Q4 2024 Worthington Steel Inc Earnings Call
Thank you for standing by my name is Krista and I'll be your conference operator today at this time I would like to welcome everyone to the Worthington steel fourth quarter.
'twenty 'twenty four earnings conference call all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question during that time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw that question I've gotten press star one. Thank you I will now like to turn the conference over to Melissa Dykstra, Vice President of Communications and Investor Relations. Melissa you may begin.
Thank you operator, good morning, and welcome to Worthington steel fourth quarter fiscal year 'twenty 'twenty four earnings call on our call today, we have Jeff Gilmore Worthington steels, President and Chief Executive Officer, Jeff Klingler, Executive Vice President and Chief Operating Officer, and Tim Adams, Vice President and Chief Financial Officer before we get started.
I'd like to note 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 that could cause actual results to differ from those suggested we issued our earnings release yesterday. After the market closed please refer to it for more detail on those fab.
Actors that could cause actual results to differ materially.
Unless noted as reported today's discussion will reference non-GAAP financial measures, which adjust for certain items included in our GAAP results, which are presented on a standalone basis, you can find definitions of each non-GAAP measure and GAAP to non-GAAP reconciliations within our earnings release today's call is being recorded.
A replay will be made available later today on Worthington steel Dot com now I would like to turn the call over to Jeff Gilmore.
Thanks, Melissa and thanks to everyone, who has joined today's call. It is a good morning here at Worthington steel we saw solid results in Q4 and finished fiscal year 2024 strong.
Performance in our people continue to demonstrate that Worthington steel.
Each deal processor poised for significant growth.
Our ability to deliver value added solutions to our customers and flat rolled steel processing electrical steel laminations and tailor welded products is unique to our industry.
Our goal is to continue our distinctive positioning by operating processes that are truly differentiating positioning us to maintain and gain leadership in the areas we serve.
As we enter fiscal year 2025, our first full year as a Standalone company, we remain focused on executing our strategy and driving shareholder value through organic growth and strategic M&A. We believe our strategy and differentiation help ensure we are well positioned to grow and deliver strong.
And for our shareholders, we have achieved a great deal in just six months as Worthington steel, but we know we have much to accomplish with.
With the Worthington business system embedded in everything we do we will work to execute our strategy of focused investments in the rapidly growing electrical steel market, which is growing faster than GDP margin accretive growth through disciplined capex and selective acquisitions and transformation our system of continuous improvement.
<unk> to increase margins reduced working capital and to add capacity.
Our enhanced leadership focus created by the separation is driving accountability and organizational alignment around our vision and status as one of the most trusted most innovative and most value added metals processing partners in North America and beyond.
Essential to continuing as a market leader is our strong culture earlier. This month, we celebrated Founder's day, Mark and John H Mcdonalds first order of steel.
As we look to our 70 <unk> year in 2025.
Philosophy, Mr. Mac voiced and nobody is alive and well here at Worthington steel, we continue to treat our customers employees investors and suppliers as we would like to be treated <unk>.
Examples of our award winning culture and our philosophy in action are evident in several milestones we achieved this quarter.
We were named a top workplace in our headquarter city of Columbus, Ohio for the 12th year in a row. This is an award based on feedback from our employees. So that makes winning even more special to me.
Our Worthington Samuel coil processing joint venture was named company of the year for 2023 by the Cleveland Chapter of the association of women in the metals industry for supporting growth and advancement of women and the Cleveland metals industry.
In April we were named a John Deere partner level supplier for the 12th consecutive year that same month, we were recognized as a 2023 supplier of the year by General Motors. This is the third time in the last 40 years. We've earned this distinction.
Both of these honors from longtime customers, who value Worthington steels proactive solution focused way of doing business, our dedication to helping our customers create value every single day continues to pay off.
I'd like to recognize and thank Worthington Steel's 4600 employees, who support our customers' lebar philosophy and helped us achieve our vision.
Excited about the progress we've made and the opportunities in front of US we continue to deliver on our commitment to advance our industry through partnership with our customers and suppliers. We have the right team and the best culture helped US continue generating a return for our shareholders. It is a great time to be in steel processing.
