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Good day, and welcome to the A

Thank you, operator. Good morning, and thank you for joining us today to review A

Thank you, Sandy. Welcome to A

Thanks, Tom. As Tom noted, we closed on the divestiture of our controlling interest in the A

Thanks, Philip. Market activity generally for Metal Coatings is normal given we are in the seasonally slower winter months. Fabrication activity remains solid.

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from John Franzreb with Sidoti & Company. Please go ahead.

Good morning, guys and thanks for taking the questions.

Good morning, John.

I'd like to start with the Metals Coatings business and the -- incurring the high zinc cost. Can you talk a little bit about where you stand as far as those costs coming down and what's the margin profile look like in the current quarter versus Q3?

On the margin profile, I think our zinc has peaked in December. And so we'll start to see some decrease as we move forward into the fourth quarter and into fiscal year 2024.

Okay. And what was the impact in Q3 of the higher zinc on the segment in Q3?

We really don't disclose that. But I'd say typically, we're -- well, because of -- keeping in mind that our -- we try to price in line with those zinc costs, so while we've kept our pricing discipline, I think the overall impact, we probably -- I'd say, we're looking at maybe 100 basis points overall, just kind of that headwind as we have about six months of zinc in our kettles and dependent on -- but there's a range of cost in each kettle across the fleet.

Okay. And on the precoat side of the business, you talked about productivity issues at several plants where I thought you said, Tom. And you also talked about lower volume hurting the op margin profile by about 100 basis points. I guess two questions here. Is the balance of the volume sequentially? Is that the productivity issue? Is there anything else going on? And can you just remind us what the productivity issues are and when do you expect them to be resolved?

Yeah. We've got a couple of different things going on. I think we've mentioned the very extremely high levels of customer inventory, which if you go into one of -- most of precoats plants, that tends to, to get in the way of being efficient logistically and moving materials which were a material handling business. So that's in the majority of plants that high inventory issue. As we noted, that's coming down and I think, we're probably within a couple of three months of being to more normalized levels in the majority of the plants. We do have three or four plants that have struggled with, I'll call it, the mix of their business, so taking some of the lower margin type activity to maintain absorption levels and keep flow. That's something that's going to take us probably a couple of quarters to work out. We've made some adjustments. We have several initiatives. There's a really good team within precoat of operating support and focus on quality. So -- but that's going to take a couple of quarters. We're going to be into next year before we see that move significantly. In terms of -- we talked about the fixed cost leverage, that deleveraging effect as we had talked about, kind of just mostly because of how our fiscal quarters fall for precoat tends to hit the worst five months of the year in the third and fourth quarter. So fourth quarter is basically all winter, which construction activity is less and a lot of the metals building customers are kind of managing their inventories and managing their business. So that part of the fixed cost deleveraging will continue through the fourth quarter. And then we hope for an early spring in March and bounce back to the really strong first and second quarters.

Okay. Thank for taking my questions. I get back into queue.

All right. Thanks, John.

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

Hi. Thanks for taking my question. First, I was wondering if you could expand on the underperformance that you mentioned in Surface Technologies. And if you could quantify that impact, that would be great. And maybe how quickly you think that you'll start to make some of those improvements that you referenced?

Yeah. It's not a huge impact overall, but it's enough to move the needle. So you're looking at a business of, what maybe $6 million, $7 million a quarter, but really low margins lower than we've experienced. So that the leadership changes were made several months ago and so I think that takes a little bit of time to gain traction. We like the initiatives that the team has going there. But I think we're going to be into the first quarter probably well through spring before we start to see any significant improvement there. Part of it is just making sure we're going after the right kinds of business. We find powder coating to be better than the plating side. So these are all adjustments in how we're targeting the customers, how we're approaching the business and then driving the normal focus on efficiencies, productivity at the six plants.

Okay. Great. And then I recognize you said you're giving guidance in a few weeks. But maybe could you give us some early thoughts on how you're thinking about the outlook, particularly for Precoat as we look into the next fiscal year? If you could just walk us through some of the puts and takes in terms of growth. I know obviously, you're continuing to gain share or see increased penetration of pre-coated metals. But I would think some of the more residential or consumer facing parts of pieces of the business might see a little bit more of a headwind. So could you just give us a sense of sort of how you're thinking directionally about growth? Thanks.

Yeah. I think when it comes to residential construction isn't a huge piece. I'm going to let David talk to the markets a little bit here in just a second. But -- so for Precoat, the focus is obviously, it was disruptive to the Precoat leadership team going through this whole process and then coming on board with A

Sure. Thanks, Tom. Yeah. Couple of things, Noelle, non-residential construction still remains pretty good, particularly on the Precoat side with metal intensive sectors like warehousing and manufacturing faring pretty well. We do have a specification of pre-painted insulated metal panels and things like data centers and cold storage construction, which continues to be a positive trend for them. When you take a look at the residential construction, as you know, single-family housing starts have struggled in the broader market, but multi-family remains quite strong. We do have the use of prepayment metal roofing, continuing to gain traction in multiple markets within residential. So we think that's going to be a positive for us going forward. Appliance and HVAC shipments have eased quite a bit from the solid pace experienced earlier in the year. And again, that related to general market and economic slowdown in the U.S. But the container market, which we've talked about on previous calls, particularly the beverage can shipments have benefited from favorable secular growth trends and the switch to aluminum for recyclability and consumer packaging preferences. So those are some of the highlights on the Precoat side specific to your question.

