AZZ Inc.

Good day and welcome to the ACC, Inc. Second Quarter Fiscal Year 2023 Financial Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star 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 a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Joe Dorme of Listen Partners. Please go ahead.

Thanks, Betsy. Good morning and thank you for joining us today to review AZZ's financial results for the second quarter of fiscal year 2023, ended August 31st, 2022. Joining the call today are Tom Ferguson, Chief Executive Officer, Philip Shlom, Chief Financial Officer, and David Nark, Senior Vice President, Marketing, Communications, and IR. After the conclusion of today's prepared remarks, we will open the call for questions. Please note there is a slide presentation for today's call, which can be found on AZZ's Investor Relations page under Latest Earnings Releases Presentation at AZZ.com. Before we begin with prepared remarks, I would like to remind everyone certain statements made by the management team of AZZ during this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Except for the statements of historical fact, this conference call may contain forward-looking statements that involve risks and uncertainties, some of which are detailed from time to time in documents filed by AZZ with the Securities and Exchange Commission, including the annual report on Form 10-K for the fiscal year ended February 28, 2022. Those risks and uncertainties include, but are not limited to, changes in customer demand and response to products and services offered by the company, including demand by the power generation markets, electrical transmission and distribution markets, the industrial markets, and the metal coatings markets. Additional increases in labor costs, prices of raw material costs, including zinc and natural gas, which are used in the hot-dip galvanizing process, coil coating process, changes in political stability and economic conditions of the various markets that ADZ serves, foreign and domestic, customer-requested delays of shipments, supply chain vendor delays, acquisition opportunities, currency exchange rates, adequate financing, and availability of experienced management and employees to implement the company's growth strategies. In addition, AZD's customers and its operations could potentially be adversely impacted by the ongoing COVID-19 pandemic. The company can give no assurance that such forward-looking statements will prove to be correct. These statements are based on information as of the date hereof, and AZZ assumes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. With that out of the way, let me turn the call over to Tom Ferguson, Chief Executive Officer of AZZ. Tom?

Thanks, Joe. Welcome to AZZ's second quarter fiscal 2023 earnings call. Thank you for joining us this morning. I'm excited to have the opportunity to share the progress we've made on our strategic commitment to become predominantly a metal coatings company. The actions taken to further deliver the business, as well as the first full quarter of combined results of our metal coatings and pre-coat metal segments. Before I do, however, let me take just a moment to recognize and thank everyone involved with the divestiture of the majority stake in the infrastructure solution segment, which we completed on September 30th. I also want to thank all the employees of AIS for continuing to focus on the business, taking care of customers, and finishing out a nice second quarter with significantly improved results over the prior year. If we would not have had to take AIS to discontinued ops, AZZ would have had another $107 million of sales for a total of about $513 million in net sales and another $12 million of operating income for the quarter. I wish all of AIS folks success as part of the new joint venture with Firmware Group, which has been rebranded as Avail Infrastructure Solutions. Next, as we dive into the quarterly results, I am pleased to say that AZZ, as we committed to back in November of 2020, is now a truly focused metal coatings company with leading market positions in both of our segments. We had a very busy quarter highlighted by our metal coating segment achieving record-level sales, while continuing to post strong profitability. Pre-code metals completed their first full quarter of results as part of AZZ with record sales and also strong profitability. We are reporting the infrastructure solution segment as discontinued operations. After the end of the quarter, we closed the sale of AIS, collected the $228 million in proceeds, and immediately used $210 million to reduce the term loan B debt, with most of the remaining balance used to reduce the revolving credit facility. Additionally, to hedge against rising interest rates, we entered into a floating to fixed rate swap for $550 million of the remaining term loan deed debt. Phillip will speak more about this later. So let's talk about the operational performance of our businesses. On a consolidated basis, we generated sales of $407 million, with the AZZ metal coating segment posting almost $166 million, which is another record quarter. And the pre-code metal segment generated $241 million, which is the highest in their history. Most markets were active, and our businesses managed well through the ongoing supply chain delays and labor shortages, and continued to operate safely while taking care of their customers. We generated over $100 million of EBITDA on an adjusted basis, excluding the one-time non-cash loss on the sale of AIS. Net income and EPS were down on a reported basis due to transaction-related expenses, depreciation, amortization, and the loss on sale of AIS, but the businesses generated EPS of $1.24 on an adjusted basis, which is an increase of 63% versus prior year. Philip will get into the details of the adjustments later. It gives me great pleasure to congratulate the entire Metal Codings team on another outstanding quarter. Despite supply chain disruptions and labor shortages, they kept their people safe, took care of their customers, and continued to drive great results. These results included the impact of the DOM and Steel Creek galvanizing acquisitions and the addition of tubing from the AIS divestiture, but organic growth was still over 20%. Operating margins of 27% provided operating income of $50 million, which is a 40% increase year over year. We did have the benefit of 5.1 million of impact from a real estate sale and insurance settlements. So normalized margins would have been just over 24%. We continue to see solid demand as we progress into Q3, but are experiencing the rising cost of zinc in our kettles as we have noted previously. Precoat joined AZZ with some momentum and generated sales of $241 million. Operating income of $36 million, or 15%. Operating margins would have been 17.8%, but were impacted by 280 basis points due to preliminary purchase price accounting, amortization, and depreciation. And also faced about $2 million of impact from other supply chain disruptions and labor shortages. One of the key services Preco provides is warehousing steel and aluminum coils for their customers. But due to well-publicized supply chain disruptions, customers have increased safety stocks, so Preco is experiencing much higher than normal inventory levels, which is both a blessing and a curse. The volume bodes well for shipments, but presents challenges to productivity and efficiencies. Preco generated solid EBITDA of almost 50 million, or 20.6%. We are pleased with how the Preco team settled into AZZ with minimal disruption and has been a great cultural fit. With that, I'll turn it over to Philip to discuss our results in further detail.

