Q4 2020 Worthington Industries Inc Earnings Call
Well be able to listen only until the question answer session up to call.
This conference is being recorded at the request stuff Worthington industries. If anyone objects you may disconnect at this time.
I would now like to introduce markets Roce Treasurer, and Investor Relations Officer, Mr. Lucky you may begin.
Thank you Christine.
Good morning, everyone and welcome to Worthington industries fourth quarter fiscal 2020 earnings call.
Our call. This morning, we are John.
What do you can see chairman and Chief <unk>, Chief Executive Officer.
Andy Rose when it gets president.
And our Chief Financial Officer, Joe.
[music] before we 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.
Actual results to differ no suggestion.
We issued our earnings release earlier this morning.
Please refer to that for more detail on those factors that could cause actual results to differ materially.
This call is being recorded and a replay we made available later on our Worthington industries Dot Com website.
At this point I was trying to call over to John for some opening comments. Thank you Mark.
Oh, you ran our announcement last night I have decided to transition out.
She's executive officer.
Well, let me see executive chairman.
And heroes has been appointed by the board to become our next CEO, especially on the same uptake in retaining the position.
[music]. These actions are the combination of a well thought through succession plan.
I'm proud of our employees.
And work hard everyday to make a difference, especially in these challenges.
[music] companies and a great position to grow.
The next decade will bring exciting opportunity.
Andy on the entire leadership team, perhaps the strongest in our history would liberal those opportunities.
I'll now turn the call over to our CFO Joe.
Review, the fourth quarter detail so.
Good morning, everyone.
[music], John I know I speak on behalf of all of Us.
When I say, how grateful we are.
But this company.
For the impact that you had on us collectively.
So many of us as individuals.
Looking forward to your continued leadership, that's our executive chairman.
[music] I'll spend a few minutes view in the quarter and then we'll turn the call overtime.
Dynamics had a significant impact on demand and on our results.
Well the negative impact 19 are easy to see it is also brought out the best and our people.
Across where they said, we're very proud the way our teams have supported each other.
Communities.
Customers and our business by keeping each other states.
Finding innovative ways to navigate the evolving new norm.
Well this crisis the sports difficult decisions, we believed that our people first culture has been all full display we will emerge stronger as a result.
[music] in Q4, we reported earnings of 29 cents per share versus 66 cents in the prior year quarter.
In addition to low demand in several key end markets due to cope with 19.
There were a unique items in the quarter and of course the following.
We incurred restructuring and impairment charges, but 15.7 million or 20 cents per share in Q4.
Severance charges.
The write down of Tradename associated with ample European operations, and our exiting the two remaining engineered cabs. So he's not included in that sale.
This compares to impairment charges of 8.5 million or 11 cents per share in Q4 question.
Estimated inventory holding losses in Q4, sorry estimate holding gains were one penny per share compared to losses of 11 cents per share in the prior year quarter.
[music] consolidated net sales of 612 million decreased 35% the prior year quarter, primarily due to significantly lower volumes in steel processing shift in mix in cylinders interested earlier this year from the engineered cabs business.
Gross profit declined in the quarter by 36 million from Q4 last year to 90 million a.
Gross margin in the quarter increased to 14.7%, 13.4% last year.
Our effective annual tax rate was 25.1% for the current here versus 22% Lester.
[music] adjusted EBITDA was 67 million in Q4 compared to 89 million last year and our trailing 12 month adjusted EBITDA is now $300 million.
We generated positive EBITDA each month Q4.
Mentor diversified mix of offerings and to our team's execution.
So what sequentially through the quarter really saw the slow down began in late March April was most challenging month for us demands and profitability wise, what may showing signs of recovery, particularly later in the month.
[music] steel processing net sales of 328 million were down 44% from Q4 last year due primarily to lower volumes.
Total ship tons were down 15% from last year, largely driven by reduced automotive in heavy truck demand associated with the coven shutdowns.
Our shipments automotive customers, which in the 12 month ended February were 58% of steels revenue, we're close to zero and both April and May.