As customer needs grow ever more unique the demand for the products and services, we offer will continue to expand.
I'll now turn things over to Jeff Klingler to comment on our operations.
Thanks, Jeff and good morning, everyone as Jeff mentioned, we had a good quarter highlighted by public accolades for multiple groups our.
Our ability to serve our customers as a direct correlation to our focus on safety I'd like to start off by congratulating our employees and the improvements we saw in fiscal year 2024.
While our ultimate goal is zero incidents, we saw 25% reduction in recordable injuries in fiscal year 2024, and I am proud of what the team has accomplished our best in class safety record and programs that drive that record are a clear reflection of our people first philosophy.
As we look at the operational overview for the quarter, let's start with a look at what we saw in our two largest end markets.
Sales to the automotive market made up 52% of fourth quarter fiscal year 2024 sales the same as the fourth quarter of fiscal year 2023, the automotive market remains solid for us and we believe North American light vehicle production could return to pre COVID-19 levels of more than 16 million units.
As early as next calendar year.
Our OEM customers anticipate more growth in the EV and plug in hybrid market as adoption continues to grow our capital investments in our Mexico electrical steel facility will allow us to capitalize on this opportunity.
The construction industry remains the second largest market we serve.
In the fourth quarter of fiscal year 2020 for the construction market made up 14% of our sales, reflecting a modest increase over the fourth quarter of fiscal year 2023, when construction was only 12% of sales.
The construction market is a large and diverse market and submarkets, where we participate we experienced strength in the fencing metal building and Colbert markets.
Turning to operational highlights for the quarter, our large capital projects related to electrical steel continue to be on track and on budget.
Of the five new presses arrived in electrical steel facility in Mexico. During Q4, we are finalizing the installation of the first press and we will turn our attention to the second and third presses in the near future.
We are also making good progress with respect to our commercial efforts to win new business for electrical vehicle programs. We have secured enough orders to fill three of the initial five presses when the OEM programs are running at full production.
Once the presses are installed we will move to the next phase, where we will produce trial orders for our customers and prepare for production level volumes expected in the fall of 2025.
Our Canada electrical steel expansion project is also progressing well from a commercial standpoint.
We have been awarded enough new business to fill 50% of the new capacity as customers look to close the backlog and their transformer order book.
Our Canada expansion remains on track and we expect the facility to be operational by the end of calendar year 2025.
Last quarter I talked about our newly licensed ablation technology for our tailor welded blanks business. This will allow us to process, many more automotive applications, including pillars rails cross car beams and door rings. In fact, we believe it opens up new products and opportunities for us.
In the existing welded blank market by about 30% I'm.
I am pleased to share we are already receiving customer interest and orders.
We continue to be pleased with the reception from our customers as it relates to our large projects as well as our newest electrical steel facility in <unk>, Germany our.
Our customers are enthusiastic about all three projects and our list of potential commercial opportunities continues to grow.
Alongside this we continue to use transformation our system of continuous improvement.
We apply the transformation systematically in our plants as we look to improve safety reduce inventory and scrap and enhance our overall productivity and performance.
Our facilities are working on multiple transformation projects, each year to optimize our processes and improve efficiencies.
And a recent example, our teams found a way to streamline material flow from the supplier or the customer one of our largest facilities. This transformation work has reduced work in process improve process cycle times by four days and approved finished good cycle times by two days.
This creates a more organized workflow and a safer environment for our employees. We expect it will also reduce working capital allowed us to respond more quickly to customers and make us even easier to do business with.
We are using those same tools and principles to apply the transformation to our corporate functions. We believe we will find efficiencies in these areas that will make us better partners and improve our bottom line.
It's been an exceptional quarter and our teams continue to perform and innovate always with an eye towards safety.
I'll close my comments with a sincere. Thank you to everyone at Worthington steel and turn the call over to Tim Adams.
Thank you, Jeff and good morning, everyone before I provide some color on the quarter I would like to remind everyone that the current year fourth quarter consolidated results on a standalone basis are compared with a prior year quarter, which was prepared on a carve out basis. We finished our fiscal year with a strong quarter reporting fourth quarter earnings of $53.
