Earnings Call Transcript
AZZ INC (AZZ)
Earnings Call Transcript - AZZ Q2 2024
Operator, Operator
Good morning, and welcome to the AZZ Inc. Second 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. I would now like to turn the conference over to Sandy Martin, Investor Relations. Please go ahead.
Sandy Martin, Investor Relations
Thank you, operator. Good morning, and thank you for joining us today to review AZZ's financial results for the fiscal 2024 second quarter ended August 31, 2023. Joining the call today are Tom Ferguson, President and Chief Executive Officer; Philip Schlom, 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.azz.com/investor-events. Before we begin, I would like to remind everyone that our discussion today will include forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements by their nature are uncertain and outside of the company's control. Except for actual results, our comments containing forward-looking statements may involve risks and uncertainties, some of which are detailed from time to time in documents followed by AZZ with the Securities and Exchange Commission, including the annual report on Form 10-K for the fiscal year. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. Actual results could differ materially from these expectations. In addition, today's call will include a discussion of non-GAAP financial measures; non-GAAP financial measures should be considered as a supplement to and not a substitute for GAAP measures. We refer you to the reconciliations of non-GAAP to the nearest GAAP measure included in today's earnings press release.
Tom Ferguson, CEO
Thank you, Sandy. Good morning, and thank you for joining us to review our fiscal 2024 second quarter results. Today, I will give you an overview of our second quarter performance, then pass it to Philip to walk through our detailed financials. After that, Dave will provide an update on AZZ's end markets. And then, I will cover our full year outlook and take your questions. Before we discuss second quarter, I first want to say that I am incredibly appreciative of all of our employees' dedication and disciplined execution of AZZ's strategies and goals this year. Now turning to our results. As I discussed last quarter, we expected the second quarter's performance to mirror the first quarter's results, and that is essentially what happened. We did improve our adjusted EBITDA performance, both in terms of dollars and EBITDA margin compared to the first quarter. Total sales were $398.5 million with Metal Coatings delivering another record-setting sales quarter of almost $170 million, up 2.4% versus last year. Our Metal Coatings team continues to demonstrate their ability to drive value by offering consistently great quality and service. As expected, due to lower market activity, volumes were down and Precoat sales for the second quarter declined by 5% to $229 million versus the second quarter of last year. Let me note that overall construction unit volume, according to the MBMA, is down about 11% over the past year, and the Precoat team has been able to defend share without chasing lower-margin volume. Focusing on flexing capacity to the available volume and driving operating efficiencies has resulted in solid EBITDA margin performance. Despite slightly lower consolidated sales for the quarter, we exceeded our EBITDA target margins for Metal Coatings and performed nicely within the range for Precoat Metals. During the second quarter, we grew adjusted earnings per share to $1.27 versus $1.21 per share in the second quarter of last year. In addition, we generated adjusted EBITDA of $88 million or 22.1% of sales. Our second quarter Metal Coatings EBITDA margin was 30.4%, and our Precoat Metals EBITDA was 20.3%. We are pleased to have worked through customer inventory issues that impacted the end of last year to achieve margins for both segments that were within or above our targeted ranges. We continue to enhance our digital galvanizing system, or DGS, which is the proprietary technology embedded at our facilities. This critical system not only connects our locations to customers with timely quality engagements, but it also provides real-time visibility for time-sensitive issues that advance production, customer service, and financial results. We continue to expand the capabilities of DGS to improve our operations and customer-facing interactions. Precoat Metals, which operates automated continuous flow of pink coating lines, continues to enhance coil zone; it's proprietary application for managing customer inventory and providing them real-time access to their project scheduling and inventory. These technology-driven platforms, coupled with our servant-minded leadership teams, position AZZ as a sustainably differentiated Metal Coatings business for our customers. As Philip 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. 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 are generating strong cash flows as we reduce working capital. Based on our strategic actions over the last 12 to 18 months, we are generating significantly higher run rate EBITDA and margin. We believe that AZZ's pure-play Metal Coatings businesses are well-positioned to uniquely serve customers with a fortified competitive moat created by extensive technical expertise and service capabilities, proprietary production technologies and strategically placed facilities across North America. With that, I will turn it over to Philip.
