Q4 2023 Worthington Industries Inc. Earnings Call
In the quarter and free cash flow was $212 million.
In fiscal 2023, we generated $539 million and free cash flow.
During the quarter, we invested $18 million on capital projects and paid $15 million in dividends. We also received $51 million in dividends from our unconsolidated jv's during the quarter, a 92% cash conversion rate on that equity income.
Okay.
Looking at our balance sheet and liquidity position funded debt at quarter end of $693 million was flat sequentially.
Net interest expense of $5 million was down by $3 million, primarily due to interest income we earned on our cash balances and to a lesser extent lower average debt levels.
We continue to operate with extremely low leverage levels and our net debt to trailing EBITDA leverage ratio is now under five times.
We believe we're very well positioned for the future with ample liquidity, ending Q4 with $455 million in cash and over $500 million.
And availability on our revolving credit facilities.
Yesterday, the board declared a dividend of <unk> 32 per share for the quarter, which is payable in September of 2023.
A 3% increase over last quarter and marks the 13th consecutive year, we have increased our dividend.
We're very pleased to be able to continue rewarding our shareholders as we deliver strong results.
I'll now spend a few minutes on each of the businesses.
Consumer products net sales in Q4 were $181 million down slightly from $186 million a year ago.
Decrease was primarily driven by lower volumes, partially offset by the inclusion of <unk> results.
Adjusted EBIT for the consumer business was $26 million and adjusted EBIT margin was 14, 2% in Q4 compared to $29 million and 15, 8% last year.
Consumers earnings and cash flows for the current quarter were strong and adjusted EBIT increased by 43% on a sequential basis as we saw a return to seasonal patterns.
While point of sale data suggests that consumers are spending less in stores. Our products are typically not considered big ticket items and are used for home projects or to enjoy celebrations cookouts and camping trips.
We believe this dynamic positions us well regardless of economic conditions.
<unk> team continues to do a great job managing the business, while developing new and innovative branded products. In fact, we launched the balloon time, many helium tank last months.
The outcome of our voice of customer research. This patent pending innovative new product is compact and easier to use opening up more opportunities for distribution and potential new channels. The balloon time. Many is currently available in select Meyer stores and will launch more broadly across the U S. Later this fall.
Okay.
Building products generated net sales of $142 million in Q4 down 18% from $173 million a year ago.
The decrease was driven by lower volumes, partially offset by a favorable shift in product mix floating products generated adjusted EBIT of $59 million for the quarter and adjusted EBIT margin was 41, 6%.
Third to $64 million and 36, 8% in Q4 of last year.
Decrease in EBIT was driven by our wholly owned businesses, which saw operating income decreased by $10 million year over year from record results due to lower volumes in residential construction and maintenance end markets.
Which continue to see some destocking compared to a year ago.
The headwinds in our wholly owned business were partially offset by higher equity earnings contributions from our building products Jv's, which collectively contributed $50 million in Q4 6 million more than they did a year ago.
Our teacher can wave both continued to perform well generating year over year earnings growth, while their end markets are being impacted by interest rates and economic uncertainty.
Our building products team continues to do an excellent job executing in the current environment, while investing in innovation and long term profitable growth and.
In Q4 drilling products shipped a first of its kind patent pending cylinder called power Corp. This disruptive innovative new containment solution gives contractors the power to increase productivity by spring water based adhesives onto a surface with speed and efficiency.
Previously those adhesives could only be applied manually.
Sustainable energy solutions net sales in Q4 of $45 million were up 10% or $4 million from the prior year driven by higher average selling prices.
<unk> reported adjusted EBIT of $3 million in the current quarter compared to a loss of $2 million in Q4 of last year.
The economy in Europe continues to be challenging and Ses's results will be impacted as a result, we believe our team continues to do an excellent job executing in the current environment, while positioning that business as an important part of the supply chain that will enable the global transition to low and zero emission mobility.
At this point I will turn it over to Tim to discuss steel processing results.
Thanks, Joe and steel processing net sales of $860 million were down 23% from $1 1 billion in Q4 last year, primarily due to lower average selling prices in Q4 of last year the market price for hot rolled steel was $1300 a ton while in Q4 of this year the market price was just over $1100 per ton.
Resulting in a 23% decrease in our average selling prices.
Total tons shipped were down 2% compared with the prior year quarter excluding.
Excluding the impact of divestitures direct sale tons were down 1%, while total tons shipped were up 8% primarily due to increased volumes with the mills direct sales tons made up 57% of the mix compared to 56% of the mix in Q4 of 2022 from a demand perspective, we're seeing modest increases in automotive production, where we can.
