AZZ Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 11, 2023

There are 11 speakers on the call.

Operator

Good morning and welcome to the AZZ, Inc. 2nd Quarter 2024 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

Operator

I would now like to turn the conference over to Sandy Martin, Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good morning and thank you for joining us Today to review AZZ's financial results for the fiscal 2024 Q2 ended August 31, 2023. Joining the call today are Tom Ferguson, President and Chief Executive Officer Philip Schlam, 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 is a live webcast for today's call, which can be found at www.az.com/investor DASH Events.

Speaker 1

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 followed by AZZ with the Securities and Exchange Commission, including the annual report on Form 10 ks 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.

Speaker 1

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 I would now like to turn the call over to Tom Ferguson. Tom?

Speaker 2

Thank you, Sandy. Good morning and thank you for joining us to review our fiscal 2024 Q2 results. Today, I will give you an overview of our 2nd quarter performance, then pass it to Philip to walk through our detailed financials. After that, Dave will provide an update on AZZ's end markets. And then I will cover our full year outlook and take your questions.

Speaker 2

Before we discuss Q2, 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 2nd quarter's performance to mirror the 1st 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 Q1. Total sales were 398,500,000 With Metal Coatings delivering another record setting sales quarter of almost $170,000,000 up 2.4% versus last year.

Speaker 2

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 precoat sales for the Q2 declined by 5% to $229,000,000 Versus the Q2 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 EBITDA target margins for Metal Coatings and performed nicely within the range for precoat metals.

Speaker 2

During the Q2, we grew adjusted earnings per share to $1.27 versus $1.21 per share in the Q2 of last year. In addition, we generated adjusted EBITDA of $88,000,000 or 22.1 percent of sales. Our 2nd quarter Metal Coatings EBITDA margin was 30.4% and our Precoat 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.

Speaker 2

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, We continue to expand the capabilities of DGS to improve our operations and customer facing interactions. Precoat Metals, Which operates automated continuous flow paint coating lines continues to enhance coil zone, its proprietary application for managing customer inventory real time access to their project scheduling and inventory. These technology driven platforms coupled with our servant mine and leadership Teams position AZZ as a sustainably differentiated metal coatings business for our customers. As Philip will 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.

Speaker 2

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 generating strong cash flows as we reduce working capital. Based on our strategic actions over the last 12 to 18 months, we're generating significantly higher 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.

Speaker 2

With that, I will turn it over to Philip.

Speaker 3

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 $398,500,000 Compared to $406,700,000 in last year's Q2, total sales declined 2% from a year ago. However, as Tom had mentioned, ACC Metal Coatings reported record sales for the Q2 with sales increasing 2.4%.

Speaker 3

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 $97,200,000 or 24.4 percent of sales compared to 101,000,000 for the Q2 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 precoat metals, which had lower cost of goods sold on decreased volumes, as well as lower freight and storage costs compared to the Q2 of last year.

Speaker 3

Selling, general and administrative expenses of $36,200,000 In the Q2 included a non recurring litigation settlement charge of $5,750,000 reported in the Infrastructure Solutions 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 and A expenses for the fiscal 2024 second quarter would have been $30,500,000 or 7.7 percent of sales for the quarter. We reported adjusted EBITDA of $88,000,000 or 22.1 percent of sales, essentially on par with the $88,700,000 of adjusted EBITDA recorded in the Q2 last year, a period that included a gain of $5,100,000 from non recurring items related to a sale of property and insurance Proceeds in the Metal Coatings segment. Interest expense for the Q2 was $27,800,000 compared to $28,100,000 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.

Speaker 3

Tax expense in the quarter was $6,000,000 which reflects an effective tax rate of 17.4% in the quarter compared to 30.1% in the Q2 of the prior year. In the Q2, we benefited from the resolution of a previous We reserve a 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 percent for the fiscal year, with longer term tax rates expected to remain in the 24% range. Adjusted net income for the quarter was $37,200,000 compared to $35,200,000 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 Q2.

Speaker 3

Since the preferred convertible shares are dilutive 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 29,200,000 weighted average shares outstanding in the quarter and for the 6 months ended August 31. Turning to our financial position and balance sheet. On a year to date basis, we generated strong cash provided by operating $118,300,000 and free cash flow of $75,600,000 net of capital expenditures. Free cash flow for the 1st 6 months of fiscal year 2024 is 3 times higher than the comparable period a year ago and reflects higher margins associated with AZZ Metal Coatings and AZZ Precoat Metals segments.

