Q1 2023 Worthington Industries Inc Earnings Call
Industries first quarter fiscal 2023 earnings call.
On our call today, we have Andy Rose Worthingtons, President and Chief Executive Officer, Joe Hayek, Worthingtons, Chief Financial Officer, and Jeff Gilmore, Worthingtons, Chief operating officer.
Please note given the business separation announcement, we made earlier this morning, our prepared remarks will be longer than normal.
For the Q&A portion of our call we ask that participants limit their initial questions through our quarterly results in order to allow everyone. The opportunity to ask questions and then to re queue for questions related to the separation.
In addition, we have posted a slide presentation to our Investor Relations website, which provides more information on the planned separation.
Before we get started I'd like to remind everyone that certain statements made today are forward looking within the meaning of the 1995 private Securities Litigation Reform Act.
These statements are subject to risks and uncertainties.
Could cause actual results to differ from those 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 Andy to kick things off.
Thank you Mark good morning, everyone.
In addition to releasing our first quarter results. This morning, we announced exciting news that we are pursuing a separation of our steel processing business into a new public company, creating two distinct market leading companies, it's an exciting day for Worthington.
Joe is going to start with our first quarter results and then I'll discuss the separation in more detail Joe.
Thank you Andy and good morning, everybody, we do have a lot to discuss this morning, and so we'll get right to it.
We started our fiscal year with solid results reporting Q1 earnings of $1 30 per share versus $2 55 in the prior year quarter.
There were several unique items impacting our quarterly results that included the following.
We divested our 50% interest in artifacts, which was a non core joint venture for approximately $42 million.
That divestiture resulted in an after tax loss of <unk> 25, a share.
We took advantage of rising interest rates and a new <unk> a portion of our inactive versus slugger pension plan, which resulted in a noncash charge that negatively impacted earnings by seven a share.
Recognized incremental expenses of a penny per share related to our recent acquisition of level five tools in the earn out associated with that acquisition and finally, we benefited by <unk> <unk> per share due to a restructuring gain recognized in the current quarter compared to gains of <unk> <unk> per share in the prior year quarter restructured.
Restructuring activity in both periods was primarily related to the monetization of noncore real estate.
Okay.
Yes.
Excluding those unique items, we generated earnings of $1 61, a share in the current quarter compared to $2.46 a share in the prior year and.
In addition in Q1, we had inventory holding losses estimated to be $2 million or <unk> <unk> per share compared to inventory holding gains of $47 million or <unk> 68 per share in the prior year, an unfavorable swing of $49 million, which is <unk> 71 per share.
Consolidated net sales in the quarter of $1 4 billion were up 27% compared to $1 1 billion in Q1 of last year.
The increase in sales was primarily due to the inclusion of temple steel combined with higher average selling prices across all of our segments.
Gross profit for the quarter decreased to $169 million from $219 million in the prior year quarter and gross margin was 12% versus 19, 7% primarily due to the swing from inventory holding gains to losses in steel processing.
Adjusted EBITDA in Q1 was $140 million down from $196 million in Q1 of last year and our trailing 12 month adjusted EBITDA is now $560 million.
I'll now spend a few minutes on each of the businesses.
In steel processing net sales of $1 billion were up 26% from $823 million in Q1 of last year, primarily due to the inclusion of temple steel combined with higher average selling prices.
Due to lower toll volumes that are consolidated jv's total shipped tons were down 8% with direct tons, making up 58% in mix versus 49% in the prior year quarter.
Direct tons were actually up 8% year over year excluding.
Excluding the impact of temple and the facility we closed in Decatur, Alabama direct volumes were up 4% year over year due to increases in our automotive and construction end markets.
Our team in steel continues to do a great job navigating inflation and supply chain challenges as they effectively manage complex programs for our customers.
In Q1 steel generated adjusted EBIT of $35 million compared to $108 million in the prior year.
The large year over year decrease was driven by lower direct spreads which were negatively impacted by the inventory holding losses, I mentioned earlier estimated to be $2 million in the quarter compared to gains of $47 million last year, an unfavorable swing of $49 million.
The inventory holding losses in this quarter included a $4 million charge to write inventory down to net realizable value due to the expected future decline of steel prices at quarter end.
Steel prices continue to be volatile and hard to predict having fallen over $300 a ton since our Q4 earnings call in late June .