Continued to experience softness in both residential and nonresidential construction, which had been impacted by rising interest rates in.
In Q4 steel processing reported adjusted EBIT of $96 million, which was up $80 million from the $16 million reported in the prior year quarter in the quarter, we had estimated inventory holding gains of $33 million compared to estimated losses of $42 million last year, we anticipate generating inventory holding gains in Q1.
And estimate those holding gains could be around half of what we experienced in the current quarter.
Our employees remained focused on what's in front of them, both near term and long term as they manage the ever changing steel environment, all planning for the future. It's an exciting time within steel processing with opportunities for us to capitalize on recent investments in light weighting electric vehicles and electric grid infrastructure. In fact, we're expanding capacity in Mexico at our <unk>.
Joint venture in addition to a planned expansion at temple steel to capitalize on the growth expected in these markets.
I'd also like to congratulate our temple steel employees, who yesterday received a global supplier of the year Award from Dana incorporated Dana named tempo of the 2022 lead electrical propulsion supplier of the year, where temples efforts to support Dana's Global electric vehicle business are thanks to the temple team as well as to the broader steel team for the poor there.
We're focused on our future and for keeping our people safe while doing so at.
At this point I'll turn it over to Andy.
Thank you, Tim and good morning, everyone.
Our fiscal fourth quarter adjusted earnings per share results were the best in our 68 year history and our just completed fiscal year was the second best ever.
Our fiscal fourth quarter adjusted earnings per share results were the best in our 68 year history and our just completed fiscal year was the second best ever.
To our customers, who make this all possible and our employees who go the extra mile everyday to make it happen. We thank you for your dedication to Worthington industries.
As we close in on our Worthington in 2024 plan to separate into two distinct financially strong growth companies, we fully intend to continue delivering the same level of quality service and commitment.
This project is progressing well and on track for completion in early calendar 2024.
We have finalized the corporate structure for both businesses and our employees have all joined a team within one of the two companies.
We believe our employees have embraced the coming changes and are excited about the opportunities in front of them.
As evidence of this we recently received the results of our annual employee engagement survey. We were pleased to learn that participation increased and employees continue to rank worthington above manufacturing benchmarks and employee engagement and manage our effectiveness.
Responses to questions specifically related to Worthington 2024 were also very strong.
Our people and our culture continue to be our greatest assets.
The belief in energy regarding the future of the company is palpable.
In addition, we hope to announce the names and branding for each company by next quarter's earnings call.
Once complete new Worthington will be a market leading company with premier brands in fast growing attractive end markets and consumer products building products and sustainable energy poised to capitalize on key trends and sustainability technology construction and outdoor living.
With higher margins and lower asset intensity this business should benefit from premium sector multiples.
Worthington steel is and will continue to be a best in class value added steel processor with a unique capability set an excellent growth opportunities in automotive light weighting and electrical steel emanations positioned to take advantage of expanding opportunities in electrification sustainability and infrastructure spending.
To ensure that both businesses begin their new day with low leverage and plenty of available capital. We have built up cash of $455 million as of quarter end we.
We plan to use this cash to pay down debt and capitalize each business with significant available capital.
Once the separation is complete we are likely to continue with our historical balanced capital allocation strategy.
Both businesses will be run with our philosophy and Golden Rural principles and utilize the Worthington business system of transformation innovation and acquisitions to drive growth and shareholder value.
Some of you may have seen our recent victory in the DC Circuit court reversing a ban unlawfully imposed by the EPA on a refrigerant cylinder.
We would like to thank all of those involved in the effort to save American jobs and deliver a practical solution that is better for the environment HVAC contractors and American workers, our customers industry Association's, Ohio, and Kentucky Governors and members of Congress on both sides of the aisle were instrumental in some.
<unk> us in this effort.
To all of our customers suppliers employees shareholders and other stakeholders. Thank you for your continued partnership and we look forward to shared success in the coming months and years.
We will now take any questions.
Thank you if anyone would like to ask a question. Please press Star then one on your telephone keypad.
For a few moments to compile the Q&A roster.
Okay.
Okay.
And our first question is from James <unk> with BMO capital markets. Your line is open.
Hi, Thank you for taking my question.
Good morning.
What's driving the strength in wave and Clos.
Okay.
Well.
There is Ah.
A handful of things that are going on but.
If you look at their models, if you look at their business models and.
The way that their businesses have evolved from an innovation perspective.
They both run really good businesses.
And specifically to kind of their cash flow contributions this year.
They tend to.
Do well when prices are going up but then they have money tied up in working capital.
