Q4 2022 Worthington Industries Inc Earnings Call
Good morning, and welcome to the Worthington industries.
The fourth quarter of fiscal 2022 earnings conference call.
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 Rogier, <unk>, Treasurer, and Investor Relations officer. Thank.
Thank you Chris Good morning, everyone and welcome to Worthington Industries fourth T Rowe's, Worthingtons, President and Chief.
Keep executive Officer, and Joe Hayek, Worthingtons, Chief Financial Officer.
Before we get started I'd like to remind everyone that certain statements made today are forward looking.
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.
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.
This point I'll turn the call over to Joe for a discussion of the financial results.
Thank you Marcus and good morning, everyone.
We finished our fiscal year.
Very strong quarter earnings of $1 61, a share versus $2 eight in the prior.
Prior year.
Excluding small onetime restructuring gain we generated $1 58 per share in the current quarter compared to $2 33 in Q4 of last year after adjusting for restructuring and a small gain on our investment.
Q4, we had inventory holding losses estimated to be $42 million or <unk> 64 per share compared to inventory holding gains of $81 million or 71 cents per share in the prior year.
A favorable swing $93 million, which is $1 35 per share.
Consolidated net sales in the quarter of $1 5 billion were up significantly compared to $978 million in Q4 of last year.
<unk> sales was primarily due to higher steel prices inclusion of our most recent acquisition and higher average selling prices in both consumer and building products.
Gross profit for the quarter decreased to $168 million from $226 million in the prior year gross margin was 11% versus 23% primarily due to the swing from inventory holding gains or losses, which were partially offset by margin increases in both consumer and building products.
Adjusted EBITDA in Q4 was $139 million down from $186 million in Q4 of last year.
'twenty two it was a record $615 million.
Now I'll spend a few minutes on each of the business.
In steel processing net sales of $1 1 billion were up 71% from $655 million in Q4 last year, primarily due to higher average selling prices and the inclusion of both central steel and Shiloh is black box business and our results.
Tons were down 5% compared to last year's fourth quarter. Despite those recent acquisition, which contributed 97000 tons during the quarter.
Excluding the impact of the acquisitions total shipped tons were down 14% year over year, driven primarily by lower tolling volumes with mills.
Direct costs in Q4 were actually up slightly year over year, excluding acquisition and facility, we closed <unk>, Alabama and <unk>.
6% of mix compared to 48% in the prior year quarter.
With the exception on the lower tolling volumes and our JV.
We saw year over year increases in key end markets, including automotive construction and agriculture.
An increase from the prior year quarter it remains below seasonal norms.
And it continues to be difficult to predict.
Okay wireless dynamics will improve.
Overall demand across our end markets and steady and our teams are doing.
As they manage through volatile steel pricing market challenging supply chain.
In Q4 steel generated adjusted EBIT of $17 million compared to 98.
It could be $42 million in this quarter.
For our compared to gains of 51 million.
And last year.
Those swing of $93 million volatile and were rising at the beginning of it.
Quarter, but then resumed falling later in the quarter.
Based on current steel pricing, we do believe that we will see modest inventory holding gains in Q1.
Consumer products net sales in Q4 were $186 million up 18% from $157 million in the prior year quarter.
Please proceed by higher average selling prices.
Partially offset by an unfavorable shift in product mix.
For the consumer business was a record $29 million and EBIT margin was 15, 8% in Q4 compared to $19 million and 12, 1% last year.
Our consumer team continues to do a great job responding to increased demand as invested in both people and equipment to increase production capacity to better serve our customers and.
In addition, we remain focused on growing the business through innovation, new product development and acquisitions.
Earlier this month, we announced the acquisition of level five tools market leader offering a complete lineup of drywall tools for both our pros and do it yourself.
We welcome a level five team to Worthington are very excited about this acquisition as it expands our existing portfolio.
In the prior year.
Thank you.
And improved product mix.
Turning products delivered a record.
For the quarter of $64 million and EBIT margin was 36, 8% up from $41 million and 33, 3% in Q4 of last year.
Our wholly owned building products business continued to show solid growth more than doubling the EBIT from the prior year and on a sequential basis due to continued strong demand and favorable mix.