Philip? Thanks, Tom. First, I'd like to thank our employees and especially our global finance professionals for their support and efforts in this year's large acquisitions and divestitures as they require significant coordination and effort. As Tom had noted in his comments, we classified our infrastructure solution segment as assets held for sale at the end of the quarter and reported the segment as discontinued operations. which requires us to separate earnings from continuing operations from those of discontinued operations. Combined sales were $513 million, operating income was $79 million at 15.4%, and EBITDA, as Tom noted, of $100.5 million at 19.6 on a consolidated basis. I will primarily focus on our continuing operations as we discuss our results for the quarter and the year-to-date periods. Second quarter sales from continuing operations were $406.7 million. Sales included the first full quarter of AZZ pre-coat metals and excluded infrastructure solution segment sales now reported in discontinued operations of $106.7 million. Sales exceeded prior year same quarter sales by $275 million. We generated gross profit from continuing operations of $101.6 million compared with gross profit of $36.4 million in the second quarter of the prior year. Our gross margin was 25% for the quarter, 270 basis points lower than the prior year, as the prior year included and reflected the metal coating segment only, while the current year includes higher sales from pre-coat, which has a slightly lower margin profile. Operating profit for the quarter was $64.1 million, compared with $20 million in the second quarter of the prior year. Operating margins from continuing operations was 15.8%, during the current quarter, 60 basis points above the prior year operating margin of 15.2%. Excluding the effect of the pre-code purchase accounting quarterly depreciation amortization expense increases of 2.2 million and 4.6 million respectively, operating margins in our pre-code business would have increased from 15% to 17.8%. We expect the depreciation amortization resulting from the pre-code acquisition to continue to impact the quarterly operating profit in the pre-code segment going forward. Second quarter EBITDA for fiscal year 2023 was a negative 17.1 million compared to the 36.6 million reported in the second quarter of fiscal year 2022. On an adjusted basis, the current quarter EBITDA was 100.5 million, 63.9 million above the prior year. Our diluted earnings per share reflected a loss of $1.91, compared with EPS of 76 cents in the same quarter last year. Adjusted diluted EPS excluding the estimated loss on sale of the AIS-JV of 114.9 million and 2.7 million in costs related to the transactions was $1.24, a 63.2% improvement over the prior year of same quarter. Year-to-date sales from continuing operations through the second quarter of fiscal year 23 were $613.8 million. a 135% increase from last year's second quarter year-to-date sales of $260.7 million. Fiscal year 2023 year-to-date net loss, including discontinued ops, was $34.5 million, was significantly lower than the $41.3 million in the prior year-to-date, and was due to the estimated loss on the divestiture, net of tax of $89 million. Cash flows from continuing operations for the six months ended August, increased 34% to $42 million, compared with the $31.3 million reported during the first half last year, primarily on higher earnings. Year-to-date cash used in investing activities was $1.3 billion and was primarily attributable to the pre-code acquisition, which finalized on May 13. Year-to-date cash provided by financing activities on a year-to-date basis was $1.245 billion, reflecting the borrowings required to purchase pre-codes. Cash provided by our discontinued operations was $22.8 million, or nearly 5.5 times higher than the first six months of the prior year. The increased cash from discontinued operation reflects stronger overall business conditions. The company continues to focus on the balance sheet on our capital allocation. Earlier last week, we announced the consummation of the sale of a 60% interest in the company's infrastructure solution segment. We received cash in the amount of $228 million, with $108 million related to our equity valuation and $120 million that was funded by committed debt financing taken on by the buyer. We immediately utilized $210 million in cash received to reduce our term loan B, paid $15 million on the revolving credit facility, and utilized the remainder on working capital. Separately, we recently finalized the closing statement working capital true-up with regard to the acquisition of pre-code metals and the amount of $15.8 million. We intend to apply these funds against our revolving credit facility to further reduce outstanding borrowings. During the second quarter, we spent $12.3 million on capital expenditures for continuing operations and $2.9 million on discontinued operations. Capital investments related to our recent precodex acquisition totaled $8 million in the full quarter. We continue to reprioritize projects as we have witnessed delivery delays due to supply chain disruptions. While we invested $18.7 million year-to-date on CapEx, we expect to invest between 40 and 45 million in capital in the current fiscal year. We did not repurchase shares during the quarter as we continue to focus on a glide path near return for continued debt reduction. Last Friday, we announced our declaration of our dividend at 17 cents. During the second quarter, we paid down debt and we deleveraged from 4.3 times leverage to 3.6 times leverage. Following the receipt of our shareholder approval at our annual meeting, on August 5th, we exchanged our 240 million 6% Blackstone convertible notes into a Series A convertible preferred stock, now reflected as a component of equity as compared to being reflected in debt at the end of Q1. Lastly, we recently entered into a $550 million three-year SOFR-based interest rate swap agreement to reduce floating debt exposure. The swap has a fixed rate of 4.277% and a yield of about 8.5% and a 40 basis point floor. The swap will hedge roughly 50% of our existing term loan B debt. We continue to focus on reducing outstanding debt and leverage and continue to invest in strategic projects, which we believe will be accretive to future earnings. Now, with that, I'll turn it back to Tom for his closing comments.