Philip Schlom, CFO
Thank you, Tom. Good morning. All numbers today are based on results from continuing operations. As Tom mentioned earlier, we reported second quarter sales for fiscal year 2024 of $398.5 million, versus $406.7 million in the same quarter last year, reflecting a 2% decline in total sales year-over-year. However, AZZ Metal Coatings achieved record sales in the second quarter, with an increase of 2.4%. Although AZZ faced some market pressures in appliances, HVAC, transportation, and construction, the transportation segment does not include significant automotive work, and the ongoing UAW strike is not expected to materially affect our business. Gross profit was $97.2 million, or 24.4% of sales, compared to $101 million in the second quarter of last year. Gross margins were affected by higher zinc costs and increased labor expenses in the Metal Coatings segment compared to last year. This pressure was partially offset in Precoat Metals, which saw a decrease in the cost of goods sold due to lower volumes, along with reduced freight and storage costs compared to last year. Selling, general, and administrative expenses were $36.2 million for the second quarter, including a non-recurring litigation settlement charge of $5.75 million in the Infrastructure Solutions segment tied to a legacy infrastructure project from when we divested our 60% controlling interest in AIS last year. Excluding this charge, SG&A expenses for the second quarter would have been $30.5 million, or 7.7% of sales. Adjusted EBITDA was $88 million, or 22.1% of sales, nearly matching the $88.7 million reported in the same quarter last year, which included a $5.1 million gain from non-recurring items related to property sales and insurance proceeds in the Metal Coatings segment. Interest expense for the second quarter fell to $27.8 million from $28.1 million in the prior year due to lower debt levels, although offset by higher interest rates. I will discuss our Term Loan B repricing shortly. The tax expense for the quarter was $6 million, reflecting an effective tax rate of 17.4%, down from 30.1% in the previous year’s second quarter. The tax benefit this quarter was due to the resolution of a previously reserved state tax issue linked to the Precoat acquisition. Consequently, we anticipate an effective tax rate of around 23.5% for the fiscal year, with long-term rates expected to stay close to 24%. Adjusted net income for the quarter was $37.2 million, an increase from $35.2 million last year, representing a 5.5% rise. Our adjusted diluted earnings per share of $1.27 were up 5% from $1.21 reported in the previous year’s second quarter. Given that preferred convertible shares are dilutive, preferred dividends are added back to earnings for our EPS calculation. Thus, the shares assume a full conversion of preferred equity, leading to 29.2 million weighted average shares outstanding in the quarter and for the six months ended August 31. Looking at our financial position, we generated strong cash from operating activities of $118.3 million and free cash flow of $75.6 million after capital expenditures. Free cash flow for the first half of fiscal year 2024 was three times higher than the same period last year, supported by higher margins in AZZ Metal Coatings and AZZ Precoat Metals segments. We are focused on improving operational performance and managing working capital wisely to facilitate further debt reduction. Capital expenditures for the first half totaled $42.7 million, covering safety, maintenance, growth spending, and about $20 million for the new Washington coil coating plant. We decided to fund the plant with operating cash flow, carefully considering the long-term financing costs against our strong balance sheet and cash flows. The new plant, including equipment, is expected to pay back in under five years, and we are confident about its capacity as 75% of its future output is committed to a customer under a long-term contract. Our capital expenditure forecast for the full fiscal year is now $125 million, increased from the prior estimate of $80 million, incorporating the Washington plant funding, which is ahead of schedule and below budget. In the first half of the fiscal year, we reduced debt by $60 million and plan to lower it by another $15 million to $40 million through the rest of the year, achieving a total reduction of $75 million to $100 million. In August, we repriced our $1.03 billion term loan B, lowering interest rates by 50 basis points and removing a 10 basis point credit spread adjustment. We also fixed half of our variable rate debt with a swap arrangement last year. These actions are helping us manage the implications of the rising interest rate environment. We have no debt maturities until 2027 and are confident that our cash flow generation will support our plans to strengthen the balance sheet and reduce our debt-to-EBITDA leverage. During the first half of the fiscal year, we paid cash dividends of $8.5 million to common shareholders and $7.2 million to Series A preferred shareholders, with no share repurchases made during the quarter. As we move forward, I want to provide an update on our 40% investment in the AVAIL joint venture. The second quarter earnings from unconsolidated subsidiaries included purchase accounting adjustments by the JV that affected our earnings. We understand their audits have now finished, and we anticipate improved earnings from the joint venture in the third quarter, potentially rising a couple of million above the current run rate. With that, I will hand the call over to David.
