AZZ Inc.

Good morning and welcome to the AZZ Inc. Second Quarter 2024 Earnings Conference Call. All participants will be in 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 your telephone keypad. 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 Sandy Martin, Investor Relations. Please go ahead.

Thank you, operator. Good morning and thank you for joining us today to review AZZ's financial results for the fiscal 2024 second quarter ended August 31, 2023. Joining the call today are Tom Ferguson, President and Chief Executive Officer, Philip Schlaum, 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. 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. 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 followed 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. 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 included 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, then pass it to Philip to walk through our detailed financials. After that, Dave will provide an update on AZZs and markets. And then I will 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 and disciplined execution of AZZ's 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. 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. Our Metal Coatings 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, and the Preco 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 EBITDA margin performance. Despite slightly lower consolidated sales for the quarter, we exceeded our EBITDA target margins for metal coatings and performed nicely within the range for pre-coated 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. In addition, we generated adjusted EBITDA of $88 million or 22.1% of sales. Our second quarter metal coatings EBITDA margin was 30.4%, and our pre-coat metals EBITDA 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 were 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. 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. Ricoh Metals, which operates automated continuous flow paint coating lines, continues to enhance CoilZone, its proprietary application for managing customer inventory and providing them real-time access to their project scheduling and inventory. These technology-driven platforms coupled with our servant-minded leadership teams position AZZ as a sustainably differentiated metal coatings business for our customers. As Philip would 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. 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. 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. We believe that AZZ's pure play metal coatings businesses are well positioned to uniquely 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. 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, ACC Metal Coatings reported record sales for the second quarter with sales increasing 2.4%. AZZ metal coatings continue to see some pressure in end markets that included appliance, HVAC, transportation, and construction. 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-coated 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 administration 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, SG&A expenses for the fiscal 24 second quarter would have been $30.5 million or 7.7% of sales for the quarter. 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 the second quarter 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. 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-code 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, 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 diluted earnings per share of $1.27 was 5% above the adjusted diluted earnings reported of $1.21 in the prior year second quarter. Since the preferred convertible shares are diluted 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, which resulted in 29.2 million weighted average shares outstanding in the quarter. and for the six months ended August 31st. 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 ADZ 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. 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 2.5% to 3% over the next 20-plus years, compared to the company's ability to utilize its strong balance sheet and cash flows to fund the project. 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 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 margins. 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 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 B, reducing interest rates by 50 basis points from SOFR plus 425 to SOFR plus 375, and removed the 10 basis point credit spread adjustment as part of the transaction. 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 common shareholders of $8.5 million and $7.2 million to our Series A preferred shareholders. We made no share repurchases during the quarter. 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 availed 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. With that, I'd like to pass the call over to David.

Thank you, Philip. Good morning, everyone. What strengthens our competitive moat that Tom described earlier is our number one market position in post-fabrication hot tip galvanizing as well as independent coil coating. AZZ's 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. 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 multifamily segments surged by 15.6% to a three-month high. We are in the early innings of critical infrastructure projects associated with the AIIJA and CHIPS Act 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 monopoles and lattice towers. Additionally, solar and renewable projects continue to demonstrate pockets of business strength regionally in the U.S. Finally, although our business saw softer demand in consumer, transportation, and residential construction end markets in Q2, non-residential construction saw strength in warehousing, manufacturing, and agriculture. We remain encouraged by longer-term trends from the 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. With that, I would now like to turn the call over to Tom.

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. For metal coatings, our fabrication customers are continuing to cite 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 and zinc as demand shifts due to weather or other macroeconomic impacts. 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, both of our segments benefit from diverse end market activity in growing industries. We are carefully monitoring the demand environment and economic trends, which we have used to develop our guidance. Given the operational improvements of Preco and improved customer inventory situation, we anticipate a stronger second half as compared to the second half of the last year. Our Preco team has demonstrated their ability to drive operational efficiencies to sustain their margins while 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. 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 through market expansion and long-term supply agreements with Blue Chip customers. We are reaffirming our fiscal 2024 sales guidance of $1.4 to $1.55 billion. adjusted EBITDA guidance of $300 to $325 million, and adjusted EPS guidance of $3.85 to $4.35. And as Philip mentioned, our capital expenditures for fiscal 2024 are 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 it at this point. We believe Avail is progressing well on its business plan and we will provide an outlook on our 40% equity portion when it makes sense. 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 significant cash flow with a focus on disciplined capital allocation. 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. Now, we will have the operator open up the call for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And our first question comes from John Transrub of Sidoti & Co. Please go ahead.

