of thing that can give us another 20,000, 25,000 tons of demand for our current facilities. And so that comes down to proximity of our locations, then being able to depend on our capabilities, which we have a great track record.

But it is the kind of thing that can give us another 20000 25000 tons of demand for our current facilities.

Tom Ferguson: In summary, I am proud of the team's execution of our fiscal 2024 plans, and I am confident that we are well positioned for growth and success. We are committed to driving further growth, improving profitability, and generating a significant cash flow with a focus on discipline, capital allocation. We believe the successful execution of our strategic plans will build momentum and drive sustainable value creation for all of our stakeholders.

And so it comes down to.

Proximity of our locations.

And then being able to to depend on our capabilities, which we have a great track record to do it.

Speaker 9: very helpful. Thank you for that color. Quick one for a second question. Just kind of leveraged targets longer term. Could you remind us what were your head is at right now, given rates and you know, brought a backdrop on financing markets. Thank you very much.

Very helpful. Thank you for that color are quick.

A quick one for a second question just to start.

Leverage targets longer term could you remind us.

Tom Ferguson: I want to thank our shareholders and the board for their continued support.

Where are you how does that right now given given rates.

Operator: Now, we will have the operator open up to call for questions. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone t-pad. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two.

And the product brought a backdrop on on on financing markets. Thank you very much.

Speaker 4: We ended the quarter at around 3.4 times leverage with a target to get down to 3 times leverage by the end of the year with the change in the

We ended the quarter at around three four times leverage with a target to get down to three point.

Three times leverage by the end of the year with the change in the.

Speaker 3: The facility for Washington, we still are in track to get in that range. So we're pulling all stops to continue to focus on our work in capital. Yeah, yeah, we're not changing our targets at this point. And that's why we felt comfortable moving from a sail lease back into funding of ourselves, you know, both our current.

The facility for Washington, We still are on track to get in that range. So we're pulling all stops to continue to focus on our working capital.

Operator: At this time, we will pause momentarily to assemble our roster.

Yes, we're not changing our targets at this point and that's why we felt comfortable moving from a sale lease back into funding it ourselves.

Both are current.

John Prandtrow: In our first question comes from John Prandtrow of Cedodianco. Please go ahead. Good morning, everyone, and thanks for taking the questions. Good morning. I guess I want to start with your commentary about the second half of the year, not only being better than a year ago, but in context with what we saw in the pre-cope markets. Do any of the three that you highlighted, HVC, transportation or construction, are they already improved maybe cadence than we saw that we knew you were expecting maybe as you were going into the second half of the year this year?

Speaker 3: that reduction so far year to date the improvement in you know small improvement in the repricing of our current debt and and just the ability to to go ahead and perform on our on our working capital so

Debt reduction so far year to date the improvement in <unk>.

Small improvement in the repricing.

Of our current debt and and just the ability to to go ahead and perform.

On our on our working capital so.

Stick with the target.

Very helpful gentlemen, really appreciate it and continued best of luck.

Speaker 9: very helpful. Gentlemen really appreciate it and continue to best the flock.

Alright, thanks, guys.

Speaker 8: The next question comes from John Brock of Kansas City Capital. Please go ahead. Good morning everyone. Good morning, John . Oh, Phil.

The next question comes from Jon Braatz of Kansas City Capital. Please go ahead.

Good morning, everyone.

Morning.

Phil.

John Prandtrow: John, this is Dave. I think as you look at it, as I mentioned in my commentary, some of the end markets are seeing the bottom residential being one of them, and we think that HVAC and appliance are certainly tied to that. As you look forward, some of the customers that we've talked to in both the HVAC and appliance and markets are seeing the bottom and filling optimistic about the balance of the year, so we'll see how things go with them, but we think it's certainly going to be improved over the prior year.

Speaker 8: The repricing of your debt, assuming no additional interest rate increases, are we talking about $5 million in annualized...

The repricing of your of your debt assuming no.

Additional interest rate increases are we talking about.

$5 million in annualized interest savings.

It is yeah at a 50 bps reduction.