David Nark, SVP of Marketing, Communications and Investor Relations
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 five primary categories, including construction, industrial, transportation, electric utility, and consumer. Construction is a broad category that captures non-building projects like bridge and highway work, that we see as strong through the balance of the fiscal year. Other construction end markets include the construction of health care and education facilities, which are expected to grow by mid-single digits over the next two years. And while residential construction has been under pressure this year, we think we've seen the bottom with August showing a 1.9% increase in residential building permits. Projections now point to the highest level of new home starts since October 2022, driven by the supply shortage of homes, while approvals for the multi-family segment surged by 15.6% to a three-month high. We are in the early innings of critical infrastructure projects associated with the IIJA and CHIPS Acts that should positively impact the company in late calendar 2023 and 2024. This directly affects our work within our electric utility end market, which includes transmission and distribution projects. We have work underway on a number of key projects this year and continue to see strong demand for transmission and distribution monopoles and lattice towers. Additionally, solar and renewable projects continue to demonstrate pockets of business strength regionally in the U.S. Finally, although our business saw softer demand in consumer, transportation, and residential construction end markets in Q2, non-residential construction saw strength in warehousing, manufacturing, and agriculture. We remain encouraged by longer-term trends from the source reshoring of manufacturing, the migration of pre-painted steel and aluminum, and a movement in the container category from plastics to aluminum throughout North America. Our Metal Coatings and Precoat Metals teams are also actively pursuing share gain activities for hot dip galvanizing as well as pre-painted coil conversions with key customers. With that, I would now like to turn the call over to Tom.
Tom Ferguson, CEO
Thank you, Dave. A few comments on our business outlook. Although our end markets are impacted by seasonality, especially in the fourth quarter when weather can impact construction activities. We continue to be focused on increasing value to our customers and improving our operations in all our facilities. For Metal Coatings, our fabrication customers are continuing to see solid backlogs due to increased activity in the end markets that Dave just discussed. Additionally, labor availability has improved since last year. We have several working capital initiatives underway that provide us more opportunities to adjust inventories of paint and zinc as demand shifts due to weather or other macroeconomic impacts. We are progressing with the construction of our aluminum coil coating facility and we are on schedule and continuing to track within budget. This is an exciting project for us, and we will keep you updated each quarter on progress. As Dave mentioned, both of our segments benefit from diverse end market activity in growing industries. We are carefully monitoring the demand environment and economic trends, which we have used to develop our guidance. Given the operational improvements of Precoat and improved customer inventory situation, we anticipate a stronger second half compared to the second half of last year. Our Precoat team has demonstrated their ability to drive operational efficiencies to sustain their margins while maintaining quality and service levels, despite 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 in our previously issued annual guidance and pleased that the second quarter results were in line with our expectations. We will continue to strategically drive growth through market expansion and long-term supply agreements with blue-chip customers. We are reaffirming our fiscal 2024 sales guidance of $1.4 billion to $1.55 billion, adjusted EBITDA guidance of $300 million to $325 million, and adjusted EPS guidance of $3.85 to $4.35. And as Philip mentioned, our capital expenditures for fiscal 2024 are now $125 million, which includes $70 million related to the Washington, Missouri greenfield coil coating plant. And we remain fully committed to achieving our $75 million to $100 million of debt reduction target this year. Our minority ownership in the AIS joint venture is not included in the full year guidance as we are not forecasting it at this point. We believe AVAIL is progressing well on its business plan and we will provide an outlook on our 40% equity portion when it makes sense. In summary, I am proud of the team's execution of our fiscal 2024 plans and I am confident that we are well-positioned for growth and success. We are committed to driving further growth, improving profitability, and generating significant cash flow with a focus on disciplined capital allocation. We believe the successful execution of our strategic plans will build momentum and drive sustainable value creation for all of our stakeholders. I want to thank our shareholders and the Board for their continued support. Now, we will have the operator open up the call for questions.
Operator, Operator
We will now begin the question-and-answer session. And our first question comes from John Franzreb of Sidoti & Co. Please go ahead.
John Franzreb, Analyst
Good morning, everyone, and thanks for taking the questions.
Tom Ferguson, CEO
Good morning.
Philip Schlom, CFO
Good morning.