Direct loans declined by 32% year over year and were 45% the mix compared to 55% in the prior year quarter.
Bolt ons rose by 4% year over year, due primarily to our consolidation of the what intense Samuel coil processing JV earlier in the fiscal year end due to strengthen our toll coding JV.
Operating results and steel processing, a loss of 1.8 million typically strong seasonal quarter was down from operating profit of 14.9 million in Q4 last year due to lower volumes, partially offset by lack of inventory holding losses in the current period.
Due to recent decline when steel prices, we do expect to have inventory holding losses in Q1.
Turning to pressure cylinders net sales were 283 million down 12% from the prior year quarter.
The decline was primarily due to a change in mix and industrial products and lower volumes in our oil and gas business.
Softness in the industrial products business was largely driven by continued weakness in our European operations.
Economic conditions in Europe are soft prior to their shutdowns and conditions worsened during the quarter.
Volumes increase for our consumer facing silver products sales were positively impacted by state homeowners.
Partially offset by declines or product lines that rely on hallmark commercial installations much more difficult during the shutdown.
Cylinders operating income excluding impairment and restructuring was 22 million.
2 million from the prior year quarter.
Operating margins on the same basis improved 7.7% from 7.5%.
With respect to our JV equity income during the quarter was 17 million.
12 million from the prior quarter, excluding a write down in Q4 up 2019 of our Chinese steel joint venture.
The decrease was across the board as our JV is primarily serve the construction and automotive end markets.
We received 45 million in dividends from unconsolidated jvs during the quarter.
For the year.
What do you income from our Jvs was 115 million and we received 123 million in dividends cash conversion ratio of 107%.
Turning to the cash flow statement on the balance sheet cash flow from operations was 81 million in the quarter and 337 million in the fiscal year.
But with free cash flow totaling 57 million and 241 million in the same period.
During the quarter, we invested 24 million on capital projects and paid 13 million dividends.
Looking at our balance sheet and liquidity position.
The debt at quarter end was essentially flat at 700 million.
Interest expense of 7.5 million was down 2 million from the prior quarter due to both in debt refinancing and lower debt balances.
We ended Q4 with over 147 million in cash up from 103 million at the end of Q3 and working capital increased by 11 million sequentially in the quarter to nearly $500 million.
We have an additional 500 million available under our revolving credit facilities.
Our net debt to trailing EBITDA leverage ratio at quarter end was roughly 1.8 times.
Yesterday, the board declared a 25 cents per share dividend for the quarter, which is a one cents increase over last quarter payable on September of 2012.
I'll be the 10th consecutive year, we've increased our dividend.
Before I turn it over to Andy but to make a few comments related to our investment at Nucor Corporation.
We discussed on our Q3 call we provided a seed investments nickel on 2015.
On June the fourth God began trading as a public company and we own roughly 19 million shares.
Oh shares are subject to lock up in terms of which we recently disclosed that FCC five.
Well there was no impact to our Q4 earnings related to our investment in Nicola accounting rules will require us to mark our shares to market going forward, which at current prices, which generated a significant gain in Q1.
Since our shares are currently subject to a lock up we have not yet made any decisions regarding our holdings, we would like to congratulate Trevor Mark and the entire nicolette team for what they have accomplished we wish them continued success.
I'll turn it over to Andy this time.
Thank you Joe good morning, everyone.
This quarter had a lot of moving parts, but fortunately business conditions are proof.
We had some positive development developments around our investment in Nicola.
Most of our business is operated under the essential business rules, although demand levels fluctuated significantly depending on the end market products.
March was relatively normal from an earnings standpoint April was essentially breakeven amazed how most of our businesses make money, albeit at lower levels with the exception of those tied to automotive.
Our employees are to be commended for adapting quickly to these volatile business conditions, all while following strips safety guidelines and evolving protocols to protect those in and around our facilities.
As June and that means the new fiscal year. This year is particularly special because we're celebrating our 60 didn't anniversary.
Our philosophy and our people live it every day to thank for reaching this milestone.
We began the year with a strong balance sheet low interest expense and significant cash and revolver availability.
