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Good day and welcome to the A

Thanks, Betsy. Good morning and thank you for joining us today to review A

Thanks, Joe. Welcome to A

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 Solutions segment as assets held for sale at the end of the quarter and reported this segment as discontinued operations, which requires us to separate earnings from continuing operations from those of discontinued operations. Combined sales were $513 million, operating income was $79 million at 15.4%, and EBITDA, as Tom noted, of $100.5 million at 19.6% on a consolidated basis. I will primarily focus on our continuing operations as we discuss our results for the quarter and the year-to-date periods. Second quarter sales from continuing operations were $406.7 million. Sales included the first full quarter of A

Thanks, Philip. For Metal Coatings, markets remain active and the team continues to focus on taking share and expanding our service offerings. Fabrication activity is solid, although customers continue to face some labor challenges.

[Operator Instructions] Our first question today comes from John Franzreb 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 Precoat. Can you kind of quantify how much of a revenue drop off Precoat’s had historically in your fourth fiscal quarter relative to its peak, kind of revenue in the summer months?

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 in the fourth quarter with the winter being the slowest.

Got it. And regarding the price increases, have you gotten any pushback on price increases in either Precoat or AMC?

I think if you ask our sales folks, they’d 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

Got it. And just one more if I could sneak it in. You mentioned that Precoat manages the 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 can you just, kind of walk me through the dynamics what's going on maybe in the steel market a little bit clearer?

Yes. That's one of those interesting things and that's why to me it's like a machinist with palettes 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 got four or five months backlog, so to speak, sitting in our warehouses waiting to be processed. So yes, while that could be delayed in terms of when it gets processed, it is going to get processed. And a lot of it's – 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 a little bit of trying around logistics and forklifts and crane needs 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. With that, I'll get back into queue.

The next question comes from Noelle Dilts with Stifel. Please go ahead.

Hi. Thanks. Just on the legacy Metal Coatings business. I was just looking back in it at back into the, I guess, early 2000s, and it seems fairly inconsistent as to whether or not 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. 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 is, 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.

Yes. That's a good question, Noelle. Metal Coatings tends to – third quarter can be relatively strong. So, 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, which - 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 to – 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. And that's 2021 to 2023. So that's sort of what you're thinking. Okay.

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

T&D is still strong.

Yes, 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 the concluding comments you talked about both Metal Coatings and Precoat being pretty resilient in downturn, but emphasize more the cost piece of that because of the 75% of cost being variable. Could you talk about, I guess, how you're thinking about demand patterns in a weaker economic environment? It seems like for Precoat in particular, you sort of have these factors that are driving increased penetration of Precoated Metals, but at the same time some markets that could be impacted, 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?

Yes, I think I'll speak to the Metal Coatings side and then David can talk to the Precoat 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 of their recreational 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 – what we like all of it. So, I don't want to say, we don't like any of our customers. But yes, the stuff that tends to absorb a lot of hours in our facilities tends to remain pretty resilient. So, it's going to fall off 7%, 8%, 10%, which we can usually absorb in terms of the number of ships we're going to run and how much labor we bring to bear. And that's just as you look around the country, we tend to be situated more in the South Midwest, Upper Midwest, and then of course out towards Arizona, Nevada, Colorado. So, tend to be in areas that are still growing from a population standpoint. So, still need infrastructure, still need construction. David?

On the Precoat side, Noelle, their biggest market that they continue to serve as a 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. 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 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 Precoat and A

Okay. Thank you.

Thanks.

Next question comes from John Braatz with Kansas City Capital. Please go ahead.

David, a question back to you on Precoat. I believe they had some exposure to the residential market. I thought maybe it was like 15% and homebuilding 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 yes, there's – the overall exposure is 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. And Philip, back to your – 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 $1 billion, and with your swap what are we talking about in terms of 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?

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

Okay. Did you say about half is protected?

Yes, we have about – we've entered into a floating rate swap for 550 million and we've got about [1.1 billion] [ph] sitting on – just under [1.1 billion] [ph] sitting on the books today.

Okay. All right. All right. Thank you very much.

Thanks, John.

[Operator Instructions] The next question comes 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.