So if you look at their equity income last year Katja relative to their distributions, we didn't get as much in distributions as we did.
But relative to net income and so this was a catch up year for them. So.
They have really well run businesses with nothing really specific thats driving their results they are facing challenges.
Most companies that participate in the building products going to construction end markets, but it's just a testament to the way that those business around and were awfully proud to be a part of them, yeah and I might add also that both of those businesses are leaders in the markets that they serve.
<unk> being acoustical ceilings, and Clark Dietrich being metal framing and.
They have the best products the best service. They can do things that other customers can't do and oftentimes that commands a premium in their marketplace.
If I look at the earnings this quarter right.
Meaningfully sequentially and I understand your prices.
Going higher so they likely push.
Price increases.
So is there any potential pre buy in those two businesses this quarter.
Yes, you had a little bit I mean, they were up.
$6 million collectively year over year, I think three five and $2 5 million, respectively, but ultimately.
They're not just buying spot a lot of times, they try and sort of understand and kind of hedge their steel buy there. So when when you do have price increases you do see some buy ahead.
But I think.
The sequential growth there is probably more seasonal than it is something really specific in the businesses.
Okay. So how should we think about it going into first quarter.
Okay.
Well both of those both of those businesses are under.
You kind of some of the same pressures we're facing some of the same headwinds that others are with interest rates and economic uncertainty.
So they're going to kind of continue doing what they're doing.
But.
I would say that.
The.
Sort of fundamentally.
Without kind of trying to get into guidance, which we don't do there theyre going to keep doing what they're doing and try and take share and maintain share and take care of their customers.
And what I would say is <unk>.
<unk> end markets.
Okay, and just one last one.
The expectation for Capex this year.
Sure. So I mean, the best place to start there is probably where we ended 2003.
We had $86 million in Capex for the year was down kind of $9 million from 22.
The way that that kind of breaks down into a little more than 50 50 at $46 million to $45 million of that was in the steel business. The rest of the business was around $40 million, we think that's a good <unk>.
<unk> rate for the businesses on a go forward basis.
But we have some pretty significant growth capex investments that we're making Tim Tim mentioned a couple.
One in Mexico, and then one that will be North America centric for the tempo business.
And we think overall looking at fiscal 'twenty, four capex could be 50%.
Slightly higher than that relative to the way it was in 'twenty three.
Okay. Thank you very much.
Sure.
The next question is from Martin Engler with Seaport Research partners. Your line is open.
Good morning, everyone.
Good morning Martin.
Yes.
I think I asked a similar question a year ago, but I'm going to revisit it.
And it comes back to the underlying profitability in steel processing.
And one.
Move the holding gains.
Steel processing was strong at $75 per ton of EBITDA for the quarter.
For the fiscal year.
What do you believe is maybe normalized unit profitability.
Cool.
Yes.
Okay.
We don't look at the business that way.
A tough one to answer.
Okay.
Maybe ask it a different way.
Yes.
Got it.
Okay.
On a margin basis or when you think about outlook.
Sure Michael ability.
Yes, I think the best way to think about that as we look at it really the gross on materials for each product and think about.
So material would be the average selling price minus the material costs, and we think of it that way.
Okay.
And do you think that.
Materially changing.
Yes.
Maybe it will continue to.
Right on a go forward basis.
What we try to do as part of our strategy to push price wherever we can and to.
Add more profitable products. So when you see <unk> being added there gross on materials is much higher than say a heartworm product. So yes. The strategy continues to be let's push price and lets push that spread as much as we can.
Yes, but you do you do you do see kind of improvement there. The last couple of years I think thats the nature of your question Martin.
But it's but it's really a testament to the job that that team does and honestly how unique that offering is because when you do as much.
As we do from a value added perspective and from a partnering with our customers perspective.
It's simply worth more and it's less commoditized and Thats something that we do pretty well and we're pretty proud of.
Yes.
Definitely deployment.
The question was China.
All right.
Prior year's leukemia.
Holding gains or losses.
Maybe 40 $50 a tonne.
Fiscal 'twenty two.
Fiscal 'twenty was at 62.
Okay.
They're seeing.
<unk>.
Definitely not.
And maybe that long term.
Normalized through the cycle.
Possibility is improvement.
Alright. Thank you that's helpful. There.
You already touched on holding gains and sustainable energy.
Unit EBITDA.
Also.
And generally improved.
Year, despite a challenging market.
You did call out pricing was a function.
Okay.
For Q unit profitability, an anomaly here or.
Maybe something that's more reflective of improved run rate.
Yes.
For the coming quarters.