Thanks, Philip. For metal coatings, markets remain active, and the team continues to focus on taking share and expanding our service offer. Fabrication activity is solid, although customers continue to face some labor challenges. Zinc LME prices have dropped significantly, and there continues to be some supply chain delays that we are normally able to cover with our existing inventories. Zinc costs in our kettles will continue to rise much of this year. Pre-coat is seeing stable market conditions and is focused on profitable growth. We continue to hire the normal levels of customer-owned steel and aluminum coil inventory continues to provide production stability while posing some logistics challenges. They're experiencing inflationary increases in their costs, including warehousing, transportation, logistics, and labor, but have been able to pass through price increases to its customers to offset the majority of the inflation. Paint is generally available, but there continues to be some shortages in PVDF, which the team has been offering alternatives for. So much like EZZ Metal Coatings, the pre-code team is meeting market challenges and overcoming them while generating strong operating results. Due to the recently completed transactions, we will not be issuing full-year guidance since we do not want to attempt to estimate equity income from the new Avail Infrastructure Solutions joint venture as the new organization settles in. And we are still working purchase price accounting analytics for pre-code. As with AZZ metal coatings, pre-coats first half is stronger than the second, and the third quarter will tend to be somewhat lower than the second quarter, and with the fourth quarter being the weakest for both segments due to the winter impact on the construction markets. Additionally, both have historically proven to be very resilient during previous recessionary cycles. This is due to about 75% of their costs being variable, so they can shed costs quickly. Finally, I want to end where I started today's call. AZZ is taking the actions necessary to become a pure-play metal coatings leader in North America. Our focus is on expanding our leading market positions in both AZZ metal coatings and AZZ pre-coat metals, positioning AZZ as a leader in both the pre- and post- fabrication metal coatings markets. Our short-term focus continues to be on seamlessly onboarding pre-coat metals and paying down debt. We have quickly reduced our leverage and attempted to reduce our interest rate risk while continuing to pay a dividend. I believe we have built a stronger, more focused, and resilient company with market-leading positions, strong cash generation, and we are positioned quite well to deliver value to our shareholders well into the future. With that, we'll open it up for questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question today comes from John with Sidoti & Company. Please go ahead.

