Q2 2020 Earnings Call
Hi.
Good afternoon, and welcome to the Worthington Industries second quarter fiscal 2020, <unk> earnings Conference call.
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I'd now like to turn the introduction at the conference over to Mark is <unk> Treasurer, and Investor Relations Officer, Mr. will give you may begin.
Thank you Stephanie good afternoon, and welcome to our second quarter earnings call.
Before we begin I'd like to remind everyone that certain statements made today are forward looking.
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These statements are subject to risks and uncertainties.
Cause actual results could differ from those Jeff.
We issued our earnings release this morning prior to the market.
Please refer to it for more detail on those factors.
The results to differ materially.
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When we made available later.
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On our call today, President Andy Rose.
President and CFO Joe.
Joe has smelting.
Thank you Marcus and good afternoon, everyone.
Q2, we generated earnings of 93 cents a share versus 57 cents in the prior year quarter.
Work you unique items in the quarter, including the following.
When completed the sale of its international operations in September .
Resulted in a pre tax gain that increase equity earnings in the quarter by 23 million and EPS by 33 cents.
Estimate inventory holding losses in Q2 were six and a half million or nine cents per share compared to a gain of one cent per share in the prior year quarter.
We sold substantially all of the assets of our engineered cabs business to a newly formed company at simultaneously acquired another caps manufacturer and exchange we received a 20% interest in that new company.
In the quarter, we recorded on the equity income line expenses related to deal fees and early operational losses typical for newly merged companies of $1.5 million pre tax or two cents.
Well, we believe that new company will be profitable, we'll likely see some additional onetime expenses in the impacts of purchase accounting.
Impact or equity income in fiscal Q3.
Consolidated net sales of 828 million decreased 14% from the prior year quarter due to lower direct shipments and lower average selling prices and steel processing.
Despite the decline in revenue and the inventory holding losses, our gross profit in the quarter was flat relative to Q2 of last year at 120 to 121 million and gross margin increased from 12.6% to 14.6%.
[noise] steel processing net sales of $517 million were down 19% from Q2 of last year due primarily to lower direct volumes due in part to the work stoppage at general Motors and lower average direct selling prices that were driven by declining steel prices.
Total ship tons were up 6% for last year's second quarter.
Total shipments increased by 21% with 50000 tons of the increase attributable to our September acquisition of Heitman steels pickling facility in Cleveland.
Direct tons decreased by 6% year over year, but increased slightly sequentially.
Direct loans were 49% of mix compared to 56% of mix in the prior.
Operating income for steel processing of $17 million was down 8 million from Q2 last year, approximately $7 million, which was driven by the negative swing inventory holding losses.
Steel processing operating income was up 11 million on sequential basis and that team is managing the business very well with a focus on increasing market share and profitability.
We believe that the year over year Destocking pattern, we've discussed in prior quarters is coming to an end and volumes are stabilizing so demand in certain markets remain soft.
Finally, due to declines the steel prices during the second quarter. We do currently expect inventory holding losses will continue in Q3.
And our pressure cylinders business net sales were 290 million down 1% from the prior year quarter.
Operating income was up 6% to 16 million from $15 million last year.
I Wonder is improved results were driven primarily by increased demand in consumer products and they want to gas business, coupled with continuing success improving margins, partially offset by softness in the industrial products business.
Uptick end market conditions for cylinders are consistent with national trends as consumer facing products are showing some growth and industrial markets remained soft.
Operations in Europe continue to experience challenges with demand due to persistently weak economic conditions in those geographies.
Turning to our Jvs and equity income excluding the impact of the weight gain I mentioned earlier equity income from our joint ventures during the quarter was $24 million up 3 million from the prior year quarter.
Increase was primarily due to strong demand our construction JV Dietrich, which increased 5 million over the prior year.
Partially offset by onetime deal cost and the loss in our new caps joint venture, which reduced equity earnings by $1.5 million.
We received $27 million in dividends from our unconsolidated jvs during the quarter.
Turning to the cash flow and the balance sheet cash flow from operations was 104 million in the quarter and it's 169 million for the first six months of our fiscal year.
During the quarter, we spent 29 million to acquire Heitman steels, Cleveland Pickling operation, We invested 28 million on capital projects, and we distributed $14 million and dividends.
Today, the board declared a 24 cents per share dividend for the quarter just payable in March of 2020.
I'll close with some debt metrics funded debt at quarter end was flat sequentially at 699 million interest expense of 7 million was down 2 million from the prior year quarter due to both a debt refinancings that was completed in Q1 at significantly lower interest rates and lower average borrowings.
We ended the quarter with consolidated cash of 72 million and $550 million available under our revolving credit facilities.