$2 million or $1 <unk> per share as compared with the prior year quarter earnings of $67 3 million or $1 37 per share. The prior year quarter included several unique items, including pre tax separation expense of $5 5 million or <unk> <unk> per share and a <unk>.
Pre tax impairment charge of $1 8 million or <unk> <unk> per share related to idled equipment. Excluding these items, we generated earnings of $1 <unk> per share in the current quarter compared with $1 47 per share in the prior year quarter in.
In addition in the fourth quarter, we had estimated pre tax inventory holding losses of $3 4 million or <unk> <unk> per share compared to estimated pre tax inventory holding gains of $32 6 million or <unk> 50 per share in the prior year quarter and unfavorable pretax swing of $36 million or 50.
Five per share in the fourth quarter, we reported adjusted EBIT of $70 4 million, which was down $28 million from the adjusted EBIT of $98 4 million in the prior year quarter. This decrease was primarily due to lower gross margin, which was impacted by lower direct materials spreads including the.
Of the estimated pre tax inventory holding losses, lower direct spreads were partially offset by higher toll spreads due to an improved mix within toll processing.
Additionally, SG&A was up $10 6 million from the prior year, primarily due to incremental costs associated with being a standalone company higher incentive compensation and benefits cost and a $3 7 million swing in bad debt expense in the prior year quarter, we recognized income of $2 million associated.
With bad debt compared with $1 7 million of expense in the current year quarter. We believe the bad debt expense variance is an isolated matter that is not expected to reoccur.
Fourth quarter results also included recognition of the final unfavorable tax court ruling related to a pre acquisition tempo matter for which we were indemnified by the former owners of temple.
Net impact on earnings is zero, however, we recognized $2 $8 million of miscellaneous income related to the indemnity receivable and an additional $2 $8 million of tax expense.
Next I will provide some commentary on the market and our shipments similar to what we experienced over the past year steel market pricing was volatile over the quarter.
Since hot rolled prices peaked in mid January at $1100 per ton the market price for steel has been unsettled hot rolled prices fell to $750 per ton in March increased in April then fell back to $750 per ton in may the hot rolled market recently decreased further with pricing in the range of 600.
Third $75 per ton.
With the decreases in market pricing, we expect estimated inventory holding losses in the first quarter of fiscal 2025 will be higher than the $3 4 million of estimated inventory holding losses in the fourth quarter, we estimate those losses could be approximately $15 million to $20 million on a pretax basis.
Net sales in the fourth quarter was $911 million up 3% from the prior year quarter, primarily due to slightly higher direct pricing and a favorable mix within toll processing, which included more high value added processing, we shipped just over 1 million tons during the fourth quarter, which was down 2% compared with the prior year.
Quarter direct sales volume made up 58% of our mix in the fourth quarter compared with 57% in the prior year quarter.
Direct sale volumes were down 1% over the prior year quarter with an increase in construction related volume that was more than offset by softness in most other markets specifically as it relates to construction, we utilize some open capacity to take on some spot and shorter term construction business.
Direct sale volume to the automotive market was down 1% compared to the prior year quarter. The decrease was primarily due to several programs reaching their end of life, while the replacement platforms experienced launch delays.
Our automotive book of business continues to be healthy, making up 52% of our sales in the fourth quarter, our technical and commercial teams worked closely with our customers to provide solutions that help customers meet their challenges. The recent supplier of the year Award from General Motors that Jeff Gilmore mentioned as a result of our dedication to helping customers succeed.
Total tons were down 3% year over year, primarily due to decreased toll pickling with the mills. However, the mix of total volume was more heavily weighted towards higher value added products, including galvanizing and tailor welded blanking.
We're cautiously optimistic about the next few quarters, our fourth quarter tends to be our strongest quarter from a volume standpoint. So we would expect the normal seasonal drop off in volume during the summer months related to the automotive market.
In addition, our fourth quarter benefited from a higher mix of galvanized in both our direct and toll order books.