John Franzreb, Analyst
Tom, 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 Precoat markets, do any of the three that you highlighted HVAC, transportation, or construction, are they showing an improved cadence than what you were expecting as you're going into the second half of the year this year?
David Nark, SVP of Marketing, Communications and Investor Relations
Yeah, 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, but we think it certainly is going to be improved over the prior year.
John Franzreb, Analyst
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?
Philip Schlom, CFO
Yeah, John. As we spoke during our prepared comments, we paid down $60 million in debt this year. We're committed to both funding the new facility as well as continuing to drive our working capital to help reduce debt further through the year.
John Franzreb, Analyst
I'm just curious, with the lower seasonality in the second half of the year, is the working capital requirements come down in the second half of the year? Just maybe some color on working capital.
Tom Ferguson, CEO
Yeah, absolutely. I think I'd 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.
John Franzreb, Analyst
Great. And just one last question on clarification. I think you mentioned that there might be a change of a couple of million dollars on JV income. Just is that a one-time change or what are your thoughts there and why was that tossed into the prepared remarks?
Philip Schlom, CFO
John, that's a good question. We've not forecasted the equity and earnings for AVAIL because of the nature of the transaction standing up their business and the cyclicality within their business. So we see them post their audit that completed at the end of July, stabilizing and then we should see a better run rate going forward. So hopefully, we'll be able to, at some point, forecast that business going forward.
Tom Ferguson, CEO
Yeah. And I'd add now that they have completed the audit on their books, getting the past adjustments out of the way, so that they can just forecast based on actual income going forward. So I 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.
John Franzreb, Analyst
Great. Thanks, Tom. I appreciate you guys taking my questions.
Philip Schlom, CFO
Thanks, John.
Adam Thalhimer, Analyst
Hey. Good morning, guys. Congrats on a nice quarter.
Tom Ferguson, CEO
Thank you. Good morning.
Adam Thalhimer, Analyst
High level, can you talk about back half of the year revenue growth? I'm just kind of curious if the trends we saw in Q2 are 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?
Tom Ferguson, CEO
Yeah. I think that's going to continue as we look forward. Now on the Precoat side though, we're lapping a pretty weak fourth quarter. So even though we've sustained our sales down 5% on significantly lower volume in the first half, we don't look for those volumes to continue down. We're seeing that, as David talked about, the construction markets and other markets are stabilizing. So, 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.
Adam Thalhimer, Analyst
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 or how should we think about pricing for both segments going forward?
Tom Ferguson, CEO
I believe a significant factor affecting Precoat's pricing is the cost of the underlying paints, which is their largest expense. We've mentioned in prior quarters that paint suppliers have been consistently raising their prices. What you're observing is the impact of those paint cost increases along with the pricing strategy based on product mix. We continue to see strong value in the metal coating sector for our customers, which supports our pricing stability through ongoing high-quality service. Additionally, with 45 plants, we are always working to optimize operations and enhance value realization. Overall, I think our pricing strategy is sustainable.
Adam Thalhimer, Analyst
Okay. And then some of my clients are kind of stressed out about where rates are and electric utility stocks have gotten hit. But from what you said, it doesn't sound like you're seeing any impact. I mean you said T&D is still strong, renewables are still strong. And I think you mentioned on the metal coating side that you're still getting good feedback from your customers on backlogs and expectations.
Tom Ferguson, CEO
We're observing a diverse range of customer projects in various markets and infrastructure. For instance, in Texas, numerous bridge and highway projects, along with new utility projects, are evident due to growing populations. There is substantial investment across infrastructure areas like transmission and distribution, solar energy, and roads. As mentioned by Dave, we believe much of this spending is still in its early stages. Essential needs such as clean water, improved roads, and transportation continue to drive demand. We feel confident in our ability to meet these needs, supported by a well-distributed network of facilities. Regardless of whether projects are in the East and contractors are in the West, we can serve them effectively depending on their purchasing decisions. This flexibility is a significant advantage of our portfolio.
Adam Thalhimer, Analyst
Great. Thank you, guys.
Operator, Operator
The next question is from Mike Heim of Noble Capital Markets. Please go ahead.
Michael Heim, Analyst
Thanks for taking my question. With the jump in capital expenditures, it looks like we've got maybe $80 million more to spend for the rest of the year. Can you just talk a little bit about how you see that falling between the third and fourth quarter?
