Q3 2022 Worthington Industries Inc Earnings 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'd now like to introduce Marcus regime.
Treasurer, and Investor Relations Officer, Mr. <unk>, you may begin.
Thank you Chris Good morning, everyone and welcome to Worthington Industries third quarter, Worthingtons, President and Chief Executive Officer, and Joe Hayek.
Before we get started I'd like to remind everyone that certain statements made today are forward looking within the meaning.
Of the $19 95, private Securities Litigation Reform Act.
These statements are subject to risks and uncertainties that could cause actual results to differ from those suggested.
We issued our earnings release yesterday after the market close please refer to it for more detail on those factors that could cause actual results to differ materially.
Today's call is being our Worthington industries Dot com.
On the website.
At this point.
I will turn the call over to Joe.
Thank you Marcus and good morning, everyone.
Our teams executed very well.
Well in the quarter and the result was a strong financial performance.
For Q3, we reported earnings of $1 11 per share versus $1 27 in the prior year quarter.
Excluding a small restructuring and impairment.
Okay charge, we generated $1 13 in the quarter versus $1 36 in the prior year after adjusting for restructuring and a small gain on our investment in Nikola.
In the quarter, we had inventory in the prior year quarter, we had inventory holding gains of $31 million or <unk> 44 per share compared to $759 million in Q3 of last year.
Increase in sales was primarily due to higher steel prices the inclusion of our most recent acquisitions and higher average selling prices in both consumer and building.
For the quarter decreased to $143 million from $164 million in the prior year quarter.
Set versus 21, 6%.
From inventory holding gains to losses, which were partially offset by increases in both consumer and building products.
Our adjusted EBITDA in Q3 was $112 million down slightly from $126 million.
In Q3 of last year, and our trailing 12 months adjusted EBITDA is now $662 million.
And I'll spend a few minutes on each of the businesses in steel processing net sales of $1 1 billion more than doubled from $504 million in Q3 of last year, primarily due to the average selling prices being higher and the inclusion of both temple steel and Shiloh is blank life business totaled.
Total shipped tons were down 2% compared to last year's third quarter. Despite the recent acquisitions, which contributed 80000 tons during the quarter.
Excluding the impact of acquisitions total shipped tons were down 9% year over year.
Direct tons in Q3 were 51% of the mix compared to 48% in the prior year.
Despite the decrease in ship tons underlying demand during the quarter was healthy volumes.
Volumes were impacted by Covid related production challenges lost shipping days.
Days due to weather U S, Canada, British closings and the ongoing semiconductor chip shortage that continues to impact automotive schedules, our automotive volume increase from the prior year quarter, but demand was below seasonal norms.
And it's still difficult to predict as production levels at the Oems remains choppy.
Construction demand continued to be solid, but our volumes decreased slightly from the prior year as we had reserve some capacity for auto to automotive demand that did not materialize.
End market demand is good now the war in Ukraine, and its impacts on the steel supply chain pricing and end market demand are difficult to predict.
Our teams are best in class and continued to navigate market volatility and supply chain challenges exceptionally well as they remain focused on taking care of each other their customers and our partners.
In Q3 steel generated adjusted EBIT of $7 million compared to $62 million last year.
The large year over year decrease was driven by the inventory holding losses, I mentioned earlier estimated to be $25 million in the quarter compared to inventory holding gains of $31 million last year, an unfavorable swing of <unk> $56 million.
Inventory holding losses for the current quarter included a $16 million charge to write inventory down to net realizable value to the expected future decline of steel prices at year end at quarter end.
Steel prices have since risen but based on current steel prices. We believe we will have higher inventory holding losses in Q4 than we did in Q3.
In consumer products net sales in Q3 were $162 million up 41% from $115 million in the prior year.
The increase was driven by higher average selling prices combined with higher volumes across the board and the inclusion of GTI.
Adjusted EBIT for the consumer business was $27 million and EBIT margin was 16, 5% in Q3 compared to $15 million and 12, 7% last year.
Year on year growth in margin as a credit to the exceptional job of our consumer team is doing managing through the current inflationary environment.
This quarter, we realized the price the benefit of price increases that were implemented late in Q2.