Good morning, guys, and thanks for taking the questions. I'd like to start out with one of the last things you pointed out about the seasonality in pre-code. Can you kind of quantify how much of a revenue drop-off pre-code's had historically in your fourth fiscal quarter relative to its peak kind of revenue in the summer months?

You know, I think... We're trying to wrestle with a couple of things because the unusual price increases from paint has kind of changed that mix a little bit. But I'd say generally it's probably around 10-15% as it falls off in that second half and it kind of trails down third quarter and then into fourth quarter with the winter being the slowest.

Got it. And going to price increases, have you gotten any pushback on price increases in either pre-code or AMC?

You know, I think if you ask our sales folks, they say it's always a battle. But when all our customers are experiencing the same inflationary pressures, so labor going up, everything from transportation, energy, utilities, transportation, feedstocks, The only difference between the two is that Zinc LME, as we've mentioned, has been going down, but offset by spot market premiums being up considerably versus paint, which just continues to go up. So we passed through the paint with a markup, and so You know, that's generally the difference, whereas zinc is just a feedstock, and we price separately of that.

Got it. And just one more, if I could sneak it in. You mentioned that Precote manages inventories for its customers, which is both a positive and a negative. Does that mean it's kind of resistant to any kind of shutdowns and temporary shutdowns, I would say, in steel production or anything like that? They don't see it immediately or through the dynamics what's going on maybe in the steel market a little bit clearer?

Yeah, that's one of those interesting things. To me, it's like a machinist with pallets of stuff sitting there to be processed. So we're carrying, I'd say normally we carry 300,000 tons, and we're carrying probably 20%, 25% more than that. So that's the abnormality. And it varies by plant, but for the most part, that gives us the stability. Basically, we've got four or five months backlog, so to speak, sitting in our warehouses waiting to be processed. So, yeah, while that could be delayed in terms of when it gets processed, it is going to get processed. And a lot of it's, you know, it varies between how much is imported and how much is from domestic steel and aluminum suppliers. So, that's why I say we like the fact that it's there because we know it is going to get painted. And that's our primary business. On the other hand, we've got an awful lot of it. So, it's... You know, it's a little bit of a trying around logistics and forklifts and cranes to get things moved around and stored. So that's the incremental cost. But on the other hand, it's good to have it there.

Got it. Thanks a lot, Tom.

Let's talk it back to Q. The next question comes from Noel Diltz with People. Please go ahead.