Philip Schlom, CFO
That should fall pretty evenly between the two quarters. The Washington, Missouri project has been ramping up. So quarter two was double quarter one as we go through Q2. Q3 and Q4 should be pretty well balanced between the two quarters, maybe a little heavier on the fourth.
Michael Heim, Analyst
Okay. And then, Philip, you talked about the lower tax rate in the quarter. And I just wonder if you could repeat, maybe expand upon the reasoning that I believe you referred to something with the Precoat acquisition.
Philip Schlom, CFO
Yeah. Without getting into too much detail, during the acquisition of Precoat 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 them. So during the quarter, we were able to reduce the most significant portion of our reserve for state taxes and we're still working through a couple of other states.
Michael Heim, Analyst
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 a one-time nature. What about the amortization of the intangibles, can you just talk about the ongoing nature of that?
Philip Schlom, CFO
Yes. The amortization of the intangible is directly related to acquisition and purchase accounting that we hold at corporate because it doesn't impact the segment operations. And so we've excluded that consistently from our ad backs. And you're right, the legal settlement was related to the business we sold and we see that as a one-time non-recurring item.
Michael Heim, Analyst
Okay. Thank you very much.
Tom Ferguson, CEO
Thank you.
David Nark, SVP of Marketing, Communications and Investor Relations
Thanks, Mike.
Operator, Operator
The next question comes from Lucas Pipes of B. Riley Securities. Please go ahead.
Lucas Pipes, Analyst
Thank you very much, operator. Good morning, everyone. Good job on the quarter and also a good job on keeping the Washington project ahead of schedule and budget, that's not something I hear very often these days.
Tom Ferguson, CEO
Thank you.
Lucas Pipes, Analyst
I wanted to ask about the types of projects in general, considering what you're observing in the market with demand appearing to be quite strong despite higher rates. How do you view organic growth? Do you have a pipeline of projects similar to the Washington one, and if so, which geographical region are you prioritizing? What markets are you targeting, and at what stages are those potential greenfield projects currently? I would appreciate any insights on that. Thank you.
Tom Ferguson, CEO
Yeah. We actually don't have any greenfields we've done. This is actually the second one since I've been here. The first one was a galvanizing plant in Reno about five years ago and then this one in Washington, Missouri. Usually, we've tended on the galvanizing side to buy up one-off competitors where they were adjacent and provided new territory reach for us. So we've tended to find that has been the better way. Right now, that pipeline is, I'll call it, quiet, which is in line with our desire not to do any acquisitions until we get through this cash flow pump on the Washington coil cutting facility. So we're always looking at new opportunities. One of the things we are doing on the Precoat side is we are working with customers to buy out their existing lines to be vertically integrated with them. And we've had some success. I'm not going to mention the specific customers. We've got NDAs in place. But we have had some success with that. So that allows us to utilize our capacity better without having to add it, but also take 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 increase, 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 we can squeeze capacity out of our existing footprint. So that's an ongoing exercise every year. But yeah, we're very comfortable with the facilities we have right now. We think we can drive organic growth just by continuing to add services to what we call Supply Chain Solutions for Precoat. We do have similar opportunities with the metal coating side. So just continuing to take share with our current businesses.
Lucas Pipes, Analyst
That is very helpful. Thank you. I have a quick follow-up on the vertical integration of capacity at some of your customers. What would be your pitch to them, and where do you believe you could provide the greatest value in such a buyout?
Tom Ferguson, CEO
I believe this is our area of expertise, so our operations will generally be more efficient than theirs. If they are using very outdated technology, their production rates might be only a quarter to a third of what we can achieve. We also excel at offering a variety of color options due to our own color blending technology. Additionally, we are running 13 plants across 15 lines, while they operate just one, which is not their primary focus. Although the financial aspect isn’t significant, taking those assets off their hands could provide us with an extra 20,000 to 25,000 tons of demand for our existing facilities. This ultimately relies on the proximity of our locations and their ability to trust our proven capabilities.
Lucas Pipes, Analyst
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 your head is at right now, given rates and broader backdrop on financing markets? Thank you very much.
Philip Schlom, CFO
Yeah. We ended the quarter at around 3.4 times leverage with a target to get down to 3 times 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.
Tom Ferguson, CEO
Yeah. We're not changing our targets at this point and that's why we felt comfortable moving from a 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.