Speaker 3

We continue to improve operational performance And remain focused on prudently managing working capital to allow for further debt reduction. Capital Expenditures for the 1st 6 months were $42,700,000 including typical safety, maintenance and gross spending, As well as approximately $20,000,000 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 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 a strong balance sheet and cash flows to fund the project, the new plant build, Including equipment has an estimated payback of under 5 years.

Speaker 3

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 and the plant's generation capability for long term sustainable operating margins. Our capital expenditure projections for full fiscal year 2024 Is now $125,000,000 increased from $80,000,000 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 $60,000,000 of debt With plans to reduce debt by another $15,000,000 to $40,000,000 throughout the rest of the fiscal year for a total of $75,000,000 to $100,000,000 in debt reduction for the full year. In August, we repriced our $1,030,000,000 term loan B, reducing interest rates by 50 basis points from SOFR plus $425,000,000 to SOFR plus 3.75 and removed the 10 basis point credit spread adjustment as part of the transaction.

Speaker 3

Also, we entered into a swap arrangement last year to fix roughly half the variable rate debt. These capital allocation are helping us offset the impact of the rising interest rate environment. We have no debt maturities until 2027 and are The cash flow generation will support plans to strengthen the balance sheet and continue to reduce our debt to EBITDA leverage. During the 1st 6 months of the fiscal year, we paid cash dividends to common shareholders of $8,500,000 $7,200,000 to our Series A preferred shareholders. We made no share repurchases during the quarter.

Speaker 3

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 AVAIL joint venture. The 2nd quarter equity and earnings of unconsolidated subsidiaries included purchase Just accounting adjustments by the JV that impacted our earnings in the 2nd quarter. We understand their audits have now been completed and we expect We may see improved earnings from the joint venture during the Q3, which may be a couple of million higher than the run rate thus far. With that, I'd like to pass the call over to David.

Speaker 4

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 dip 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 5 non building projects like bridge and highway work that we see as strong through the balance of the fiscal year.

Speaker 4

Other construction end markets include the 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 segment surged by 15.6 percent to a 3 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 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.

Speaker 4

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 source reshoring of manufacturing, the migration of prepainted steel and aluminum And a movement in the container category from plastics to aluminum throughout North America. Our metal coatings and precoat metals teams are also actively pursuing share gain activities for hot dip galvanizing as well as prepainted coil conversions with key customers. With that, I would now like to turn the call over to Tom.

Speaker 2

Thank you, Dave. A few comments on our business outlook. Although our end markets are impacted by seasonality, especially in the Q4 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.

Speaker 2

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 the 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 precoat and improved customer inventory situation, we anticipate a Stronger second half as compared to the second half of the last year.

Speaker 2

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 $1,400,000,000 to $1,550,000,000 adjusted EBITDA guidance of $3 $300,000,000 to $325,000,000 and adjusted EPS guidance of $3.85 to $4.35 And as Philip mentioned, our capital expenditures for fiscal 2024 are now $125,000,000 which includes $70,000,000 related to the Washington, Missouri Greenfield Coal And we remain fully committed to achieving our $75,000,000 to $100,000,000 of debt reduction target this year.

Speaker 2

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.

Speaker 2

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.

Operator

And our first question comes from John Franzreb of Sidoti and Co. Please go ahead.

Speaker 5

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

Speaker 6

Good morning. Good morning.

Speaker 5

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 COAP markets, Do any of the 3 that you highlighted HVAC, Transportation or Construction, are they an improved maybe Cadence than we saw that we knew you were expecting maybe as you're going into the second half of the year this year?

Speaker 4

Yes, John, this is Dave. I think as you look at it, 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 we'll see how things go with them and but we think it's certainly going to be improved over The prior year.

Speaker 5

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?

Speaker 3

Yes, John, as we spoke During our prepared comments, we paid down $60,000,000 in debt this year. We're committed to both funding The new facility as well as continuing to drive our working capital helps reduce debt further through the year.

Speaker 5

I'm just curious with the lower seasonality in the second half of the year, is it working capital requirements come down in the second half of the year? Just maybe some color on working capital.

Speaker 2

Yes, 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.

Speaker 5

Great. And just one last Question on clarification. I think you mentioned that there might be a change of a couple of $1,000,000 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?

