Q1 2020 Earnings Call
Good afternoon, and welcome to the Worthington Industries first quarter fiscal 2020 earnings conference call. All participants will be in listen only until a question and answer session of the call. This conference is being recorded at the request of Worthington industries. If anyone objects you may disconnect at this time.
I'd now like to introduce Sony Higginbotham, Vice President corporate communications missing and bottom you may begin.
Thank you John .
Good afternoon, and welcome to our first quarter earnings call before we begin 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 uncertainty and could cause actual results to differ from those suggested.
We issued our earnings release this morning prior to the market open please refer to it for more detail on those factors that could cause actual results to differ materially.
This call is being recorded and will be made available later today on our Worthington industries website.
On our call today, our chairman and CEO John Mcconnell.
Resident Andy Rooney.
And vice President and CFO , Joe Hayek.
On an I'll now turn the call over to John Mcconnell. Thank you Sonia.
Welcome and thank you all for joining underscore first quarter earnings call.
This quarter, certainly had a lot of noise in there so let's get right to it I'll turn the call over to Mr. hate to start reviewing the numbers like John Good afternoon, everybody.
In Q1, we reported a loss of nine cents a share versus earnings of 91 cents a share last year.
There were several unique items in the quarter, including the following.
Pre tax restructuring and impairment charges of 45 million primarily related to our engineered cabs business and our decision to write down the 10% investment we have in our steel joint venture in China.
Charges reduced earnings from the current quarter by 65 cents a share.
The prior year quarter included impairment charges of 1.4 million or a penny a share.
As we mentioned in our press release. This morning, we are actively exploring strategic alternatives for the caf business, including but not limited to the possible sales majority interest.
Our estimated inventory holding losses were 8.4 million or 11 cents per share in the quarter compared to a gain of $14 million or 17 cents per share in the prior year quarter.
We incurred a pre tax charge of 4 million or six cents per share related to the early extinguishment of our 2026.5% public bonds, which we refinanced in August using cash on hand that an issuance of longer term euro denominated debt with an average interest rate of 1.76%.
And our cylinder business, we recognized a pretax profit of 12.8 million or 17 cents per share related to the early termination of a customer take or pay contract, which effectively pulled some future earnings into their current quarter.
Consolidated net sales decreased by 13% to 856 million in Q1 from the prior year quarter due to lower direct shipments and lower average selling prices in steel pricing.
In addition to declining steel prices, which impact our revenues and demand. Many of our end markets are seeing very little or no growth and we believe economic conditions trade wars tariffs and uncertainty have impacted behaviors, both in the us and in Europe .
Gross profit declined in the quarter by 26 million from Q1 of last year to 117 million, primarily driven by the 21.
22 million unfavorable swing in pre tax inventory holding losses, and lower direct volumes of steel, partially offset by improvements in cylinders and the pull forward of the margin dollars related to that cancel take or pay contract.
Turning to steel processing net sales of $523 million were down 21% from Q1 of 2019, due primarily to lower direct volumes and lower average direct selling prices driven by declining steel prices total ship tons were down 9.3% with direct shipments down 15.4% and told <expletive> .
Finding 1% from last year's record first quarter.
Direct tons were 54% of mix compared to 58% in the prior year quarter.
As we've discussed on previous calls we believe that last year customers were building inventories due to rising steel prices, which peaked in July .
While this year customers have been destocking to reduce and maintain low inventory levels with the recent low point in steel prices occurring in July of 2019.
While we believe year over year Destocking is beginning to moderate we did continue to see some softness in Q1 automotive volumes due to reduced north American auto builds year over year, and we saw weakness in agricultural end markets.
Operating income for steel processing of 6 million was down 33 million from Q1 last year driven by the negative swing approximately 22 million in inventory holding gains or losses combined with lower direct volumes.
Due to continuing declines steel prices, we do expect inventory holding losses will continue into Q2 of 2020.
That said, we also believe that our steel processing team is managing that business very well in a difficult environment and is maintaining ended certain markets increasing their market share while remaining focused on long term growth and profitability.
Turning to pressure cylinders net sales were 304 million up 1% over the prior year quarter.
Operating income of $30 million was up $15 million from Q1 of last year.
Excluding the 12.8 million benefit related to the take or pay contract within our industrial products business and impairment charges in the prior year cylinder operating income was up 4% year over year due primarily to improvements in the oil and gas business and in the industrial products business.
Cylinder end market conditions in the us were stable or operations in Europe continued to face headwinds through the economic conditions in those geographies.
In engineered cabs net sales were up 3% over Q1 of last year, driven by favorable product mix capture reported operating loss before restructuring of $4.5 million.
It was 200000 worse than the prior year quarter.