Lucas Pipes, Analyst
Very helpful. Gentlemen, really appreciate it, and continued best of luck.
Tom Ferguson, CEO
Thanks, Lucas.
Operator, Operator
The next question comes from John Braatz of Kansas City Capital. Please go ahead.
Jonathan Braatz, Analyst
Good morning, everyone.
Tom Ferguson, CEO
Good morning.
Jonathan Braatz, Analyst
Phil, the repricing of your debt, assuming no additional interest rate increases, are we talking about $5 million in annualized interest savings?
Philip Schlom, CFO
It is, yeah, at a 50 bps reduction and $1 billion outstanding. It equates to about $5 million 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.
Jonathan Braatz, Analyst
Okay, good. Secondly, zinc costs are currently lower compared to last year. Eventually, you'll be able to benefit from these reduced costs. Do you anticipate a slight improvement in your operating margins in metal coating in about six to nine months? Will this have a positive impact on your operating profile?
Tom Ferguson, CEO
Yeah, we certainly hope so. Our Metal Coatings team is looking ahead at how acquisitions will impact their budget for next year, and we feel confident. We've discussed how they've effectively provided value through pricing. We expect to begin negotiations with the zinc suppliers in about a month. A significant consideration right now is that premiums are currently around $0.30 to $0.35 above the LME price. This uncertainty around next year's premiums is something we are keeping in mind. However, I anticipate that this situation will offer us some advantages.
Jonathan Braatz, Analyst
Can those premiums vary quite a bit year-to-year?
Tom Ferguson, CEO
They can fluctuate significantly from year to year, with recent movements ranging from under $0.15 to between $0.30 and $0.35. Additionally, there's variability based on different regions across the country. These factors all influence our commitments regarding zinc and our collaboration with suppliers. Currently, we are optimistic about the supply chain and the availability of zinc, which allows us to reduce some of our safety stock levels.
Jonathan Braatz, Analyst
Okay, Tom, as we look forward to 2024 and the new Washington facility, what are the anticipated start-up costs, and what kind of initial net contribution will Washington make to your finances or income statement? Will there be a bit of a drag with some costs to absorb before it becomes beneficial?
Tom Ferguson, CEO
We've accounted for everything. With the formal and complete startup in fiscal 2026, that's already included in our plans and outlook as we move forward. We will be adding skilled labor, training them, and while there's an element of that in our projections, it won't extend over a long duration.
Jonathan Braatz, Analyst
Right. Okay. All right. Thank you very much.
Tom Ferguson, CEO
Thanks, Jon.
Operator, Operator
The next question comes from Brett Kearney of Gabelli Funds. Please go ahead.
Brett Kearney, Analyst
Hi, guys. Thanks for taking my question and congrats on the continued momentum.
Tom Ferguson, CEO
Thanks, Brett.
Brett Kearney, Analyst
On Precoat Metals, great to see the improvement in consistency in margins this fiscal year. I think it sounds like a lot of the heavy lifting was done, eliminating some of that excess warehousing expenses. Just curious how you guys are feeling about, I guess, the sustainability of margins at that business here or even room for potential improvement, I know you'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?
Tom Ferguson, CEO
We feel positive about our progress. The Precoat Metals team has shown great discipline and focus in reducing excess customer inventory. The sites are now cleaner and more navigable, which enhances productivity and efficiency. We continue to provide excellent service and solutions to our customers, managing inventories more effectively. I'm pleased with our target range and the fact that we've achieved a couple of quarters with EBITDA around 20%, which appears more sustainable moving forward. While I won’t claim this is easy, the team is in a good rhythm. We are currently focusing on three out of four sites, with one that has significantly improved operations. We'll keep working towards continuous improvements at our facilities. Additionally, our efforts to vertically integrate with some customers are helping to increase volume and demand at several plants, making our operations more predictable and sustainable. This also paves the way for us to reach and surpass the 20% EBITDA target as we introduce new services. Over the last 18 months, we've invested in new slitters and capabilities, which are now operational and adding value.
Brett Kearney, Analyst
Excellent. Very helpful. Thanks so much, Tom.
Tom Ferguson, CEO
All right. Thank you.
Operator, Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Tom Ferguson for any closing remarks.
Tom Ferguson, CEO
Thank you, operator. Thank you for your time today, and I look forward to updating you on our third quarter results in just a few months. Thank you very much. Have a great day.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.