Q4 2021 Worthington Industries Inc Earnings Call
Okay.
Our adjusted EBITDA in Q4 was a record $186 million up from $67 million and Q4 of last year and our adjusted EBITDA for fiscal 2021 plus of record $483 million.
And very strong quarter and our results are starting to benefit from the recent strategic actions, we've taken to both divest low performing assets from our portfolio and acquired businesses with attractive and cash flow profiles.
Turning to the businesses.
And the steel processing.
Net sales of 655 million doubled from $328 million and Q4 of last year due to increased volumes and higher average selling prices total shipped tons were up 38% from last year's fourth quarter, which was negatively impacted by COVID-19 related shutdowns, particularly at our automotive customers.
<unk> tons increased by 47% and over the prior year quarter of our total tons increased 31%.
Direct tons of Q4 were 48% of the mix compared to 45% the year ago.
The continued to see solid demand across nearly all of our major end markets, including automotive heavy truck and agriculture.
Sales of record setting performance actually could have been better.
We saw some delays and orders from automotive customers because of semiconductor and other supply chain constraints and edition the U S steel market remains tight and our teams and our customers continue to face unprecedented market conditions throughout our steel processing team has done a great job of managing through and fluid and constrained market.
The take care of our customers and the generated operating income of $94 million and the quarter compared to a loss of 2 million and Q4 last year.
The large year over year increase was primarily driven by strong demand relative to last year combined with increased spreads and.
And the quarter, we had inventory holding gains estimated to be $50 million of 71 per share compared to holding gains of the penny per share and Q4 last year.
The current quarter also benefited from mark to market and arbitrage gains we were able to generate given the rising steel prices.
And so on current steel prices, we do expect that we will have meaningful inventory holding gains in Q1 of 'twenty, 2 as well, which will be partially offset by headwinds related to the back half of which continues to widen.
And our pressure cylinders business net sales in Q4 were $323 million up 14% from the prior year due to increased volumes and higher average selling prices for both consumer and industrial products.
Net sales and the current quarter benefited by $19 million from the inclusion of general tools and <unk> and this was more than offset by a $33 million reduction and sales related to our recent divestitures.
Demand for our products in North America remains strong and we continue to see a gradual recovery of our European business, which was significantly impacted our color related shutdowns a year ago.
Cylinders operating income excluding impairment and restructuring charges was 31 million of $9 million from the prior year quarter, while operating margin increased to 9.6% from 7.7% Q4 last year.
The team and pressure cylinders continues to perform at the very high level while the.
Navigating supply chain challenges, bringing new products to market and growing the market share of team has recently completed several divestitures and 2 strategic acquisitions, and we believe position us well for additional growth and profitability moving forward.
Earlier this month, we announced that we are dividing our pressure cylinders segment into 3 new reporting segments consumer products and building products and sustainable energy solutions effected with the startup of our new fiscal year, which began on June the <unk>.
And our fiscal 2022 Q1 call in September and we will begin reporting and discussing our results and those new segments.
With respect to our Jv's equity income during the current quarter was $42 million and compared to $17 million of last year.
We saw strong year over year improvements from wave and car T. Chek due to continued strength and the commercial construction market and from Serbia share or increased spreads and inventory holding gains drove the upside during.
During the quarter, we received $26 million and dividends from our unconsolidated jv's.
Turning to the cash flow statement and the balance sheet cash flow from operations was $40 million and the quarter and $274 million per the full fiscal year with free cash flow of totaling $192 million and that the same period.
Free cash flow for the quarter was $23 million, despite headwinds from a $118 million increase and working capital primarily associated with higher steel prices.
During the quarter, we completed 2 divestitures generating $25 million and.
$17 million on capital projects paid $13 million and dividends and spend of $47 million to repurchase 700000 shares of our common stock.
And our balance sheet and our liquidity position funded debt at quarter end of $710 million was relatively flat sequentially and interest expense of $8 million was in line with the prior year quarter.
And in Q4, with the $640 million and cash as we continue to take a balanced approach to capital allocation.
<unk> focused on growth and on rewarding shareholders.
Earlier this month, we announced the acquisition of shy of those use of blank life business for $105 million.
Our business generated adjusted EBITDA of $20 million in calendar 2020, and we believe it will be of valuable and strategic addition to our steel processing segment, enabling us to expand our higher margin and laser welded and working offerings, both of which play an important role and light weighting efforts and the automotive market.
And yesterday the board declared a <unk> 28 per share dividend for the quarter, which is payable on September 2021.
