Q2 2021 Worthington Industries Inc Earnings Call
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Good afternoon, and welcome to the Worthington Industries second quarter fiscal 2021 earnings conference call.
All participants will be able to listen only until the question and answer session of the call.
This conference is being recorded at the request of Worthington industries.
If anyone objects you may disconnect at this time.
I would now like to introduce Mark as Rosy Treasurer, and Investor right, Sorry Relations Officer Mr. Rose you may begin.
Thank you Andy Good afternoon, everyone and welcome to Worthington Industries second quarter fiscal 2021 earnings call.
On our call. This afternoon, Andy Rose Worthington, President and Chief Executive Officer, and Joe Hayek, when it gets chief financial Officer.
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 format.
These statements are subject to risks and uncertainties that could cause actual results to differ from those adjusted.
You should our earnings release earlier. This morning, please refer to it for more detail on those factors that cause actual results to differ materially.
Today's call is being recorded and a replay will be available later on our Worthington industries website.
At this point I will turn the call over to Joe for a review the financials.
Perfect and good afternoon, everyone.
In Q2, we reported a loss of $1.40 per share versus earnings of 93 cents in the prior year quarter.
There were two unique items in the quarter to call out as follows.
We recognized a pre tax loss of 149 million or $2.18 per share on our investment Andy for the corporation during the quarter.
This loss consisted of two components first we had an unrealized loss of 144 million related to our 7 million shares of Nicola as a stock sales from $40.81 at the beginning of the quarter the $20.41 at quarter end.
As we mentioned on our Q1 call you share it will be subject to featured mark to market revaluations for as long as we own the stock.
Second we recorded 5 billion and expenses related to the legal profit sharing and bonus expenses that we mentioned last quarter.
In the quarter, we also incurred restructuring and impairment charges of $11 million or 17 cents per share.
And related to the divestiture of our North American cryogenic assets, which we announced during the quarter net.
As well as an impairment to our oil and gas assets due to the prolonged downturn in that market.
Finally, the prior year quarter benefited by 33 cents per share related to a pre tax gain from $23 million. We recorded in equity earnings on weighted completed the sale of international operations.
Adjusting for these unique items, we generated a second quarter record 95 cents per share compared to 60 cents last year.
Consolidated net sales in the quarter of 731 million decreased 12% from the prior year due to lower average selling prices and steel processing.
Lower volumes in the oil and gas business from pressure cylinders and our exit in Q2 last year from the engineered cabs business.
Reported gross profit for the quarter decreased by $15 million from Q2 last year to $135 million and gross margin increased from 14.6% to 18.5% in Q2 of this year.
Our adjusted EBITDA was $95 million in Q2 of 2021 up from $76 million in the prior quarter and our trailing 12 month adjusted EBITDA is now $370 million.
In Q2, we saw continued strength in many of our end markets and our teams executed exceptionally well continue to deliver value to our customers, while navigating fluids and challenging environment.
Turning to the businesses and steel processing net sales of $469 million were down 9% from Q2 to 2020, due primarily to lower average selling price.
Total shipped tons were up 2% from last year's second quarter due to an increase in total tons as a result of our consolidation of the Worthington Samuel coil processing JV earlier this calendar year.
Direct loans were flat year over year, and made up 48% of mix compared to 49% of mix than the prior year quarter.
Apparently for steel in the U.S. tightened significantly and our teams have been doing a great job managing our supply chains to meet the needs of our customers.
We continue to see solid automotive and construction demand and we are beginning to see improvements in demand related to agriculture and mark.
Operating income for steel processing of $38 million in the quarter. It was about $21 million from last year net operating margin more than doubled from 3.3% to 8%.
The large year over year increase was primarily driven by favorable conversion cost arbitrage gains that we were able to take advantage of given the rising steel prices and negligible impact estimated inventory holding gains in the current quarter compared to losses of $7 million or nine cents per share last year.
Based on current steel prices, we expect to have inventory holding gains in Q3 of this year.
Okay.
And our price cylinders business net sales were $262 million down 10% from the prior quarter as sales in the oil and gas business remains muted due to the downturn in that industry.
Our team in cylinders continue to perform at a very high level and demand for our consumer facing products remain solid.
Consumer volumes were down year over year due to production limitations as a result of staffing shortages at a few of our facilities, which limited our production.
Consumer business also had a very tough comp to last year.
Volumes in our industrial products business increased year over year, we continue to see softness in demand in Europe.
So that are cylinders operating income excluding impairment restructuring charges mentioned earlier was $14 million down $1 million from the prior year quarter non operating margins were essentially flat.
The decline was primarily due to the downturn in the oil and gas business, partially offset by improvements in the industrial business.
