Worthington Enterprises Q2 2023 Earnings Call Transcript

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December 21, 2022

Key Takeaways

  • Worthington reported Q2 EPS of $0.33 versus $2.15 a year ago, and $0.44 excluding $9 M of separation costs, acquisition expenses and restructuring gains.
  • The company incurred $53 M in inventory holding losses (vs. $42 M gains last year), a $95 M unfavorable swing driven by lower steel prices and volumes, and expects Q3 losses closer to $25 M.
  • Consumer Products (+9% sales) and Building Products (+17% sales) saw lower volumes due to customer destocking and softer retail/construction demand, though average selling prices rose and inventory levels are stabilizing; Sustainable Energy sales rose 15% with modest EBIT gains.
  • Steel Processing sales fell 10% to $842 M on 13% lower tonnage (partially offset by Temple Steel), resulting in a $17 M adjusted EBIT loss (vs. $72 M gain prior) as direct spreads tightened, though steel prices have stabilized.
  • Worthington plans to separate its steel processing business by early 2024, with total separation costs of $35–45 M, while maintaining a strong balance sheet (net debt/EBITDA ~1.25×, $130 M cash, $675 M revolver) and delivering $108 M free cash flow in the quarter.
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Earnings Conference Call
Worthington Enterprises Q2 2023
00:00 / 00:00

There are 9 speakers on the call.

Operator

Good morning, and welcome to the Worthington Industries Second Quarter Fiscal 2023 Earnings Conference Call. All participants will be able to listen only until the question and answer session of the call. This conference is being recorded at the request of Worthington Industries. If anyone objects, you may disconnect at this time. I'd now like to introduce Marcus Rogier, Treasurer and Investor Relations Officer.

Operator

Mr. Rogier, you may begin.

Speaker 1

Thank you, Chris. Good morning, everyone, and welcome to Worthington Industries' 2nd quarter fiscal 2023 earnings call. On our call today, we have Andy Rose, Worthington's President and Chief Executive Officer Joe Hayek, Worthington's Chief Financial Officer the end of the call. And Jeff Gilmore, Worthington's Chief Operating Officer. Before we get started, I'd like to remind everyone that certain statements made today end of the 19 95 Private Securities Litigation Reform Act.

Speaker 1

These statements are subject to risks and uncertainties end of the call. We issued our earnings release yesterday after the market close. The end of the call. 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 worthingtonindustries.com website.

Speaker 1

At this point, I will turn the call over to Joe to kick things off.

Speaker 2

Thank you, Marcus, and good morning, everyone. I'll go over the consolidated results and provide some additional color on the building products, consumer products and sustainable energy solutions businesses, And then Jeff Gilmore will go through Steele's results. Jeff, as many of you know, is our current Chief Operating Officer and will be the CEO of the Steele business when we complete the planned separation of our businesses. In Q2, we reported earnings of $0.33 a share versus $2.15 a share in the prior year quarter. The end of the quarter.

Speaker 2

There were some unique items that impacted the quarterly results, including the following. We incurred pretax expenses of $9,000,000 $0.14 a share related to the planned separation of our steel processing business, which we expect to complete by early calendar 2024. We will quantify those costs each quarter going forward until the contemplated separation is complete. We We also recognized incremental expenses of $0.01 per share related to our recent acquisition of Level 5 Tools and the earn out associated with that acquisition. The And finally, we benefited by $0.04 a share due to restructuring gains associated with the divestiture of our WSP EP joint venture's last remaining steel processing facility.

Speaker 2

This compared to restructuring gains of $0.03 a share in the prior year quarter. The Excluding these unique items, we generated earnings of $0.44 a share in the current quarter compared to $2.12 a share in the prior year. The end of the call. In addition, in Q2, we had inventory holding losses estimated to be $53,000,000 or $0.81 a share, compared to inventory holding gains of $42,000,000 or $0.61 a share in the prior year quarter, an unfavorable swing of $95,000,000 primarily due to the lower average selling prices in steel processing combined with lower volumes partially offset by the inclusion of Temple Steel. The Our gross profit for the quarter decreased to $106,000,000 from $185,000,000 in the prior year and gross margin was 9% versus 15%, $54,000,000 down from $168,000,000 in Q2 of last year and our trailing 12 month adjusted EBITDA is now $455,000,000 the end.