Combined with higher average selling prices.
At our Jv's by theatrics results improved by $15 million year over year, while <unk> was down $4 million a year ago.
<unk> customers have been impacted by construction delays both issues are approved.
Our kitchen wave contributed equity earnings of $23 million and $21 million.
Effectively.
Building products team continues to do an excellent job of certain of our customers in the near term as they invest in new product development and production capacity. The business has a healthy order book and we are optimistic about demand going forward.
Despite significantly lower volumes due to the divestiture at the end of Q4 last year of our LPG auto gas business in Poland.
Excluding the divestiture net sales were up 20% in Q4 versus last year.
The business reported an EBIT loss of $2 million in the quarter compared to a profit of $4 million in the prior year quarter.
800, <unk> as higher average selling prices were more than offset by mix and the impact of significantly increased input costs.
Given the already trained.
Impact on the European economy input costs.
Freight cost Sandblast solutions is likely to remain challenged in the near term.
We are very excited about the long term growth prospects for this business as we develop an optimized solutions that serve the rapidly.
With respect to cash flows and our balance sheet.
<unk> and free cash flow was.
$142 million.
It has strong release of cash from operating working capital, primarily due to lower steel prices and reduced inventories, which added $77 million.
Dollars to cash flow.
For the full fiscal year cash flow from operations was <unk> 70.
$70 million and free cash flow was an outflow of $24 million.
Operating working capital increased by <unk>.
$258 million during the year.
<unk> result of higher steel prices.
We expect a substantial portion of that working capital build in fiscal 2022 will return to us in the form of validate and JV investments.
$23 million on capital projects.
Page $14 million in dividends and spent $52 million to repurchase 1 million surfaces, we have slightly over 6 million.
Shares remaining under our share repurchase authorization.
Liquidity position funded debt.
Year end $745 million decreased $68 million of sequential.
Interest expense of $8 million was up slightly due to higher average debt levels.
In the quarter, we established an accounts receivable securitization facility that allows us to borrow up to $175 million at favorable short term rates further bolstering the company's already strong liquidity.
Mission.
We ended Q4 with $34 million in cash and $632 million in availability under our revolving credit facilities.
We believe we are well positioned heading into the new fiscal year.
Yesterday the board declared.
There's an 11% increase over last.
2022.
This marks the 12 consecutive year, we've increased our dividend and we are very pleased to be able to continue rewarding our shareholders as we deliver strong results.
At this point I will turn it over to you.
You, Joe and good morning, everyone.
On an amazing year. It has been for our company and our employees record earnings per share of $7 30.
Record EBITDA of $615 million Jenny.
General Motors supplier of the year, John Deere supplier Hall of Fame for the second time.
Best places to work in Central Ohio, 10 years running.
All of this in the face of a very tough operating environment filled with supply chain challenges steel price volatility.
From lingering COVID-19 challenges.
I cannot say enough good things about how our employees have gone above and beyond to take care of each other and deliver for our customers all while staying focused on implementing our value.
Physicians and innovation.
So our mix in fiscal 'twenty, two with the acquisitions of Shiloh is blank like business and temple steel with these we have success.
Expected from electric vehicles.
And the build out of the electrical grid.
We can now offer broad a.
Our broad customer base, it's a full complement of laser welding light weighting applications in electrical steel eliminations, FERC electric vehicle motors and Transformers.
It is not often that you see products in the steel markets that are expected to grow at double digit rates for the foreseeable future.
Business introduced a number of new products. This past year and added the innovative drywall tool brand level five towards growth.
<unk> portfolio of tools today.
Today, we have 10 unique brands in the tools outdoor living and celebration categories.
And our pipeline of innovative new products continues to expand.
In building products, we are benefiting from our focus on providing solutions that save time and labor for the new construction and renovation market.
Which are dominated by wind solar hydro.
And hydro electric.
Overall, we are making strategic.
Investments in propane hydrogen electric and related areas to increase our exposure to markets, where our products will play key roles in the energy transition.
Our goal is to create.