At this point and I will turn it over to Amy.
Thank you Joe and good morning, everyone.
Our fourth quarter was a record of strong finish to what has been the best fiscal year and Worthington and history of.
Of course, we never would have predicted this a year ago of lunar and the depth of the Covid pandemic automotive and manufacturing was at a standstill and we're navigating a very uncertain business environment.
We say all the time that people are our most important asset and they prove that yet again this year by adapting quickly to keep each other safe, while continuing to deliver our products and services to customers and record fashion.
Despite the steel supply shortages semiconductor slowdowns and labor availability, all of which impacted production schedules. Our teams did a terrific job and should be commended for their efforts.
Supply chain and continue to be constrained, but overall, our demand levels and backlogs are quite good across almost all of our major markets. We.
We have also been proactively raising prices and our downstream manufacturing businesses to offset increased raw material costs.
We are excited to begin reporting 3 new segments next quarter consumer products and building products and sustainable energy solutions. This change will better align our businesses around the attractive end markets, we serve and provide investors with additional insights on performance.
And all of these segments have tested leaders compelling strategies and the resources they need to grow.
We will continue to leverage our transformation playbook, new product development, and innovation and M&A to achieve above market growth rates and increase our return on capital.
We sold the last of our underperforming assets and the fourth quarter. So our focus has shifted to accelerating our innovation and M&A growth initiatives across our portfolio.
We have a strong balance sheet recently supplemented by the exceptional return generated on our investments and Nikola Corporation.
We have always been and entrepreneurial company and the success of this investment allowed us not only to reward our shareholders, but also our employees and the communities we live and work.
We are proud to have just completed our 65th year of business a record of 1 of that and we're all well and we are well positioned to continue creating value for our shareholders and fiscal 'twenty 2 and beyond.
Thanks, again to all of our employees for their hard work dedication to each other and perseverance over the past 15 months.
We will now take any questions.
And.
At this time to ask the question you will need the principal of 1 of your telephone.
And the star 1.
So it's part of your question just the breath of the past the standby, while we compile the Q&A roster.
Your first question comes from the line of Seth Rosenfeld from Exane BNP and your line is now open.
Good afternoon.
And can take your questions and congrats on the very good.
For the year.
So I'll start off.
You can kind of pleased with the question on inventory holding gains. Please obviously a huge driver of the strong.
And margins in Q4 and can you just you touched on the front of the prepared remarks, but maybe a bit more color and how you'd expect that the current sequentially into Q1.
On current market trends do you expect that.
The inventory gain.
And with the Q over Q basis.
You also mentioned earlier kind of derivative gains as well completed in the mall.
The color on that.
For Q4, and looking forward and.
And then strategically.
Steel pricing, obviously incredibly robust of its finding the most of the work.
And again.
Inevitably at some point and looking forward can you just walk us through inventory management, and how we're going to the business.
Lindsay what's moving between losses with price, it's probably flat.
Yes, Thats a lot lot of in that question and I appreciate it the first 1 and that's probably the easiest we do expect that in Q1.
We have we look at the same forward curve that you do and everybody else sees but we do have reasonable visibility into Q1, and we think those inventory holding gains will will be very material and probably a bit lower than they were in Q4. So we think about that sequentially.
Relative to your sort of second question on kind of how we do things and ultimately how we manage our inventories.
We feel like we have a very sort of sophisticated approach and a very talented team.
And we're certainly aware of that there's some cyclicality and the steel markets and so at some point of steel prices of oil decline and so we do a lot of things.
And take.
Care of our customers while.
Not overextending ourselves on on inventories and things along those lines and so.
And it's a little bit more of a muddled right now just because demand is so strong and the market is so tight that we've got the a lot of things to try and balance which is being able to have access to this deal. So that we can take care of our customers while trying not to.
And to take.
Take on any kind of detrimental inventory risk and as you know we.
Mirror.
What we promised of customers with purchasing that steel or guaranteeing and price to ourselves for that steel. So we're going to continue to do that we understand and realize and things will.
And certainly not stay the way they have been for the last 3 or 4 months for the next 3 or 4 years, but.
We will feel like we're pretty well positioned to do as well as we possibly can continue to take share as we're able to do things for our customers the others can't.
And the BLK, regardless of the situation that we find ourselves in.
Thank you just the follow up I think you called out.
The brigade $51 million I think of the prepared remarks and also the touched on derivative gains as well is that included and the 51 or is that additional free games and good luck. It's.
And it's separate and is just certain things that we believe that we can we can do along the way when there's volatility and steel prices.