Speaker 4: It is, yeah, at a 50 bits reduction and a billion dollars outstanding.

And $1 billion outstanding.

Speaker 4: It equates to about $5 million per year. And we're actively working with our bank group and we'll continue to watch some markets for opportunities to continue to do things that can help.

It equates to about $5 million per year.

We're actively working with our bank group and we will continue to watch the markets for opportunities to continue to do things that can help.

Speaker 8: you know, bring down that interest cost. Okay, okay, good. Secondly, zinc costs currently are off on a year-over-year basis. And eventually that's going to, you're gonna work through that.

Bring down that interest cost okay. Okay. Good Oh secondly.

Zinc costs currently are are off on a year over year basis, and eventually that's going to you're going to you're going to work through that.

John Prandtrow: Fair enough, and with the change in the financing plans on the new facility, how should we be thinking about debt levels in the near-term? Can you just give us some thoughts there? Yeah, John, as we spoke, during our prepared comments, we paid down $60 million in debt this year. We're committed to both funding the new facility as well as continuing to drive our working capital health, to help reduce that further year.

Speaker 8: Over through those lower costs. Do you see a little bit of a tailwind?

I'll work through those lower cost do you see a little bit of a tailwind to your operating margins.

Speaker 8: to your operating margins in metal coating maybe six, nine months down the road. Is that going to prove to be a little boost to your operating profile? Yeah, we would hope so. I think...

And metal coating, maybe six nine months down the road.

Can that is that going to prove to be a little boost to your operating profile.

Yeah, we would hope so I think it's we.

Speaker 3: We've got some of our Melcoa's team sitting here and they're looking with, you know, inquiring faces, you know, what's that's gonna do to their budget for next year? But, you know, we're confident. We had talked about how we've done a better, they've done a great job of providing price for value. But we do think,

We've got some of our metal coatings team sitting here and there they're looking with <unk>.

John Prandtrow: You know, I'm just curious with the lowest season now in the second half of the year, working capital requirements come down in the second half of the year, just made some current working capital. Yeah, absolutely. I think I'd mention it, we will continue to be able to drive pain inventories in some of the same inventories down. The other thing I'd comment on is the cost in our kettles for our zinc is going to continue to come down, so that inventory level will reduce as the year plays out.

Inquiry in phases. This is do you know what thats going to do to their budget for next year, but.

But we're confident we had talked about how we've done a better they've done a great job of providing price for value.

But we do we do think.

Speaker 3: This is about within the next month or so is when we start, we're having those negotiations with the zinc suppliers. And...

This is about within the next month or so is when we start we're having those negotiations with the zinc suppliers and.

The Big factor you have to add right now is the premiums are in the 30 to 35 cent range added to whatever the <unk> is so that's.

Speaker 3: The big factor you have to add right now is the premiums are in the 3035 cent range added to whatever the LME is. So, you know, that's part of part of the unknown at this point is what are those premiums going to look like next year. But yeah, I would anticipate this will provide us some some tail.

John Prandtrow: I just one last question on clarification. I think you might be a change of a couple million dollars on JV income. Is that a one-time change, or what are your thoughts there? Why was that tossed into the prepared remarks? John, that's a good question. You know, we've not forecasted the equity and earnings for avail because of the nature of the transaction, them standing up their business, and the cyclicality within their business.

That's part of part of the unknown at this point is what are those prime is going to look like next year.

But yes, I would anticipate this will provide us some some tail winds can those premiums vary quite a bit.

Speaker 8: Can those premiums vary quite a bit? Here to your.

They can vary.

Speaker 3: They can vary quite a bit year to year. And they have just the last year movement from, you know, caught in the less than 15 cent range to the 30, 35 cent range. And then you've also got some variants depending on the regions of the country. So, you know, these are all things that

Quite a bit year to year.

And they have just the last the last year movement from.

Call it call it in less than 15 cent range to the 30 to 35 range and then you've also got some variance depending on the regions of the country. So you know.