It's sustainable products and business practices that are accretive to margins and free cash flow as these markets accelerate their growth.
End market demand remains strong across most of our products and markets that operating challenges remain including labor availability in some cities continued intermittent supply chain disruptions transportation shortages in steel price volatility.
Our commercial operations purchasing and supply chain teams have done an excellent job working together this year overcoming constant curve balls and deserve much credit for a record of success.
We continue to be bullish on the future of all of our business segments as we refine and execute more dynamic growth strategies that will continue to leverage innovation transformation and M&A.
In the near term higher producer prices and consumer prices combined with higher interest rates.
<unk> some risk to what otherwise would be a solid economic backdrop to start fiscal 2023.
I'm in my 14th year at Worthington industries in fiscal 'twenty. Two is without question. The most impressive performance I have been fortunate enough to be a part of.
In the face of numerous challenges our people went above and beyond to deliver for our customers, while achieving record financial results.
Every business unit is we're working hard smart and performing at very high levels.
So all of our stakeholders congratulations and thank you for your loyalty.
We'll now take questions.
And at this time, if you would like to ask a question. Please press Star then one on your telephone keypad.
And we'll pause for just a moment to compile the Q&A roster.
Our first question today is from Martin Englert with Seaport Research partners. Your line is open.
Hi, good morning, everyone.
Good morning, Mark.
Cross the cylinder segment Asps improved sequentially and higher pricing was called out in the prepared remarks with Walter release.
The extent of this was pricing versus mix can you discuss the typical duration that you price the products business.
I guess, how often does that typically change here.
Yeah, So so Martin if not sooner.
Cylinders anymore, obviously, it's building products and consumer products, but in both of those businesses. We mentioned during Q2 and Q3 conversation there.
The ability and the pricing contracts and those things sometimes lag.
When you see inflation and so we were able to in.
Late Q2, and a couple of cases, but largely in Q3.
We were able to kind of catch up if you will to where our costs were and finally be able to reset some of those contracts and so.
In in building products a lot of those are.
Renew and go forward on a more short term basis, but some of them are also annual but.
Again, we don't really think.
About it has.
Higher pricing carrying the day, we honestly think about it as the.
The products that we have which we were able to price more appropriately given our input cost.
After we got into kind of calendar 2023, now, but Andy Andy mentioned. These are these are products that are <unk>.
Save people time, right, our foam and adhesive products.
When you are putting up a roof or putting down a floor rather than nailing things into their into the ground are into different studies.
Save a ton of time, and our smart led technology and building products.
Really save time for propane distributors and everything else and so in this market, where labor or is that a premium both in availability and cost.
We really think about it as the.
The ROI for those product becomes even more visible for our customers and then the end user customers and thats driving a lot of what we're seeing.
Thank you for that that's helpful.
Within steel processing, and holding losses were $42 million for the quarter.
Yes.
You alluded to I think a modest positive gain near term I guess, how would you define modest.
Does it mean significantly less than the losses, we had this quarter.
Sure.
Well I.
I guess I interpreted.
You would expect to gain on the current quarter misinterpret that.
Sure Yes.
The size of the gain in this quarter will be.
The lower number obviously than the size of the loss, but yes, you are right it will be a modest gain for the quarter.
That's really all the visibility we typically have.
At the same time.
The bias for steel pricing generally has has return to that.
That current sloping downward as you know.
Okay.
I guess pulling out.
Inventory holding gains and losses.
Steel processing EBITDA per ton I think was about $73 in the current quarter, which was comparable to first quarter I believe.
Gains and losses.
But it's elevated I guess I kind of think of the through cycle of around $50 a ton I know year.
<unk> changed a bit with direct versus tolling, but I'm curious of that.
$73 per ton underlying.
Is that something that sustains near term or was that just the near term.
Mix or pricing or something that dissipates.
Yes.
It's a great question and there is as you know there are a lot of puts and takes in there I think the business. Excluding FIFO ran at about a 6% EBITDA margin.
For 2022.
Yes.
I would say that historically normal.
Okay. So more so youre thinking on it on a percentage basis kind of.
When you are looking at things through cycle got it.
Yes.
Sorry go ahead.