Speaker 2

With respect to cash flows and our balance sheet, cash flow from operations was $133,000,000 in the quarter and free cash flow was 108 the We've generated over $360,000,000 in free cash flows in the last 12 months. During the quarter, we invested $24,000,000 on capital projects, the $15,000,000 in dividends, received $24,000,000 in proceeds from asset sales and received $55,000,000 in dividends from our unconsolidated JVs. The Like in Q1, the dividends we received from our unconsolidated JVs exceeded their equity earnings during the quarter as their working capital levels have normalized, Allowing them to pay out earnings that were not distributed in the prior fiscal year. Looking at our balance sheet and liquidity position, funded debt at quarter end of $699,000,000 decreased $7,000,000 sequentially and interest expense was down $1,000,000 also on a sequential basis. We are operating with low leverage and our net debt to trailing EBITDA leverage ratio is roughly 1.25 times.

Speaker 2

We also have ample liquidity end of Q2 with $130,000,000 in cash and $675,000,000 in availability under our revolving credit facilities. The Yesterday, the Board declared dividend of $0.31 per share for the quarter, which is payable in March of 2023. The We'll now spend a few minutes on each of the businesses. In Consumer Products, net sales in Q2 were $154,000,000 up 9% from $141,000,000 in the prior year quarter. The increase was driven by higher average selling prices, which were partially offset by lower volumes.

Speaker 2

Adjusted EBIT for the consumer business was $13,000,000 in the quarter and EBIT margin was just under 9% compared to $18,000,000 12.5% last year. The There were 2 primary drivers for the decline in consumers profitability. 1st, retail sales slowed, not materially, But it is clear that consumers are watching their discretionary spending. In addition and more impactfully, our retail customers reduced their inventory levels during the quarter. The Result was a significant decline in customer orders, which led to lower volumes and lower fixed cost absorption.

Speaker 2

In addition, the The quarter was negatively impacted by $1,000,000 of expenses related to our acquisition of Level 5, including the write up of inventory to fair market value. The end of the quarter. While the quarterly results for the consumer business were not as strong as we would have liked, that team continues to do an excellent job managing through a challenging environment. The Additionally, we have started to see customer inventory levels stabilize, which we believe will lead to more seasonally normal volumes going forward. The Building Products generated net sales of $142,000,000 in Q2, up 17% from $121,000,000 in the prior year quarter.

Speaker 2

The The increase was driven by higher average selling prices, which were partially offset by slightly lower volumes. Adjusted EBIT for Building Products $41,000,000 in the quarter and adjusted EBIT margin was 29% compared to $55,000,000 45% in Q2 of last year. Decrease in EBIT and margin was primarily driven by lower equity earnings in our Crytitrich and Wave joint ventures, which were down $11,400,000 3 point $4,000,000 respectively compared to very strong results in the prior year quarter. The softness was partially offset by improvements in our wholly owned businesses, the We saw operating income increase $1,400,000 or 31 percent year over year due to higher average selling prices and a favorable product mix. The Similar to what we saw in consumer, many of our product lines and building products saw customers decrease their orders due to higher than optimal inventory levels.

Speaker 2

In 2021 early 2022, when supply chains were uncertain and tight and demand from end users continued to grow, Many of our customers ordered at or above their expected demand levels and those same customers are now rationalizing their on hand inventories while demand has moderated with the economy. While the demand outlook is unique by end market and will be impacted by the broader economy, the Our team continues to execute at a very high level and we believe that as customer inventory levels stabilize, we will see a return to more seasonally normal demand trends. The end. In Sustainable Energy Solutions, net sales in Q2 of $38,000,000 were up 15% compared to $33,000,000 in the prior year quarter Due to increased volumes and higher average selling prices. The business generated adjusted EBIT of $1,000,000 in the current quarter, which was up slightly from the prior year As the favorable impact of higher average selling prices was partially offset by higher production costs.