Okay. Thank you.
I guess the last question from my side, please with regards to your downstream businesses.
And could you please touch on the pricing environment and your ability to pass on.
Part of the rising.
The call.
The customers with cash.
But as long as most of the JV.
To what extent is that going up on a like for like basis since the.
Low margin or have you been able to increase prices and anticipation of the higher cost to hit your P&L.
Hey, Seth this is Andy and I would say every business has a little bit different in terms of how we approach.
Steel price inflation Budd.
We have gotten a lot better across almost every business that we have in terms of increasing price ahead of inflation.
Sometimes it's contractual.
Simple there would be like our industrial gas businesses around the cylinders, where the buyers of very sophisticated the contracts.
And the sort of account for that.
Outside of that our consumer products business for example, where those prices are not contractual and you have to go and negotiate the price increases, but I would tell you in this environment where steel prices of.
John up 250% to 300%, depending on where you are tagged.
The start.
And there's no purchasing manager on the planet that doesn't expect some kind of price increase and I think as empathetic to that so we've gotten a lot more sophisticated over the last 4 of 5 years in terms of doing this in advance of that.
And steel price flowing through our P&L. So I think we're in really good shape there.
Great. Thank you very much.
Your next question comes from the line of Phil Gibbs from Keybanc Capital. Your line is now open.
Hey, good morning.
1 of the Bill.
And so on the side of wave I know in previous cycles.
Steel inflation starts to pick up and earnest like it's doing now you've got customers that will do all they can to try to get ahead of it.
Bringing more material than the perhaps need obviously, we've had a good quarter was that something that you saw this time around as well.
So.
Not as much as you might see because of the scarcity of steel generally and on products. That's the dynamic that will always exist but.
And a lot of our business weighted included.
And we.
Our shipping everything that we can just trying to take care of customers.
What were waves volumes relative to last year. If you do you have an idea of that.
They were they were higher and they have they had higher volumes obviously.
And a lot of what we talk about relative to last Q4.
The comparisons are not as relevant as you'd like them to be because last year was.
<unk> of the Covid shutdowns and so this year was significantly better but relatively speaking.
We're looking at things as much sequentially right now as we are year over year and sequentially things continue to improve and.
Commercial construction and not just relative to last year, but relative to earlier this year.
Okay.
That's helpful. Thank you and then from the scrap gap you mentioned in your prepared remarks.
What can you remind people what the what that means and how that and how that may impact you and this coming quarter.
So.
The <unk> gap, if you will for US very simply stated is the different spin.
And the hot rolled coil band of steel versus what.
And of scrap is worth and that gap has historically been and a range and when steel prices run really really far really fast.
And yes gets larger and there are some lines of the things that happened and pricing wise, but.
And our steel processing business around 10% of those tons and up as scrap and some way shape or form.
And that's predominantly in our banking businesses, and and our cold roll or our strength businesses and we're always going to have a little bit of.
And entails crash length of the beginning at the end of a given coil and and so as that gap widens.
There, obviously is a bit of a headwind for us that gets created relative to 1 of the normalized or historical averages for that gap.
And what does that what does that mean numerically for you guys.
Is it substantial and minor just trying to understand it.
Yes.
I think.
And a couple of years ago, we had this happened as well as the $2.32 tariffs were coming off I mean, I think it's of.
It's a pretty substantial number for us from and it's not catastrophic it won't.
The offset of FIFO gains for instance, and in Q1, but it's a real number.
And I mean, it's millions of dollars bill and the.
The issue is that when we price the steel the scrap was 1 number and now scrap is a very different number so.
But the spread between what you are selling and what Youre, what youre getting from the scrap is much higher so.
And I agree.
I appreciate that and then on the on the net working capital side.
Obviously, a big pick up in the working capital because of the pricing environment, how should we think about that.
The evolving next quarter, because obviously prices continue to rise, but maybe not at the same level that youre inbounds came in at the end of May.
And so trying to understand that too.
It's Tim and into 2 things if you look at how working capital of unfolded during the year, we had actually we saw reductions in working capital in Q1, and Q2 of around $100 million and then we built.
$180 million and working capital collectively and Q3 and 4 and so from you.
And probably a bit more of that sort of has to come in in Q1 certainly.
But for US it's almost like we're we're building of bank of source and so assuming and when steel prices declined that cash flow comes back to us and so we saw.
And I expect the build in working capital.
In Q1, but then beyond that we feel like as things stabilize or come down some of that will start to come back gross.