Given the recent steep decline in steel prices, we will have meaningful inventory holding losses in Q2, which we believe could be as high or higher than the 42 million estimated loss. We had in Q4 of 2022.
Consumer products net sales in Q1 were $189 million up 28% from $148 million in the prior year quarter.
The increase was driven by higher average selling prices and higher overall volumes, which benefited from the acquisition of level five tools at the start of the quarter.
Adjusted EBIT for the consumer business was $21 million and EBIT margin was 11, 1% in Q1 compared to $21 million in there.
And 13, 9% last year.
Adjusted EBIT in the current quarter was negatively impacted by $3 million of expenses related to the level five acquisition and included the write up of inventory to fair market value.
In addition, production delays and ongoing inflationary pressures, including higher wages and input costs were a drag on margins for the quarter.
While this quarter could have been better for our consumer business that team has executed very well in a challenging environment and continues to be focused on growing our business with new and innovative products that provide value for our partners and end consumers.
Building products generated net sales of $150 million in Q1 up 31% from $115 million in the prior year.
The increase was driven by higher average selling prices.
Building products generated adjusted EBIT of $63 million for the quarter and adjusted EBIT margin was 35, 1% compared to $49 million and 42, 5% in Q1 of last year.
The overall improvement was driven primarily by our wholly owned businesses.
Reduction in adjusted EBIT margin was driven by inflationary cost pressures in the wholly owned business as well, which partially offset the benefit of those higher average selling prices.
Our building products JV contributed EBIT of $44 million in Q1, an increase of $1 million over the prior year quarter.
Higher contributions from <unk> were partially offset by a decline at wave.
Well collect matrix continues to perform very well due to declining steel prices, we do expect their results to moderate moving forward.
Right.
And sustainable energy solutions net sales in Q1 of $31 million were up 21% compared to 26 million in the prior year quarter due to increased volumes and higher average selling prices.
Business reported an adjusted EBIT loss of $1 million in the current quarter compared to a loss of $3 million in the prior year.
The operating environment in Europe continues to be exceptionally difficult as inflation fuel shortages in war related dislocations continue to place a burden on that entire population.
As a consequence of the financial results for sustainable energy solutions are likely to remain challenged in the near term.
However, we continue to be very excited about SCS as end markets, which are poised for above average growth over the long term.
Our integrated solutions position us very well to enable the hydrogen ecosystem and adjacent sustainable energies.
With.
Respect to cash flows and our balance sheet.
Cash flows from operations was $81 million in the quarter and free cash flow was $60 million.
We've now generated over $200 million in free cash flows in the last two quarters.
During the quarter, we invested $56 million to acquire level five tools spent 21 million on capital projects paid $14 million of dividends received $48 million in proceeds from asset sales and received $75 million in dividends from our unconsolidated jv's.
Dividends, we received from a consolidated JV exceeded their equity earnings during the quarter as their working capital levels have started to normalize and they were able to pay out earnings that were not distributed in the prior fiscal year.
Looking at our balance sheet and liquidity position.
On the debt at quarter end of $706 million decreased $39 million sequentially.
Interest expense of $9 million was up slightly due to higher average debt levels associated with short term borrowings during the quarter.
We ended Q1 with $36 million in cash and $664 million of availability under our revolving credit facilities.
Joining us with ample liquidity for the future.
Yesterday, the board declared a dividend of 31 per share for the quarter, which is payable in December of 2022.
At this point I will turn it back over to Andy.
Thanks, Joe.
After a good start in fiscal 2023, with our second best first quarter ever adjusted earnings per share of $1 61, and EBITDA of $140 million, our solid accomplishment in the face of declining steel prices and continued challenges throughout our supply chain.
We continue to pair our non strategic assets with the sale of our 50% ownership interest in artifacts during the quarter.
We are approaching the end of this multi year process of repositioning our businesses for growth by exiting noncore and underperforming operations and beginning to invest in higher returning products and markets, we had almost $60 million of free cash flow during the quarter and our net debt to EBITDA is very modest at one two times.
End market demand remained steady across most of our products and markets, but recent market volatility could lead to changes in this outlook as higher rates impact various markets. Our employees continue to go above and beyond to deliver for our customers. Despite the many challenges the world has faced over the past few years.
Today, we announced an exciting plan to separate our steel processing business into its own separately traded public company.
Gaining business, which we are calling new Orleans and for now has market, leading products and services and consumer products building products and sustainable energy. This.