Demand remains strong across the board for our consumer business, and while inflationary pressures shipping and supply chain issues will likely persist.
We're confident in our team's ability to continue growing the business and delivering value to our customers with a focus offerings.
Building products generated net sales of $133 million in Q3, which was up 38% from $96 million in the prior year.
The increase was driven by higher average selling prices.
Building products adjusted EBIT was $50 million and adjusted EBIT margin was 37, 3% up significantly from $27 million and 28, 4% in Q3 last year.
Our wholly owned building products business generated nearly five fold year over year increase in EBIT during the quarter due to healthy demand combined with higher average selling prices are.
<unk> results improved by $15 million year over year, while wave was down slightly from a year ago.
Our teacher can wave contributed equity earnings of $21 million and $19 million respectively.
The building products team has done a great job navigating a very challenging environment, while continuing to focus on serving our customers.
Going forward, we believe the strong demand in the commercial and residential building markets that we serve will persist the inflationary conditions will also persist.
And sustainable energy solutions net.
Net sales in Q3 were $31 million down slightly from 32 million in the prior year, despite significantly lower volumes due to the divestiture of our LPG on our gas business.
Excluding the divestiture net sales were up 31% in Q3 versus last year.
Business reported an adjusted EBIT loss of $3 million in the quarter compared to breakeven results in the prior year as higher average selling prices were more than offset by the impact of <unk>.
Positioning itself to serve the global hydrogen ecosystem and adjacent sustainable energies like compressed natural gas and will benefit as those volumes ramp up.
The European market remains challenged and the ongoing war in Ukraine has caused business conditions in Europe to deteriorate further with materially increased energy prices and demand uncertainty.
However longer term the conflict may accelerating Europe's planned adoption of hydrogen in alternative fuels and our plan is to be prepared to be a leader in serving that market.
With respect to cash flows and our balance sheet cash flow from operations was $74 million in the quarter with free cash flow totaling $51 million.
We started to see our operating working capital levels decreased during the quarter, primarily due to lower steel prices, which added $49 million to cash flow during.
During the quarter, we received $29 million in dividends from our unconsolidated Jv's spent $270 million on the acquisition of temple invested 24 months.
$14 million in dividends and spent.
Shares of our common stock at an average price of $54 26.
Following the Q3 purchases, we have slightly over 7 million shares remaining under our share repurchase authorization.
Looking at our balance sheet and liquidity position funded debt at quarter end of $813 million increased $111 million sequentially, primarily to fund the acquisition of temple.
Interest expense of $8 million was up slightly due to higher average debt levels and we ended Q3 with $44 million in cash and $396 million available under our revolving credit facility.
Yesterday, the board declared a <unk> 28 per share dividend for the quarter, which is payable in June of 2022.
At this point I will turn it over to Andy.
Thank you Joe good morning, everyone.
We had another very good quarter, despite the continuation of a difficult operating environment and the emergence of inventory holding loss headwinds.
Not surprised but continue to be humbled and grateful for the commitment of our employees to doing what it takes to deliver for our customers.
End market demand remained strong across most of our product lines, but operating challenges remain including labor availability supply chain disruptions transportation shortages in an extremely volatile steel pricing environment.
Our commercial purchasing and supply chain teams have done an excellent job reacting quickly and effectively to higher input cost bypassing.
Yes.
Our experts in steel processing continued to prove that they are world class at managing through this volatility without compromising customer quality and service.
The benefit of higher selling prices was particularly noticeable in the year over year improvement in consumer products and building products this quarter.
Clark <unk> had another strong quarter and an exceptional calendar year, but we expect their business to gradually return to more normalized levels in 2022.
Sustainable energy solutions is struggling due to lower automotive demand in Europe and higher input costs.
We continue to be very bullish on the future of all of these business segments as we refine and execute more dynamic growth strategies that will continue to leverage innovation transformation and M&A.
Most of you on the call know there was a precipitous decline in steel prices during the quarter from an all time high for hot roll of $19 58 per ton.
During the quarter it fell briefly below $1000 per ton.
However, the recent events in Ukraine have reversed this trend significantly as hot roll now sets around 1300, an upward pressure.