Turning to cash flows and the balance sheet cash flow from operations was $35 6 million in free cash flow was an outflow of $9 2 million during the fourth quarter. We spent $44 8 million on capital expenditures related to a variety of projects, including the previously announced electrical steel expansions in Mexico and Canada.
On a trailing 12 month basis, we generated $96 million of free cash flow.
Yesterday, we announced a quarterly dividend of <unk> 16 per share payable on September 27, 2024 and.
In regard to our balance sheet operating working capital increased $25 1 million during the fourth quarter, primarily due to a reduction in payables. We ended the quarter with $40 2 million of cash, which is down $26 million from the third quarter due to spending on various strategic capital projects, our ABL debt on May 30.
One was $148 million, resulting in net debt of $107.8 million in summary, Worthington steel had an excellent fourth quarter and all of our teams performed very well everyone. At Worthington steel continues to be focused on driving value for our stakeholders on both a near term and long term basis.
I am proud of our teams for their dedication and for their continued commitment to safety.
At this point, we would be happy to take your questions.
Thank you if you would like to ask a question. Please.
Press Star one on your telephone keypad to raise your hand and join the queue.
I'd like to withdraw that question again press star one.
Your first question comes from Martin Englert with Seaport Research partners. Please go ahead.
Hello, Good morning, everyone.
Hey, Mark Hey, Martin.
Wanted to circle back and discussed.
Overall profitability within steel EBITDA per tonne.
And some of that you alluded to in the discussion, but excluding the holding losses for the quarter, which were fairly minimal I mean the.
Underlying EBITDA seems like it might have been a high water mark versus history I understand it's not.
Exact apples to apples.
Given the separation and you called out higher mix of gallons.
Favorable mix and tolling is may be.
Some of the drivers, but what im getting at is the sustainability of that type of underlying EBITDA or is this more of a.
It was a good quarter, we had unfavorable mix higher gal.
Good.
Margins on toll processing and this is maybe a little bit of an anomaly.
Relative to history.
Yes, Martin I think he this is Tim I think you answered your own question I think it was overall, we had a very good mix this quarter within toll we had some galvanizing additional galvanizing tons as well as tailor welded blanks ons and then within direct it was more galvin as well we also picked up some spot business in there.
You didn't mention that but we picked up some spot business there in the construction market and that was that.
Higher margins as well so those were the big drivers for them.
Okay.
<unk>.
That's helpful. I appreciate that.
Can you discuss what youre seeing.
Again, you alluded to this when you talked about seasonality, but maybe a little bit more specific July overall automotive planned downtime.
Is that looking.
Maintenance schedules versus last year and versus history.
Any comment as far as inventories in the auto supply chain that youre seeing.
This is Tim again, let me start just to talk about seasonality in general for US and then I'll hand, it over to Jeff when you talked a little bit about what he's seen in automotive. So we went back and we looked at our seasonality.
By quarter. So if you take our direct tons and divide by four quarters. What you typically see for US is Q1 is what I would call the average quarter when.
When you look at Q2 and Q3 those tend to be down from a direct volume standpoint, three or 4% and then when you look at Q4 that tends to be up six or 8%. So Q1 perspective it's.
It's an average quarter for us so overall, what I'm trying to say is Q4 is our strongest in Q1 tends to be the second strongest <unk>, sorry, I meant on automotive.
Yes.
I'll address for interrupting, but just to clarify you're discussing negative 3% to 4% and up 6% to 8% versus the quarterly average for any given year.
I will ask first.
First is on <unk>.
Sure got it.
And then with regard good morning Barton This is Jeff Claimer with regards to the automotive market.
We remain very optimistic about.
The automotive sector here for the remainder of 2024, we will see the normal summer slowdown I don't think anything right now has us, believing it's going to be.
Unusual or something out of the ordinary but we do expect to.
To see a year and a modest increase of 1% to 2%.
Over 2003 built.
We're keeping a very close eye on things such as inflation and interest rates, which.
Cause.
Yes.
On there, but generally we remain very optimistic.
The planned downtime.
Just looking at scheduled this year for the summer versus last year, you're not seeing any deviations or an extension on multiple planned on being down versus last year.