This side of our business was recently re segmented to better align with the attractive markets. It serves and develop broader growth strategies to leverage our strong market positions.
Worthington is poised to capitalize on key trends and sustainability technology remodeling and construction and outdoor living and we'll continue levering its robust new product pipeline of sustainable Tech enabled solutions to disrupt mature markets.
We believe that new Worthingtons high margins and lower asset intensity will provide the opportunity for premium sector multiples.
Worthington steel as a best in class fuel processor with excellent growth opportunities in automotive light weighting solutions and electrical steel laminations positioned well to take advantage of fast growing trends in electrification sustainability and infrastructure spending.
It deserves its own platform and capital structure to accelerate its growth and value creation opportunities.
This business will be run by Jeff Gilmore and the existing steel leadership team.
Jeff is currently our Chief operating officer, and previously ran steel processing and the former pressure cylinders abroad.
A broad skill set and is well qualified to lead steel as its own public company.
Jeff is here to answer questions later and will join us for future earnings calls as well.
We do not anticipate any material changes to our modest leverage and ample liquidity mindset for both companies and we are likely to continue with similar capital allocation strategy.
These businesses will be run with our philosophy and Golden rule principles and utilize the Worthington business system transformation innovation and acquisitions to drive growth and shareholder value.
This is a historic decision for us.
So I thought I might try and answer two simple questions for you why are we doing this and why now.
Heman Board are laser focused on shareholder value and it has become clear that we have two very distinct businesses that should be valued differently and will benefit from their own strategic focus and capital allocation priorities.
Secondly, both companies are now big enough to succeed on their own as independent public companies.
And we are coming at this from a position of strength. We just had two of the best years in the company's history and the business is performing well, we have low leverage and both businesses have robust growth strategies and are well positioned for the future.
Our team and the board collectively made this decision and we are confident that both businesses will thrive as their own separately traded public company.
In doing so we will be able to better service, our customers provide more and better career opportunities for our employees and deliver stronger returns for our shareholders.
I'm in my 14th year at Worthington industries and cannot be more excited about our future our business is well capitalized performing well and poised to embark on a journey to take one great company and create two great companies.
To all of our customers suppliers employees shareholders and other stakeholders I hope you share in our excitement for where we are headed.
I'm sure there are lots of questions and we will try to answer them, all but I would ask that you limit questions to the quarterly results until we answer all of those and then you can reenter the queue and we will discuss the separation.
Okay.
Alright.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
First question comes from the line of Martin Engler from Seaport Research. Your line is open.
Hi, good morning, everyone.
Martin Good morning.
So just to clarify.
Holding losses.
For the quarter was about one 5 million from the absolute value correct.
That is correct and part of that.
Martin was a bit of a bring forward. If you will of losses that we could identify that we knew we were going to have in Q2.
We brought those Florida into Q1 about.
About $4 million.
Okay.
And then look forward looking comment one.
Losses comparable or potentially.
The prior year, which I think was 42 1 million is that correct.
So the number is right what we actually said was that they could be as larger larger than the losses that we had in Q4 of 'twenty, two which were $42 million, but your number is exactly right because in Q2 of last year, we had $42 million in gains so.
That's the.
The way that we're thinking about it just given the really steep decline that we've seen in steel prices as we all know they were coming down and then.
The Russian invasion of Ukraine, They pop back up to $15600 and then since then they've they've resumed their rather steep decline to under $800.
Got it thanks.
Thanks for clarifying.
Welcome to the <unk> loss of 42 3 million.
Great that's helpful.
Can you provide a little bit of color commentary across the end markets.
The steel business.
Well some of the consumer and building products.
Incrementally on the March order books.
Yes.
Log of activity in Netherlands.
Okay.
Thanks Suzanne.
<unk> been for quite a bit in this year.
Changing changing at all.
Sure Joe.
By end market. There are some things that are a little unique in each but one of the things thats.
And to all of the businesses and really to the entire market is inflation that you see.
Higher prices, but then you also see much higher cost and so.
In consumer products and building products specifically.
Have you have higher cost in building products, you actually have and in consumer products, excluding the purchase accounting for the level five acquisition you saw increases in.
EBIT.
But then you saw decreases in EBIT margins and that's a direct reflection of the inflationary trends that we're seeing.
Steel is.
A bit more unique just because of the impact that rapidly rising prices have there and rapidly declining prices have and in terms of people's behavior.
