Good day and welcome to the AZZ Inc. Second Quarter Fiscal Year 2023 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Joe Dorame of Lytham 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 31, 2022. Joining the call today are Tom Ferguson, Chief Executive Officer; Philip Schlom, 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 the 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 and raw material costs, including zinc and natural gas, which are used in the hot-dip galvanizing process; coil coating process; changes in the political stability and economic conditions of the various markets that AZZ serves, foreign and domestic; customer-requested delays of shipment; 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, AZZ'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 have made on our strategic commitment to become predominantly a metal coatings company.

The actions taken to further delever the business, as well as the first full quarter of combined results of our Metal Coatings and Precoat Metals 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 Solutions segment, which we completed on September 30.

I also want to thank all the employees of AIS for continuing to focus on the business taken 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 Fernweh Group, which has been rebranded as Avail Infrastructure Solutions.

Next, as we dive into the quarterly results, I'm 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 Coatings segment achieving record level sales, while continuing to post strong profitability. Precoat Metals completed their first full quarter results as part of AZZ with record sales and also strong profitability. We are reporting the Infrastructure Solutions 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 B debt. Philip 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 Coatings segment posting almost $166 million, which is another record quarter. And the Precoat Metals 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 continue 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, and 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 these adjustments later.

It gives me great pleasure to congratulate the entire Metal Coatings team on another outstanding quarter. Despite supply chain disruptions and labor shortages, they kept their people safe, took care of their customers, and continue to drive great results.

These results included the impact of the DAAM 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 Precoat provides is warehousing steel and aluminum coils for their customers, but due to well publicized supply chain disruptions customers who increased safety stocks of Precoat is experiencing much higher than normal inventory levels, which is both a blessing and a curse.

Volume bodes well for shipments, but presents challenges to productivity and efficiencies. Precoat generated solid EBITDA of almost $50 million or 20.6%. We are pleased with how the Precoat 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 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 AZZ Precoat Metals and excluded Infrastructure Solutions segment sales now reported in discontinued operations of $106.7 million. Sale 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 Coatings segment overall.

While the current year includes higher sales from Precoat, 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 Precoat purchase accounting, quarterly depreciation and amortization expense increases of $2.5 million and $4.6 million, respectively, operating margins in our Precoat business would have increased from 15% to 17.8%.

We expect the depreciation and amortization resulting from the Precoat acquisition to continue to impact the quarterly operating profit in the Precoat segment going forward. Second quarter EBITDA for fiscal year 2023 was a negative $17.1 million, compared to $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 $0.76 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 due to the transactions, was $1.24, a 63.2% improvement over the prior year same quarter.

Year to date sales from continuing operations through the second quarter of fiscal year 2023 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 just continued 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 Precoat 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 Precoat. Cash provided by our discontinued operations was 22.8 million or nearly 5.5x 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 Solutions 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 utilize the remainder on working capital.

Separately, we recently finalized the closing statement working capital true up with regard to the acquisition of Precoat Metals in 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 Precoat 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 million and 45 million in capital in the current fiscal year. We did not repurchase shares during the quarters. We continue to focus on a glide path [indiscernible] for continued debt reduction. Last Friday, we announced our declaration of our dividend at $0.17.

During the second quarter, we paid down debt and we deleveraged from 4.3x leverage to 3.6x leverage.

Following the receipt of our shareholder approval at our annual meeting on August 5, 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] [ph] a fixed rate of 4.277% and a yield of about 8.5%, and a [40 basis points lower] [ph]. This swap will hedge roughly 50% of our existing Term Loan B debt.

We continue to focus on reducing outstanding debt and leverage and continue and 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 offerings. 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 costing our kettles will continue to rise much of this year. Precoat is seeing stable market conditions and is focused on profitable growth.

The continued higher than 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 cost, 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.

Pain is generally available, but there continues to be some shortages in PVDF, which the team has been offering alternatives for. So much like AZZ Metal Coatings, the Precoat team is meeting the 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 Precoat.

As with AZZ Metal Coatings, Precoat’s 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 cost being variable so they can shed cost quickly. Finally, I want to end where I started today's call. AZZ has taken 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 Precoat 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 Precoat 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..

[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 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 pass through the paint with a markup and so 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 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 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..

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 AZZ, as well as what Kurt and the team are doing on the Precoat side and you're seeing to, kind of [cross pollinate] [ph] some of those ideas going forward?.

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..

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