The decline during the quarter helped us achieve a modest level of working capital relief. Although this may be short lived.
You may have seen our press release this morning announcing our commitment to.
Science based targets for greenhouse gas emissions.
We have yet to establish specific targets. So this is in process.
Lincoln Today has many products and solutions that enable emissions reductions and we intend to increase our focus on these products.
To capitalize on the growth opportunity in those businesses.
We believe firmly that we have a huge opportunity to play a central role in building the bridge to a cleaner environment.
We are positioning our businesses to maximize this opportunity.
Laser welding light weighting applications, electrical steel lamination and gas systems for the hydrogen ecosystem.
Many other of our existing products already offer cleaner.
To a future dominated by wind solar hydrogen and hydro electric.
Okay.
Business environment continues to be very challenging our teams continue to go above and beyond to make.
Manage through these difficulties and deliver for our customers and shareholders. We are well positioned for whatever the market brings us next.
Thank you to all of our employees for their efforts, we will now take questions.
Thank you.
To ask a question before it research partners.
Hey, good morning, everyone.
Good morning, Mark.
So steel inventory holding losses were $24 9 million for the quarter, you indicated that they'd probably be greater for the current quarter here.
Any sense of scale are some goalposts on what we can expect there.
Well other than we will.
A couple of minutes ago, you look at the.
Pace of the decline.
<unk>.
HRC generally speaking and as you also know Martin our FIFO gains and losses are a little bit of a lag I mean, we had LIFO gains in Q2.
Right.
As those prices starting to lag and so.
It's difficult to say with a lot of granularity sitting here on March the <unk> higher than they were in Q.
Okay.
Would it be reasonable.
I would assume like a 35% or $40 million as a placeholder until we know more.
That has been totally up to you.
Yes, Sir.
Okay. Okay.
Sure Fair enough.
Looking out into some of the Jv's Clark Dietrich and profitability.
<unk>.
I'll provide an update on how product prices.
As it relates to the input cost.
Okay.
Yes.
So I think if I understand your question correctly basically in those businesses.
They tend to.
And then input costs catch up if.
If you will environment, what happens is the exact opposite.
But where they are.
Al.
They'll try to hold price.
But oftentimes there is downward pressure in that.
And waves quarter here, what what I would tell you is.
We've never seen an environment.
Unlike they are right now.
So it's a little bit unclear for us even exactly how that is.
That's going to manifest itself in profitability because.
The steel pricing is just so dynamic right now.
I can tell you that you heard in my comments.
Kind of catch up so that's one.
While we expect.
Yes.
Their profitability will kind of start to trend downward from the levels that it was worth over the past year.
What usually.
Usually happens in a declining steel price environment as customers will withhold purchases as long as they can if they believe the prices going down which it was until the Ukraine War started and that sort of stopped that so.
That may sort of stimulate a more normal buying pattern.
Got it that's helpful. Thank you for that.
Similar kind of trend in waves.
Yes.
As we.
Talk about Martin.
Prices are going up people buy aggressively.
And the opposite happens on the way down.
What we ultimately did because of that dynamic in part for wave was to create some pretty tough comps I think this was still the third.
Kind of best quarter. Thank you for that and if I could one last one.
Maybe its contribution.
Sure and how things are progressing.
Leveraging your automotive relationships with that business.
Yes.
Very happy with that business very happy with that team. We just spent a lot.
Last couple of days with.
With our board going through strategies, including the temple strategy.
It's going exceptionally well as you know we have.
Kind of a one time kind of purchase accounting charges and so so temples contribution was modest a couple million off to a great start in terms of.
Their contribution and their EBITDA and we're very excited about.
Not that often that you.
And the steel processing space.
To where you expect.
Double digit growth for.
Years and years.
And there's just a lot of opportunity.
In the different segments, they serve and the question for us is which of those opportunities do we try and help the team they're capitalized.
Yes.
Okay.
Thank you.
Our next.
Question is from Zane Wang with.
Thank you for taking my question.
Good morning.
Hi.
So can you talk about your outlook into the next quarter.
Also demand.
Commented.