Yes, I would say I would say it wasn't an anomaly, but it's also not the beginning of a trend.
So.
The first quarter for that business is always going to have some headwinds because of the August shutdowns in Europe and things like that but.
Ultimately that business is continuing to.
Invest in the transition that we talk about the global transition to low and zero emission mobility, but in the meantime, they're buffeted by what's happening in Europe and some of the other things that are.
Kind of challenged them. So so we expect them to you.
There's certainly going to do their level best to do better every month every quarter and we hope to see.
<unk> grow their profitability some in the next year, but it's going to be in fits and starts and it's going to be a little choppy.
What are you hearing from your customers in the euro footprint.
That business and I understand there is a strong seasonality on a sequential basis that you just highlighted.
Got it.
What are you hearing what are you seeing and anticipating.
Maybe thinking about.
The current quarter fiscal Q relative to last year.
The level of activity is that something thats going to be.
Likely down our comparable or is that.
That is starting to pivot and kind of come up off the bottom.
Yes.
With Ses you mean, the conversations that we have with customers Martin.
Regular basis are further out than that there. These are our plans. This is what we hope to be able to accomplish in the next three or four years.
Ultimately believed the inflection point for that industry.
Is still.
Several years away from that kind of hockey stick.
So we're going to continue to.
Participate help innovate and drive some of those conversations forward, but.
But ultimately we feel really good about the investments we've already made that will have us.
A key part of that supply chain, but the market still has to grow and when there is.
And ongoing war and all of the disruption that you have.
Everybody's plans get kind of.
Thrown out and you have to think a little bit more about what's in front of you in the European economy has reflected that in the last year and a happen we see that continuing.
Yes.
Okay excellent and one last one.
The budget and tax rate for fiscal 'twenty four.
No reason to think it would be materially different than it was this year.
Okay.
Congratulations on the results. Thank you.
Thank you.
The next question is from Phil Gibbs with Keybanc capital markets. Your line is open.
Hey, good morning.
Good morning, Phil.
On the side of wave profits were up.
This nicely year over year was that largely driven by spreads or volume or do we have a little bit of a mix of both.
Yes, I mean I think.
As you know Phil this business kind of goes in cycles around what steel pricing is doing and so this quarter, we saw a little bit of.
Margin expansion from the business their end market.
Yeah.
While it's remained pretty steady.
You heard Joe's comments earlier.
We're kind of waiting to see some volume softness there we haven't seen a ton of that yet, but commercial construction. Most people anticipate either the back half of this year or early in 'twenty four that youre going to see some softness there but.
For the time being their businesses is pretty good and margins are pretty good.
Thanks, Andy and then <unk>.
For the steel folks but.
Automotive is kind of a lot of mix.
Knowles, there I think a lot of.
Seemingly like Cup.
A couple of steps forward a couple of steps back changes.
Changes in mix that sort of thing, but what are you all seeing in your automotive business in terms of pull.
Pulls in expectations and or any any model changes that youre focused on just kind of an update on the broader mosaic.
Yes from an automotive standpoint.
Year over year, we were up about 7% in North American production was up about 7% as well.
For the year.
Final IHS.
<unk> are predicting a 15 million units for calendar 'twenty, three which is up 5% over last year's $14 315.
15 billion units sounds like it's pretty strong but at the end of the day, it's still quite far behind the units that were produced on averaging 19% and 18. So they did about $16 $6 19 and 18.
As you say supply chain problems, there that talk about as much but they are still there.
There is lots of varying things out there interest rates are going up.
Inventories improved a little bit so there is lots of things happening out there, but yes.
Yesterday, we think automotive is going to be up about 5% this year.
Okay.
Thank you.
And then as it relates to the.
The separation coming in.
A couple of quarters is there anything that you all need to do in terms of it.
In investment or or transition there I would assume most of that stuff was pretty fracturing.
And the last several years, but any.
Water systems modifications, you guys need to do that are material before that point in time or do you feel like you are pretty set.
Well.
It is an opportunity to give a shout out to the folks that work in our it group because we have.
An excellent group of people that keep us up and running.
Consistently in there.
Shouldering a lot of the burden of the separation because thats, where a lot of it has to happen, but the short answer is there is a little bit of investment, but it's somewhat of a rounding error relative to our total capex in terms of what we need to do to separate and that some of that will happen.
Before we separate but some of it will also happen post separation, but it's not a material amount of investment that's got to happen.
That makes sense, yes, Phil Phil it's it's a little unique to us, but the business is actually run on different ERP systems. Today. So they are a bit more portable than a situation, where you would have to kind of carve something out of a different company, but but more broadly on <unk> 24.