Speaker 3

John, that's a good question. 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 point forecast that business going forward.

Speaker 2

Yes. 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 think we will get into a cadence here shortly. Philip and I are both on that Avail Board. So as we're able to do that, I'm hopeful that we'll be able to give some actual guidance around it and provide More color on a quarterly basis.

Speaker 5

Great. Thanks, Tom. I appreciate you guys taking my questions.

Speaker 3

Thanks, John.

Operator

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

Speaker 7

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

Speaker 2

Thank you. Good morning. Thanks.

Speaker 7

High level, can you talk about back half of the year revenue growth? 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 precoat, a little bit up in Metal Coatings?

Speaker 2

Yes, I think that's going to continue as we look forward. Now on the precode side though, we're lapping a pretty weak particularly pretty weak Q4. 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.

Speaker 2

We look for PreCoat to 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 we just look for them to continue providing that outstanding service that earns their customers business. So it should be another good half for them.

Speaker 7

Okay, great. And then one thing that struck me as really positive was the pricing in precoat, 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?

Speaker 2

Well, I think part of the price on precoat is the underlying since paints they're By far, their largest cost component and we had talked about that in previous quarters where the paint suppliers had continued to increase price. That's really the flow through is what you're seeing the flow through on that paint cost price relationship Plus driving the pricing value on mix. So I think we continue to see that. In terms of the Metal Coatings side, they provide just outstanding value for their customers. So I think They'll defend their price levels based on providing continued outstanding service and quality.

Speaker 2

And I do think we also When you have 45 plants, you've obviously got some of them you're working on and they're continuing to do that and drive better value realization in those Operations. So, yes, I think it's defendable.

Speaker 7

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

Speaker 2

Yes, for the most part, we're seeing customers and it is the diversity of the markets, Infrastructure, a lot of these projects is like here in Texas, you've got all sorts of you can't drive around very far without seeing bridge and highway projects, New utility projects, growing population. So a lot of infrastructure, whether it be on the T and D, the solar front Or on Bridge and Highway, things like that. So we do, as Dave said, we believe a lot of that spending is still in the early innings, But you've got to have clean water, you've got to have improved roads, you've got to have transportation. 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.

Speaker 2

So we view that as a significant advantage given our portfolio.

Speaker 7

Great. Thank you, guys.

Operator

The next question is from Mike Heim of NOBLE Capital Markets. Please go ahead.

Speaker 6

Thanks for taking my question. With the jump up in capital expenditures, it looks like we've got maybe $80,000,000 more to spend For the rest of the year, can you just talk a little bit about how you see that falling between the 3rd Q4?

Speaker 3

That should fall pretty evenly between the two quarters. The Washington, Missouri project has been ramping up. So quarter 2 was double quarter 1. And as we go through Q2 and Q Q3 and Q4 should be pretty well balanced between the 2 quarters, maybe a little heavier in the 4th.

Speaker 6

Okay. And then, Philip, you talked about the Lower tax rate in the quarter and just wondering if you could repeat maybe expand upon the reasoning that you believe you referred to something with the Pre Code acquisition.

Speaker 3

Yes, 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

Speaker 6

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 is probably one time in nature. What about the amortization The intangible, can you just talk about the ongoing nature of that?

Speaker 3

Yes. The amortization of the intangibles directly related to acquisitions 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 add 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

Operator

The next question comes from Lucas Pipes of B. Riley Securities. Please go ahead.

Speaker 8

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.

Speaker 8

I wanted to ask about kind of projects more broadly, kind of what you're 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? And 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.

Speaker 8

Thank you.

Speaker 2

Yes, 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 5 years ago and then this one in Washington, Missouri. Usually we're we've 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.

Speaker 2

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 precode side is we are working with customers 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.

Speaker 2

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, we just completed our strategic plan and there is going to be demand, capacity Demand increased, particularly on the coal coating side going forward. We did not make 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 and but yes, 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.

Speaker 2

Supply Chain Solutions is what we call it for PreCoat. We do have similar opportunities with the Metal Coatings side. Just continue to take share with our current businesses.

Speaker 8

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

Speaker 2

Yes, I think for us it's 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 Providing them different color schemes, we've got our own color blending capability.

Speaker 2

And just quite frankly, We're operating 13 plants, 15 lines. They're operating 1 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 25,000 tons of demand for our current facilities. And so that comes down to Proximity of our locations, then being able to depend on our capabilities, which we have a great track record of doing.