Thanks, and then last 1 from from me is just on cylinders in terms of what you see across each of your your business units does this.
And does this volume momentum that you've seen and consumer and industrial continue or was there was there of pent up demand and.
The seasonal effect that you saw that was just really pronounced because.
And I've seen your volumes are strong and a while and I know things can shift around.
From timing, but maybe just speak about the short term and.
And then the strategic term for per cylinder sales and as we break that break that up a little bit. Thanks.
Yes, again, each market is a little bit different Phil but.
I would tell you that across most of the cylinder and market demand is pretty good really good.
Some of the products, particularly around the consumer products and gas grill cylinder.
<unk> and camping cylinder.
Those products really benefited from Covid.
And people are doing things outdoors and.
And our restaurants were eating things so.
And the demand has been very strong and people have thought.
And.
And then book.
Demand for the.
The longer periods of time and maybe they historically have so.
And it's hard it's hard to know exactly where we're going to be 9 or 12 months from now but right now it feels like it's pretty steady.
And Phil 1 thing to add to that and still feel and sequentially. This will be true and the GCI acquisition.
If you have a lot of Skus and Steve have some shift of lot of products to so youre seeing some of the effects of there and when you look at the raw volumes.
Thanks, John.
The good ones.
Likewise.
Your next question comes with the line of John Tumazos from John to Michael's Barry Independent Research. Your line is now open.
Congratulations on all of the great work of someone wanted to close a couple of years ago, Your EMR and $13 a share.
And I would've thought we were nuts right.
Thank you Joseph.
And I asked a few questions about incoming steel first.
There's 4 specific mini mill.
Past sinton.
Sinton.
And the Doublings of.
The Big River, and Arkansas Delta and Toledo.
And talents and and Kentucky.
Should we interpret that the sinton.
And Big River expansions basically don't provide for steel for Worthington because.
And too much in Arkansas, and Texas, maybe Delta.
When they are.
And would be an important supplier of close to your center of gravity or maybe gallatin.
And I might answer that question, a little differently than maybe what you are expecting John I think when when capacity comes online I think its generally good.
For the market because it provides additional scale, but it also provides some relief hopefully on pricing.
Just because we may not be buying that steel and a few of those facilities. It's still should help of the overall market. So.
It would be a little difficult I think for Joe or items sit here and say exactly of which supply chains, and we might be able to incorporate those mills into us there and obviously not ideally situated for where the majority of our facilities are but there's probably some opportunity there. So.
But I understand the kind of where you think of it are wary of the questions.
There's a couple of.
And can speak your suppliers J W.
And Ohio.
And Ken.
Says they are bringing a lot more swaps and from Russia, and Canada Portage, Indiana.
Carol.
Are those.
More and your center of gravity that Mike.
Might incorporate or those people you never did business with.
No.
It's similar.
And then Andy just gave you John the.
And the honest answer is that we.
And we talk to everybody and we try and.
Deal with as many people as it makes sense based on what steel is required where it needs to go and what needs to happen to it and so.
And we chat with everybody and try and make the best decisions, we possibly can relative to the availability and needs.
Did you benefit.
From more incoming steel and recent months.
Because of the auto companies cut back lacking chips.
And with the U S steel and cliffs refusing to restart blast furnaces.
Is there a risk 6 months from now that you have less inbound steel.
Because the auto companies come first.
And the cliffs and U S steel won't restart furnaces.
Yes, I mean, and I guess theres always that risk.
And we are a pretty large buyer of steel John and we have worked very hard over the years to build strong relationships with our mill partners and.
I think we have the symbiotic relationship where we help them when they need help and they help us.
The need help so I feel like the last year and has been a really difficult operating environment on a number of fronts..1 of them has been the supply of steel but.
And we've done pretty well on that front and it hasn't been perfect by any means but and so 6 months if the auto companies ramp back up again.
And is there some risk that things get really tight again of course, there is but we also sell of the auto company as a fair amount of steel as well so.
They need our product as well so it's a complex equation theres nothing theres no doubt, but I feel like we're pretty well positioned on that front.
And you disclosed $565 million of <unk>.
Solid David inventory.
How much is the inventory.
Not consolidated from the JV assets.
Meaning what how much did they have on their balance sheets of Fiat how many tons of steel.
Or dollars.
100% or your pro rata share of the Jv's.
I don't think we can answer that question without doing a little work there John.
The lion's share.
I mean, most of the with the exception of probably service Cerro who carries.
A fair amount of tons Clark Dietrich and waived their small relatively speaking compared to the overall of the Worthington industries total there just.