As we mentioned earlier, we are actively exploring strategic alternatives for this business and we recognize pre tax restructuring and impairment charges of 41 million in the quarter.
Our cash business has continued to make improvements and has positioned itself very well for the future, but we feel that undertaking. This evaluation of alternatives is the right thing to do for both the business and for our shareholders.
Turning to our Jvs equity income during the quarter was 25 million down $5 million from the prior year quarter.
$4 million of that decrease was due to a charge associated with our decision to write down our 10% investment in our steel joint venture in China.
Our equity income from wave increased by 1.9 million.
Serviacero was down 2.9 million, primarily due to inventory holding losses.
We received 30 million in dividends from unconsolidated jvs during the quarter.
Turning to the cash flow statement and the balance sheet.
Cash flow from operations was 64 million in the quarter.
Received 9 million and proceeds from asset sales primarily related to the divestiture of our cryogenics business in Turkey, we invested $22 million on capital projects reduced our debt by 50 million.
And we paid 13 million and dividends and 30 million to repurchase 750000 shares of our stock.
Today, the board declared a 24 cents per share dividend for the quarter payable in December of 2019.
I'll close with the balance sheet funded debt at quarter end was down 50 million sequentially to $699 million I'll interest expense of 9 million was down slightly from the prior year quarter.
As we mentioned earlier during the quarter, we called our 150 million, 6.5% coupon bonds that were due in April 2020.
We incurred a pretax charge of 4 million to call. The bonds. We were very pleased to be able to refinance them using cash on hand, and issuing roughly 100 million of long term euro denominated notes maturing in 2029, 2031, and 2034 with an average interest rate of 1.76%.
Based on current debt levels. This refinancing should reduce our future interest expense run rate by approximately 2 million per quarter.
We ended the quarter with consolidated cash of $46 million and $548 million available under our revolving credit facilities.
Adjusted EBITDA over the last 12 months, which includes 13 million charge for the tank replacement program was $302 million and our net debt to trailing EBITDA leverage ratio is roughly two times.
This point I'll turn it over to Andy.
Thank you Joe good afternoon, everyone.
While our first quarter had some challenges primarily driven by continued steel price volatility in tariffs, we accomplished a lot during the quarter and our positioning ourselves well for the balance of the year.
Our recent focus has been on cleaning up underperforming and noncore assets. During the last several months, we exited our alternative fuels business in Turkey and wrote off the value of our strip steel joint venture in China.
We've also been engaged in a review of strategic alternatives regarding our engineered cabs business and hope to have additional information in the coming months regarding our path forward.
Our goal remains at all of our businesses achieved year over year growth in EBITDA and return our cost of capital.
And as we manage our portfolio into the future. Our goal is to raise our overall cash return on investment.
In the meantime, our cash flow remains solid we are using that cash to reward shareholders and other ways. We refinanced long term debt using some of that cash and we'll save almost $8 million per year in interest costs at current debt levels.
We continue to see value on our shares and repurchased 750000 shares during the quarter and while we did not complete any acquisitions, we've seen some increased activity around our core that is encouraging.
A lot has changed in the past year Worthington with new leadership in many of our businesses and renewed commitment to driving shareholder value.
This is not an industry there is not an industry in America that has not being disrupted in some manner right now and ours is no different whether its electric vehicles cloud based data analytics or robotics. All of these forces are accelerating change around us.
Change creates opportunity and we expect to be leading this change not watching it passes by.
We have a talented group of leaders charting our course in an excellent workforce that is the key ingredients to delivering success. Thanks for your continued support or Worthington.
John Andy Thank you Joe good job disposal take any questions. They we have.
And ladies and gentlemen, if you would like to asking question on the call. Please press star one deal here as Tony indicated when placed into Q. If your question and answer any waste remove yourself in the queue. Please press the pound key again, so I wonder if you have a question.
And first your line of American English with Jefferies. Please go ahead.
Hi, good afternoon, everyone of our.
So within steel processing, even when adjusting for the inventory holding losses, the operating profits per ton seem quite low can you talk about what's driving that exactly is this something to do with mix. There may be something else and then also touch on the magnitude of inventory holding losses in fiscal Twoq, you that you might be anticipating.
Sure ill take the second one first we do expect inventory holding losses in Q2, we think that there will be.
Two thirds of what they were the this is a it's a little early but two thirds what they were in Q1.
And with respect to steel processing generally getting outside of FIFO volume.
Is the significant contributor there we had we were down indirect tons 88 tons year over year for the for the quarter and so our margins have actually hung in there pretty well, but when you have lower volumes like that especially year over year you have some challenges of we also had a couple of.
The two or three week outages that were plans that were very necessary and beneficial for our facilities to do some maintenance and do some things like that but as you know when you have an outage like that that's plan to build inventory ahead of that.