Hi, thanks. I'm just on the legacy metal coatings business. I was just looking back in it back into the, I guess, early 2000s, and it seems fairly inconsistent as to whether or not, you know, the third quarter is stronger than the second quarter. It seems like about 50-50. So I was hoping you could dig into your expectations a little bit more for the back half of the year. You know, obviously, you had pretty nice growth in the second quarter. in terms of metal pounds that you processed. Could you just speak to, which I think of as sort of a proxy for volume, so could you just speak to your volume expectations in the third and fourth quarter? And also if you could touch on kind of the key market drivers, how you're thinking about the relative strength in some of the key metal coatings markets in the back half of the year. Thanks.

Yeah, that's a good question, Noelle. Metalconia tends to, third quarter can be relatively strong. So, you know, they tend to be more balanced across their quarters. What we are seeing, of course, is I think the headwinds for us is that rising cost of zinc in our kettles. So we've gotten our prices up and been able to maintain that with our high service levels. But now our costs are catching up in terms of what's in our kettles and what's going to remain in our kettles. And then that starts to flip over probably towards the end of the year. So while the volumes are going to be solid and look to be solid through the third quarter generally, we will have some margin impact. So we're talking more about the income side. Not that they're going to fall dramatically off of what they've been, but we've consistently said that at some point they do return to that 21% to 23% operating margin range, and we would anticipate that as we get into the second half.

Okay, so in that 21% to 23%.

So that's sort of what you're thinking.

Okay.

Yeah. Yeah.

Yeah.

We're not talking about falling off the cliff. And then in terms of markets, you know, sadly, out of hurricanes, you do get some opportunities, but that tends to take a while to manifest itself. Two, construction activity remains solid for the most part. Solar continuing to do well. The things that have slowed up, recreation, obviously, the people brought their docks back in, so we got things like that that have slowed up. The normal summer activity has gone away. But transportation, trailers, bridge and highway infrastructure, you know, that spend is still coming, and we're seeing more of it. Missing anything? T&D?

T&D is still strong.

Yeah, T&D is still strong. So most of the markets outside of the recreation and some of the ag is pretty solid.

Okay. And then kind of in the concluding comments, you talked about both metal coatings and pre-coat being pretty resilient in downturn, but emphasized more the cost piece of that because of the 75% of cost being variable. Could you talk about, you know, I guess how you're thinking about demand patterns in a weaker economic environment? You know, it seems like for pre-code in particular, you sort of have these factors that are driving increased penetration of pre-coded metals, but at the same time, some markets that could be impacted. You know, sort of net-net, can you give us some thoughts on just generally how you're thinking about how volume might trend in a weaker economic environment?

Yeah, I think I'll speak to the metal coating side, and then David can talk to the pre-code side. Metal coatings, traditional stuff, I mean, we continue to see the infrastructure spend because there's just catch-up that has to happen still. And then the utility spend is going to continue as well because we're behind, and so renewables are continuing to come into the market. So even in a more recessionary environment, while that may slow, it's not going to stop. And so we The discretionary part becomes more the recreational, the residential construction, industrial, some of the industrial construction stuff. So that's why I say it's pretty resilient in the part that tends to be the stuff we – well, we like all of it, so I don't want to say we don't like any of our customers. But, yeah, the stuff that tends to absorb a lot of hours in our facilities tends to remain – pretty resilient. So, you know, it's going to fall off 7, 8, 10%, which we can usually absorb in terms of the number of shifts we're going to run and how much labor we bring to bear. And that's, you know, that's just, as you look around the country, we tend to be situated more in the south, midwest, upper midwest, and then, of course, out towards Arizona, Nevada, So tend to be in areas that are still growing from a population standpoint. So still need infrastructure, still need construction. David?

Yeah, on the pre-code side, Noel, you know, their biggest market that they continue to serve is the general construction market. And within there, you know, a couple of bright spots in particular for them have been the manufacturing sector and the warehousing sector within the broader construction markets, which have been holding up really well. You know, so I think we'll continue to see a focus there. And, of course, as Tom mentioned in the call, seasonal slowdown. And then as we look about, you know, recessionary trends, the other thing, too, to point out is that we do have in our investor deck a slide that talks about how both businesses, pre-coat and AZZ metal coatings business, held up through the last recessionary cycle. And Again, I think that as you look at that and our investors look at that, that gives them some type of indication, and that's what we're looking at as well on how we expect to perform as we enter into another cycle.