Assuming the economy continues to open back up here and abroad, we expect to see improvements in our businesses, David particularly those that were hardest hit last quarter.
As it occurs we believe there will be opportunistic ways to allocate capital to drive value for shareholders.
However, with the economic outlook still unclear, we will remain guarded on our approach until there is evidence of a broad based recovers.
I would like to say thank you again all of our employees for their hard work and dedication to Worthington industries over the past several months as an organization, we have adapted well to our new normal and while we are hopeful the worst is behind US we're prepared for whatever challenges lie ahead.
Finally, I'd like to thank our chairman John Mcconnell and the board of directors for giving me the opportunity to lead this great company I'm humbled by the selection and highly motivated to continue the legacy started by John each with all the 1955 and successfully expanded upon by John P. Mcconnell.
My goals are simple to protect our unique culture guided by our philosophy in continue delivering solid returns to our shareholders.
We have a talented leadership team in great employees, all across the company, which gives me high confidence that together, we will deliver on these goals and more.
I'll take any questions.
Thank you ask a question.
The press Star one on your telephone to withdraw your question. Please press the pound ASCII. Please standby, we compile the Q and a roster.
[noise]. Your first question comes from line of a Seth Rosenfeld from exam B M. P. Your line is open.
Good morning, Thanks for taking my questions today, and congrats on a very strong course.
Thank you said if I.
If I may I, just wanted to follow up with regards to Nikolai and I I understand you you've already commented that you might be limited what all you can say given the lock up but if we can try if you can give us a little bit of color pleased with how you think about this business from a strategic perspective Worthington does have a number.
Stakes in businesses.
I had been longstanding what do you view Nicola something up extra Egypt long term holdings or a business that would be potential disposal opportunity.
And then a follow up you didn't make a comment in your prepared remarks about kind of capital allocation recognizing ways to drive value for shareholders, given where we are in this cycle.
We're worthington to dispose, it's taken Nicola how would you envision potential capital allocation ups and pleased with regard to either shareholder returns or further investments in the business. Thank you.
Yes that with respect to any decisions around equal we have not made any and we're not going to comment further at this point.
I will tell you that from a capital allocation standpoint, you know Worthington historically has followed a balanced approach we've been a dividend paying company.
For since the first year, we went public and over the past 10 years Weve Allott allocated capital to share repurchases to benefit our shareholders. We've also continued to protect pursue capex investments to reinvest in the company and as you would well now we're a profit sharing company. So he shares.
Some of our profits for the employee so I would expect that over time.
Regardless of what what we do with the goal of that will kind of follow a similar approach.
Thank you, it's very clear and just one follow up please with regard the timeframe of lockup I think there's been some continued into the drastic with regards to the timeline.
Can you just walk us through this kind of staggered approach that's lockup systems. Please thank you.
Sure Jeff It's Joe.
Rather than doing that on this call. It it is and as filed with with with the FCC.
Then we would just direct people to that when a document.
Okay. Thank you very much.
Your next question comes from the line, Phil Gibbs from Keybanc capital markets. Your line is open.
I mean, congratulations to John and Andy I know the.
Transition will be.
Seamless and congratulate you both.
Yes.
Thanks Bill.
First question just is just as on the cylinder side I think Joe you mentioned in your prepared remarks and clearly.
I guess in hindsight not a huge surprise based on this the stay at home orders, but.
What are you seeing now I guess in the consumer businesses that strengthen the can't being in DIY why in and.
Grilling how is that all.
Is that all saying staying Stalin for you all.
So the the quarter and the new fiscal year is all of the three weeks old fill and yet you're right.
The mix in cylinders shifted.
It's very difficult for contractors to enter People's homes. It was very difficult for anything that happened on commercial construction sites over in Europe.
Automotive and things like that were soft but the.
Product lines of ours that were concern that our consumer facing a we saw benefit and so.
That that continued into may and into the first couple of weeks of of June the watch word for for all of US right now is still unfortunately uncertainty because.
We can't predict whether.
Those things will continue unabated.
For the next 12 months or or not but.