In a declining steel price environment like the one that we had ultimately that that hurt us a bit on the piano side as well.
So the playful inventory holding losses that you called out for the quarter that included the inventory build as well or that would be exclusive of the implications that that is that is separate from that number that is separate any rough estimates on maybe what the headwinds would've been from the holding losses all.
Tory build and then also anything else associated with the outage, yes. Those the outages would have would just because of the dynamics that took place in terms of the way that steel prices decline that was north of $4 million.
Okay. So 4 million an outage expense and then some other amount of inventory holding losses above and beyond the 8 million that you called out from also associated with the outage no no no doubt that Daddy outages really is that is that that number okay and the level losses were on top of.
Okay.
Okay and within cylinders can you provide some more detail on the take or pay contractor that was cancelled what what happened what was going on with that and then also what you're seeing regarding the more recent demand trends with industrial and consumer products relative to where you are correct.
Order here, where things are trending today.
Sure so with respect to the get the contract and the bringing forward of those margin dollars.
Some of the nature of our business.
Is that we do significant amount of engineering work tooling work to spool up for long extended programs.
In this case, we were working with a very large Japanese OEM.
On some hydrogen fuel cell oriented tanks.
Did it did a fair amount of work we're set reserve factory capacity for the next 18 months because of some shifts that they had in platform and in demand they decided not to move forward.
And had to.
Essentially terminate that contract.
As a consequence of that.
We will receive the cash flows that would have been associated with us performing over that contract over the next five or six quarters.
Thats the amount that you see there that would have been from a cash flow perspective sprout over fiber six quarters because of an accounting requirements and the fact that we've agreed to that.
We were compelled to recognize all of that in Q1, so effectively what we're doing is bringing forward.
That was margin dollars, we would have gotten for the next five or $6, where we'll recognize the cash at comes in in this quarter.
But with respect to cylinder markets generally I think domestically things things are pretty reasonable we think that growth is moderate and we think we're doing a good job maintaining or growing our share we have seen some softness in Europe .
We have facilities over there and we have.
Businesses in those geographies our teams there are doing a terrific job in a pretty challenging environment.
Can you remind us what your regional split is for that business.
Tween, NAFTA and the euro market and anything else there toured vacillates, a little bit, but the European piece of cylinders business is usually between about 18 and 20% of the total and it's primarily industrial products.
Okay.
Any specific industrial end markets and it's more heavily weighted towards.
In in bureaus, it's still high pressure and LPG.
Primarily.
Okay. Thanks for all the detail if I could one last one do you have a budgeted capex number for the year and anticipated tax rate.
Yes, probably 90 to 100 million something like that.
It would be a good good estimate.
22 million in the first quarter.
And we know I mean, it be it'd be a bit of against margin, but I would we would say in terms of tax rate.
23% to 25%.
Okay excellent. Thanks for all the color and good luck.
Thank you.
Next we'll to Phil Gibbs with Keybanc capital markets. Please go ahead. Thanks good afternoon.
So.
The.
The corporate or other.
Loss in the quarter I think was around 5 million that had been zeroed out the last several quarters anything that we should be thinking about there in terms of persistence or more of over one time item related to some of the things that you're doing here.
Yeah, I would say, it's probably more one time.
Theres.
Primarily the charge there as it related to an increase in health care costs and.
A combination of a slight uptick in our overall healthcare costs, and then a large sort of onetime event.
We're self insured and so that flows through that other line item.
And then Theres also some lesser to a lesser extent theres some legal costs that are in there.
So should I model something being modest are pretty even for the future. Yeah. Yeah, I mean that line item should be relatively flat going forward, but we do get these sort okay seasonal upticks like the one we have here.
So what we're looking at.
That's correct me if I'm wrong Europe is not in the numbers now, but they were last year and I know that they.
You may have not been all that accretive to you all so I'm just trying to understand the comparison.
I would answer that one Phil is it's a pretty clean number the sale of Europe actually is expected to close a next week. If you can believe that it's been ongoing because some regulatory issues but.
Europe was a very small percentage of waves profit so it really shouldn't affect our number.
I'm much more than a quarter to half a million dollars every every quarter or something like that but we've also so we have also lap that allocation change yes.
When.
The proceeds relative to that sale have you realize those are you still are those on the comp.
About two thirds of 'em, we have realized the proceeds we've actually been paid the full amount, but it's being held in escrow till the deal closes.
Okay. So that's on your so thats been realized on your financial statements at this point.
Except for the last portion of proceeds which is not not it's less than $10 million.
Okay.
And the growth that you saw the profit in wave year over year is that more related to volume or spread just trying to gauge the demand and mix environment, It's actually both.
Here in the U.S. their volumes were up quarter over quarter and their spreads were up.
