Q3 2021 Worthington Industries Inc Earnings Call
Mark.
Thanks, John.
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Okay.
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Good afternoon, and welcome to the Worthington Industries third 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 the Worthington Industries, Inc.
Any one of jet you may disconnect at this time I now like to introduce Marcus Raunchy Treasurer, and Investor Relations Officer. Mr. <unk> you may begin.
Thank you.
Good afternoon, everyone and welcome to Worthington industries third quarter of fiscal 2021 the earnings call.
On our call this afternoon.
Good morning, Vince President and Chief Executive Officer, and Joe Hayek Worthington.
The financial Officer.
Before getting started I would like to remind everyone that certain statements made today are forward looking within the meaning of the ninth.
95, private Securities Litigation Reform Act.
The statements are subject to risks and uncertainties that could cause actual results to differ from the suggested.
We issued our earnings release earlier this morning.
Please refer to it for more detail on those factors that could cause actual results to differ materially.
Today's call is being recorded and a replay will be made available later on our Worthington industries Dot com website.
At this point I will turn the call over to Joe who will discuss our financial results.
Thank you Marcus good afternoon, everyone.
In Q3, we reported earnings of $1 27 per share versus 27 in the prior year quarter.
There were a few unique items in the current and prior year quarters to call out that include the following.
We incurred pre tax restructuring and impairment charges of $28 million or <unk> 16 per share in Q3, primarily related to the exit of our unprofitable oil and gas business, which we divested at the end of January.
First the charges of 48 per share in the prior year quarter.
We recognized a net pre tax benefit of $4 million or <unk> <unk> per share on our investment of Nikola Corporation during the quarter.
This benefit was primarily due to us selling our remaining shares of Nicola for $147 million.
In total we realized cumulative pre tax cash proceeds of $634 million from our investment of Nicola and contributed $20 million and shares to the Worthington Industries Foundation.
Establishing of charitable endowment supporting worthwhile commodity costs.
The prior year quarter included an <unk> 11 per share benefit related to a gain on the consolidation of our Worthington Samuel coil processing JV combined with the lowering of the reserve associated with the tank replacement program within pressure cylinders.
Excluding these items, we generated a record $1 36 per share of earnings in Q3 compared to <unk> 64 in Q3, a year ago.
Consolidated net sales in the quarter of $759 million were relatively flat compared to $764 million in the prior year quarter.
The reported gross profit for the quarter increased by $49 million from Q3 last year to $164 million and our.
Gross margin increased to 21, 6% from 15, 1% as we had inventory holding gains this quarter and losses in the prior year quarter.
Adjusted EBITDA was $126 million up from $79 million in the prior year quarter and our true.
Mailing 12 month, adjusted EBITDA is now $364 million.
Our adjusted EBITDA through the nine months ended February is $297 million.
We had a very strong quarter with solid demand across most of our end markets and our teams continue to execute very well and are focused on delivering value to our customers.
Taking a look at the business units in steel processing net sales of $504 million were up 3% from Q3 of 2020.
Due to higher average selling prices.
Partially offset by lower toll volumes direct tons were flat year over year of against the tough comp. Our total shipped tons were down 11% from last year's third quarter, driven by a decrease in toll tons caused by furnace and mill outages.
Direct tons made up 48% of the mix compared to 44% in the prior year quarter.
The U S steel market remains extremely tight as demand has recovered more rapidly the supply.
We believe that we have gained share in key markets and in Q3 continued to see solid demand across our major end markets. The.
<unk> construction and agricultural markets all continue to show strength and we are starting to see improvement in heavy truck.
Youll generated record operating income of $63 million in the quarter, which is up $44 million from $19 million in Q3 last year.
Operating margins increased significantly from three 9% to 12, 5%.
The large year over year increase was primarily driven by increased direct spreads which benefited from inventory holding gains estimated at $31 million of 40 <unk> per share in the quarter compared to the losses of $6 million or <unk> <unk> per share in Q3 of last year.
The current quarter also benefited from arbitrage gains we were able to generate given the rise in steel prices.
Based on current steel prices, we expect that we will have significant inventory holding gains in Q4 of the share as well.
In our pressure cylinders business net sales were $255 million down 6% from the prior year quarter.
Primarily due to lower sales in our recently divested the oil and gas business, where sales declined year over year by $24 million.
Sales were up in both industrial products and in consumer.
We continue to see strong demand for our consumer facing products and our European business still while still facing headwinds starting to show signs of recovery.
Cylinders operating income, excluding impairment and restructuring charges and the benefit we had last year from the reserve adjustments I mentioned earlier was $13 million.