Okay. Thank you. Thanks.

The next question comes from John Bratz with Kansas City Capital. Please go ahead.

Question back to you on pre-code. I believe they had some exposure to the residential market. I thought maybe it was like 15%. And, you know, home building market has sort of shut down. Are they seeing an impact on that end market?

We're seeing some impact on the residential side, John. And, yeah, there's the overall exposure is, yeah, about what you had anticipated. We kind of group it. collectively within the construction market in general. And within construction, it's about 20% of the overall construction business that we see.

Okay, okay, okay. And Philip, back to the debt on your balance sheet. Obviously, you paid some down now, some additional debt down, and I think you're around about a billion dollars. And with your swap, What are we talking about in terms of, you know, all-in cost of that debt at this time? Assuming, I mean, obviously it's going to go up when the Fed raises rates, but where do we stand at this time?

Yeah, on the half, $550 million that's hedged is running about 8.5, and the balance of that debt is running at about 7.5. So as dip and win rates further increase, We're protected on a portion of that, and then we may see some increase on the floating piece.

Okay. Did you say about half is protected?

Yeah, we have about five. We entered into a floating rate swap for $750 million, and we've got about $1.1 billion sitting on the books today.

Okay. All right.

All right. Thank you very much. Thanks, John.

As a reminder, if you would like to ask a question, please press star then 1 to be joined into the question queue. The next question is from Brett Kearney with Gabelli Funds. Please go ahead.

Hi, guys. Congrats on the continued strategic momentum, and thank you for clarifying how solid the results were this quarter on a combined company basis.

Thank you.

The question I had, I know it's early days, but as you have kind of gotten together with the pre-coat team more, I'm curious, Tom, at this point, you know, opportunities you guys are, you know, uncovering in terms of best practices you guys have at AZZ as well as what Kurt and the team are doing on the pre-coat side and you're seeing to kind of cross-pollinate some of those ideas going forward.

Yeah, it's interesting. I've been able to get out to all of the pre-coat plants and also – go to some of their sales events. And, and I think we, we see a couple of different opportunities. One from a sales opportunity perspective, uh, I'd have to say that our sales teams get along really well. And, uh, so we, we see upside potential just talking to some of the large customers that can, that either use both galvanizing and pre-painted metal, uh, finding more ways to work with them and, uh, and increase our presence across both sides is, we haven't quantified that yet, but there's quite a few of those opportunities as we talk about some of our large customers that may do business with one side but not the other currently, and may or may not have been aware that the other side even existed until recently. So I think that's, That's almost seamless, but we're still working on identifying those opportunities and making sure we have that kind of outreach and that our sales folks understand what the benefits of hot dip galvanizing is to customers and our metal coatings folks understand what pre-coat brings to bear. So we're really excited about that because those are future growth opportunities and leveraging our network, which tends to overlap. From an operating standpoint, I think this is, you know, we just, we look at the fact we, EHS is kind of opportunity to share best practices. We deal with furnaces and ovens and we handle material. So we move stuff. I think we're still in the early days. We've got a set of meetings teed up over the next several weeks. to really work on some of those issues now that we've been able to visit each other's plants and we'll continue doing that. Our board has requested we start quantifying this and cataloging it, so we're going to get on that effort. But I think it's going to be more significant than what we originally teed up, and especially from a customer growth perspective. So we're excited about that, and especially the fact that we pretty much speak the same language when it comes to coatings, material handling, and how we deal with our processes.

Terrific. Thanks so much, guys. Sure.

The next question comes from Bill Baldwin with Baldwin Anthony Securities. Please go ahead.

Good morning, and thank you for taking my question. I just wanted to see what kind of color or insights you can offer on your capital spending allocations for this year as far as the nature of the types of projects.