You are in a seasonally strong time for outdoor activities.
Which which we think drove some of that strength in Q4 and.
Moving forward, we would expect.
Asset knowing anything else further trends to be seasonally normal.
[noise] sale that business just as you would have had a sense is has proven in the past to be counter cyclical. This is obviously a different situation with.
You know a virus sort of driving.
Yes, economic decline, but.
It's behaving similar to in the past.
And potentially even a little bit stronger.
Okay.
When.
We look at waves.
That business from what I understood, what I understand has a high repair and remodel component to the commercial construction aspect of it.
So probably still more resilient through through cycle, but I'm sure it impacted because of the.
Just the just the non essential businesses et cetera, and people shutting down office complex and some.
Any any changes you are seeing to that business right now or things kind of where they where they have about.
Yeah, I think as it relates to wave and to a certain extent clarkdietrich as well I mean commercial construction was obviously impacted.
Probably more so in some of the bigger cities that were hot spots like New York City, but.
Their demand was off during the quarter.
There is longer term implications here some are probably positive and there's certainly some that are negative.
The work from home trend, obviously for the long run has some negative implications if theyre not building as many commercial office buildings, but as you said wave is Uh huh.
As a percentage, sometimes as high as 60 or 70% repair and remodel business and so what that means for existing office buildings, probably a lot of reconfiguration of workstations and the way people work and social distancing continue so there could be some positive impacts there too. So these are the.
It's really hard to predict kind of where this thing goes the in the short run no. There their volumes are up just because activity is down.
Thanks, Andy and looking at the steel processing business.
Clearly a big automotive component I would think March was still Okay. April was the biggest impact may start to come out of this we thought of it as you pretty position for the restarts.
And I know you've got some new businesses sprinkled in there as well just trying to consolidate so is there going to be a big.
Change in your mind in just aggregate volumes in that business in the first quarter or given the fact that March was still good and now we're recovering some things could be reasonably.
Stable.
Just trying to understand lot of moving pieces with all the told business that's being thrown in there now.
Sure and yeah, Phil Interestingly.
The.
Shutdowns in automotive and we're in we're at mid March and our shipments were still pretty reasonable for another 10 days post and so as a consequence on on the back end.
Our shipments lag the restart since I think there were some inventory on hand, and so as as we look.
Into our big end markets, there are automotive construction AG and heavy truck and so as we.
We look at.
Hs forecasts and things like that as as the automotive.
Ddrthree and others.
Ramp back up we would expect to.
We have our results be impacted and have a reasonable correlation.
Those.
Hi, just forecast continue to bounce around a little bit and some of those restarts have been a bit.
Bumpy, but anytime you do take 58% of your business and have it via zero for.
A couple of months, it's really tough to overcome and certainly that is not going to be zero in June.
Thank you very much.
Your next question comes from the line of John Tumazos from John Tumazos, very independent research. Your line is open.
Thank you very much I want to thank John Mcconnell for his service to the company, it's been a pleasure and honor.
Work with you for 30 or so years.
Thank you John pleasure to work with you.
I want to congratulate Andy and the others on their promotions.
And Mark Russell, who is not on the call.
Pre weaving Worthington in finding a good gig.
Oh.
I'm sure Hill will appreciate that.
The.
With regard to the.
Core businesses Theres been a little bit about people on the economy.
Could you tell us if there are.
It's from suppliers are customers permanent shutdowns.
I'm thinking of U.S. steel <unk>.
Great Legacy course, Michigan.
Cliffs idling, the hot strip mill and Dearborn, Michigan.
Some of the auto plants that are permanently closed.
Fortunately, you're not exposed to the airline industry or.
Travel and entertainment so much but.
Are there any.
Changes that you have to make and maybe those are the changes you are making because your customers and suppliers are changing.
So so John it's Joe a couple of thoughts. The first is that we haven't had any material.
Disruptions from supply chain perspective, we.
Certainly dealt as as everybody did with.
Shutdowns and other disruptions.
We don't think that any of those will have a.
Material impact our business.