$1 million from the prior year quarter, while operating margins increased to 5% from four 4%.
The current quarter results include losses on the oil and gas business through January and losses in the structural composite of industries of our STI for the entire quarter.
As well as one time charges related to our acquisition of general tools and instruments with GTI and January collector.
Collectively these headwinds totaled roughly $4 million.
As you May have seen in addition to the divestiture of the oil and gas business, we sold our Sci business earlier this month.
Including the divestiture of our Cryo science operations in Alabama, which we completed in Q2.
Now divested three unprofitable business and the businesses in the last six months in May of two strategic acquisitions, GTI and pretax pressure technology.
GTI significantly expands our presence in specialty tools and gives us new sourcing and supply chain expertise.
The <unk> acquisition of complements our recent investments of sustainable mobility enabled by hydrogen at CMG.
These investments include the expansion of our composite cylinder facility in Poland.
And the construction of a new type three and type four hydrogen cylinder production facility in Austria.
We believe these strategic transactions and investments position of cylinders very well for future growth and will be additive to our profitability.
With respect to our Jv's equity income during the current quarter was $32 million compared to $25 million last year.
We saw year over year improvements from all of our <unk> with the exception of wave waves of results were down slightly because of increased partner allocations, but improved on a sequential basis as the commercial construction market continues to recover.
During the quarter, we received $18 million of dividends from our unconsolidated jv's.
Turning to the cash flow statement and the balance sheet cash flow from operations was $9 million in the quarter and $234 million for the first nine months of our fiscal year with free cash flow totaling $169 million in the same period.
Free cash flow for the quarter was actually negative by $7 million due primarily to increasing steel prices that caused our working capital levels to increase by $71 million.
During the quarter, we generated $147 million in pre tax proceeds from the sale of Nikola stock, we completed two acquisitions totaling $130 million.
The $16 million on capital projects paid $13 million in dividends and spent $52 million to repurchase $1 million of our common stock when one of these shares of our common stock at an average price of $52 and <unk> 37.
Looking at our balance sheet and liquidity position under debt at quarter end of $709 million was relatively flat sequentially and interest expense of $8 million was in line with the prior year quarter.
We ended Q3 with $650 million in cash and are well positioned to continue our balanced approach to capital allocation.
Focused on growth and of rewarding shareholders.
Earlier today, the board increased the authorization on our stock repurchase program to an aggregate of 10 million shares and declared a dividend of 28 per share for the quarter.
<unk> percent increase over last quarter, which is payable in June of 2021.
This marks the 11th consecutive year, we have increased our dividend and we are very pleased to be able to reward our shareholders with this increase.
Now I'll turn it over to Andy.
Thank you Joe and good afternoon, everyone. Our fiscal third quarter was a record financial performance, we faced some lingering operational challenges, including steel supply shortages staffing issues related to COVID-19 corn teens, and some extreme weather all of which impacted production schedules, but our teams did a.
Terrific job and we delivered outstanding results.
The good news is that demand is excellent across most of our end markets and there does not appear to be any signs of let up.
We continue to be grateful to our mill partners, who are working hard to ensure that we receive steel in a timely manner. The rapid rise in steel prices over the past two quarters created large inventory holding gains in our steel processing business.
We have been raising prices and our downstream manufacturing businesses to offset increased raw material costs.
I want to give yet another shout out to the dedicated employees of Worthington industries, who have come together and inspiring ways to keep our operations running safely and effectively in this trying time with the.
The question our people deserve recognition for these exceptional financial results.
So with our core business is performing well and the cleanup of our underperforming operations largely complete our focus has shifted to accelerating our strategic growth initiatives. We continue to have sizable cash balance.
And a growing pipeline of attractive M&A opportunities that will accelerate our growth.
Our lean transformation playbook, and new product development and innovation will augment our M&A to drive shareholder value.
Our opportunistic and balanced approach to capital allocation has served us well over the years that approach led us to raise our quarterly dividend by 12% per day, a reflection of our strong financial position and performance further rewarding our shareholders.
With the vaccine rollout underway, we are hopeful that a normal business environment is only months away, we need to stay vigilant until such time as we can all come together again.
We are well positioned to come out of this pandemic stronger and more nimble than before.
We have learned a lot this past year, including how to adapt quickly to changing rules and safety protocols to manage and work remotely and perhaps most importantly to be flexible in our daily activities to do what it takes to help get the job done.
A big Thank you to all of the Worthington industries employees for their dedication during the past year.
We will now take any questions.
If you would like to ask a question you will need to press star one on your telephone to withdraw your question, Chris the pound or hash key please standby, while we compile the Q&A roster.