And what they make is not a huge book huge percentage of the volume that we buy the company.
With the Jv's.
Closer collectively to 10% of your 4 plus million tons of steel process and consolidated volume.
Or would they be.
More like 30% of.
I feel like this is of pop quiz.
We will get back to you on that 1 John.
Let me continue.
Comparing may 31, 2 a year ago.
The total dollar inventories rose 40%.
But raw materials rose only about 10% and finished goods, 20% where work and process.
Rose about 120%.
Should we interpret.
The work in process of sort of when and voluntary you have to process the steel to get sales.
And thats up almost as much as the percentage change and steel prices, but raw materials and finished goods dollars up so much west means.
And youre trying to carry less.
On the process steel inventory and Youre getting the finished goods out the door.
Fast as lightning twice as exciting.
Yes, I mean, thats and Thats, a reasonable step through it.
And we don't we're not holding any finished goods because we know that our customers needed and we're trying to get at film as quickly as we can and so after we finish and it doesn't behoove us to leave it sitting around.
When we.
Analyze the.
The steel processing.
Margins.
The profit per ton was $51 of EBIT for the fiscal year.
Which was a pretty good year.
The revenues are 5 of 6 and the EBIT base costs of $4.55.
Should we interpret because of the towing ratio.
The.
If you Werent tolling the.
And the revenues would be.
Closer to the center twice as much cost closer to.
Of that minus $51 and then.
And we shouldn't.
Take the.
The revenues and cost per ton literally because of the totally.
I definitely think it is fair that you think about the direct business and Thats only and business differently, we do.
Is there a limit to how much you can increase the total ratio.
To move the steel price risk to the customer.
While we made more money on the direct business, John So while tolling customers are important to our business and.
We do book profits I think the.
The steel kind of the lion's share of the steel company is the direct business in terms of profitability. So.
All things being equal I think.
That makes more sense.
Thanks, and not all customers 1 of my questions and sorry for the pop quiz.
Alright, thank you.
Again as the reminder to ask the question you May Press Star followed the 1 on your telephone keypad, Okay and then the star 1 to ask the question.
Do you have a follow up question from the line of Seth Rosenfeld from Exane BNP. Your line is now open.
Thank you 1 more please on the pressure cylinder business, obviously stripping out 1 off of Q4 margins were particularly robust in the business.
Changing and the business more of or you've had some disposals of lagging operations and then.
And so on the strength and metals pricing and your ability of passed on to customers very rapidly.
Can you give us the color on the sustainability of margins or the level of EBIT.
Going forward.
And of a new normal for the business post disposals.
Or rather where the some 1 off with regards to the metal spread expansion and that we should.
Consider reversing in due course.
I think it is a number of factors that you hit on a couple of them..1 is that we have eliminated some underperforming operations and cylinders. So obviously just the math there will raise the operating margins.
We also have been pushing price, although I don't know I don't think of this as an example of where we're suddenly rapidly expanding margins because we've been raising price.
A lot of our efforts around recovering the.
Rice that all of the.
The cost inflation that we have on primarily steel, but some other costs as well there are certain products, where we do have a little more pricing power, where we will obviously have some margin expansion, but then the other thing that's.
Really helping us now as our innovation efforts are really <unk>.
And really good momentum and we're starting to launch products into the market that are contributing.
Millions of dollars to the bottom line so to the extent that we can continue that momentum, which I feel really good about the.
Our pipeline is very robust and cylinders and typically when you launch new products because of the development costs and other things they are higher margin contributors to what's going on there. So the confluence of all of those factors make me feel pretty good about where we are with respect of cylinders and pretty bullish on and on where things could head.
And the future now.
In the quarter.
Can I tell you it's going to be the same probably not but I feel really good over the long term in terms of where we're headed with respect to the profitability of the pressure cylinder business.
Thank you just the follow up the underperforming businesses that were disposed, where they've EBIT loss, making or were they just lower margin and its.
Terms versus the new course.
And.
And probably a little bit of both but I would tell you the lion's share of them were loss, making.
Okay understood.
And thank you very much of the call from me.
Yes.
I am showing no further questions at this time I would now like to turn the conference back to the company.
Great, Thanks, Andrew and for joining us today.
And I hope, everyone and continuing to stay safe and we'll look forward to speaking to you again in September and talking more about our new segments. So thanks again.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
And then.
Okay.
Okay.
Okay.
And then.
And next year.
And then.
Yes.
John.
And.
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Net.
Okay.
Okay.