We've done some capacities for auto volume, which didn't really realize.
What's your outlook.
Alright.
Yes.
Audit demand.
Some of the.
Headwinds that were unique to Q3.
Whether that impacted the Midwest significantly and then the.
Rich closing between.
I mean, Canada in Detroit for a week or 10 days.
We certainly hope that those don't recur.
But the big.
Sort of.
Ongoing uncertainty with automotive is that they have it's not specifically for all kinds of things with resin implies.
Stick and other things but.
The watchword for us is still.
Both kind of improving but unpredictable and below seasonal norms. We don't think that that gets materially better and we don't have great visibility out beyond six months, but we don't think.
Okay.
Really better over the next six months.
Okay. Thank you so much.
I know we've talked about.
Jamie.
I can share a little bit on landfill.
Why is way.
Chuck you changed perform indefinitely.
The same.
Pricing environment.
Yes, I am not so sure.
Are performing differently, maybe if youre, if youre comparing to historical norms it might appear that way.
They are behaving similarly, I think in terms of what's going on in the market, but I think this time around with steel prices Clark Dietrich.
Did a much better job.
Of raising prices ahead of the cost inflation coming into their business and so they.
And I think the market responded and part of it part of that was.
The leadership team, they're doing a great job of getting ahead of it but I think also part of it was the pricing environment or the demand I'll call. It the supply environment, where if you remember back six nine months ago there was.
Steel demand.
Yes that makes sense. Thank you very much.
Okay.
And also.
If we look at.
Casino products.
The elevated.
Steel input costs to customers.
Okay.
Q3's, Jones will continue or would you need to.
And catch up.
Thanks.
Therefore expecting lower margin.
Yeah.
Yes.
I would say I would say, yes, and yes, we do expect continued strength in our downstream businesses demand is very good.
And at the same time prices have risen and so.
I would suggest.
Might come down a bit, but we still should be ahead of.
Where we were last year in those downstream businesses.
And we hope to be able to continue that.
We will come up in Q4 from <unk>.
Input costs will come up.
In Q4 from where they were in Q3.
Great cool.
Sorry, one last one maybe on working cap.
Capital.
So how should we expect.
Working capital.
Behaving.
Paul.
And Andy mentioned steel prices have popped up but again, it's a little bit of a lag and so we don't expect.
We don't expect working capital with free cash flow in Q4.
Beyond that it is.
Difficult to predict dislike.
Steel prices and things generally so nope no drag in Q4, but beyond that.
Hard to say.
Great.
Okay.
Question.
The Laughlin IV.
You want to give more than your recently acquired at Kimco.
Like synergies that you could realize.
All lines have normalized.
Contribution.
<unk>.
Sure sure so we.
Similar to Martin's question, a few minutes ago and similar answer.
One additional thought there would be.
Our automotive strength and presence we believe we will help them an awful lot in the coming years as well.
<unk> and their own automotive business growth.
Okay great.
Thank you.
Thank you you bet.
It appears we have no further.
I Hope my apologies, we do have any questions very independent research. Your line is open.
Congratulations.
And just having that $15 7 million.
Charge when steel prices fall.
At times, it could be a lot worse.
So impressed that you earned over a dollar in the quarter. Thank you congratulations.
Yes, Thanks John .
As best I can figure the U S loses for $4 5 million tons of iron units.
We'll see.
Yes.
Crane War sanctions.
If we don't import a couple million tons of slabs from Russia further.
Three rolling mills that are rushing out.
Fed with Russia swaps say a couple of million.
Tons of.
Hey, Gary.
For the different high quality sheet mills.
I would say a couple of hundred thousand tonnes of finished steel from Russia in a couple of hundred thousand tonnes of finished steel from Ukraine.
So yesterday the CME.
Bush showing scrap future was $900.
Spot.
And it was in the fives.
In January before the Ukraine or.
How scrap peaks in the winter and bottoms in the summer because it's easier to collect.
So we got this crazy scrap thing going on.
It Amazes me that four 5% or 4% disruption in the iron units.
There's $350 scrap price.
It's a tough job dealing with steel prices, you guys know better than us.
Are there any mills.