John Prandtrow: So we see them post their audit that completed in the end of July, stabilizing, and then we should see a better run rate going forward. So hopefully, we'll be able to at some point forecast that business going forward. Yeah, and I'd add now that they have, you know, completed the audit on their books, you know, getting the past adjustments out of the way so that they can just forecast based on actual income going forward.

These are all things that.

Speaker 3: you know come into play as we make our commitments on Zinc and work with our suppliers who have been you know we feel good about supply chain right now and the availability is

Now come into play as we make our commitments on zinc and work with our suppliers, who have who have been.

We feel good about the supply chain, right now and and the availability of zinc.

Speaker 8: Okay, which allows us to bring down any, you know, some of our safety stocks. Okay. Looking ahead sort of, you know, in the 2024, the new Washington facility, what are, what might in terms of startup costs, what kind of net contribution?

Which allows us to bring down any.

Some of our safety stocks, Okay. Tom looking ahead sort of you know into 2024.

John Prandtrow: So I think we will get into a cadence here shortly. Philip and I are both on that avail board. So as we're able to do that, you know, I'm hopeful that we'll be able to give, you know, some actual guidance around it and provide more color on a quarterly basis. Great. Thanks Tom. I appreciate you guys taking my questions. Thanks, Tom.

The new Washington facility.

What are what my in terms of startup costs, what kind of net contribution.

Speaker 8: initially we'll wash them and have on your finance or on your income statement. We'll be a little bit of a drag. There will be some cost to absorb before it becomes additive.

Initially.

We'll Washington have on on your.

On your finance are on your let's say your income statement.

Will it be a little bit of a drag will be there'll be some cost to absorb before biff.

Before it becomes additive.

We've got all those factored in so.

Speaker 3: We've got all those factored in. So, you know, with the formal and complete start up in fiscal 2026. So that's already factored into our plans and outlooks as we look forward. Because we will add the skilled labor and bring them on, get them trained. But.

Adam Fowlheimer: The next question comes from Adam Fowlheimer of Plumpton Davis. Please go ahead. Hey, good morning, guys. Congrats on a nice quarter. Thank you. Good morning. Thanks. Hi, level.

With the formal and complete startup in fiscal 2026.

So that's already factored into our plans and outlook as we look forward.

Tom Ferguson: Can you talk about back half of the year revenue growth? I'm just kind of curious if the trends we saw on Q2 is kind of in line with what you're thinking for the back half? A little bit down and pre-code a little bit up in metal coatings. Yeah, I think that's going to continue as we look forward. Now on the pre-code side, we're laughing a pretty weak, particularly pretty weak fourth quarter.

Because we will we will add the skilled labor and bring them on get them trained but but.

So yeah, there is some of that in there.

Speaker 3: So yeah, there's some of that in there.

But there is not it doesn't go on for a long period, Alright, alright, Okay, alright, Thank you very much.

Speaker 8: but there's not a it doesn't go on for a long period. Right. Okay. All right. Thank you very much.

Thanks, John Thanks, Sean.

Tom Ferguson: So even though we've sustained our sales down 5% on significant lower volume in the first half, we don't look for those volumes to continue down. We're seeing that as David talked about. The construction markets and other markets are stabilizing. So we look for pre-code to perform well on a comparative basis in the second half from a sales perspective. And then our metal coatings folks, as I've joked at times, they wake up and fight 45 battles across their 45 plants every day and continue to win a significant majority of those battles. So we just look for them to continue providing that outstanding service that earns their customers business. So, you know, should be another good half of them.

The next question comes from Brett Kearney of Gabelli Fund.

Speaker 10: The next question comes from Brett, here in the A of Gabelie's one. Please go ahead. Hi guys, thanks for taking my question and congrats on the continued...

Please go ahead hi, guys.

Thanks for taking my question and congrats on the continued momentum.

Thanks, Brett.

Speaker 10: I'm pre-code metal is great to see the improvement in consistency in margins this fiscal year. I think it sounds like a lot of heavy lifting was done, eliminating some of the excess wear housing expenses.

I'm pretty cold metal, it's great to see the improvement.

Distantly and margins this fiscal year.

I think it sounds like a lot of the heavy lifting was done eliminating some access.