That we see it right now ultimately we feel like the steps we've taken at some of the great work that our teams have done.
Positions us exceptionally well with with customers, we've been able to take care of our customers were able to offer them.
Stability and solutions that we think are unique to us.
So we love where we're positioned.
But we also need to reach as high as we'd like to we need reasonable demand than some of that is out of our control, but we are thinking about that both long term short term everyday and we like where we are for now and John maybe just to add a few other color comments here that.
We a number of years ago developed secondary and tertiary sources of supply on steel side for a really all of our products.
Because we didnt want to take the risk of.
Shutdown of Amelle really creating our supply so we're pretty well prepared for that I'm sure there will be.
Ships that happen, but we do have other sources of supply around that the on the only other thing that comes to mind for me as there has been as it related to the auto restarts. Some parts suppliers that are supplying demand the Oems, where they've had a delay production or idle facilities for days or weeks.
Because they don't have all the parts they need thats not necessarily direct to us, but it does impact our.
Our shipments of steel.
Could you give us some color on the Serviacero and.
Artiflex being and the Red and the corridor, where their charges to those or was it just no revenue and some still holding loss in each case.
It's the latter job.
If I could ask one last and thank you for putting up with me.
Owning question about Nicola.
Couple of questions.
So and the next quarter, if your reported a mark to market.
That's kinda they'd be a noncash pretax item.
Does it have any tax implication.
First.
The we will we would only pay attacks on a realized gain.
Will you provide free taxes that are deferred or is it just not enough not in the tax line at all.
Yes, we wouldn't be in the tax line at all.
It's not it misses no tax nothing.
It's just a paper right up and write down every quarter, we never right.
Next question and this is a hypothetical.
If you.
At a later stage.
Dividend it did Nicole shares to the Worthington shareholders.
Wed all of us decide whether were.
Excited about the electric or hydrogen trucks.
Uh huh.
Would that be a taxable event for worthington or for us or would just be a return of capital.
And if you can answer this right now I apologize for being so specific.
Let's call it alright hypothetically the.
Tax consequences for us.
Would be the same.
As as they wouldn't be in any given scenario. So we would pay the corporate tax and and are the shareholders would pay whatever is appropriate for that.
So you would pay taxes, if you distributed the shares.
That is our understanding from talking to people.
That are experts and tax yes.
Well, let me just interject.
I'm not an auto analysts, but I like what I've read about in the Cola.
Like that it's focused on one product.
Where I'm uncomfortable that Tesla makes high end cars economy cars trucks.
Right.
It's to build charging stations every state.
Tries tries to do too much I think that Nicole wise and more focused model and Mark is a businessman.
Notebooks works on nuts and bolts. If you just held the Nicole for Awhile unleaded grow I'd be very comfortable was a minor but happy Worthington shareholder.
Thank you John.
All the best.
Your next question comes from line of Edward Colliers from.
See fundamental your line is helping.
Hi, good morning, Thanks for taking my question.
Fire alarm one off here so sorry.
Uh huh.
Two quick questions for me.
First is maybe a longer term question.
To get your thoughts on the 10-K, you mentioned that the shift from steel dollar generals and pardon.
But that's part of the business much.
Just wondering if you can provide maybe some more context around the topics of competition and obsolescence.
And specifically.
I'm wondering if you guys are seeing any long term threats from technological disruptions or maybe two forms of competition.
In your end markets or.
You are legacy competitors in your specific business lines.
Yeah, we're having a little bit of a hard time hearing you I heard parts of your question.
The present with respect to technological obsolescence I don't.
I don't think were experiencing a lot of.
Is that right now in in our.
I'll call it product lines are different businesses.
I didn't really catch the first part of your question now.
Yeah.
Well there was mostly the question can you hear me better now.
Little bit yes.
All right sorry about that yeah, I'm, just wondering if youre seeing you know any new forms of competition or you know shifts in your end markets are you know maybe I'm going to be.
Our in long term impacting demand for your products.
Yeah long term partnership this is Joe and long term yes.
It's hard to say, we certainly realize that people can enter and things can happen.
