Q3 2020 Earnings Call
All participants will be able to listen only question answer session of the call. This conference is being recorded at the request Worthington industries. If anyone objects. You may disconnect. At this time I feel like introduced markets Roce Treasurer, and Investor Relations Officer Roce you may begin.
Thank you Michelle.
Good morning, everyone and welcome to Worthington industries third quarter fiscal 2020 <unk> earnings call.
Our call. This morning, we have John Mcconnell, where do you sense, Chairman and Chief Executive Officer.
Any rose when he gets president.
And our Chief Financial Officer, Joe here.
Before we can get started I'd like to remind everyone that certain statements made today are forward looking within the meaning of the 1995 private Securities Litigation Reform Act.
These statements are subject to risks and uncertainties.
Could cause actual results to differ from those suggested.
Future earnings released earlier this morning.
Please refer to it for more detail on those factors that could cause actual results to differ materially.
This call is being recorded and a replay will be made available later on a religion industries Dot com website.
At this point I will turn the call over to John personal opening comments.
Well, thank you Mark.
Thanks to those who joined US today for a third quarter earnings conference call.
In the third quarter was there again.
Well of course review our financial performance.
We expect that much of your interest will be on the effects of the crop virus most immediate have longer term impacts on our business at all.
Yeah, we're prepared to discuss what's attached to the best to borrow knowledge as of today.
Let's get started with our CFO, Joe Hey, does he reviews, our performance in the third quarter Charles.
Thanks, John and good morning, everyone.
Well, our Q3 and its which was just four weeks ago. The world was a different place.
So to start water recognized that well earnings calls are important aspect of our responsibility as a public company lot of what we talk about in the past tense today has less relevant normally would.
The current 19 virus and the steps being taken to mitigate it spread having significant negative impacts on our society and our economy.
There are grateful for and humbled by the work being done by countless individuals working to stem the spread of devices.
We are doing whatever we can to help contribute.
We're now as ever mindful of our philosophy and our belief that people are our most important asset.
Spirit ingenuity and dedication of our people is remarkable and it has been on full display last few weeks, there's a source of pride for all of US and that's trying time for the U.S. and across the globe.
Another through its somewhere in the quarter, Andy will provide some additional comments and then we'd be happy to take questions.
Q3, we reported earnings of 27 cents per share versus 46 cents in the prior year quarter.
So unique items in the quarter, including the fall.
We incurred restructuring and impairment charges or 36 million for 48 cents per share in Q3 compared to restructuring gain in the prior year quarter of 14 cents.
Current quarter charges, primarily related to a plant consolidation in our oil and gas business or you're consolidating three facilities the too.
Optimize efficiency and capacity utilization.
In Q3, recognizing a gain of 6.1 billion or eight cents per share related to acquisition. The majority ownership and consolidation of our Worthington Samuel coil pricing JV.
It was a cashless transaction that involve thus contributing our recently acquired Heitman steel Cleveland facility to the JV.
Which increased our total ownership to 63%.
The results of this JV had consolidated since December 31 2019.
And where it previously was included in equity income.
Our estimated inventory holding losses in Q3 were eight cents per share compared to losses 14 cents per share last year.
And the current quarter benefited by three cents a share as we lowered our reserve associated with the tank replacement program will then pressure cylinders.
This replacement program was initiated in Q3 of last year and negatively impacted those results by 17 cents per share.
There's a fair amount of noise numbers, but importantly, when adjusting for impairment restructuring and the impacts of the replacement program. Our Q3 EPS for 2020 was 64 cents versus 49 cents a year ago.
[noise] consolidated net sales of 764 million decreased 13% from the prior year, primarily due to lower average selling prices and steel processing or volumes in the industrial and consumer products businesses with their pressure cylinders and our exit from our engineered cabs business.
But the decline in revenue our gross profit in the quarter increased by 26 million from Q3 last year, and 116 million and our gross margin increased significantly from 10.3% to 15.1%.
Our adjusted EBITDA was 79 million in the third quarter compared to 57 million in the prior year and our trailing 12 month adjusted EBITDA is now $322 million.
Turning to steel processing net sales of $491 billion were down 12% from Q3 of 2019, due primarily to lower average direct selling prices, which were partially offset by increased volumes total shipped tons were up 36% from last year's third quarter, largely driven by the recent consolidation of our toll.