Warehousing expenses I'm just curious how you guys are feeling about the sustainability of margins at that business here, even room for potential improvement I know you were focused on a few apolo fleet average sites and whether there would be any incremental investments go into kind of unlock the productivity improvements at the at those local.

Speaker 10: I'm just curious how you guys are feeling about, I guess the sustainability of margins at that business here, even room for potential improvement. I know you're focused on a few below fleet average sites, and whether there would be any incremental investments going to kind of unlock the productivity improvements at those locations.

<unk>.

Yeah, I think thats what.

Speaker 3: We feel good. The discipline and the focus from the pre-COVID-MELS team has been really great. And getting rid of a lot of that excess customer inventory has equal walk in the site. They're cleaner, they're easier to maneuver. You can just feel the improved opportunities for productivity and efficiency. So that's helpful.

We feel good the the discipline and the focus from from the <unk> metals team has been really great.

Tom Ferguson: Okay, great. And then one thing that struck me as really positive was the pricing and pre-code. I think he said plus 7%. Is that kind of a one-off this year or actually think about pricing probably for both segments going forward? Well, I think, you know, part of the price on pre-code is the underlying since paints, they're, you know, by far their largest cost component. And we had talked about that in previous quarters where the paints suppliers that continue to increase price.

And getting <unk>.

Rid of a lot of that excess customer inventory.

You can walk into sites, they're cleaner there.

Easier to maneuver or you can just feel the improved opportunities for productivity and efficiency.

So that's helpful.

And that's continuing I think we're still providing great service and a set of solutions to our customers.

Speaker 3: Continuing, I think we're still providing great service and to set solutions to our customers.

Speaker 3: and continuing to inventory a whole bunch of customer metals. So, but in a more effective way. So I like our target range. I really like the fact that we've got a couple of quarters in the 20% EBITDA range. I think that's becoming far more sustainable as we look forward. And.

And continuing to the inventory a whole bunch of customer metal so.

Tom Ferguson: So, you know, that that's really the flow through is what you're seeing the flow through on that paint cost price relationship. Plus, driving the pricing value on myths. So, I think we continue to see that in terms of the metal coating side, you know, they provide just outstanding value for their customers. So, I think they, you know, they'll defend their price levels based on providing continued outstanding service and quality. And I do think we also, you know, even when you have 45 plants, you've always got some of them you're working on and they're continue to do that and drive better value realization in those certain operations. So, yeah, I think it's, I think it's defendable.

But in a in a more effective way.

I like R. R.

Our target range.

Really like the fact that we've got a couple of quarters in the 20% EBITDA range, I think thats, becoming far more sustainable as we look forward.

And.

Speaker 3: I'm never going to say it's easy because the team up there would shoot me, but But I think they are there in a good cadence and a good rhythm and then they are we do have the three or four sites

Never going to say, it's easy because the team up there would shoot me but.

I think they are they're in.

Good cadence and a good rhythm and then they are we do have the three or four sites.

Speaker 3: that you know it shifts but because we had

That it shifts, but because we had there's still three of the four but one is now operated much better.

Speaker 3: There's still three of the four, but one is now operating much better. We're focused on three and we've added another one, so we'll never declare victory on continually improving some of those facilities. And by the way, this...

We're focused on on three and we've added another win so you know we'll never.

Declare victory on continually improving some of those facilities.

Tom Ferguson: Okay. And then you're, you know, some of my clients are kind of stressed out about where rates are and electric utility stocks have gotten hit. But from where you said it doesn't sound like you're seeing any impact of, I mean, you said T and D still strong renewables, still strong. And I think you mentioned on the metal coating side that you're still getting good feedback from your customers on backlog and expectations.

And by the way these this.

Speaker 3: When I mentioned the D vertically integrating some customers, that also gives us some volume, which some, you know, a couple of our plants just needed more volume and more demand. So it allows us to make that more predictable, more sustainable, and continue to drive to that 20% range. And then hopefully, you know, go beyond it as we add other services. And we have deployed capital over the last 18 months.

When I mentioned the deep vertically integrating some some customers that also gives us some volume with some a couple of our plants just needed more more volume and more demand. So it allows us to make that more predictable more sustainable.