Speaker 2

That's very helpful. Thank you for that color. A quick one for a second question. Just kind of leverage targets longer term, could you remind us Where

Speaker 8

your head is at right now given rates and broader backdrop on financing markets? Thank you very much. Drop on financing markets. Thank you very much.

Speaker 3

Yes. We ended the quarter at around 3.4x leverage With a target to get down to 3.3x leverage by the end of the year with the change in 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.

Speaker 2

Yes. We're not changing our targets at this point. And that's why we felt comfortable moving from sale leaseback into funding it ourselves. Both our current debt reduction so far year to date, the improvement in 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.

Speaker 8

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

Operator

The next question comes from Jon Braatz of Kansas City Capital. Please go ahead.

Speaker 9

Good morning, everyone.

Speaker 3

Good morning, John.

Speaker 9

Phil, the repricing of your debt, Assuming no additional interest rate increases, are we talking about $5,000,000 in annualized interest savings?

Speaker 3

It is, yes, at a 50 bps reduction and $1,000,000,000 outstanding, it equates to about $5,000,000 per year and we're actively working with our bank group and we'll continue to watch some markets for opportunities to continue to do things that can help Bring down that interest cost.

Speaker 9

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 I'll work through those lower costs. Do you see a little bit of a tailwind to your operating margins And Metal Coating, maybe 6, 9 months down the road. Can that is that going to prove to be a little boost to your operating profile?

Speaker 2

Yes, we would hope so. I think it's we've got some of our Metal Coatings team sitting here and they're looking with Inquiring faces, what that's going to do to their budget for next year. But we're confident. We had talked about how We've done a better 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 start we're having those negotiations with the zinc suppliers.

Speaker 2

And The big factor you have to add right now is the premiums are in the $0.30 $0.35 range Added to whatever the LME is. So that's part of the unknown at this point is what are those premiums going to look like next year. But yes, I would anticipate this will provide us some tailwinds.

Speaker 9

Can those premiums vary quite a bit year to year?

Speaker 2

They can vary quite a bit year to year and they have. Just the last year movement from, Call it in the less than $0.15 range to the $0.30 $0.35 range and then you've also got some variance depending on the regions of the country. These are all things that 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,

Speaker 5

Okay.

Speaker 2

Which allows us to bring down any some of our safety stocks.

Speaker 9

Okay. Tom, looking ahead sort of into 2024, The new Washington facility, what are what might in terms of start up costs, what kind of net contribution Initially, will Washington have on your finance or on your let's say your income statement, Will it be a little bit of a drag? Will it be some cost to absorb before it becomes additive?

Speaker 2

We've got all those factored in. So with the formal and complete start up 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. But so yes, there's some of that in there. But there's not a it doesn't go on for a long period. Right.

Speaker 2

Okay. All right.

Operator

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

Speaker 10

Hi, guys. Thanks for taking my question and congrats on the continued momentum.

Speaker 2

Thanks, Brett. Thanks, Brett.

Speaker 10

On PreCoat Metals, great See the improvement and consistency in margins this fiscal year. I think it sounds like a lot of the heavy lifting was done eliminating Excess warehousing expenses, just curious how you guys are feeling about, I guess the sustainability Of margins at that business here, even room for potential improvement, I know you're 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?

Speaker 3

Yes, I think that's

Speaker 2

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 as you can walk in the sites, they're cleaner, they're Easier to maneuver. You can just feel the improved opportunities for productivity and efficiency. So that's helpful.

Speaker 2

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. So, 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.

Speaker 2

And I'm never going to say it's Easy because the team up there would shoot me, but I think they are in a good cadence and a good rhythm. And then they are we do have the 3 or 4 sites that it shifts, but because we had There's still 3 of the 4, but one is now operating much better. We're focused on 3 and we've added another one. So we'll never Declare victory on continually improving some of those facilities. And by the way, this When I mentioned the de vertically integrating some customers that also gives us some volume with some a couple of our plants just More volume and more demand.

Speaker 2

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 sliders, new capabilities And all that's already embedded up and running and providing value now.

Speaker 10

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

Operator

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

Speaker 2

Thank you, operator. Thank you for your time today and I look forward to updating you on our Q3 results

Operator

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

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Earnings Conference Call
AZZ Q2 2024
00:00 / 00:00
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