Most of what we had underway for metal coatings and pre-coat, interestingly, kind of similar, mostly on the material handling. One of the bigger ones on the pre-coat side was just finishing up – up at one of the St. Louis facilities, which was an expansion and adding a drive-through bay just to de-bottleneck it and give it, I think, 10,000 square feet, probably even more than that, of additional warehousing space. And so that project is just finishing up. So most of the capital had already been deployed on it. The one thing that we're struggling to get spent is the capital on forklifts the lead times on those is i think 56 weeks so some of that's going to get a roll over in the next year and not get deployed this year what else philip well that's the big things i mean obviously we're looking at just normal ongoing maintenance of our facilities kettle changes and and equipment for processing on metal coast Yeah, we did have quite a few kettle changes through the summer, and I think we got a lot of those knocked out. So we're in pretty good shape going into the end of the year. But, yeah, with 47 kettles out there, I think, somewhere in there. So, yeah, you get 8 to 10 kettle changes every year. And so just keeping up with that, keeping up with on the pre-code side, there's some controls, vision controls, things that they've been investing in. A lot of that's been deployed and continuing to get deployed. So just improving productivity, efficiencies, normal, normal stuff. And, um, uh, and also now, uh, the additional CapEx that's been deployed for some of the warehousing, uh, call it de-bottlenecking, if you will, to, uh, to take care of the incremental inventory. Uh, but, but fairly normal. And, uh, And the biggest project being that expansion up in St. Louis that's wrapping up.

Do you have, I feel right now going forward, what you think kind of your level of maintenance capex will be for the combined operation now?

Yeah, about $25 million.

Okay. are there further opportunities for uh increased uh investment in productivity and automation or software or whatever to increase productivity of uh of either operation either metal coatings or pre-coats i'm sorry tom go ahead absolutely yeah no absolutely i think uh on the metal coating side we've you know for the most part between the digital galvanizing system which is implemented

pretty much everywhere, and continuing to expand its capabilities. From a maintenance production standpoint, facilities are in good shape. So, you know, I think we've got the skin plant expansion going on in Arizona. Pretty much normal stuff on the metal coating side. And then R&D, which, you know, we've ramped that up, and we've got some nice, things coming out of R&D on the hot dip galvanizing side. But those are actually relatively small with big benefits that come out of them. On the pre-coat side, I think continuing to invest in advanced controls, improving productivity, helping drive throughput. We've got a slitter that's ready to be installed up in one of the St. Louis plants. So adding those services to give us, you know, those value add services that tend to provide us additional sales volume, but also incremental profitability. So there's several of those opportunities as we get into our normal annual planning process and start laying that in for next year. So just on my tour through the facilities, great teams out there. doing a lot of good things, taking care of their customers. And in some cases, they just need a little more room to be able to handle more. And in some cases, they need to expand their warehousing space to be able to drive another $5, $10, $15 million of throughput through an already existing high-performing facility. So, So I think those are the kinds of things that we're looking at and that we'll have opportunities to invest in. And this, you know, not huge amounts of capital, but nice returns.

This concludes our question and answer. And our next question comes from Noel Diltz with People. Please go ahead.

Just, again, to make sure we're all thinking about this correctly, for pre-code margins, you know, obviously you called out sort of the headwind in the quarter and ongoing around inventory. You know, is that kind of 2 million headwind that you discussed the same sort of level we should think about as we get to the November and February quarters, or do you expect it to get a little bit better? I'm just trying to get a sense of you know, the right, again, range of maybe how to think about pre-code EBITDA margins in the back half of the year and even into 24. Thanks.