And continue to drive our drive to that 20% range and then hopefully go beyond it as we add other services and we have we have deployed capital over the last 18 months.

Tom Ferguson: Yeah, for the most part, we're seeing, you know, customers and it is the diversity of the markets, infrastructure, a lot of these projects is, you know, it's like here in Texas, you've got all sorts of, you can't drive around very far without seeing region highway projects, new utility projects, growing population. So a lot of infrastructure, whether it be on the T and D, the solar front or on bridge and highway, things like that.

Two newsletters, new capabilities and all of that is already embedded up and running and providing value now.

Speaker 3: to new slitters, new capabilities, and all that's already embedded up and running and providing value now. Excellent, very helpful.

Excellent very helpful. Thanks, so much Tom Alright.

Alright, thank you.

Yes.

This concludes our question and answer session I would like to turn the conference back over to Tom Ferguson for any closing remarks.

Speaker 1: This concludes our question and answer session. I would like to turn the conference back over to Tom Ferguson for any closing remarks.

Tom Ferguson: So, you know, we do, as Dave said, we believe a lot of that spending is still in the early innings, but, you know, you've got to have clean water, got to have improved roads, got to have transportation. So, you know, we feel comfortable with that and back to, we have a great spread of our facilities. So, whether the projects are going on in the east and contractors are in the west, we're able to service them on both sides of that, depending on where they decide to buy from. So, we view that as a significant advantage given our portfolio.

Thank you operator.

Speaker 3: Thank you, operator. Thank you for your time today, and I look forward to updating you on our third quarter results in just a few months. Thank you very much. Have a great day.

Thank you for your time today and I look forward to updating you on our third quarter results in just a few months. Thank you very much have a great day.

Tom Ferguson: Thank you. Great.

Speaker 1: The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.

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

Tom Ferguson: Thank you guys.

Speaker 11: What.

[music].

Mike Heim: The next question is from Mike Heim of Noble Capital Market. Please go ahead. Thanks for taking my question. With the jump up in capital expenditures, it looks like we've got maybe 80 million more to spend for the rest of the year. Can you just talk a little bit about how you see that falling between the third and fourth quarter? That should fall pretty evenly between the two quarters. The Washington, Missouri project has been ramping up. So quarter two was double quarter one. As we go through Q2 and Q3 and Q4 should be pretty well balanced between the two quarters. Maybe a little heavier on the floor.

Mike Heim: Okay.

Philip Schlom: And then Philip, you talked about the lower tax rate in the quarter. And just wonder if you could repeat, maybe expand upon the reasoning that you believe you referred to something with the precode acquisition. Yeah. Without getting into too much, during the acquisition of precode metals, we had during our due diligence taken reserves related to some state tax exposures. We were able to address those post acquisition and resolve themselves. So during the quarter, we were able to reduce the most significant portion of a reserve for state taxes. And we're still working through a couple of other states.

Philip Schlom: Okay. And then finally, as we kind of talk about some of the adjustments to a gap that you've provided, I assume that the legal settlements, probably one time in nature, what about the amortization of the intangible? Can you just talk about the ongoing nature of that? Yeah. The amortization of the intangible is directly related to acquisition and purchase accounting that we hold at corporate because it doesn't impact the segment operations. And so we've excluded that consistently from our addbacks. And in your right, the legal settlement was related to the business we sold and we see that as a one time non-referring item.

Mike Heim: Okay. Thank you very much.

Mike Heim: Thank you. Thanks, Mike.

Lucas Pipes: The next question comes from Lucas Pipes of B Riley Security. Please go ahead. Thank you very much operator. Good morning, everyone. Good job on the quarter and also a good job on keeping the Washington Project ahead of schedule and budget. That's not something I hear very often these days.

Tom Ferguson: Thank you. I wanted to ask about kind of projects more broadly, kind of what you're given what you're seeing in the market with demand, seemingly really resilient despite higher rates and such. How do you think about organic growth? Do you have a pipeline of similar projects to the Washington one? And if so, what geographic region are you most focused on? And what markets are you focused on? And in what stages with those potential Greenfield projects B today, early planning, middle planning, late planning would really appreciate your color on that.