No.
We are anticipating roughly two weeks.
Foremost automobiles.
Okay. Thanks, that's helpful.
If I could can you just provide an update on the <unk>.
Electrical steels elimination business.
I understand it's embedded in the overall business, but any kind of comment on how margins performed in the quarter.
Some goalposts on share of overall sales.
If there is anything else to add as far as the growth initiatives. I know you did touch on a lot of things in the prepared remarks, however on that aspect.
Jeff do you want to take that and I can jump in sure.
Overall in general we're very pleased with that.
The electrical steel business.
We're most excited about the investments that we have that we've been talking quite a bit about in Mexico for RP.
Factory expansion for vehicles that project is on time and on budget.
Spent about $25 million to date.
Building is nearly complete we have installed the first press and are working on the next three.
Commercially we are we're very happy with the level of commercial activity and the new orders that we have received those orders will now start production very early production will be at the end of calendar 2025.
So we still have a little time, but we're very pleased with progress on that project and then in Canada.
That project is also on time and on budget.
Spent also about $25 million to date and production and that new facility will also be yen at.
Initial scale.
End of 2025 same story there.
Really pleased with the level of commercial interest and activity and in fact, we've received orders already.
Or roughly 50% debt that future capacity and Mark Martin. This is Jeff no more just to add you had mentioned margins and be embedded in the business, which are exactly right. It's embedded in the rest of the business but.
Certainly we've mentioned.
Several times the margins for.
The electricals delamination business will be our highest margin business. So that's certainly exciting to us and more importantly, we're making these investments because.
The growth in those markets will be much greater than GDP, we think over the next seven to seven to 10 years. So we remain highly optimistic longer term.
Yes.
Any goalposts on what the overall sales.
<unk> contributed for the quarter, there or even the last year.
Speaker Change: No, we're not going to disclose that Martin it's embedded in the business and that's how we're going to continue to report it.
Would you have any interest in going further downstream potentially partnering with somebody.
Speaker Change: We produced Transformers.
Martin right now no I think we have a very specific strategy that we're confident in our.
And staying close to our core right now.
Think about the growth over the next 10 years, let us get our arms around this and enjoying the opportunity we have in front of us and be best in class before.
Before we start getting too far ahead of ourselves so we're going to stay close to our core.
Okay excellent I appreciate that and nice job on the quarter.
Thank you appreciate it Martin.
Your next question comes from Phil Gibbs with Keybanc capital markets. Please go ahead.
Hey, good morning.
Hey, Bill.
Question on some of the color you provided for the new business wins I think you said three out of the five <unk>.
<unk>, 50% of the capacity.
Related to Mexico, and Canada, respectively.
<unk> already gone out and secured business for would it be your goal.
And in the months ahead to try to secure more business on that capacity or are you purposely leaving some.
Open open for spot so I'm, just trying to think about how.
You view.
The value of that capacity and leaving some open or wanting wanting firm commitments.
Yes sure. Good morning, Bill fell just by we're here. Good question, so two different scenarios in Mexico.
You are right. We have installed two of the first five presses, we have intentions to buy 10 presses for that building.
Yes, we would anticipate in that type of business, partially because of the site the sales cycle time from us.
With program startup.
We're actively pursuing business ahead of the equipment being installed and.
Commitments in advance.
So we are we are actively.
Pursuing and continue to win new programs that will launch 18 to 24 months out from the time of our awarded in Canada.
For the transport business.
We will we're very happy with the position right now that we have.
Having 50% of that capacity pre sold so to speak with a long term commitment.
And we will from this point on to take that more of a case by case basis.
We do need to leave a certain percentage of that capacity open for flexibility and for surge demand and things like that but we certainly like the comfort of having commitments in advance of selling equipment. So we're going to balance that it's going to be very situational.
<unk>.
A handful of places that we would like to go secure some longer term commitments.
But yes.
We're happy with the pace that we're at right now and so this is Jeff Gilmore. This will make sense to I believe it's Mexico, that's highly automotive so that will be contractual business. So if we're able to fill up as those presses are on order.