With respect to our JV equity income during the current quarter was $26 million compared to $47 million last year, which included a 23 million gain related to the sales leads to international operations laser results were down slightly year over year as the slow recovery in commercial construction continues excluding waste prior.
Gain on the sale equity.
Equity income was up slightly over the prior year quarter.
During the quarter, we didnt receive $30 million dividends from our unconsolidated JV.
Turning to the cash flow statement and the balance sheet cash flow from operations was $107 million in the quarter and free cash flow was $91 million driven.
During the quarter, we received $22 million in proceeds from asset sales primarily related to the divestiture of our cryogenics assets, we invested $16 million in capital projects paid $13 million dividends and spent 39 million to repurchase 860000 shares of our stock at an average price $45.
Looking at our balance sheet and our liquidity position on the day at quarter end of $707 million was flat sequentially and interest expense of $7 million was in line with the prior year quarter. We ended Q2 with $713 million in cash.
Earlier today, the board declared a 25 cents per share dividend for the quarter interest payable in March 2021.
At this point I will turn it over to 18.
Thank you Joe good afternoon, everyone.
Our fiscal second quarter was a record performance. Despite a few unique operating challenges.
The steel prices have been rising rapidly and supply has been very tight as demand continues to recover.
We are grateful to our mill partners, who are working hard to ensure that we receive steel in a timely manner. So that our steel processing business can meet customer delivery schedules.
Pressure cylinders, we are facing labor shortages in several regions strong demand, coupled with covance quarantines and hiring challenges eliminating production.
Despite these obstacles our employees continue to go above and beyond to meet customer expectations, while working safely and efficiently.
Excluding the large unrealized mark to market loss from our needless stake the core business delivered solid EBITDA and free cash flow from the quarter, we had a sizable cash balance that will allow us to take advantage of market dislocations, where it makes sense.
History has shown us the financial flexibility a key during times like these were opportunities arise and speed of execution matters. We.
We intend to continue our balanced approach to capital allocation in 2021, and this will likely include capacity expansion for high return businesses, M&A and opportunistic share repurchases.
Our business is holding its own with an effective vaccine rollout underway. We are optimistic that a normal marketplace is on the horizon hopefully by the second half of 2021.
Over the next several months will likely remain challenging from an operating standpoint, our leaders are executing solid business strategies that leverage our value drivers of transformation innovation and M&A.
Worthington is very well positioned to come out of this and that is stronger than when we entered further separating ourselves from our competitors.
A big Thank you to all the Worthington family from making it happen every day.
One final note.
Moving to industries is a great place to work because of its people and culture rooted in our philosophy.
Our philosophy as a set of principles with the primary goal of making money for our shareholders, but doing it by practicing the golden rule treat others. The way, we would like to be treated.
January 3rd Mark So to start day for us as one of the great disciples of our philosophy is retiring after 49 years with the company.
Virtual England started his career with us as a welder in 1971 in Columbus, Ohio.
Our cylinders business for several years and will retire as senior Vice president of manufacturing.
You accomplished a lot in his business endeavors that I consider its biggest impact to be on our people.
He has topped all of us lessons about how to be good business, but more importantly, how to be better people in the process.
You tell us how to you step on someone's shoes, but not mess up their shine.
And to hire the right people provide an environment, where they can be successful and hold them accountable.
And finally non us the importance of bridging the past the present and the future as we transform our business and prepare for success in the next 65 years.
Merger you are truly one of the great leaders. Thank you for a lifetime of contributions will now take any questions.
At this time, ladies and gentlemen, we would like to ask a question. Please go ahead. Please press Star then the number one on your telephone keypad.
Again that Star then one to ask a question.
Well from from just the momentum compiled.
Hey roster.
Your first question today comes from the line of Seth Rosenfeld with Exane BNP. Please proceed with your question.
Good afternoon.
Thats a good set of results from thanks for taking our question okay.
Thanks, Mike.
Cash if.
If I can kick off please coupled with a couple of comments you made in your prepared remarks within steel processing first of all can you.
From I came out about 30 people from the scale of inventory holding gain this last quarter.
Perhaps in a relative basis the scale of gain you would expect in the following Q3.
And then you also mentioned an arbitrage opportunity its steel processing can you give us a little bit more color on non with what that was in the scale. Please.
Sure. So a handful of questions in there. So we had a $200000 of inventory holding gains in the quarter.
So essentially zero.
We expect those will be significantly higher in Q3.
From a number on it but if you go back and look through the.
Weighted steel prices have trended, we do expect to have a significant gains in Q3 in that regard and with respect to the arbitrage gains that.