Ahead.
So I just said we see if there are.
We have gross on material, we have other things that are happening and they are currently it's going to be some noise.
Prices are very very volatile.
But I think thats the way that we think about it.
Normalized environment.
I guess coming back to the $1 per ton.
I am not wrong in thinking I mean, youre thinking about it on a percentage basis.
Not necessarily wrong in thinking about it that it kind of reverts to the through cycle over time, Brian .
Martin This is Andy I would say.
It's unclear we've been through kind of an interesting couple of years here with respect to steel availability steel price volatility.
And so a lot of what's happened in the marketplaces I think.
People like us and our competitors have tried to recapture some of the costs increased freight costs increased labor cost and I think thats reflected in the higher margins today, whether that reverts back up.
<unk> is a little bit unclear at this point.
In many markets that's the case, but.
Theres also been a lot of consolidation.
And the mill space. So I think that is helping support higher prices and higher margins as well so.
The backdrop right now is as solid.
We will see where it goes from here.
Thanks.
Paul if I could one last one here could you just provide an update on the tempo of integration.
How that's progressing.
And then maybe a brief update on sustainable energy solutions I know you've commented that there has been some headwind in the euro market and Thats, probably going to remain challenged but I guess, when we think about.
What's the time horizon potentially look like before that would turn positive.
So first question temple the integration has been going very well, we are actually wrapping up.
Kind of a revisit of kind of.
The strategy for that business not because they didn't have a good strategy. They did but I would tell you that one of the.
Things that they faced prior to us owning them was capital constraints and so we don't obviously have that and so that market is growing rapidly it's growing globally and so the question that we're trying to answer is where are we going to invest to get.
The highest rates of return and be able to serve our customers on a global basis. So I would say, we're probably as excited or more excited than we were when we acquired the business. The team is fantastic there they continue to be very engaged.
They have integrated very well into Worthington, where it makes sense we're not.
Trying to smother them, what we're trying to give them access to our resources where that makes sense.
They have taken advantage of that so its so far its been.
A great partnership.
Integration process.
And we look forward to kind of where it goes from here on sustainable Energy solutions. You are correct that business is European centric right. Now we have made some investments to expand our capabilities in and around the hydrogen space there but.
The core of that business is being impacted by the European economy The war in Ukraine.
And so short term it's faced some headwinds we still are very optimistic about the long term.
Prospects for that business.
We don't like businesses that don't make money. So we're working hard to try and get it back to profitability.
Sooner rather than later, but.
Time will tell exactly how long it is before demand comes back there.
Yes, I know.
I know there.
People in Europe , and we feel for them because the situation is what it is but it's hard to underestimate how disrupted the European economy, and European freight and European supply chain and the availability.
And coordination as Youre trying to shift things from various places to and from Europe , Hasnt been and how.
Disrupted.
And so some of that will depend on the Ngls geopolitical situation, but Andy is right.
It's <unk>.
That's a great business for us longer term.
Turning to face some headwinds certainly for the next couple of quarters, Yes. The one thing I will say that.
Is a positive for you.
The products that they make is what's happening with energy and.
In Europe is has obviously made them rethink their supply sources and they're looking for alternatives and transitioning away from dependence on Russian oil and natural gas and so that is actually driving a lot of activity in that business, but it doesn't necessarily mean it shows up in it.
Quarter.
Yes, thats more of a longer medium longer term shifts, but it's good to see.
Pivoting to the other direction here. So thank you for all your time congratulations on the results not only for the quarter, but for the year and navigating a challenging environment.
Thank you Mark.
The next question is from Phil Gibbs with Keybanc capital markets. Your line is open.
Hey, good morning.
Alright.
When does the the inventory gains and holding losses.
Sickness, I guess abate you had a big loss here you got a modest gain next quarter.
Train role has rolled down the tracks down 500 Bucks on hot rolled in the last two months does that show up in Q2 does that persistent in Q3.
Where do we need to level out I guess for for this for the CES.
Because you are massive swings within swings and I think you can join me in saying that you've never seen this before so we haven't either.
We're trying to figure this out.
<unk>.