And on the way that sort of things can get priced et cetera.
Automotive is still.
<unk> to show some signs of life, we're not ready to.
Declare that things are back.
Everybody seems to have semiconductor solutions, but other supply chain limitations are holding.
Then back.
I think all the Detroit three have mentioned same over the last month or so and construction markets.
Our reasonable as as is AG.
All that being said.
Across our markets we see.
Evidence red and signs that things are.
Happening.
That are slowing down and nothing is very steep but nothing as catastrophic but as Andy mentioned.
Youre going to.
We're in an environment, where the economy has higher prices and some potentially some growth. So we've got our eye on everything.
Businesses have a really good feel for what's happening.
Other thing that you would see I think in some of those results with respect to temple.
And then the markets that theyre in those markets will continue to grow exceptionally well regardless of.
Where GDP is just because its electrification de carbonization and infrastructure. So lots of end markets that we that we follow and lots of end markets that we're in but for the most part we feel really good about where we are in but we're certainly aware of the market conditions that we're in and where thing.
<unk>.
May or may not go over the next six to 12 months.
When your comments about kind of from a high level things are slowing a bit.
On the margin what are you seeing this in construction and AG on OCC.
Okay.
A little better on the margin incrementally here.
One.
Other key end markets as it pertains to the steel do you think about construction and AG.
Nothing nothing really specific that we would say.
Strong growth or decline Martin.
Okay, Alright, thank you for that color I'll get back in queue.
Sure.
Your next question comes from the line of Phil Gibbs from Keybanc capital markets. Your line is open.
Hey, good morning.
Good morning, Phil.
Question I had was on the consumer portfolio.
No Matt.
That the volumes there has over the last 12 to 18 months have been very resilient and then just just anything that you all may be you're seeing to the extent.
Some of the big box guys.
It could be could be taking down inventories into the end of the year. We were just reading, what Walmart and target are saying and alike.
How are you seeing that.
Flow through the year.
Consumer businesses.
Yes, everything you said is true field inventory levels at our customers have increased.
Sometimes what that causes them to do is to want to kind of pare back on weeks of inventory that they have or how they're thinking about things like that.
It has it has a probably a bit of a more outsized impact on it.
Our tools business.
There.
Those.
Products and those solutions really have longer supply chains.
<unk>.
They end up.
And those retailers are doing a good job and so seeing a little bit of that are.
<unk> fuel in our towards business continues to be.
Very solid.
That's we believe a bit countercyclical if people decide to.
Travel less and spend more time at home, that's going to that's a benefit to those products.
And that is and then as we look at.
Our helium business, there's actually a shortage of helium.
Worldwide.
We're fortunate that we have really good relationships with folks and are able to continue.
Continued producing that domestically.
And so.
As things are happening.
And as going to retailers and consumers are.
Behaving a bit differently.
Pretty good data on pretty good insights and we're able to respond to where we think it's appropriate but.
As I said, nothing nothing seems to be alarming at all.
But we've got our eye on it and we'll certainly stay vigilant, maybe just one other comment bill on.
On the you know.
The one pound propane cylinder business for a long time, we were kind of allocating product because we were behind.
We are no longer an allocation, but I'm not sure inventory levels at some of the retailers are excessive for that product. That's the highest volume product that we have and then the other thing, which I never really like talking about but that business does benefit from natural disasters, and so there'll probably be some uptick in.
And this quarter related to the hurricane in Florida.
Thanks, Andy and then last question just here on the industrial portfolio.
What are you what are you all seeing seeing there because I know, it's I think it's reasonably diversified a lot of it is north America, but some of it may be yes.
Outside the U S. So maybe talk about what youre seeing in the industrial side of things and then ill.
I will jump out here. Thanks.
Alright, I think youre talking about building products right.
I was thinking.
And on certain industrial type cylinders.
Sure. So Phil yes. So those are those are embedded in building products those those larger propane cylinders.
Continue to.
Benefit from our team is really good work and our.
Exposure to end markets that are continuing to grow rather nicely.
The JV.
<unk>.
Or a little sort of distinct.
Wave and car T trick behave a bit differently I think we mentioned in our prepared remarks that our.
<unk> has been doing exceptionally well.
But they are a bit more.
Susceptible to declines relative to steel prices and so we do expect their results to moderate a bit going forward.
There their outlook in there.
Execution remains very strong as does.
The execution per wave.
Wave had.