Tom Ferguson: Thank you. Yeah, we actually don't have any green fields. We've done this. This is actually the second one since I've been here. The first one was galvanizing plan in Reno about five years ago. And then this one in Washington, Missouri, usually where we've tended on the galvanizing side to buy up one off competitors, where they were adjacent and provided new territory reach for us. So we've tended to find that has been the better way right now that that pipeline is.

Tom Ferguson: I'll call it Quiet, which is in line with our desire not to do any acquisitions until we get through this cash flow pump on the Washington Coal Cutting Facility. So we're always looking at new opportunities. One of the things we are doing on the pre-code side is we are working with customers to buy out their existing lines, so to de-vertically integrate them. And we've had some success, not going to mention the specific customers we've got in the A's in place.

Tom Ferguson: But we have had some success with that. So that allows us to utilize our capacity better without having to add it, but also take out capacity out of the market. So those have been our two strategies between the two businesses as we get in, you know, we just completed our strategic plan. And there is going to be demand capacity to man increase, particularly on the coal coating side going forward. We did not make any specific commitments as to the need for building another greenfield.

Tom Ferguson: But continuing to look at, you know, how can we squeeze capacity out of our existing footprint? So that's an ongoing exercise every year. But yeah, we're very comfortable with the facilities we have right now. We think we can drive organic growth just by continuing to add services to what we do. Supply chain solutions is what we call it for pre-code. We do we have similar opportunities with the metal coating side. So, you know, just continue to take share with the with our current businesses.

Tom Ferguson: That is very helpful. Thank you. Quick follow-up on this, the the the vertical integration of the vertical capacity, some of your customers. What would be the kind of the pitch to customers? What do you think you would add the most value in in such a buyout? Yeah, I think for us, it's, you know, this is what we do for a living. So, our lines are going to tend to be faster than theirs.

Tom Ferguson: You know, if they've got really, really old technology, it may be rendered at a quarter to a third of the line speed we can give them. We also can do a better job of providing them different color schemes. We've got our own color blending capability. And just quite frankly, we're operating 13 plants, 15 lines. They're operating one and it's not their core business. You know, so taking those assets and we're not talking about large amounts of money, but we are to take those assets off their books.

Tom Ferguson: But it is the kind of thing that can give us another 20,000, 25,000 tons of demand for our current facilities. And so that comes down to proximity of our locations, then being able to depend on our capabilities, which we have a great track record to do it. Very helpful. Thank you for that color. A quick one for a second question. Just kind of leverage targets longer term. Could you remind us where you had us at right now, given rates and the broader backdrop on financing markets?

Tom Ferguson: Thank you very much. We ended the quarter at around 3.4 times leveraged with a target to get down to 3 times leveraged by the end of the year with the change in the facility for Washington. We still are in track to get in that range. So we're pulling all stops to continue to focus on our work in capital. The current debt reduction, so far year to date, the improvement in small improvement in the repricing of our current debt and just the ability to go ahead and perform on our work in capital. So stick with the target. Very helpful. Gentlemen, really appreciate it and continue to best the flock.

Tom Ferguson: Thank you.

John Brock: The next question comes from John Brock of Kansas City Capital. Please go ahead. Good morning, everyone. The repricing of your debt, assuming no additional interest rate increases, are we talking about $5 million in annualized interest savings? It is. Yeah, at a 50 bips reduction and a billion dollars outstanding. It equates to about $5 million per year and we're actively working with our bank group and we'll continue to watch some markets for opportunities to continue to do things that can help bring down that interest cost.

John Brock: Okay, okay, good. Secondly, zinc costs currently are off on a year-over-year basis and eventually that's going to work through those lower costs. Do you see a little bit of a tailwind to your operating margins in metal coating maybe six, nine months down the road? Is that going to prove to be a little boost to your operating profile? Yeah, we would hope so. I think, you know, it's, we've got some of our metal coatings team sitting here and they're looking with, you know, inquiring faces.