As such in JV, which added 152000 tons this quarter.
We also saw strength in our legacy coded toll processing business, where volumes more than doubled.
We were very pleased to see our direct tons also increased by 4% year over year continuation of the positive trend that we've been seeing there.
Direct Tom's were 44% the mix compared to 57% in the prior year quarter.
Operating income for steel processing of 19 million was up 9 billion from Q3 of last year due to higher crack spreads and increased tolling volumes.
In terms of outlook steel processing, what's typically has a strong seasonal lift in Q4 is going to face headwinds related to the automotive OEM shutdown and general economic conditions, which will impact.
[noise] and our pressure cylinders business net sales were 271 million down 7% from the prior year quarter.
Operating income excluding impairment restructuring and the tank replacement program was 12 million down 9 million from the prior year quarter due to lower volumes in our industrial and consumer products business, partially offset by an improvement in the oil and gas business.
Softness in the industrial products business was largely driven by continued weakness in our European operations.
In our consumer products business, we believe that volume decreases spread function of strong demand in Q2, and a warm winter, which reduced demand for heating applications.
Going forward, our fresh cylinder business has end market diversity and in past downturns has not seen precipitous decreases in demand across the board.
That said supply chain operational per customer disruptions are all possible in the current environment.
In addition, our oil and gas business will face headwinds caused by lower oil prices and decreased drilling activity in its markets.
Okay.
With respect to our JV equity income during the quarter was $25 million up 5 million from the prior quarter.
The increase was primarily due to strong demand in our construction JV car T trip, which increased 3 million year over year, we received 21 million and dividends from our unconsolidated jvs during the quarter.
So all of our JV is operated end markets that are being impacted by shutdowns and face possible supply chain and operational uncertainty. We do expect that they will all be negatively impacted to an extent vestments slows.
Thanks to the cash flow statement and the balance sheet cash flow from operations was 87 million in the quarter and 256 million for the first nine months of our fiscal year with free cash flow totaling 184 million in the same period.
During the quarter, we invested 21 million on capital projects, a 13 million dividends and spent 21 million to repurchase 550000 shares of our common stock.
We have recently slowed down our capex spend in for the foreseeable future are prioritizing spend related to continuity of operations.
And our balance sheet and liquidity position funded debt at quarter end was flat sequentially at 699 million.
Interest expense of 7 million was down 2 million from the prior year due to both debt refinancing and lower debt balance.
We ended Q3 with over 100 million in cash and working capital of nearly 500 million.
We also have over $500 million available to us under our revolving credit facilities.
Our net debt to trailing EBITDA leverage ratios roughly 1.9 times.
Yesterday, the board declared a 24 cents per share dividend for the quarter payable in June 2012.
Just want I'll turn it over to answer.
Thank you Joe good morning, everyone.
As Joe mentioned, the Coven 19 virus has led to unprecedented protectionist measures and as derailing, a well performing economy.
Many states, including Ohio in Michigan are implementing stay at home measures to control the spread of Iris.
As we manufacture or part of a supply chain that makes products for use in health care home and portable heating construction and critical transportation.
Infrastructure many of our businesses are considered the central businesses under these rules.
Therefore, we will continue to operate in those locations based on customer demand levels and with our top priority continuing to be the safety of our people.
We're working hard to serve our customers and our country by continuing to produce these important products as needed.
As I mentioned at Worthington, we've been very focused on the safety of our employees business partners. We're also developing and executing contingency plans for our businesses as they are impacted.
The good news is that we have a template from 2008 2009, and we're well prepared to move quickly and effectively as needed.
We have a strong balance sheet with low leverage and interest expense and significant cash on hand, and revolver availability to weather demand declines as they might occur.
Another benefit for Wilmington is that we have historically generated significant free cash flow and declining markets for liquidation of working capital, providing a natural hedge against the risk of lower earnings.
As for now we have not experienced a big drop in demand, but we are anticipating more in the coming days and weeks. Most of you know the temporary closing of many of the automakers and several major construction projects.
We are hopeful that many of these measures have their intended effect minimizing the spread of the virus, but our temporary in nature.
Of course, our steel processing business is heavily tied to automotive, which will certainly be impacted by a weaker economy.