Add to lap I think some of the lagging indicators they had relative to demand and some.
Pricing dynamics that they had a year ago, and we do expect them to continue doing a good job as well.
Other businesses, there are refrigerant foam and adhesive oriented and a bunch of other things and while there will always be pockets of issues that could be specific to product lines or anything else overall.
We feel like those businesses are.
Solid GDP growers, and we obviously hope to do better than that through taking share and thinking about things that we can.
Enhanced relative to our products.
Thanks, guys.
Sure.
Our next question comes from the line of Seth Rosenfeld from BNP Paribas. Your line is open.
Hi, good morning, Thanks, taking my questions.
On the demand side.
Your earlier comments on <unk> across Europe .
Good color on the scale decrease in weakness you've witnessed of late.
Did that kick in just recently in all of them are much earlier in the year with energy cost per start to increase.
What your sentiment is with regard to activity levels looking ahead through winter.
Sure.
It's a great question.
And obviously you.
Probably a better window to it than that most of us but the.
The economy.
There are two economies that we have to really pay a lot of attention to in Europe . One is the general economy and then obviously the other is for.
Hi, hydrogen CMG and an alternative energies.
Long term, what's happening for alternative energy solutions.
To accelerate adoption of hydrogen and Alt fuels for.
For all the reasons that we know about.
Short term there is.
Going to be a fair amount of dislocation and I don't say this slightly but some economic pain and some real hardship for people and for businesses.
When we look at that economy. It was slow six to nine months ago.
We anticipate it will be even more challenged moving forward as you mentioned as you get into.
Colder weather and you have scarcity issues with respect to.
Energy raw materials.
Things like that our businesses are doing everything they can to take care of their people take care of our customers and try and source.
Things, where they are available.
And that's happening I think everywhere, but.
I don't think we would have kind of an order of magnitude because.
Our business there is relatively specific but.
We don't see it getting.
Terribly.
Worst than it has been it would probably be as kind of an incremental <unk>.
Down but not much.
Their stuff is it's not a huge.
Revenue component or the overall business.
Our exposure there.
Great. Thank you.
Just coming back to the earlier question on autos can you give any additional color on the scale of the company you're witnessing.
Feedback from many of our peers spin kind of continued delay in a couple of weeks.
That said much earlier in the year.
Any additional color on the scale with us to date and what your customers are telling you might happen looking forward as well.
Yes.
We think sequentially, it's pretty flat.
<unk> <unk>.
Supply chain challenges.
It seems as though most OEM.
Oems have solved or addressed their semiconductor shortages and those should get better at the same time there are shortages for other products.
And their.
<unk> ability to produces bounded by lots of different things and so we actually see automotive sequentially.
Up slightly.
Slightly.
But from a low base, so what I would call it creeping along the bottom searching for some upside in.
First half.
Of 2023 calendar certainly looks better.
I think some of that thank you. So much some of the commentary was on was on Q3, which for a lot of those folks and tomorrow. So.
Mhm.
Your next question comes from the line of catcher <unk> from BMO capital markets. Your line is open.
Good morning, Thank you for taking my call.
Ken Good morning.
About the inflationary pressures specifically, what do you think how feasible develop through the rest of the year and maybe are you taking any actions that you could mitigate those thank you.
Sure.
We like others have seen inflation.
Whether it's in our business or at the grocery store or at the pump and so.
We have taken kind of actions.
Across the board with.
Understanding that our input costs everything from materials to Labour have gone up.
We have tried.
Tried to.
Pass along those costs so that.
We're able to <unk>.
Execute on our business plan, and we pay attention to elasticity of demand and we pay attention to what's happening out there but.
Suffice it to say we.
We don't see it.
Sequentially going up by 10%, but we also don't see it going down and I think we feel like we're at a relatively high level and signs. We're seeing is that it'll be relatively plateaued for at least the next several months.
Okay, just maybe one more on D. So the steel prices are coming down.
Shouldn't that benefit D.
The former cylinder businesses a bit or is there a delay that we should be looking at.
That's exactly right there, we try very hard to understand and you've got to take care of our customers with fixed price contracts for.
Anywhere from nine months to a year and so anytime prices.
Go down like this there is absolutely a bit of a delay in terms of the potential benefit that we would have there.
Okay. Thank you very much.
Sure.
Your next question comes from the line of John Tumazos from GTI Research. Your line is open.
Hi.