<unk> asks about timelines we did.
As we as we thought we would we did file our initial form 10 with the SEC.
During.
Our Q4.
Or kind of in that process and then certainly our fiscal year just ended.
And so we will get our audit done in the next kind of month.
Month, or six weeks, and then and then hope to.
Get that on file with the SEC and start those conversations and we'll go from there.
Thanks, guys good job.
Thank you.
The next question is from John Tumazos with John Tumazos, very independent research. Your line is open.
Okay.
Thank you very much for.
12 or $13 of earnings in the last two years with steel prices falling $250 a ton.
It just boggles my mind, you did so well congratulations I wish I could shine your shoes.
That's very kind of you John but we believe our steel processing businesses.
The best around so they're showcasing what they can do.
How much was the total percentage for 2023.
12 percentage in 2023 four.
The entire well I'll say in fourth quarter fourth quarter was 43%.
So.
It was probably not a lot higher than that John for the fiscal year. This was the first.
This was the first quarter, where we saw year over year growth in tolling.
Most mostly having to do with the geographies, where they are in some of their mill partners getting back up and going.
So.
In the fiscal year just ended the steel processing volumes fell 272000 tons.
If we have a 5% rebound in fiscal <unk>.
2024 in line with the auto production for example, it would only make up about half of that loss ground.
What are the.
Segments steel processing.
Declining.
I would've thought that reassuring and lower steel imports would be helping you.
We had some divestitures in there in prior quarters. So we exited in our facility in Decatur, Alabama that was a direct.
Facility only direct sale facility only.
Also exited a toll processing facility in Jackson, Michigan, So you've got some divestiture noise in there.
<unk> got over coming out of the figures in front of me, but youre seeing some of the impact of that in those numbers. When you look at it on a consolidated basis.
Yes, John in Q4, specifically, excluding divestitures, our direct tons were down 1% and total tons were actually up 8% and I think Tim Tim mentioned this.
We are seeing some headwinds in the construction space.
And automotive is kind of.
From recessionary levels growing a bit.
That's our largest end market that make that picks up some of the slack in some of the year over year weakness you see in construction.
Okay.
Concerning the.
The demerger.
Do you think it would be unreasonable.
For to estimate.
$300 million or larger buybacks, the first year from the combined companies.
And let me just elaborate.
I'm estimating steel dynamics is Andrew <unk> on current earnings and Nucor under eight.
So I'm worried the steel processing business.
As a discounted P and sympathy to that.
I'm a little worried.
The.
Remain co.
Divers.
Construction in cylinder.
We even dietrich businesses doesn't have an exact comparable might get misunderstood like a little mini conglomerate.
So it's not clear to me that the combined valuation is a lot more.
Maybe I'm, just saying tongue in cheek.
Our legal and banking advisors encourage you to do it to charge of these big <expletive> fees $24 million.
But do you think it's unreasonable to expect much larger buybacks in the coming year.
Out of concern the two companies don't trade as well as your current 10 P ish.
Well a couple of things there John first we didn't do this spend because our bankers and lawyers encouraged us to we did it because we believe it's the right thing to do for our shareholders and for the long term value creation of the company and for our employees.
Other stakeholders I will say.
While we have not been buying back stock. This year, because we are trying to fortify our balance sheet. So that when we do separate.
Both companies have a tremendous amount of liquidity and low leverage.
To take advantage of opportunities, but it's a little difficult to say right now what those opportunities might be if you. If you have followed us which I know you have for a long time, you know that.
We allocate capital based on where we think the best opportunities are and sometimes those opportunities are acquisitions, sometimes those opportunities are to repurchase our shares when we think there is value there.
And it's a little bit of.
A black box in terms of where these companies will trade when we separate as you sort of correctly identified now we actually are extremely bullish that both of these companies are going to trade at premiums to their peer groups.
At the end of the day, we will have to wait and see how that shakes out.
When that does that all sort of determine where we think the best value to invest our free cash flow is.
Thank you I'm, just lazy and cranky I don't want to rebuild my models when you changed your segment spin COSE.
Yeah.
Fair enough. Thank you.
Johnny.
Again as a reminder, the star one if you'd like to ask any questions.
And it appears that we have no further questions I'll turn it back over to the presenters for any closing comments.
Well great. Thanks, everyone for your time today, we appreciate you joining us and encourage everybody to have a great fourth of July holiday and we will speak to you in September .
Yes.
Okay.
This concludes today's conference call you may now disconnect.
Yeah.
Yeah.
Yeah.