Good morning, everyone, and thanks for taking the questions.

Good morning. 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-CODE markets. Do any of the three that you highlighted, HVAC, transportation or construction, are they an improved maybe cadence than we saw, than we knew you were expecting maybe as you're going into the second half of the year this year?

Yeah, John, this is Dave. I think as you look at it, you know, 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 end markets are seeing the bottom and feeling 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.

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?

Yeah, John, as we spoke, you know, 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 to help reduce debt further through the year.

You know, I'm just curious. With the lower season now in the second half of the year, does working capital requirements come down in the second half of the year? Just maybe some color in working capital?

Yeah, absolutely. I think I 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 for our zinc is going to continue to come down. So that inventory level will reduce as the year plays out.

Great. 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 is that, what are your thoughts there and 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. So we see them post their audit 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 add, now that they have completed the audit on their books, getting the past adjustments out of the way so that they can just forecast based on actual income going forward so i i think we will get into a cadence here shortly uh philip and i are both on that avail board so as we're able to do that um you know i'm hopeful that we'll be able to give you know some some actual guidance around it and uh and provide more uh more color uh on a quarterly basis great thanks tom i appreciate you guys taking my questions thanks john

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

Hey, good morning, guys. Congrats on a nice quarter. Thank you.

Good morning.

Thanks. High 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. A little bit down in 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, though, we're lapping a pretty weak, particularly pretty weak fourth quarter. So even though we've sustained our sales down 5% on significantly 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. You know, we look for pre-coat to, you know, 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, you know, we just look for them to continue providing that outstanding service that earns their customers business. So, you know, Should be another good half for them.

Okay, great. And then one thing that struck me as really positive was the pricing in pre-code. I think you said plus 7%. Is that kind of a one-off this year? How should we 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 paint suppliers that continue to increase price So, you know that that that's really the flow through is what you're seeing the flow through on on that paint cost price relationship plus driving the you know pricing value on on mix so 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, 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 defendable.

Okay. And then some of my clients are kind of stressed out about where rates are and electric utility stocks have gotten hit. But from where you sit, it doesn't sound like you're seeing any impact. I mean, you said T&D is 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 backlogs and expectations.

Yeah, for the most part, we're seeing – know customers and it is it's the diversity of the markets uh 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 bridge and highway projects uh new utility projects growing population so a lot of infrastructure whether it be on the t d uh the solar front or or on bridge and highway things like that so you know we we do as 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.

Great. Thank you, Gus.

The next question is from Mike Heim of Noble Capital Markets. 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. Then as we go through Q2 and Q3 and Q4, it should be pretty well balanced between the two quarters, maybe a little heavier in the fourth.

Okay, and then, Philip, 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 into too much, 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 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 other states.

Okay. And then finally, as we kind of talk about some of the adjustments to GAAP that you've provided, I assume that the legal settlement's probably one time in nature. What about the amortization of the intangibles? Can you just talk about the ongoing nature of that?

Yeah, the amortization 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 ad backs. 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.

Okay, thank you very much. Thank you. Thanks, Mike.

The next question comes from Lucas Pipes of B Reilly Security. Please go ahead.

Thank you very much, operator. Good morning, everyone. Good job on the quarter and also good job on keeping the Washington project ahead of schedule and budget. That's not something I hear very often these days. Thank you. I wanted to ask about projects more broadly. 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? If so, what geographic region are you most focused on? What markets are you focused on and in what stages would those potential greenfield projects be today? Early planning, middle planning, late planning would really appreciate your color on that. Thank you.