Did we buy good morning, Jonathan is back in the current quarter.
We did not.
Are you benefiting from a rebound in vehicle output either on the programs that Worthington supplies.
Or your competitors getting busier, leaving you other business.
Given that the chip shortage seizing.
Yes.
We definitely feel like we have.
Done well and you know our ability to manage these complex solutions is increasingly attractive to our customers when you see it.
Our direct volumes are actually up a bit that we believe our market share gain and so we don't anticipate.
Automotive recovering to.
Pre or post COVID-19 levels, just because those supply chain challenges are persisting, John but we do feel pretty good that they won't be any worse volume wise than they have been in the last six or nine months.
Yes, I mean end market demand is still pretty good I think the Sars rate is in the Fourteens 14 million mid fourteens outlet, but dealer lots are still very low with respect to inventory. So even if there is some softness on the sales side.
We expect.
At least for the next several quarters that demand will be good in the steel business.
We're already Fox be gone in the November quarter entirely.
Yes.
As Servius Sara the only JV that will be.
<unk> was the steel processing company.
The majority owned JV is that are embedded in steel today will certainly also remain with steel GWB Spartan.
Samuel.
W. P.
One irony is Ben.
The other large distribution company rely on same store.
Outperformed.
Worthington a great deal in terms of share price.
With the separation do you think the new steel processing.
We'll be in a better position to match or exceed reliance.
In terms of I mean, that's part of part of the thesis.
Thesis here John is more focused.
<unk> leadership teams and more focused capital allocation.
That we do expect the business to accelerate its growth and obviously hopefully outperform we don't control the share price, but there is obviously some intent here to unlock value for both both businesses.
Thank you.
Okay.
And your next question comes from the line of Martin Engler from Seaport Research Partners. Your line is open.
Okay, well. Thank you some questions on the separation.
John John provided us a great segue so absolutely go ahead Martin.
Okay.
Thank you for that.
Any anticipated separation costs are a goalpost that we can use.
Yes.
We don't have a great feel for that we're not going to disclose that but we absolutely will keep you posted and we will disclose that number every quarter as we go forward.
Okay.
What about thoughts on loss of synergies.
Operating here, whether it be purchasing power.
The corporate overhead.
Thanks, Tom.
Yeah, Yeah, we absolutely know that those are real we don't believe that any of those numbers are amounts will be material.
Okay, and then obviously, you're obviously theyre not nothing but we will we were.
We're baking that into our assumptions and we are confident that.
It will impact either company's ability to reach its goals.
Okay. That's all I had on that thank you very much.
Okay.
And again, if you would like to ask a question Press Star then the number one on your telephone keypad. Your next question comes from the line of Seth Rosenfeld from BNP Paribas. Your line is open.
Okay.
Thank you for taking my questions again first with regard to the separation can you touch on that if there is any need to refinance.
And with that in order to complete the spin.
Thank you Alexandra different businesses I'll start there please.
I think you said the need to refinance Seth I understood correctly.
Yes. Please.
So we have not finalized capital structures for either company. What we can say is that we expect both business to businesses to be conservatively capitalized we use the phrase.
Modest leverage and ample liquidity.
And so we want both companies to come out of the gate with <unk>.
Plenty of capital to me.
Meet the needs of growing the business.
We obviously are going to be very focused on trying to preserve.
Most if not all of the.
Attractive financing that we have in place some of that will have to be refinanced hopefully not all of it.
Okay. Thank you.
Separate question. Please would we think about this because obviously the last two years with exceptional.
But worthington steel historically have seen more volatile windfall gains and losses, and perhaps ask the industrial business and the guidance for Q2 is a sharp reminder, about.
How do you think about how <unk> operates going forward is there an effort to.
Joseph Mccorry management trying to limit the risk of inventory losses on Standalone basis.
Or do you view as being adequately stable.
Change in strategy.
I do not anticipate a change in strategy I should probably let Jeff answer. This question, but the reality is we are always focused on trying to minimize the amount of inventory in and hence the amount of.
Price swings or volatility in earnings related to that you know we've talked about this historically, we run kind of a balanced position when we sell to a customer we match it up with the mill contract, but we have inventory in our system and that's where we get this volatility but we have.
An amazing price risk management team and our sales team and purchasing team that worked tirelessly to minimize that volatility as best we can.
But the reality is.
At the end of the day, we're always going to have some of it.
Okay, great great. Thank you.