Yeah, I think the target for pre-code is still going to be above the 20% EBITDA in the short term as we come into the lower volumes in the second half of the year. I think we will face that. Those headwinds, we would hope to overcome the We can't overcome the purchase price accounting impact, but we'll be working to overcome the efficiencies, the productivity to do a better job of managing inventory and getting it located better. So I, while I see, you know, I don't see that changing much in the third quarter, but I, you know, I see us working to get that rectified and move in the right direction as we, as we get into the, to the, towards the end of the year. And then obviously as we go into next year, first quarter tends to be a really, really strong quarter for pre-code. And as we pick that up, we look, we, we, we definitely want to be efficient and productive. and hopefully pick up that $2 million plus some as we get into the new fiscal year. So yeah, we're not getting on the 20% margins.

Okay. And then I know you mentioned you don't want to estimate infrastructure solutions contributions given the transactions ongoing, but I guess just a few thoughts there given your continuing ownership. You know, historically, the November quarter has been pretty strong, just given fall turnaround work. You know, are you seeing that continue? Obviously, backlog looked pretty good in the quarter. Could you kind of give us some directional, some thoughts on just directionally how we should think about the back half of the year? Thanks.

Sure. We left them. Of course, we're still 40% owners. So, yeah, we left them with a strong backlog. and help build that, and we do have their results in our numbers for September fully. Fall turnaround season was strong. Good activity, some international activity, which usually bodes well. The electrical, the battery energy storage activity was really good. Switch gear was good. Backlog was strong. The businesses were performing pretty well in general. I think the issue, of course, is just you got some new, the ownership Fernwell folks are great. So, you know, we're only kind of alluding to the natural changeover as a new CEO comes in and gets acclimated and as they adjust and We also have the TSA, so the transition service agreements to deal with, which I think we've set up in a really good way. So I'm sure they think it's a profit center for us. We think it's just a cost. So, you know, these are all things we just, I just want to be cautious because this is that these first couple of months are all transitionary and And as we deal with that and get into the fourth quarter and probably have our first board meeting, we'll get a better handle on that outlook. But from a pure backlog and operating perspective, as we talked about, they had a great second quarter, dramatic improvement over the second quarter prior year, and we're set up for a very nice third quarter.

Okay. Thank you.

Uh-huh.

The next question comes from Trip Rogers with Westwood. Please go ahead.

Hi, thanks for taking my question and congratulations on the results. I guess just to state the obvious, looking at the market reaction, I mean, there is a disconnect here between the results you're producing and your communication of those results. And I mean, I think a lot of it comes around your guidance and your lack of that. I mean, I understand to answer your last question, how you wouldn't want to, you know, the uncertainty with providing guidance to the new joint venture, but is there a way we can get a better sense of what those earnings will be? I mean, this is a deal you've worked on for quite some time, and just why do we need to wait until the end of the year before we get some better guidance of what the new entity will generate?

Yeah, I think you bring up a really good point, and I think as we look at it in hindsight, we needed to have communicated much better One, about the discontinued ops and what that was going to mean, and that's a miss on our side. I think we've got to do some analytic work. You know, we have a relatively, and I hate to sound like I'm making excuses, we've got a small finance accounting team that's been working on two massive transactions, the closure of AIS and transitioning that, the the accounting work on pre-code, which, yeah, we've had it for a quarter, but we've been working on the purchase price accounting and obviously had some adjustments at the very end, including over this weekend. So, you know, we will get to our analytics and issue at least sales and EBITDA guidance or an outlook as soon as we can. particularly given the market reaction to our lack of doing so. But I also don't want to put anything out there that's just going to be off. And so we've got some work to do, and I think I don't want to peg a date, but as soon as we can get comfortable that we've got an EBITDA outlook for the balance of Q3 and Q4, We would love to put it out there and get our board's concurrence on that. So those are the things we need to work on. The moving pieces are the things around just getting the analytics done and getting comfortable and having our first board meeting with the new partners at Fernwall. talking about the avail infrastructure solutions outlook. So, you know, those are the moving pieces that we have.

Okay, thanks. But point taken.

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

all right well thank you very much for being on the call we do look forward to communicating uh the outlook for the year as well as uh our q3 results if that's the next time we do communicate thank you very much the conference is now concluded thank you for attending today's presentation you may now disconnect