Well I mean, Thats certainly a good question I don't have a great answer with a lot of <unk>.
<unk>, what you're seeing this quarter.
It's actually what we talked about on in giant swing.
The gain next quarter are more kind of an echo ranked from.
When steel prices post rushes invasion of Ukraine bounce back up to $1500.
But then they've kind of resumed their downward bias and so if you kind of.
Look out into the future once we get through.
The curve ultimately flattening and Theres always a lag effect for our inventory holding gains or losses.
The market Okay.
Yes.
It would appear right now to be relatively flat. If you just look at the forward curve is kind of starting on August September into the into next year, whether that holds or not remains to be seen but.
We're clearly doing everything that we can.
To optimize our inventory positions at all times, but.
To a certain extent.
The forward curve is going to.
Do what it does without.
Kind of regard for what we think are one.
And just generally on the macro side on on nonresidential construction, you've obviously got some.
Some leading indicators there some some thoughts on the orders that <unk> and <unk>.
Wave and Thats, a mix between new and MRO and <unk> got some some vision and some of your cylinders portfolio.
Whats the latest.
In terms of the mosaic on the nonresidential construction side with the rising rate and softening housing price environment.
Yes, I mean, it's a little unclear I think there are obviously some flashing yellow lights. There just in terms of construction cost generally as well as rising interest rates, which will change the economics of.
Some of those projects I will tell you.
We don't have an economics department here at Worthington that sort of.
Does deep dives, but one of our JV partners does Armstrong in their outlook right now is kind of just slightly up year over year.
Obviously, that's subject to change as additional economic data points come in but.
There's a lot of puts and takes in commercial construction, it's not just office buildings.
So I think there are there is demand for other.
Types of buildings, particularly around.
<unk> medical in the healthcare field that is offsetting what you might expect would be some of the decline so.
We're cautiously optimistic.
Things hold up.
Okay.
And then on the Capex side, you've got Tampa.
<unk> I think you're talking about putting in more <unk>.
Assessing capability.
There are two to augment our portfolio, but what are you thinking about in terms of I know, it's a little early but physical.
Well I guess it isn't really any more fiscal 'twenty three capex.
Yeah.
We are right at 94 ish million dollars for the year, we think it'll it'll be up modestly.
10% to 20% year over year, we do have the inclusion of temple.
Honestly, probably would have spent more in 2022, but for supply chain and other delays in being able to complete projects.
And so on.
Our level of spend to a certain to a large degree but on the margins.
<unk> is going to be kind of subject to availability of products and not being able to get that money deployed.
And the way in on a timeline that we want and we've got some really cool growth oriented projects that we're excited about and a continuation of the theme.
It's not really the cylinders business anymore, right, it's consumer products and building products, but in both of those businesses.
The trends that you saw beginning with coated are inherent to any recession that you go into in that you're not spending money on airplanes or lay on a cruise ship youre going to do more at home you might go campaign Youre going to work around your house and then on the building products side a lot of those products are ultimately.
The labor savings oriented and driven and so to Andy's point, we are cautiously optimistic but.
I feel like if there was a.
Consumer led recession or something like that that are we won't be immune to that but that a lot of the places that we play are going to be a bit more insulated than some of the others that are out there.
No that makes sense totaled and last one for me is just on the auto side.
SME.
<unk> been a big talking point for the last several months and counting.
What are what are your customers, telling you now in terms of any of that Don braking, perhaps as the year progresses.
For 2023.
It's probably more at 2023 phenomenon at this point you look at.
Inventory on dealer lot days all of those metrics are at historic lows and you've done that you can still drive past car dealership.
The parking lot fairly empty and so.
Things are steady.
But things have not begun.
To hockey stick back.
When all of this happens depending on the economic environment that will clearly have some some catch up to.
Kind of fill those channels, but it's very difficult to predict when that will start and how rapidly it will be.
Thank you.
Sure.
The next question is from John Tumazos with John Tumazos, very independent research. Your line is open.
Could you tell us a little bit about the drywall tools acquisition.
The EBITDA multiple you paid the synergies that might have presumably this goes into construction segment.
So sure John the level five will actually goes into.