Adjusted EBITDA over the last 12 months was 300 million and our net debt to trailing EBITDA leverage ratio is roughly 2.1 types.
At this point I'll turn it over to Andy.
Thank you Joe and good afternoon, everyone.
We had a busy quarter with the sale of engineered cabs. The closing of say the sale of waves international business and the purchase of payments pickling facility in Cleveland.
All while continuing to manage FIFA losses from the extended decline in steel prices over the past two years.
I'd like to remind folks on occasion, the lower steel prices are good for all of Worthingtons businesses in the long run it's just frustrating as we incur inventory holding losses as prices fall.
Overall, we feel good about where the businesses are and how we're positioned for calendar 2020.
Pressure cylinders is realizing solid benefits from the reboot of transformation that began a few years ago on the commercial operations and supply chain Workstreams oil and gas has recovered nicely and is now accretive to EBITDA, but we are facing some meaningful weakness in European cylinder business.
Ill has a bit more to go with FIFO headwinds, but early successes during the contracting season and improved volumes that are galvanizing plants are encouraging.
Our JV has had a solid quarter and both wave and Clarkdietrich have done admirable job holding margins at steel prices have fallen.
I would like to say, thank you to all of our engineered cabs employees for their hard work and dedication over the past several years.
We believe the newly combined company will not only be profitable, but as well positioned to be the clear market leader and outsource cab manufacturing under its new ownership.
With this sale, we've made significant progress cleaning up underperforming and noncore assets, we're very focused on owning businesses with solid free cash flow and operating them in such a manner as to generate the highest returns on capital that we can.
Our strategy is being built to drive these returns higher across all of our existing businesses as well as any new acquisitions.
As we look forward to calendar 2020, we're continuing to drive transformation acquisitions and innovation across the organization. So that we can deliver on our goal of year over year earnings growth.
We're also building stronger capabilities around automation analytics and advanced technologies that will enable us to further separated ourselves from competitors.
Thanks to all of our employees for their hard work and contributions in 2019. Those efforts are beginning to impact financial results and have us positioned well to start off the calendar 2020.
We'll now take any questions.
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Our first question comes from Martin Englert. Please go ahead.
Hi, good afternoon, everyone.
How are you.
Good and yourselves.
Great. Thank you could so if you touched on the heitman contribution there for the quarter I think you said that was.
50000 tons that it had contributed is that correct.
Yes, Thats and that was for two months. Okay. So if we think about an annualized rate on that is that something north of 300000 tons for modeling purposes.
Like Threeforty should be should be close to that that's not unreasonable I mean, if you think about it that was still was 25000 amount for two months.
Okay. Thanks for that detail there and.
You called out potential inventory or likely inventory holding losses in threeq, you as well any goalpost for the magnitude there.
Yes.
You know.
And we talked about this a bit last quarter.
For losses were smaller in Q2 than they were in Q1, we would expect that they would be smaller again in Q.
Q3 than they were in Q2 and if prices hold.
No guarantees obviously, but if prices hold we would be through those losses in Q3.
Through.
Through Q. Thank you for that if I could go one more on you talked about the transaction costs and cabs and I think that was 1.5 million on a pre tax basis two cents per share is that correct.
The 1.5 million is the combination of the transaction expenses and also the startup losses I would call them.
Okay got half half.
Okay, and then you made a very quick comment about steel processing.
Contract pricing, but I didnt quite catch that could you review that again provide a little bit more context.
I think that was Andy's comments, just so far so good in terms of the contract season in steel processing.
Meaning that something up year on year.
Yes, what I would say is the contracting season is still underway, but I think we believe at least.
Out at the gate, we've had some.
Share of wallet games with some of our our long standing customers, which has been nice and a few new wins.
Okay. Thanks for the additional detail there on nice results for the quarter.
Thank you Sir.
Your next question comes from John Tumazos. Please go ahead.
Could you say congratulations on the improvement Merry Christmas Swag to John the fees not on the call.
Could you explain the turnaround in.
The metal framing business, a year ago was losing a half a million.
Now.
Equity income was 13 million over three quarters, it's big change.
And could you explain.
The roof.
Of your steel prices.
You were mentioning the losses would be over in the third quarter two the earlier question.
So the November .
Spot prices were in the four ninetys and as soon as the.
November contract expired. The Nymex was 555 563 557.
Week by week.
Some of us might be under the wrong impression that prices. It immediately rose 60 $65. This month.
And you have contracts that are across all different products galvanized cylinders different locations different customers and I think the on the outside we might have an overly simplistic view.
The easiest way to try and explain why we will have FIFO losses in the next quarter, John with that uptick in steel prices, which is accurate.
There is a one quarter lag so.