Okay. Great. That's really helpful. And then I know you're not including the JV income in the fourth quarter. Would you anticipate that you would start to include that in guidance as you look at next year or is that still sort of a TBD item? Thanks.

We did have our first Board meeting yesterday, and we like the leadership team. So they're very disciplined and focused. They're getting through the usual purchase price accounting things to go from being part of A

Okay. Very good. Thank you.

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

Good morning, everyone.

Hey, John.

Good morning.

Tom, going back to the Precoat, you mentioned that a couple of facilities took on some, I guess, lower margin business. And I guess as you look forward, how do you balance that against maybe some weakness in general market activity. How do you balance maybe taking maybe additional lower margin business versus saying no and risking maybe a little bit more deleveraging of the cost side of the equation?

Yeah, I think that's -- we're spending a lot of time with the Precoat team, which was actually really enjoyable because it's so similar to our galvanizing business. But yeah, we're focused on profitable growth. And so -- but they've got great indicators in terms of how they're running their paint efficiencies, productivity, line feet per hour per day, all that kind of per minute. So there's a balancing act, but I think we want to defend our market share. We are focused on what things are more profitable than others. We have made some leadership team, some leadership changes in a couple of those plants already. And we anticipate that, that's going to start to drive better performance, better consistency. And because right now, it's hard to say for sure that certain business isn't all that profitable when you've got some underperforming operational issues. So dealing with that and the team has been dealing with that. So it's not like they've been sitting there. But those plants are also in markets where labor is even more constrained. And while I'm not going to give any specifics on which plants those are, they are in more labor constrained market. So we're having to pay more to get the folks we need, which we're willing to do because labor is still a relatively small piece of our overall cost structure in precoat. So -- but yeah, we want to defend share overall, take care of our customers and then carefully balance the fixed cost absorption in those plants as well as against the overall. So that's a mouthful that I just gave you, but I can tell you, it's a daily, weekly review that the Precoat team does on this. So they're looking at this every single day.

Okay.

And moving business between plants, if they're finding they're not serving their customers. So sometimes it's where we've been taking some expense to move it to the right places where we can service the customer the best.

Yeah. Okay. Secondly, on the galvanizing metal coating operation, you talked about zinc costs being relatively high. But natural gas costs have come down sharply here in the last 90 days. How much of an impact might that have on the margins of the business?

Well, it's actually a significant spend, it's fairly de minimis in terms of the overall margin impact. And also because of the way our commitments flow with the utilities, we won't be seeing some of that until we get into next year anyways.

Okay. All right. Thank you very much.

All right. Thanks.

Our next question comes from John Franzreb with Sidoti & Company. Please go ahead.

Hi, guys. Thanks for taking the follow-up. Just a little bit of questions about the guidance here. [indiscernible] has the nine month number at $3.52 (ph). And I believe on Page, was it 7, you have it at $3.89 and your guidance is $4.5 to $4.25. I just want to know if we can kind of reconciliate what the number is we should be using as a baseline number in relationship to your guidance because if we use that $3.89 number, it seems like a really sizable drop in the fourth quarter. Can you just help us there?

Yeah, I think, John, it's a good question. And fourth quarter will be seasonally lower than the first nine months of the year. We've been working -- we've had a lot of change in the operations with the acquisition of Precoat Metals and the divestiture of the controlling interest and avail or AIS infrastructure. And so some of those outlets don't have fully updated numbers. So David's been working with those outlets on getting better historical numbers, but $3.89 is where we're bridging from for the guidance.

So that suggests a number between $0.16 and $0.36 for the fourth quarter. Am I understanding that properly?

Yeah. That's the way it will flow. Obviously, it's significantly lower volumes on the seasonality as we've talked about for -- particularly for Precoat. On the Metal Coatings side, I think we will kind of see the tailing off of these high zinc costs, and we are doing everything we can to hold price and so yeah, this is the -- probably our ugliest quarter. And then Q1, we get into the spring and build up into what I think going forward will traditionally be our strongest two quarters in the first half of the year.

And I guess just a nagging question, what kind of share count are you using on that $3.89 and what are you thinking about for the full year? It's kind of bounced around based on profitability, I guess, level?

It's based on the dilutive and un-dilutive (ph) features, we're using about 25 million shares in the calculation, John. In the fourth quarter to finish out on Tom's question, what's putting pressure as we seasonally have lower sales, and we do have the fixed cost of our interest on the debt and then the preferred dividends on our Blackstone preferred equity. So that's what's pushing a little pressure in that seasonally low fourth quarter.

Well, we also had the unusually low tax rate in the third quarter. And so that starts to normalize or go back towards normal in Q4.

Yeah. We'd expect [Multiple Speakers] We'd expect taxes to normalize in the 24% range for fiscal '24.

You took my question. Thank you very much. Appreciate it.

Thanks, John.

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

Yeah. We really are excited about the addition of Precoat Metals and particularly as we see how well the culture and leadership teams fit with our Metal Coatings team. Both teams live by the same values have almost identical operating cultures. So we look forward to sharing next year's outlook and guidance within the next few weeks. As we get back into the normal corporate operating mode, I also look for us to be able to provide a lot better clarity and transparency on what our -- what's in our margins and how to look at those going forward. I know everybody would prefer that. So we'll get out of the big adjustment mode into a stable operating mode that drive where we're demonstrating the great margins that both of these businesses can have and talking about our business from the normal markets, operational things that drive it and how we're getting back to growing share and driving profitability. So thank you for joining us today.