And your first question comes from the line of Phil Gibbs with Keybanc capital markets.
Hey, good afternoon.
Good afternoon.
The question.
Cylinders, you've made a handful of of strategic maneuvers here.
So it's buying things from selling things.
Typically of.
Positive seasonality in your fourth quarter your may quarter, but I just wanted to make sure.
We weren't missing the.
From the baseline perspective, because there's some puts and takes so.
Are you are you anticipating that there's going to be kind of normal seasonality versus the third quarter base or are there other things that we're not considering that have come out. So just trying to understand the composition of the business now and then.
What to expect.
Sure Phil the weed.
Would expect pretty normal seasonality.
In Q4.
Of the businesses that we have divested of.
We're actually on the margin probably less seasonal than the ones that are part of the core at this point. So we wouldn't expect that to change materially.
So this level.
255 ish of sales is a good good base to work off of.
It seems as reasonable as anything else sure.
Sounds good and you had mentioned in the release of my thinking and some of the remarks that there were some challenges in terms of steel procurement, obviously supply lagging demand.
The persistent theme here for a few months.
Sure.
Is that inhibiting your ability to see volume growth this coming quarter.
Versus the versus this february quarter or.
Do you think the normal seasonality will who will prevail and Theres also I guess, some some questions about the the auto issues.
Of which you're obviously very well aware of what's involved and so.
Help us think about what we should be expecting for for just steal from a from a volume perspective, given all of the puts and takes right.
Yes, I would say Phil you should certainly expect the normal seasonality uptick for steel processing as you kind of mentioned.
There are a few different variables here, which are a little bit tricky to predict one of the semiconductor shortage, which is the kind of intermittently affecting the production schedules of some of our customers.
<unk> got the steel supply issue, which.
It's hard to predict exactly when we will face those challenges. It was probably worse back in December January timeframe, it's gotten better a little bit more as of late although with the seasonal uptick our guys are kind of anticipating that we might see a little bit more of that in the.
In the April may timeframe, so it's hard to say, but I still don't think even if we do experience some delays related to those things were still going to have.
The reasonably good seasonal uptick that we normally experience.
Yes, Phil we also did have an outage in one of our facilities that was planned. It went a few days longer than the plan that was in Q.
Q3, and obviously, we hope at this point nothing like that would recur in Q4.
Thanks, guys and then lastly.
On the strategic side, Youre, obviously flush with cash right now and as Andy said looking too.
Looking to pounds.
Growth opportunities. So if you do go the M&A route.
What are some of the things that you're you're interested in are you.
Planning on branching out any of your silos are you staying within the core and then secondly.
What type of annualized Capex should we think about given I'm sure. You've also got some organic opportunities as well.
Yes, I would say on the M&A front, Phil most of what we do will be in and around our core.
There's certainly opportunities.
And the steel processing I think we've historically focused on kind of the higher margin higher value add.
The segments, there, which I think we would likely continue that.
Within the pressure cylinders segment you saw recently do.
The sizable acquisition in the consumer products space, we think there's a tremendous amount of opportunity there there's lots of them.
Business is out there and we're doing our best to stay disciplined as well.
Those businesses and the trade at higher multiples than.
We have historically.
Acquired businesses, but at the same time they are in many cases worth it so I would expect.
We were to do something.
In the next 12 months to 18 months you could think about consumer products is an area, where we might do something and then in our core legacy filling of the business. The industrial product space. You know there is still it's still a highly fragmented market globally. So there are opportunities out there for that as well. So it's an interesting time to be looking at M&A because of <unk>.
Little bit of the <unk>.
And the have nots of been created because of the Covid situation. So when we look at companies, we're trying to filter through you know.
A lot of the.
The changes that have happened in the last year of some of which are sustainable some of the chart.
And Phil just to round out your the answer to your question relative to Capex. We would expect Q4 will be in the neighborhood of Q3.
And then beyond that I think.
Our fiscal year of 'twenty one.
We're going to have some growth oriented projects, where we're done with those investments and we'll make some more so I would expect them to be.
Radically different at this point.
In the year income.
Good color. Thanks, guys. Good luck thanks Bill.
Your next question comes from the line of Tristan <unk> with the Science BNP Paribas.
Yes, hi, Thank you for taking my question.
If I may.
Windfall gains you mentioned you expect those gains to continue into the next quarter.
Can you give us a sense of.
The magnitude of sales came in the given the pricing continued to rise to some extent.
Let's say prices of all that the level.
Yes, what kind of.
We'll be looking at.