The big driver of it for US is the quarterly index, so the quarterly indexes still trending down.
And then when you add the one quarter lag for December January and part of February we're going to experience losses, because those quarterly numbers will be down.
If that makes sense. Thank you as it relates to collect Dietrich what I would tell you. There is a couple of things are going on one there's there's a relatively new leadership team there.
And they over the past call it 18 months or so have been.
Changing some of the ways they go to market.
Which has been enhancing margins and then I would tell you that in this downward price cycle. They have been doing a much better job of managing.
Price as steel prices decline, so, whereas in the past oftentimes.
The price of metal studs would drop precipitously as steel prices fell theyve been.
Dropping more slowly which has enabled them to make money has the decline happens so there to be commended for that and I think there.
Competitors are also also behaving more rationally as as a result.
Yes, one more question as we look out.
Three four years.
And steel dynamics builds a whole new mill.
May be Big River does or doesn't and then there's three Oh electric furnace mill Doublings.
And Big River and.
Delta and then maybe.
JSW produces more maybe they don't.
But with all this new she'd output.
Hopefully the market grows and imports gets displaced does that make more opportunities for worthington.
Yes.
Is it as simple as if domestic sheet output grows to 20%.
Worthington should grow turned 20%.
Well I don't think necessarily that just because we add capacity means there is more customers buying steel so I would I.
I would think about it as what is the market for those products going to be and if the market is growing them, maybe there will be more opportunities what I would tell you as it relates to Worthington based on the new capacity adds a couple of things one is that.
The more capacity that goes on should continue to apply pressure to prices keeping.
Steel prices lower which is good for us I made that comment and.
In earlier, which is we are in our steel company a processor were a spread business. So prices are lower we use less working capital and in all our other businesses were essentially a manufacturer using steel of an input. So lower prices are good for our raw material costs. So overall I would say that capacity add should be.
Good for us in the long run.
There are few areas, where we compete with the mills and there may be.
Some headwinds there, but I would say overall, it's a good thing.
If the new capacity for examples of one or two mills in the Texas Gulf Coast displace foreign steel do you have a better opportunity of getting or processing or if it's a domestically produced Taiwan as opposed to an important.
I'm not sure that matters that much what I will tell you about if theres less.
Foreign steel in the U.S., there's less opportunities for.
Some of our competitors, who like to do very speculative buys at low prices and oftentimes, we'll use that to try and buy market share, which I think it impairs margins in the marketplace. So I think that net net would be a positive.
I was thinking at the mill, sometimes are your customer if they get behind in their pickling department or whatnot.
Yep.
Yes, I mean thats the interesting thing about our business right, we have the mills or our customers our competitors and our joint venture partners.
It is.
Almost have to take them all independently.
Thank you very much.
Thank you.
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One zero Isaac I got Mustapha Muesli Star Star, one or something.
Merry Christmas.
Thank you.
When I looked at the cylinders business. The sales came in line with expectations, but the margins were a little tighter was there anything unusual in the cdna side, because I know you you all you sometimes move.
Assets around at times or have inefficiencies and just look like the the DNA side that there was some some pressure that I wasn't looking for.
Yes so.
Margin wise in.
Cylinders I think things were generally good.
You mentioned a bit earlier.
Our European business is slow and this is the drag on margins certainly.
Consumer products business, and oil and gas business or year over year better.
There are some pockets of strength.
In industrial and a couple of pockets that are have some room to approve.
It domestically with with respect to SGN today.
Thats, largely and Thats less a.
Cylinders answer and more a cut our corporate wide answer Areshian a was up it's really I'd put it in three buckets fill the first is that labor costs are a bit higher or in a tight labor market we want to.
Attract and retain the best and brightest that we possibly can there are a couple of onetimers in there that relate to the engineered cabs transaction, but that were.
Expensed and recorded in corporate and the third piece I would say is that we we are investing and we have continued to invest in as Andy mentioned analytics advanced technologies, and PD and transformation resources to further improve our value proposition hopefully separate ourselves from others and so.
To an extent theres theres, an investment component there as well.
Thank you and then.
I think it with below the line.
Net income to non controlling interest 4.8 million highest I've seen on a quarterly basis for quite some time, which means something above the line was doing.
Very well, presumably what was that.
It's a it's a couple of our consolidated.
Joint ventures.
Specifically, one that does tolling.
In the coated business.
Okay.
And I think I had one more yeah I think Andy you answered. It was the why are you still experiencing holding losses, you gave the lag answer so.
All good over here thanks, John .
Thank you.
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All right well. Thank you all for joining US today, everyone have a merry Christmas to great holiday happy New year, and we will speak to you in March.
Yeah.
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