John Brock: What's that going to do to their budget for next year, but we're confident we had talked about how we've done a better, they've done a great job of providing price for value. But we do, we do think this is about within the next month or so is when we start, we're having those negotiations with the zinc suppliers. And the big factor you have to add right now is the premiums are in the 30, 35 cent range added to whatever the LME is.

John Brock: So, you know, that's part of part of the unknown at this point is what are those premiums going to look like next year? But yeah, I would anticipate this will provide us some some tailwinds. Can those premiums vary quite a bit here to your? They can vary quite a bit here to your and they have just the last last year movement from, you know, caught caught in less than 15 cent range to the 30, 35 cent range.

John Brock: And then you've also got some variants depending on the regions of the country. So, you know, these are all things that come into play as we make our commitments on zinc and work with our suppliers who have been, you know, we feel good about supply chain right now and the availability is, which allows us to bring down any, you know, some of our safety stocks.

Tom Ferguson: Looking ahead sort of, you know, into 2024, the new Washington facility, what are, what might, in terms of startup costs, what kind of net contribution initially will Washington have on, on your, on your finance or on your income statement. Will it be a little bit of a drag? Will there be some cost to absorb before, before it becomes additive? We've got all those factored in. So, you know, with, with the formal and, and complete startup in fiscal 2026.

Tom Ferguson: So, that, that's already factored into our, our plans and, and outlooks as we look forward. Because we will, we will add the skill labor and bring them on, get them trained. But, but, so yeah, there's, there's some of that in there. But there's not, it doesn't go on for a, for a long period. Right. Okay. All right. Thank you very much. Thanks John.

Brett Peerney: The next question comes from Brett Peerney of the Belly Fund. So, he's so ahead.

Tom Ferguson: Hi guys. Thanks for taking my question and congrats on the continued momentum. Thanks Brett. I'm, I'm pre-code metal is great to see the improvement in consistency in margins this fiscal year. You know, I think it sounds like a lot of heavy lifting was done, eliminating some of the excess warehouse, warehousing expenses. Just curious how you guys are feeling about, I guess, the sustainability of margins at that business here, even room for potential improvement.

Tom Ferguson: I know you were focused on a few below fleet average sites. And whether there would be any incremental investments going to kind of unlock the productivity improvements at those locations. Yeah, I think that's, we, we feel good the discipline and the focus from the pre-code metal team has been really great. And getting rid of a lot of that excess customer inventory has, you know, you can walk in the site. They're, they're, they're cleaner.

Tom Ferguson: They're easier to maneuver. You can just feel the improved opportunities for productivity and efficiency. So, so that's helpful and that's continuing. I think we're still providing great service and it says solutions to our customers. And continuing to inventory a whole bunch of customer metals, so, but in a more effective way. So I like our target range. I really like the fact that we've got a couple of quarters in the 20% EBITDA range.

Tom Ferguson: I think that's becoming far more sustainable as we look forward. And I'm never going to say it's easy because the team up there would shoot me, but, but I think they are there in a, in a good cadence and a good rhythm. And then they are, we do have the three or four sites that, that, you know, it shifts, but because we had, there's still three of the four, but one is now operating much better.

Tom Ferguson: We're focused on three and we've added another one. So, you know, we'll never, you know, declare victory on continually improving some of those facilities. And by the way, this, this, When I mention the D vertically integrating some customers, that also gives us some volume, which some, you know, a couple of our plants just needed more volume and more demand. So it allows us to make that more predictable, more sustainable, and continue to drive to that 20% range, and then hopefully, you know, go beyond it as we add other services. And we have deployed capital over the last 18 months to, you know, new slitters, new capabilities, and all that's already embedded up and running and providing value now.

Tom Ferguson: Excellent, very helpful. Thanks so much, Tom. All right. Thank you.

Tom Ferguson: This concludes our question and answer session. I would like to turn the conference back over to Tom Ferguson for any closing remarks. Thank you, operator. Thank you for your time today, and I look forward to updating you on our third quarter results in just a few months. Thank you very much. Have a great day.

Operator: The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.