Question I had, I know it's early days, but as you have kind of gotten together with the Precoat team more curious, Tom, at this point, opportunities you guys are uncovering in terms of best practices you guys have at A

Yes, it's interesting. I've been able to get out to all of the Precoat plans and also go to some of their sales events and then I think we see a couple of different opportunities. One from a sales opportunity perspective, I'd have to say that our sales teams get along really well. And so, we see upside potential just talking to some of the large customers that either use both galvanizing and [pre-painted metal] [ph], finding more ways to work with them and increase our presence across both sides. 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 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 Precoat brings to [bear] [ph]. 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 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 and 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. Just wanted to see what kind of color or insights you can offer on capital spending allocations for this year as far as the nature of the types of projects? Most of what we've – we had underway for Metal Coatings and Precoat interestingly kind of similar. Mostly on the material handling. One of the bigger ones on the Precoat side was just finishing up at one of the St. Louis facilities, which was an expansion and adding a [drive thru bay] [ph] just to debottleneck it and give it, I think 10,000 square feet, probably 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 [forklift] [ph], the lead times on those is, I think 56 weeks. So, some of that's going to roll over in the next year and [Technical Difficulty] this year. What else, Philip?

That's the big thing. Obviously, we're looking at just normal ongoing maintenance of our facilities, kettle changes, and equipment for processing on the [metal coat] [ph] side?

Yes, 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 yes, with 47 kettles out there, I think, somewhere in there. So, yes, you get 8 to 10 kettle changes every year. And so, just keeping up with that, keeping up with – on the Precoat side, there's some controls, vision controls, things that they've been investing in and a lot of that's been deployed and continuing to get deployed. So, just improving productivity efficiencies, normal stuff, and also now the additional CapEx has been deployed for some of the warehousing, call it debottlenecking, if you will to take care of the incremental inventory, but fairly normal. And the biggest project being that expansion up in St. Louis is 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?

Yes [indiscernible] million.

Yes.

Okay. And are there further opportunities for increased investment in productivity and automation or software or whatever to increase productivity of either operation, either Metal Coatings or Precoat?

I guess, Precoat is probably the most – I'm sorry, Tom, go ahead.

Absolutely. Yes, no, absolutely. I think on the Metal Coatings side, we've for the most part between the digital galvanizing system, which is implemented pretty much everywhere and continuing to expand its capabilities from a maintenance production standpoint. Facilities are in good shape. So, I think we've got the spin plant expansion going on in Arizona. Pretty much normal stuff on the Metal Coatings side. And then R&D, which we've ramped that up and we've got some nice things coming out of R&D on the hot dip galvanizing side. So, we'll – but those are actually relatively small with big benefits that come out of them. On the Precoat side, I think continuing to invest in advanced controls, improving productivity, open 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 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 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 to take 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 million, $10 million, $15 million of throughput through an already existing high performing facility. 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 not huge amount of capital, but nice returns.

And our next question comes from Noelle Dilts with Stifel. Please go ahead.

Again, to make sure we're all thinking about this correctly, so, Precoat margins, obviously, called out sort of the headwind in the quarter and ongoing around inventory, is that kind of 2 million headwind that you discussed within, 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 the [range] [ph], again, range of maybe how to think about Precoat EBITDA margins in the back half of the year and even into 2024. Thanks.

Yes. I think the target for Precoat is still going to be above the 20% EBITDA in the short-term as we come into the lower volumes in the second half of the year. I think we will face that those headwinds we would hope to overcome – we can't overcome the purchase price accounting impact, but we can over – we'll be working to overcome the efficiencies, the productivity to do a better job of managing inventory and getting it located better. So, while I see – I don't see that changing much in the third quarter, but I see it's working to get that rectified and move in the right direction as we get into 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 Precoat. And as we pick that up, we definitely want to be efficient and productive and hopefully pick up that 2 million plus as we get into the new fiscal year.

Okay.

So yes, we're not getting on the 20% without margins.

Okay. And then, I know you mentioned you don't want to estimate Infrastructure Solutions contributions given transactions ongoing, but I guess just a few thoughts there given your continuing ownership. Historically, the November quarter has been pretty strong just given fall turnaround work. Are you seeing that continue? Obviously, backlog looks 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 and of course we're still 40% owners. So, yes, we left them with a strong backlog and help build that and we do have their results in our numbers for September fully. [First] [ph] turnaround season was strong. Good activity, some international activity, which usually bodes well. The electrical, the battery energy storage activity was really good. Switchgear was – 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, [indiscernible] folks are great. So, we're all 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, 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 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 an 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.

The next question comes from Trip Rodgers 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 wanted to – the uncertainty with providing guidance for 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 the deal you've worked on for quite some time. And just, why do we need to wait till the end of the year before we get some better guidance of what [indiscernible] generate?

Yes, 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. We have a relatively – and I hate to say, [like I make] [ph] an excuse is, we've got a small financial county team that's been working on two massive transactions, the closure of AIS and transitioning that. The accounting work on Precoat, which, yes, 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, 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 [indiscernible], 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 Fernweh and talking about the Avail Infrastructure Solutions outlook. So, those are the moving pieces that we have.

Okay. Thanks.

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 the outlook for the year, as well as our Q3 results, if that's the next time we do communicate. Thank you very much.