Speaker 2

Despite a continued challenging operating environment in Europe, That team continues to do an excellent job executing. We remain very optimistic about the hydrogen and alt fuels ecosystems and our SCS business. End. At this point, I will turn

Speaker 3

it over to Jeff. Thanks, Joe. In Steel Processing, net sales of $842,000,000 the We're down 10% from $938,000,000 in Q2 of last year, primarily due to lower average selling prices and lower volumes, Which were partially offset by the inclusion of the Temple Steel acquisition. Steel prices peaked in the latter half of twenty twenty one At over $1900 per ton and recently we're trading under $700 per ton. Our total shipped tons were down 13% Compared to last year's Q2 driven primarily by lower towing volume with the mills and the exit of our consolidated JV WSP, the Direct tons in Q2 were relatively flat compared to the prior year quarter and were 54% of the mix compared to 47% the prior year quarter.

Speaker 3

From a demand perspective, we continue to see stability and signs of growth in automotive, but did experience some weakness in our end market demand, which has been impacted by the slowdown in both residential and non residential construction. In Q2, the Steel reported an adjusted EBIT loss of $17,000,000 compared to a $72,000,000 gain in the prior year quarter. The The large year over year decrease was driven by lower direct spreads, which were negatively impacted by the inventory holding losses that Joe mentioned earlier, estimated to be $53,000,000 in the quarter compared to $42,000,000 last year, an unfavorable swing of $95,000,000 the Those steel prices have stabilized because of lagging price indices, we anticipate we will see moderate inventory holding losses in Q3, the which could approximate or be slightly lower than the loss we reported in Q3 of fiscal year 2022, the Which was $25,000,000 It's been 1 year since we purchased Temple Steel and it continues to prove to be an excellent addition to our steel processing business. The The Teffel leadership team is doing an outstanding job managing the business and executing on strategic initiatives the to meet the growing demand for increased electrification in many of our markets.

Speaker 3

Lastly, I am so proud of all of our teams they remain focused on keeping our people safe and running efficient operations, all while doing an excellent job delivering for our customers.

Speaker 4

The end

Speaker 3

of the call. At this point, I will turn it

Speaker 5

over to Andy. Thank you, Jeff, and good morning, everyone. Our fiscal Q2 was somewhat challenging, driven by significant steel price declines and inventory destocking at several of our larger consumer and building products customers that stockpiled product to offset supply chain challenges. The end of the call. These short term trends appear to be waning and we are optimistic that this quarter represents a trough in earnings and we will enter calendar 2023 with some solid the end market demand remains steady across most of our products and markets despite the continued debate around where the economy is headed As a result of the Federal Reserve's continued rate hikes, higher rates will clearly impact some markets, but recall there is another $1,300,000,000,000 of approved government investment spending from the Inflation Reduction Act, the Chips and Science Act and the Infrastructure Investment and Jobs Act underway.

Speaker 5

The Some of this money will almost certainly benefit our various businesses, although the extent is hard to quantify. The I want to express my gratitude for our employees who continue to go above and beyond to deliver for our customers despite the ebb and flow of input costs and supply chains. The end of the year. As evidence of our hard work Worthington received 3 outstanding awards during the quarter. Investors Business Daily voted us as their top ESG company of 2022.

Speaker 5

Newsweek named us to their list of America's Most Responsible Companies for 2023 the And Computer World named us as the best place to work in IT for 2023. All of these accomplishments reflect the strength and quality of our Golden Rule culture and the hard work and dedication that our employees bring to work every day. The Congratulations and thank you. Last quarter, we announced an exciting plan to separate our steel processing business into its own public company. The We are calling this initiative Worthington 2024 with the goal of standing up to financially strong strategically well positioned companies to unleash their full potential.

Speaker 5

Our team is working hard and we are on track to make that happen. The Once complete, we will have a market leading business in consumer products, building products and sustainable energy the poised to capitalize on key trends in sustainability, technology, construction and outdoor living. The With higher margins and lower asset intensity, this business should benefit from premium sector multiples. The Worthington Steel is and will continue to be a best in class steel processor with excellent growth opportunities the in automotive light weighting and electrical steel laminations, positioned to take advantage of fast growing trends in electrification, sustainability the and infrastructure spending. In anticipation of the planned separation in early 2024, We have been strengthening our balance sheet by building cash so that both companies have financial flexibility to maximize their potential.

Speaker 5

The end of the call. We do not anticipate any material changes to our modest leverage and ample liquidity mindset for both companies end, and we are likely to continue with similar capital allocation strategies once the planned separation is complete. The Both businesses will be run with our philosophy and Golden Rule principles and utilize the Worthington Business System of Transformation, the innovation and acquisitions to drive growth and shareholder value. So while the quarter was challenging, primarily due to the rapid decline in steel prices, We are well capitalized and poised for a return to better results. Demand is solid and when combined with our market strength and excellent teams, our future is bright.