That's an ideal situations. So we're pleased with where we're at as you know you are awarded those programs and it's generally life of program. So they are longer term contracts and Jeff you hit the nail on the head Canada is a bit of a different situation.
Jeff and his team obviously, we're excited to go out and fill up 50% of that.
Business out of the gate failure, you got a great base load business you are covering your fixed costs and now Jeff and team have a great opportunity to continue to sell out that capacity, which we're highly optimistic it will do.
Thanks, very much and then balanced I had a question.
Yes can you hear me.
Yes.
I also had a question on net working capital and just how we should think about.
Evolution over the next couple of quarters that did come in a bit.
Above our expectations this quarter and so trying to think about what that could look like for the next couple of quarters with particularly with some of the substrate costs coming down.
Yes, I don't have specific numbers to give you by your intuition is absolutely correct is as the price of steel has come down we will release working capital over time.
So you should see an improvement in working capital quarter over quarter.
Speaker Change: And then lastly for me you.
Speaker Change: You all mentioned at our conference a few weeks ago that you're I think you are in the early innings of some some structural things we're doing into the business in terms of.
Either cost or cost or efficiency relief and I think that was also outlined in your.
At Investor Day, a few quarters ago in terms of.
Betting.
That 10% EBITDA margin goal and so.
Long winded question, but way of asking.
Where.
Should we see some of those some of those initiatives flow through what are some of those initiatives.
<unk>.
And can you just basically talk about the process and we're on the right track here with the way that we're thinking about it.
What you're communicating.
Yeah, Phil This is Jeff Klingler again, I'll kick it off and let Tim or Jeff add in if you'd like I'll talk to you about where we're at and what we're targeting.
So we spend a lot of time talking about our transformation process, which is our continuous improvement program or it's really just a systematic way of identifying and.
Eliminating waste.
Ross all our all our organization.
What's new in the new structure. You mentioned is we are taking that expertise and we are focusing on some of the corporate functions.
Human resources finance.
Indirect purchasing.
So we're taking the same process, we're mapping out all the processes and value stream and then we are identifying areas that we want to say.
Say attack, but we wanted to take our improvement various ways of improvement the techniques we've developed over the years.
To problem solve and yes, we think we're going to be able to streamline and.
To make things more efficient.
Reduce costs and generally make it much easier to serve the businesses from the corporate functions. So Tim.
We're at right now is we just kicked it off last month and.
The program and we're in the stage of mapping all of those processes and then Phil This is Jeff Gilmore just to add.
As you think about timing of this.
It's really about a 12 month process I mean, it's a methodical approach we will do a deep dive diagnostic into each one of those departments and so you are truly trying to identify what's working what's not working what do you need to add what do you need to eliminate and once you go through that diagnostic process.
You are putting in.
<unk> plans to implement and.
Really a good way to look at this is.
Worst case scenario.
The corporate functions, our biggest customer is the business and so we become a better supplier to the business and then the business becomes a better supplier to our customers best case is we find those efficiencies.
And there is cost savings and improvement to the bottom line and we're confident that we will see both and we're excited about the initiatives and I know, Jeff putting there is very excited about the opportunities.
Thanks, Chantal gentlemen.
You got it.
Your next question comes from John Tumazos, with John Tumazos, very independent research. Please go ahead.
Thank you Lee.
Tower in six of earnings still business as it was.
Should we expect.
Worthington to generate cash.
In the August quarter from working capital given that steel prices fell.
Yeah, absolutely as prices fall.
And that came up a little bit earlier, but we expect to release, some working capital I haven't quantified it yet but that.
Typically that's what we see.
And ladies and gentlemen that does conclude our question and answer session. I will now turn the conference back over to Jeff Gilmore for closing remarks.
Thank you everybody for listening in and showing interest in Worthington steel appreciates all the great questions.
Again, we're very pleased and want to thank all of our employees to 4600 again, and we will look forward to getting back with you at the end of this quarter for another update. Thank you have a great day.
This concludes today's conference call. Thank you for your participation and you may now disconnect.
[music].
Okay.
[music].
Speaker Change: Yes.