Construction segment, but it's embedded in our consumer products business.
Very excited about that business grown from the ground up by the founder and CEO real reputation for innovation or.
Cutting edge.
Improvement in tools I don't know how much you know about the drywall business, but there are <unk>.
Titan and steps you go through and dry wall and it requires.
For optimal production and productivity different types of flex points different angles.
And different types of tools.
Those guys really crack the code has been able to take share everywhere. They are gone.
We paid a little north of 10 times on the EBITDA side, we are 100% excited about it because of the breadth of our consumer offerings into big box retailers and into the stores, where they are they also sell a bunch direct to consumer so theres going to be.
Learning both ways for us.
Ross.
We are.
Their CEO and team is staying and committed to the business, but we really feel like as well.
And a part of our GTI platform and consumer products, we're going to be able to do great things for them from an access perspective and add more people in a do it yourself or pros.
See and understand what those products do we think there'll be able to take share and it also gives us entre into an entirely new.
<unk> segment in that specialty tools business.
I'm more excited about what's possible there.
John just.
This is.
One of the most exciting things going on at Worthington right now is in our consumer product space we have.
Develop.
Very strong capability of taking either under managed brands and reinvigorating them and then driving them into our broad network of customers or in this case.
Taking an emerging brand, which has a lot more penetration.
Before it becomes mature and really helping take the business to the next level. So.
As we go forward Youre going to see a lot more hopefully of these types of either new products introduced from within Worthington or new products that we acquire and really help accelerate their growth.
Big strategy for US we've got an excellent team.
That is really.
Developed a great capability there. So we're excited about the prospects of this business.
So as we look this isn't the consumer segment and as revenues and EBITDA.
We look to the current year 2003.
Over $300 million went into working capital last year.
Is any of that money going to come out.
Should we expect.
Working capital dollars, excluding cash and debt to Vietnam to same.
The year end.
So John $258 million land to working capital.
In 2022.
We do expect a fair amount of that to come back to us in the form of cash flow unless steel prices go up again.
Of course, the cash balances fell when you've got a little bit of short term debt.
Does that mean, there's going to be a pause in acquisitions.
The dollars were.
Very big.
Last year $384 million 130 in 2021, I guess 2018 was $2 85.
2017, there werent any acquisitions 2019. It was 10 2020 is 31.
Yes, John I was whether we're borrowing or not.
Well, obviously, if you look at our leverage level based on trailing EBITDA were pretty low leverage I don't know what the exact math is but one two or three.
The EBITDA, we have a lot of available credit.
And as you were just talking with Joe I would say we have.
Our stash of cash in working capital that we expect to get back so.
<unk>.
Short of steel prices, reversing course, and starting to go back up.
The other thing I would tell you is.
I am not rooting for a recession and by any means but when you see slowdowns in certain markets you've already seen obviously.
A big blow up in terms of a lot of.
The new economy stocks, but youre starting to see valuations come down.
I think in other markets too and Thats, when we start to lick, our chops, a little bit and get excited about.
Potentially being even more active I mean, you've got to find the right companies you've got a strike the right balance of.
Price and you need a willing seller so.
But I think for us.
It was out there for us to buy it.
Renewable prices, but we paid 10 times for level five so we're not afraid to start paying up for really good businesses.
So interiors, you've spent about $570 million in acquisitions.
Is there a nervousness that thats a lot of organizational change.
Business issue Scott.
Jim.
Sometimes you learn more after you own them than before.
So.
Sorry, a little bit of.
Caution given how much you've spent how quickly.
I don't know if its so much the dollars John it's more how many businesses have we bought and how much integration is there one of the things that has changed for us.
Over the past several years is the way, we're integrating businesses and the short answer is a lot of cases, we used to pursue full integration, which pick a function. We were integrating it fully into Worthington, we're not doing not necessarily as much anymore and that's a very conscious decision on our part partly because we want these businesses.
To preserve their own growth strategies.
We don't want them.
Metal if you will in terms of their path to success, because theyre already good businesses and doing well, but I think also that.
Sometimes when you do full integration.
<unk> necessarily arent accomplishing.