You would buy from.
That you think wouldn't have iron units.
Because this Russian metal is not going to arise.
Yes, John Thank.
Thank you.
We don't think so we have great relationships with the mills that have eas and those that have blast furnaces I think it is a.
What's happening in Ukraine is terrible for a lot of reasons.
Pretty far down on the list.
Pig iron and other things from that area, but the bottom line for us in North America, and our belief is that between.
The.
And between the integrated who candidly are pretty vertically integrated.
Including having their own mines in certain respects that that we at least at this point in the near to mid term don't believe that there will be a shortage of steel that's available prices have obviously come up and price increases have been announced.
<unk> by the mills as they contend with significantly higher input costs.
But in the near term we don't foresee.
Worthington being negatively.
Negatively impact by availability of raw materials.
Arent buying for mono MK, Oregon steel anyways, those arent your suppliers.
For the VAT.
Sure.
So I could ask a question about.
Yes.
Trading our hedging practices on futures.
In a normal world.
Sure.
<unk>.
And down Crazy situation in the last year, but in a normal world if worthington.
Needs to process, four 5 million tons of steel.
Across its various subsidiaries.
Would you.
Forward.
And the futures market several months to fix the cost of the steel.
You need to buy in the open market or would you sell short.
Because you're such an inherent long having steel in inventory, which is normal world what would your.
Futures practice.
So I'll start that answer John by saying, we don't think.
<unk> and our core business of steel processing on steel when we sell to a customer we mirror that with a mill. So if we sell based on our quarterly index will mill. It will mirror with one of our mill partners on a quarterly index. So that were matched where we get our FIFO gains in <unk>.
Losses as that base inventory that sits in our in our system.
And.
The challenge with that is it's a large volume and so to hedge that would be extremely expensive you know the futures market exists for scale, but it is not the most liquid market on the planet and so the spreads are high and it would be very expensive to do that so and we've elected in the past when we could potentially.
We do that to just not.
Not attempt to do that.
Well the short answer is.
We don't do what you are talking about we will lean a little bit on occasion.
In the markets, but that's not the practice of our business.
So on the weekend of March seven as for example, the second weekend after the Ukraine invasion.
That week.
Six months futures for iron ore.
Scrap and.
In hot rolled sheet, each escalated 40 odd percent for the week before.
Where instead of a downward slope forecasting price declines into the summer.
Prices rose the slope became upward sloping.
In a normal fashion that reversal would've had no impact on your share or not and those just in a liquid futures to begin with.
That's correct.
So.
With all of this craziness in all these different steel ingredients steel markets.
Some of us might look at the $15 $7 million charge you took as of February 28th.
Thanks Chi.
On March 23, the prices are so much higher.
$350 for ingredients $600 for steel something like that.
That youre just going to.
Earn that back in May 31 quarter.
What youre, saying and you're cautious guidance as the year.
Lead times.
For the matches of your buy price itself price are so many months out.
That you're here.
Your March business was priced before the Ukraine or in your April business before the Ukraine, or and you can't make that money back the way we would imagine just looking at daily price screens, Micah Donlin investor rather steel guy in the market grinding it out like you guys.
John that's largely true and it's impacted heavily by the quarterly index, which will come out.
We can have on April the <unk> and <unk>.
That index will be down from where it was on January one.
So thats, where the lag really comes in.
So if investors are expecting you to make it back because the prices surged.
It might be the August quarter, the November quarter, given all of these wax.
I think thats.
That's fair from a timing perspective.
Thank you for your explanations and I think it's just so fabulous that you've made a dollar rather than lost $2. This quarter.
Im at all.
Thank you.
As I mentioned earlier that the teams have done a great job of really trying to.
To minimize the impact of the big fall in steel prices, so kudos to them.
Thank you.
Again, Please press star one if you'd like to ask a question.
Okay.
Okay.
And it appears that we have no further questions I'll turn the call back to the presenters for any closing remarks.
Greg Thanks for everybody joining us today, we will look forward to speaking with you in June .
Everybody have a great day.
Ladies and gentlemen.
Okay.
Okay.
Thank you.
Okay.
[music].
Yes.