As well.
Their volumes were up year over year, you mean relative to last.
Yes, yes, okay.
And then let last question for me is just.
Assuming that we.
You know for simplicity takeout engineered cabs moving forward just out of the.
The numbers any estimate in terms of how much DNA is tied to the business.
Well get to that number.
Brad that would quickly.
Thank you, Phil you're talking about the depreciation and amortization within engineered cabs.
Yes, so if you were to sell it or.
Wind it down I mean, how much of depreciation is associated with that.
Mark on that number okay.
Thank you obviously the majority of its written off now so there won't be any going forward, but I.
I know what you're trying to do you not trying to figure out how much is coming out.
Thank you.
Next we'll go to John Tumazos very independent research. Please go ahead.
Thank you for the great Euro denominated financing.
And all the good housecleaning I think the Euro went down more in the last month in the interest rate you're going to pay.
The interesting times for sure I was in Greece, and I had some leftover euros it got to valued.
So.
With the 92000 tonne fall in steel processing volume in the quarter. That's just the tons that you took title to what was the rate of change of total tons.
So is the direct on is actually 88000 tons.
And so that was.
The direct tons number well make sure I'll give you the wrong one.
Direct us a decline a little over 15% toll is just 1%.
So it was basically a switch from direct to tool.
You got it the mix the mix shifted.
Okay. So it wasn't really a volume decline per se.
What do you think is the natural rate of growth.
Of the steel processing business.
The cylinder business and wave is they.
Exist today.
Excuse me thing in South coast as I could think of them as around GDP.
And we're pretty adult there'll be some markets that grow more rapidly than that and within our businesses and with our end markets there'll be some that grow slower than that but overall.
We think of them as GDP over the midterm and we're very comfortable operating environment like that because we think thats the way that we go about our business through innovation.
Through lean manufacturing through selective M&A will allow us to have lots and lots of opportunities to take share from those and ultimately longer term grow more rapidly than our markets dip.
The volumes fell a lot.
In the industrial cylinders, a double digit at around 5% into consumer cylinders.
Was there.
Anything in particular that might explain Ah, yes. That's a great question. We should have mentioned earlier, 90% of that decline is because of the divestitures. If you recall at the end of the calendar year last year, we divested of our rating and soldering operations.
Thats the lions share of that decline in volume.
Thank you very much.
Certainly thank you.
To answer Phil's question on the amount of depreciation and amortization pork engineered cabs, it's about five and a half million per year.
And ladies and gentlemen, just quickly remind you. If you do have a question. Please press star one and we do a follow up from Phil Gibbs. Please go ahead.
Thank you so if I'm going to take the 12 plus million of lost the or future gross profit that you pulled into this quarter, given the take or pay.
Hydrogen contract.
I would imagine revenue from that contract would have been a multiple of that over what you thought the life would have been.
So how do you replace moving forward how do you replace that lost.
Lost business, because it's a it's a pretty big John can I know, that's pretty specialized equipment that you're running.
The most of those materials on just give us a flavor for for that market.
At the very good question that is a business for us is so you're.
You illustrate the point, which is it's.
We've got to go get there and we're fully aware that and our commercial teams and our engineering teams are out talking to customers that sometimes a good thing to have capacity in a market where the products that you have our desirable and with the world in different places moving.
Attractions in terms of the fuels that we use we feel pretty good about our ability to replace that not tomorrow, but over the course of the next several months.
And this is largely.
You are making this stuff for in the U.S. or out of Europe .
For the produced in the U.S. it might end up in a geography other than the U.S. Okay.
Thanks I appreciate it.
And we do a follow up from John Tumazos. Please go ahead.
With.
[noise] benchmarks for hot rolled sheet, having fallen June last year, non 24 to about 525 June this year than bouncing up and eroding a little bit.
She can we assume that when nov is over.
That $400 is roughly wash through your system and its steady state.
Yeah, I mean, assuming prices stay stable, where they are the answer is yes.
Further your cash balances close at 45.6 million at the end of August .
When business goes to two should generate a little bit of cash.
Lower receivables and lower inventory values.
When business picks up how much money do you think you'll put back into working capital.
That's a relatively complex question because a lot of it depends on what steel prices do John in terms of you know how much.
The actual tons of inventory, we don't expect to change significantly.
But the price certainly can affect that.
But obviously it business goes up 10% than you know, there's an equation there.
Hi, guys out your guess, we'd be better than mine [laughter] right. It's a it's not an easy one to answer.
Thank you.
And with no further questions in queue I'll turn it back to the company for any closing comments.
Thank you all again for joining us where this review the first quarter, we look forward to talking to you.
Thank you.
Ladies and gentlemen that does conclude your conference. Thank you for your participation you may now disconnect.
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