Yeah, we actually don't have any. Greenfields, we've done, this is actually the second one since I've been here. The first one was galvanizing plant in Reno about five years ago, and then this one in Washington, Missouri. Usually 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 pipeline is, 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 coil 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, 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 NDAs in place. 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 demand increase, particularly on the cold coating side going forward. We did not make any progress. any specific commitments as to the need for building another greenfield. But continuing to look at 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-coat. We do have similar opportunities with the metal coating side. So, you know, just continue to take share with our current businesses.

That is very helpful. Thank you. Quick follow-up on this. The de-integration of vertical capacity at some of your customers, what would be the pitch to customers? Where do you think you would add the most value in such a buyout?

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 running 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. So taking those assets, and we're not talking about large amounts of money, but we are to take those assets off their books 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, them being able to depend on our capabilities, which we have a great track record of doing.

Very helpful. Thank you for that, Collar. A quick one for a second question. Just kind of leverage targets longer term. Could you remind... us, where your head is at right now given rates and the broader backdrop on financing markets. Thank you very much.

We ended the quarter at around 3.4 times leverage with a target to get down to three times leverage by the end of the year with the change in the 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.

Yeah, 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 our current debt reduction so far year-to-date, the small improvement in the repricing of our current debt, and just the ability to go ahead and perform on our working capital. So stick with the target.

Very helpful. Gentlemen, really appreciate it, and continued best of luck. Thanks, Lucas.

The next question comes from John Brotz of Kansas City Capital. Please go ahead.

Good morning, everyone. Phil, 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 bps reduction and a billion dollars outstanding. It equates to about $5 million per year. And, you know, we're actively working with our bank group, and we'll continue to watch the markets for opportunities to continue to do things that can help, 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 going to work through that – 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 we've got some of our metal coatings team sitting here and they're looking with inquiring faces as to what that's going to do to their budget for next year. But But we're confident. We had talked about how they've done a great job of providing price for value. But we do think this is about within the next month or so is when we're having those negotiations with the zinc suppliers. 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. So, you know, that's 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 tailwinds.

Can those premiums vary quite a bit year to year?

They can vary quite a bit year to year, and they have. Just the last year movement from, you know, call it 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, you know, come into play as we make our commitments on zinc and work with our suppliers who have been We feel good about the supply chain right now and the availability of zinc, which allows us to bring down some of our safety stocks. Okay.

Tom, looking ahead sort of into 2024, the new Washington facility, what might, in terms of startup costs, what kind of net contribution initially will Washington have on your – on your finance or on, let's say, your income statement, will it be a little bit of a drag? Will there be some cost to absorb before it becomes additive?

We've got all those factored in. So, you know, with the formal and complete startup 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. So, yeah, there's some of that in there, but it doesn't go on for a long period. Right, right.

Okay, all right. Thank you very much. Thanks, John. Thanks, John.

The next question comes from Brett Kearney of Gabelli Funds. Please go ahead.

Hi, guys. Thanks for taking my question, and congrats on the continued momentum. Thanks, Brad. Thanks, Brad. On pre-code metal, it's great to see the improvement and consistency in margins this fiscal year. You know, I think it sounds like a lot of the heavy lifting was done, eliminating some of the excess warehousing expenses. I'm just curious how you guys are feeling about, I guess, the sustainability of margins at that business here or even room for potential improvement. 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 feel good. The discipline and the focus from the Preco Metals team has been really great. And getting rid of a lot of that excess customer inventory has, you know, you can walk into sites, they're cleaner, they're easier to maneuver. 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 solutions to our customers. And continuing to inventory a whole bunch of customer metals. 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 I'm never going to say it's easy because the team up there would shoot me, but uh but i think they are they're in a in a good cadence and a good rhythm and then they are we do have the three or four sites uh that that uh you know it shifts but uh because we had there's still three of the four but one is now operating much better uh we're focused on 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 uh and by the way these this um When I mentioned the D vertically integrating some customers, that also gives it some volume, which 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 go beyond it as we add other services. And we have deployed capital over the last 18 months. to new slitters, new capabilities, and all that's already embedded up and running and providing value now.

Excellent. Very helpful. Thanks so much, Tom. All right.

Thank you.

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.

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