Our next question comes from the line of Phil Gibbs from Keybanc capital markets. Your line is open.
Hey, guys.
As we look to this potential separation in early calendar 2020 forward. We've obviously got some some time before then.
Before that occurs perhaps a year and a half.
Will you.
Continue to.
Essentially operate your capital allocation structure as the current enterprises the way you've done in the past which is.
It will be very opportunistic in terms of the stock buybacks and then we also.
Focus on M&A.
M&A or will some of those things we put to the sidelines as you.
As you sort of get your arms around capital structures, and how you want to work in those businesses moving forward in other words.
Business as usual for you all in the next 18 months or you can almost operate with the mentality that they are already separated.
Okay.
Yes, I mean, that's.
It's a little bit of a difficult question to answer Phil what I would say is.
Both companies, while historically, we've had sort of a balanced capital allocation strategy.
We've deployed capital and the Capex, we pay dividends, we bought back stock and we pursued M&A that it's really just part of our strategy in our DNA and that will likely continue for both companies I will tell you there is.
Some focused right now on trying to make sure that when we do separate that both businesses are very well capitalized.
To go forward now that doesn't mean, we're not going to deploy capital. It just means that we're going to be cognizant of making sure that both businesses are set up for success at the same time I will tell you we still want to keep the gas pedal on our businesses and their strategies, we don't want to just stopped pursuing growth and generating strong returns for shareholders. So.
There will be a delicate balance.
Are you trying to find the right mix for that which could be more of the same but it also could change things up a little bit.
Yeah.
Yes.
Thanks.
Sure.
And your next question comes from the line of John Tumazos from J T. I Research your line is open.
I Didnt Marina in my business by the way.
For them.
As going forward.
Uh huh.
How clear demarcations b in terms of new acquisitions.
For example, our business Mike Your Dietrich industries that was acquired over three decades ago became the new JV subsequent JV.
Would that be considered.
Old Worthington business or a new Worthington business.
I'm not sure how to exactly answer that question John other than to say that certainly for the steel processing business Worthington steel, we're referring to it there are a number of consolidation opportunities when we bought Dietrich.
<unk>, a long time ago, we were pursuing kind of a.
I'll call it a hub and spoke strategy by downstream steel consuming businesses.
Processing business may do some of that or are they may continue to just consolidate and some of the higher growth markets.
Electrical steel and automotive light weighting laser welding, where there is a lot more growth and frankly, a lot more margin and in the core business, but there is absolutely a consolidation component there.
<unk> new Worthington.
Our M&A focus is on building strong branded.
Consumer and building products and then also looking at the high growth and sustainable energy. So our focus is probably a little more I'll call. It asset light finding great businesses that are less capital intensive.
And pursuing growth that way, but.
<unk>.
For for at least the spin when it happens part.
Clark Dietrich will.
I'll stay with new Worthington.
Okay.
I recall.
Going on the way Bill Dietrick, and 94 taken public before Worthington bought the business.
He described it as buying.
Non prime galvanized and running it through a die.
It was prime for steel framing, but not prime for automotive or metal buildings.
So he can you conceptualize the business, Mike secondary steel business.
So theres a lot of cracks if you would.
In terms of the two new companies going forward will there be a common director.
Ah.
Yeah.
And a procedure to make sure the two companies arent bidding against one another for the same deal because of the overlaps.
That's something we haven't really talked about or as you noticed this separation is going to take 12 to 15 months or so.
I don't actually expect there to be much if any conflict between the M&A strategies of the two different businesses I think we're.
Part of part of the thesis behind this separation is that the businesses are very different in terms of their strategic focus and where the growth is going to come from so I don't I don't expect that's going to be an issue.
Yes, John with.
With respect to your question on common directors one of the one of the common things that we will have is.
Our largest shareholder right who today owns.
A third of the company will own a third of both companies and so that piece of what has always been inherent and appreciated by the company will be in stem will stay in place.
Exactly thank you.
And again, if you'd like to ask a question press star one on your telephone keypad.
And there are no further questions at this time I'll turn the call back over to Worthington industries management for some closing remarks.
Great. Thank you everyone for joining US today. This is an exciting day for all of US here at Worthington and hope you share in that excitement. We will keep you posted as things develop and look forward to speaking with you soon.
This concludes today's conference call. Thank you for your participation you may now disconnect.
[music].
Yes.
Okay.
Yeah.