This is really are.
Intel and ability to lean in and take advantage of what was really a truly historic run up man in steel prices and so.
That group was able to generate pretty significant leverage and operating margins for the steel business in Q2.
Okay would you expect the arbitrage benefit to continue going forward or should we think about some trade off arbitrage benefit from a bit lower inventory holding gains bigger in Q3.
Yes, well index.
Fair and just to quantify that arbitrage gains after tax it was about $5 million in Q2.
And so certainly have inventory holding gains in.
Q3, the quarter is 17 days old and so hard to predict anything on arbitrage from just yet.
Okay, very clear and then a more general question. Please on the market environment.
You touched on earlier, how tight the market as we've all seen steel prices go vertically higher and we could weeks.
To what extent are you facing any pushback from your customers on the ability to pass on higher prices and on the supply side. Obviously a lot of this has been supply line rather than just the man line are you seeing any signs.
Getting to the weekend or when you think about the market going forward. How concerned are you about a crack on the horizon.
Yes. So you know obviously customers don't like higher prices, but the way we run our business. So I think you know this is when we sell to a customer. It's typically based on on index, plus plus us a dollar spread so the contracts really specifically.
He said automatically based on what the prices do.
Obviously, the spot markets, a little bit different and is the spot market for us as Andy anywhere around plus or minus 30% at any given time.
If customers need steel they obviously have to pay the spot prices I mean, that's just the way the market works.
With respect to pricing.
Prices have run off pretty substantially and I think our said there's still upward pressure.
There.
It certainly feels like it or January pricing right now.
But obviously when we get info.
So close to $1000 a ton for for hot rolled steel.
We will start to get nervous that doesn't get up there very often so I think while we haven't seen any cracks and the price at this point, we are starting to wonder when that might occur tight market right now.
Okay, great. Thank you very much.
Good day.
Your next question comes from the line of sales Keybanc. Please proceed with your question.
Hi, good afternoon.
Okay.
The quest.
Two questions just on the.
Steel inflation, obviously hot rolled spot has doubled theres, clearly anticipation or keeping the curve that it comes down.
That supply comes back on line and I think that seems to be pretty pretty well understood, but the next.
A few weeks to months how does this.
Flaishon or spike.
Impact.
The the margins in the steel consuming.
Businesses that that you hold and I think you mentioned the challenge.
In the consumer product line, just because of the lack of steel availability. So.
And labor So just just curious in terms of.
Firstly, the potential impacts just to the spreads in the non steel businesses in the short run.
And then when we.
When you can get back to lots of trending consumer cylinders.
Yes, a lot of questions there bill.
What I would say on the cylinders side of every business has a little bit different in terms of how it reacts to rising steel prices.
In cylinders historically, there has been a lag.
Between when steel prices rise and when that flows through I will tell you that we have become a lot more sophisticated over the last four or five years with respect to hedging.
Our steel purchases for that business. So I would anticipate that the impact is a lot less than it has been historically there.
When we.
Go to market, we're locking in some of those margins with hedges so.
Wave is a different business in and of itself as well wave it tends to do well in these environments because.
They're able to get price increases and.
Typically they get those price increases ahead of when the steel cost inflation hedge because they have steel on order for a number of months so.
I would expect for away from there would likely be some margin enhancement over the next couple of quarters for cylinders, there may be a little bit of degradation, but I don't I don't anticipate it will be.
As much as it has been historically and then in the steel business you know work.
We price based on a dollar spread for the most part and so while the dollar contributions shouldn't change significantly.
With respect to the money that we are making although there will be FIFO gains total here like that.
To some degree overall margin percentage will go down because.
Steel prices have risen.
Yes, Bill. This is finished off day these.
Bob There what you're embedding in your question was.
You are related to workforce and net both any non mentioned we have been challenged and that is not at all unique to us everybody across the country has been challenged with Covance and cases in quarantines and people being nervous on all those things and so.
Our plans and our people are doing a terrific job of keeping each other sales and looking out for each other but.
Dan needs. These things happen in the protocol from the CDC is what it is and so we could have sold more.
In the consumer business certainly in from brother businesses, if we had been able to produce it so as we have more and more available labor, we ramped up hiring and we obviously get people back after the end of their corn seed, but assuming that they are healthy and so we expected that will kind of get better.
A little bit as we go but certainly over the next few months should be back to the.
Full strength in terms of people at least.
Great. Thanks for handling my multi part question on trying to keep up with the SEC.
Sorry.
Second question your cash.
Back to the light from Q1 at least relative to the recent history.
What should we anticipate for budget this year.
I think if you look at.
Q1, being pretty heavy in Q2 being pretty light.