With respect to sort of newer entrants to competition I mean, we always have several competitors and all of our business. They are they are different.
Whether you're talking about steel or cylinders for our joint ventures.
We havent noticed.
Anybody in the last threat 90 days that emerged on the scene, but.
Rest assured we make it our business to know who those folks are and we try and compete as successful as we can with.
And I guess I might just add one of the things that we have experience is that.
The current environment politically is somewhat protectionist.
For the you asked which is I think help some of our products and.
One of the outcomes of coven is likely to be you know near shoring or re shoring of certain critical products and supply chains and I think we are well positioned to benefit from that for sure I think we've seen some of that already but more to come lightly.
Okay, I'm sort of wondering you know the efforts to improve mileage in cars doesn't seem to.
Hurt the business in any appreciable way units.
And I wouldn't think but just want to can you guys that.
Shift towards electric vehicles, you know probably does the parts demand for your products, but just want to confirm that.
I mean, we haven't experienced any appreciable.
Demand loss from electric vehicles.
As as more and more electric vehicles at the road there that you know there that we expect there could be some.
Demand loss, there, but I will tell you the counter to that from our vantage point is we believe were the vast and most efficient steel processor in the country and it's an opportunity for us frankly to take market share and we've done that recently.
And we have products that benefit from that right Peter PWB, our laser welding business is capitalizing on Lightweighting and other things that are going on in automotive so.
Yes, it's a threat potentially down the road, but it's it's a huge opportunity for us right now.
Okay, Great. Thank you and then my second question is regarding the lockup agreement that you guys mentioned.
I'm just wondering.
How you guys came to the terms of that lock up agreement or was it a unique negotiation you guys undertook or are all the early investors covered by.
Similarly, structured agreements or do they have more typical six month partnerships.
Yeah I appreciate the question not something that we can Merck plenty I'm talking about thank you though.
Okay got it thanks guys.
Your next question comes from line Seth Rosenfeld from Exane B M. P. Your line is helping.
Well, thank you for taking couple of questions.
If I may just with regards to this steel processing business. If you follow ups. There you comment in prepared remarks expectation for some windfall losses in Q1 are able to give us any color on potential scale that those windfall losses, perhaps you referenced Cox periods.
And then secondly, with regard to automotive order book I think are able to get a little bit more color with regard to current order intake and perhaps how that might compare to normal pre coke at levels.
He didnt no I think half of your furloughed workers are already coming back to work in the June should we think about that and something of a proxy for for Boeing. Thank you.
Yeah, I mean, the ramp up has been a little.
Bumpy you know.
Partly because of some of the supply chain issues for parts and other things and.
Different facilities opening up at different times for our customers, but I.
I guess, what I would point you to SAP is the I just data in terms of demand for this year, there, saying 13, three maybe 13 that million cars versus.
Original forecast of 16, and a half and obviously, we lost six to eight weeks of production already. So so we do expect that it will it will be ramping back up to kind of a normalized level.
If it hasn't already probably not they're quite yet, but certainly by July and that's shutdowns are going to be less in July.
For the automotive change over so I would expect we're getting getting back to normalized levels here pretty soon.
I'm not sure I understood. The first part of your question or.
We expect shocks to us.
No sorry for the inventory holding losses.
Okay one.
Yes, yeah that wasn't from that one that was that on that one Seth I know you've been you've been around us for a while it's really based on the decline in steel prices and if you look at the hot rolled.
Per tonne over over the course of time and I look at what happened sort of starting in March.
You, probably get a pretty reasonable proxy for it.
The one thing I did actually when I want to correct when a John Tumazos as question was around the tax we would.
We would.
Probably the it would be netted but we would likely record a deferred tax in in Q1.
The the gain on our investment in nickel.
Thank you very much.
Sure.
Okay. If he would like to ask a question.
Press Star and the number one on your telephone keypad.
[noise] and there are no further questions at this time I turn the call back over to the company.
Thank you all for joining us for our fourth quarter earnings call look forward to.
Turning to produce good results for you and.
Okay finished your day well spacing.
Thanks, everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].