Interestingly low financing rates in gas prices should help offset some of this decline.
We may also benefit from the trade deal that requires a higher percentage of us content. Once you once it is enacted.
We will point you to the I just data being updated regularly as a good proxy for what happens to auto demand overall in the us.
Pressure cylinders is a collection of niche products and markets certain segments of the industrial products business will clearly feel the impact of lower industrial production globally. We were already experiencing this in Europe prior to the outbreak interestingly consumer products, our consumer products business has proven rather resilient previous recessions.
As you will know we have for some time in investing in various forms of innovation.
Most of that investment has been in and around new product development within Worthington, but we occasionally invest in outside companies that have the potential to disrupt industries.
In 2015, we provided startup capital to seed Nicola Corporation designer and manufacturer of electric and hydrogen trucks and power trains.
Nicola recently announced a plan to go public in Q2 through a reverse merger into vector Ifyou acquisition Corporation.
Which if it occurs as structured would result in Worthington owning roughly 5.5% of the company.
You can find more details on Nicolas website, Nicola motor Dotcom.
As we prepare to navigate whatever comes next I would like to say, thank you to all of our employees for their hard work and dedication to Worthington industries over the past several weeks. We have received a lot of great ideas exceptional support and cooperation as we work hard to continue operating while keeping everyone safe.
On a brighter note economic disruption, while never welcome will create opportunities for our company.
We have a strong balance sheet and significant available capital to invest in our business.
To take advantage of opportunity to nesting M&A and allocate capital whether its value.
Our primary focus today is protecting our balance sheet, but once the market settle instability emerges we will move quickly to capitalize on value creating opportunities.
We will now take any questions.
At this time if anybody has a question please press star one.
Keypad again that would be star one on your telephone keypad wait for a moment tick all the given a roster.
Your first question comes from Phil Gibbs from Keybanc. Your line is open.
Hey, good morning.
Morning, Phil.
Question. Firstly was was on automotive clearly a lot of exposure as we all know steel processing business.
Based on what you're seeing now and I know, it's a fluid situation with the big three and others.
I think are.
Just just want to Nokia scores up with what you're thinking I think our auto auto analysts is looking for was 30% to 40% year over year potential decline in auto production is that.
Something that could be feasible based on what you're seeing right now on.
And our or any of your customers telling you when they may be back in action.
So the answer to your second question Phil is no we're in communication with the Detroit three obviously as.
In big important supplier to those guys.
I don't know.
Their initial shutdown estimates were through Monday of next week.
And not having heard anything today I wouldn't want to speculate.
The.
Numbers for 2030% down again.
You're right it's fluid everything is.
Possible the latest Hs estimates were down sort of 13% to 17% think as of yesterday for the year, which would put us.
14, 14, and a half million, but again thats an estimate.
And it will all depend on.
How quickly.
Two things happen one the production restarts into probably more importantly.
How soon and quickly people will in numbers return to dealerships and buy cars.
And that so thats a big unknown.
Do you have.
Can you I mean is going to say can you provide us some sense in terms of how this may or may or may not impact the the alternative fuels business as well I mean, low oil prices, but I know that there's there's been a push into some emerging technologies.
Trying to think about trying to think about what we may see.
There.
As well because I think you mentioned, the ancillary oil oil and equipment business.
Certainly going to be hit, but thinking about alternative fuels as well.
Yes, we interestingly fell we don't have nearly as much exposure to that market as we used to we've exited a couple of businesses and product lines related to that.
So while we are watching it.
And it will have some modest impact I don't think youre going to see that business should tail off obviously, because the spread is no longer there with the big decline in oil prices, but it's not going to have them, but you know a significant financial impact on us because we just don't have a lot of products that we're selling in that market anymore.
Okay.
And your comments your comments on Capex.
In terms of cutting cutting that I mean, certainly that's emerging for from US if anybody in the industrial landscape right now but.
Any any sense in terms of.
Where that can go.
As I know the company is a little bit different.
In terms of its composition in the last crisis, but were working.
Could we expect to see that those levels versus the 80 plus million that we've been seeing the last few years.
Yeah I mean.
I would suggest that we can probably squeeze that maintenance capex is probably 25, maybe $30 million.
It's a little fuzzy just because define maintenance capex, but.
I think in the last downturn, we got down to those levels and I would suggest we could probably do something similar.