You could probably average those and double it for the second quarter.
In terms of spending what we spent in the second half sorry, what we spent in the first half.
As Andy mentioned earlier, we've got some what we think are really attractive growth capex projects that are coming up and.
So we're pretty excited about those but.
As you might expect that will.
Cost us money.
Thank you.
Thank you.
The good news is they're still as we have.
Cash balance that exceed $700 million right now so we're in a good spot.
It's going to take advantage of those capex projects as well as other capital allocation opportunities.
Thanks, Andy.
Your next question comes from the line of John Tumazos with John to methods, Inc.
Thank you very much.
Have you been able to get enough of each group of steel.
Or have you had to turn down any customer orders.
Because there's not enough steel.
John the market is very very tight and we are having conversations with our mill partners and our customers every single day.
Trying to get.
Everybody, what they need and ultimately our non partners are doing the same thing for us so.
Now getting into specifics, let's just say, it's a very challenging time for everybody in this ecosystem and everybody is aware of where we are in is China level best to.
Take care of customers wherever those customers might be and get through this as quickly as we can.
Can you give us any insight as to where they are.
Hot rolled or cold rolled or galvanized steel plate or.
Whether it's easier to get steel for your processing in Indiana, or Ohio versus Buffalo or somewhere else.
And anything like that.
I think that gives me the answer is it's it's not as easy to get steel as we'd like anywhere there are certainly pockets, where geography matters, but overall.
Overall.
We're doing everything we can and we know our partners are doing the same so I probably can reliably give you any more specificity than that John.
Four or five times over the years are done in a private placement offering or try to help out a new company I confess I haven't had one as good as your $2 million cool.
Is there a.
A desire on your part or any rationale for less of a few managers whenever there.
In a busy phase say trying to get something done.
Yes, John we have been essentially a passive investor in legal sense.
Probably 2016.
The company, we help start the company, we seeded with capital and then maybe the best way to say it as we set them free.
They went kind of their separate ways and started raising third party capital outside of Austin.
So we have not been involved operationally.
At all or financially from the.
Beyond our original investment so in fact, we got our 2 million investment paid back.
Two or three years ago, So we really havent, even had capital at risk since then.
We have a lot of we have a lot of respect from Mr. Russell.
But he is very capable guy and has built a nice team over there and.
I think Dave day there.
Working feverously to get their product to market.
Presumably is still on your 7 million shares the same as the lock up through November Thirtyth.
That is correct.
They are true thing having fallen away.
John presumably they maybe raise my true public offering.
Do you expect that to you.
I would be willing to say.
Say put 10% of your recent proceeds you're 50 million into their next financing.
Ill from along.
Well, they don't need capital right now John they have eight or $900 million of cash on the balance sheet and their burn rate as far less than that so now that to the extent they do need to raise capital down the road.
No I don't I don't think Thats.
We're not large.
Private equity investors. This was a strategic investment for us around the product line that.
We were in and around at the time, which has helped fuel systems.
So that that's typically the way we do investments we don't we don't invest in large public companies.
Thank you.
And again, ladies and gentlemen, if you would like to ask a question. Please go ahead and press Star then the number one on your telephone keypad.
Your next question comes from the line.
John Tumazos with John Smith.
Please proceed with your question.
This man crews in the minority interest deduction from net income.
Because of the profitability of the.
Sam we all JV.
Recently been acquired from expanded or TV history.
Mostly yes, you're correct John It is a reflection of the strength and improvement in our majority owned JV switch, which include TWB WSP and the Worthington annual coil processing venture as well as Mark.
Thank you.
Your next question comes from the line of Seth Rosenfeld.
Yes.
Please proceed with your question.
Thank you just one follow up please when we look at the two Jvs wave and Clarkdietrich that are most construction exposed or your comments on current demand trends I think last quarter you spoke about the headwinds from non resi on the profit.
Offices things of that sort are you seeing any meaningful weakness across those two businesses.
So I would not say meaningful weakness as Dan any other way other than kind of a slow recovery from the trough in April may I think ways waste volumes were down 5% quarter over quarter and.
Their profitability was down slightly so we certainly see them continuing to recover with GDP and with construction.
Still below where they were this time last year.
Okay. Thank you very much.
Yes.
And at this time there are no further questions in queue I turn the call back over to the presenters from closing remark.
All right well thanks, everyone for joining us today I hope that everyone listening has a safe and happy holiday season.
And get a chance to enjoy some quality time with your family. We look forward to speaking to you again after the new year. Thanks.
This concludes today's conference call. Thank you for your participation you may now disconnect.
No.
Okay.
Andy.
Okay.
Hi.
Andy.
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