Good question, Tristan, we would expect that day, where they would be in the neighborhood of where they were in Q3 with potentially a little bit of upside.
Alright.
And maybe.
Just being completely.
To conclude the a lot of the.
The operation in recent months the spill.
Moving and acquiring so all of you see the business is changing a lot of it possible you could provide a bit more color on the guidance for the next quarter.
It's difficult.
What you mentioned in your commentary with the products from challenges.
Moving forward, especially fulfilling the.
What should we expect.
Yes, I mean, you know this we don't give earnings guidance. The one thing I will point you to in Joes comment.
Is that can you sort of outlined $4 million of one time expenses too.
The two thirds of that probably was related to the two businesses we divested.
We're losing money.
So the the.
Of those losses, obviously go away.
But that's probably as much color as we can get without.
Crossing the line on the guidance at this point.
The interesting alright.
Just to clarify we may have an additional.
Sort of.
Sort of one time acquisition accounting charge for for GTI to the two.
Soon of a couple of million dollars from the quarter, but that would that would be it.
Alright, that's helpful and maybe.
Last question on the chip shortage.
What kind of the impact that you've seen so far and what do you expect moving forward.
Can you get the sense that the situation right now is worsening.
Okay.
Yes, I mean I'm not sure we're the best position the answer that question to be honest its more of our customers I mean, we obviously talked of our customers regularly.
I think earlier. This week you saw I think it was the four facilities that delayed some production related to the chip supply for that could impact us but.
It's kind of net I mean, a lot of the production.
Lines are and the mouth right now so they're getting chips, but they're just not sure how much and how fast.
<unk>.
It's a little hard for us to answer that question with any level of accuracy.
Non interest as you know.
The situations, they're actually building cars.
Leaving the semiconductors and the chips out with the plan on adding those later, but it's definitely something that we're.
Keeping an eye on it we would say it had a pretty limited are muted impact on us thus far but that can always change.
Yes.
We're fortunate.
In some respect because over the last several years, we've migrated our business and so in our steel processing business.
The business that we have going into automotive.
75% of that's an estimate but around 75% of that business is non sedan.
Truck crossover SUV band and things like that so.
Just given the profitability profiles of those vehicles for the Oems those are typically the last that theyre going to shutdown.
Alright, Thank you very much thank.
Thank you.
And as a reminder, if you would like to ask the question. Please press star one on your telephone keypad again Thats Star one.
And your next question comes from the line of John Tumazos, with John Tumazos very independent research.
Thank you Chris.
Can you walk us through the 124000 ton.
The steel processing volume decline versus last year.
How much of it was because you couldn't get as much too.
How much of it was because of the on the customers' chips.
Much of it was because last year was a good period with one more.
The.
Yes, all good questions I think the answer would be yes, and yes, and yes, John the.
Could be a bit more specific direct tons, which.
To be candid the profit more from and thank our more of our core business those were flat and so the decline was exclusively related to our total tons and you had a number of things.
<unk> had mill outages and furnace outages and with the toll business oftentimes, we're partnering and doing some of that for the mills and so if they're not producing steel obviously, we're not going to total code or toll process those tons.
We also in certain situations when we could.
Shifted from from tolling to direct really just trying to take as good of care of our customers.
As we could.
And then in one of those facilities as I mentioned earlier, we did have.
An outage in December for a couple of weeks and so.
That coupled with as you suggested that the pretty good comp from.
Q3 of last year is really what drove that decline it was the 100% of the tolling business.
Alright.
It's hard to have another Nicola.
But are there any more of $2 million.
The investments flowing around the company.
Yes, I mean, we have a few things that we see periodically John but.
And we've talked I mean, one of the things that's interesting about our business now is we are starting to incorporate more technology.
Made some investments in hydrogen is different.
It's a different areas. So I don't I don't I don't think theres, another nickel of laying around right now of at least as obvious to anybody sitting around the table, but.
We will continue to be entrepreneurial and to see the ideas or businesses that we think make a lot of sense and as you know.
And the the world of investing.
Times, you never know what youre going to get in you get surprises in the places where the expected so but at least right now I don't see any.
And the investments on our balance sheet that are worth $650 million.
Right now when do you think the investments.
This.
Do you expense them do you capitalize from if you capitalize them.
Where are they on the balance sheets other assets.
Yes, there was we see they're typically not all of that large John and Theyre typically expense.
Thank you.
At this point, we will turn the call back over to the company for closing remarks.
Just want to thank everybody for joining us and appreciate yet again all of the efforts of our colleagues at Worthington industries. Thanks for joining us today, and we will look forward to talking to you again in June.
Have a great afternoon.
Yeah.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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