Okay.
And so.
That notwithstanding that's not our plan right this minute right, where it will come down to.
To the level of that it needs to.
To help us think about things that we have focused and prioritized our campus accordingly.
But we also see opportunities.
As Andy mentioned, because as things are happening as things are just place.
When we get when the economy gets its feet underneath that we feel like.
People in a position like ours will have some pretty good opportunities to grow and to do things that we're probably a bit more difficult with.
Frothy, M&A environments and things like that.
Hi, Good let me just one more before I jump off.
I know theres been a lot of gloom and Doom and seriously in and that's that's a serious concern given where we are in the here and now but what what's is there are you modeling any scenarios, where there could be a sharp.
Bounce back in three or four months similar similar to some extent work with what we're seeing in China because.
I think.
Well not likely it's certainly a possibility so I'm wondering how you're thinking about the potential for for that not wanting to cut too deep. Thanks.
Yeah and to be honest fell I mean, we haven't really started.
Scaling down the business were keeping people around and we're actually hoping for that me shaped recovery.
Day by day is a little bit of our motto right now and we get new information everyday, but where we absolutely want to be prepared for a bunch of different scenarios, one of which would be this thing bounces back pretty hard and we're ready for that we want to be able to serve our customers. We also have mitigate.
Asian plans or different scenarios, where it's not as good but we're going to take a measured slow approach to anything in terms of scaling down our business.
Thank you.
Again, if anybody would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from John Tumazos from John Tomorrow. Your line is open.
Thank you for taking my question. Thank you for your service to the company in the team.
Talks times.
Clearly the traditional may seasonality is out the window.
Is it reasonable guess for me revenues about 20% less than what you reported this morning.
Okay.
That's a good question John.
I I think the answer to that question probably depends on what happens.
In terms of timing of reopening the economy, you know I think the hope is.
Mid mid April.
If that happens I think may you know, we could see some bounce back in may, but I don't until we know when the state start opening things back up it's very difficult to say what may would look like.
Yes, John I would I would encourage you to.
You know this but in our in our steel processing business.
If you include our majority Jvs, that's almost 60% automotive.
March was has for the first three and a half weeks then okay, but the declines and the demand drop off our our here.
And so as Andy said it when we can pinpoint.
With better certainty when things open back up we'll have a better idea of what revenue impacts are likely to be not just in the may quarter, but beyond.
Second question.
Our share buybacks.
Off the table because of the macro business uncertainty.
And.
I'm sure you event.
Very close relations with.
Many of your customers some of whom are not public well well as well capitalized as Worthington.
Do you see yourselves.
Making bridge loans are taking equity stakes or even buying out some of your good customers that might fit Worthington model.
I would suggest that we are in the manufacturing business not in the financing business. So I do not.
Anticipate there will be situations, where we want to take ownership of customers our vendors.
No in the last financial crisis, there were a lot of there was a lot of stress in the supply chain and we had very low default rates.
Across our portfolio I think it less than 1% in terms of customers paying us et cetera. So.
We're watching it very closely right now.
But I don't think you're going to see us loaning money to folks.
Certainly not.
On purpose and taking equity stakes in.
In terms of your other comment I would tell you where we're prioritizing capital right now is first and foremost to protect our balance sheet.
You heard us talk a little bit more about maintenance capex, we want to keep our equipment market ready and in good shape.
And.
We're also focused on preserving our dividend assuming that continues to make sense.
Beyond that I would tell you, where we will look for stability in the economy and our business and once we feel that we have that there will be a lot of capital allocation decisions.
Where we can think about deploying capital to create value for our shareholders. We know that will be there, but we want to make sure that we do that at the right time and that it's hard to say when that time might be.
Thank you.
Again, if anybody has any questions. Please press star one on your telephone keypad.
And that would be star one on your telephone keypad.
I have no further questions in queue I turn the call back over to presenters for closing remarks.
Again, we thank you all for joining us where this conference call.
We all need to stick together to.
Work, our way through this kronos virus epidemic.
And last summer and turning to watch jobless claims.
Claims fall and all those things that will signal their economy is starting to return to normal.
Hopefully will not be too long and hopefully we all get through well. Thank you again.
Thank you everyone. This will conclude today's conference call you may now disconnect.