Speaker 5

The To all of our customers, suppliers, employees, shareholders and other stakeholders, I hope you share in our excitement for where we are headed.

Operator

The Our first question is from Phil Gibbs with KeyBanc Capital Markets. Your line is open.

Speaker 6

Hey, good morning.

Speaker 2

Good morning, Phil. Good morning.

Speaker 6

The question firstly is just on seasonality. You pointed out that there were some sizable destocking in your recent quarter, notably in your consumer businesses. The And then to some extent, in construction, I think the Q3 from a volume standpoint is typically a little lower the November quarter, if I'm thinking about that correctly, are pretty in line with it. So you're saying Relative to the Q2, we should expect that those similar seasonal patterns should play out versus where you're at right now.

Speaker 2

The I think that's fair. I think some seasonality returns and we do think that the Not 100%, but most of the destocking is done. And so sequentially, we see a little bit of upside.

Speaker 6

The In terms of the seasonality being a little the positive in the Q3 versus the second. Okay.

Speaker 2

Well, that's so sorry. So seasonality is relatively flat, but the Consumer saw more destocking earlier. It'll including products might take a little more time because the seasonally normal the growth there on the wholly owned businesses certainly is more like March, April, May.

Speaker 6

The That makes sense. And then on the inventory swings, this past quarter, the You guys have called out a $50,000,000 headwind, maybe a little bit more versus neutral. And then the impact is going to be less than half of that in the next quarter. Did I hear Jeff correctly there?

Speaker 3

Yes, Phil, this is Jeff. You heard me correctly. $53,000,000 headwind this current quarter and I think this quarter probably very similar to what you saw the Last year Q3 and that would be approximately

Speaker 4

$25,000,000 so half.

Speaker 6

Thank you, Jeff. Okay. Thank you, Jeff. And then the The last one is just around the separation costs this quarter, dollars 9,000,000 pretax, I think $9,000,000 $10,000,000 the Is that the level of spend we should see over the next 3 or 4 quarters? Does that taper up the Does that taper down?

Speaker 6

Does that go up? And what are those costs largely covering right now?

Speaker 2

The I think Phil that's a reasonable estimate. I mean those costs are out of pocket the advisory fee transaction oriented fees and we think those costs will be the neighborhood ultimately and it will ebb and flow a little bit between now and the end of the potential separation. The But $35,000,000 to $45,000,000 there is a good range. And then there might be some other costs associated with the things that will happen down the line in terms of software etcetera, but those shouldn't be all that material in addition to those numbers I gave you.

Speaker 5

The The one cost sale Joe didn't mention is there may be some financing costs down the road too once we determine the capital structures of the various companies and how that might the go forward.

Speaker 6

Makes sense. Thank you.

Speaker 2

The Thank you.

Operator

The next question is from Katja Jansich with BMO Capital Markets. Your line is open.

Speaker 4

The Hi, good morning. Thank you for taking my questions.

Speaker 2

Good morning.

Speaker 4

Can you talk a little bit about the How you see the margins developing and the non steel processing business over the next quarter or 2, please? The

Speaker 2

So margin wise in the consumer products business, again, when you the destocking and you have volumes as low as they are, it's harder to outrun your fixed costs. And so, I think the It should be sequentially no worse likely better than it was in Q2 although in Q3 of last year the In consumer products, we had some we had different input costs for steel in particular. So the Probably won't be as high as they were in Q3 of last year. And then building products, it's really the same story the When Andy talked about trough in terms of revenues, it's going to be helpful there just sort of seeing those things the continuing to get a little bit more volume back. But we don't expect a V shaped recovery by any means, but we do expect some sequential improvement in the building product space as well.

Speaker 7

Okay. And then maybe quickly on the CapEx, I think you previously said it's going to be up 10% to 20% year over year. Does that still stand or can you provide an update on that?

Speaker 2

The Yes, we're halfway through the year. We're still trending around $100,000,000 for the year.

Speaker 7

The Okay. And then just lastly on the separation, what are kind of the next steps we should

Speaker 5

Yes. So we've actually made a lot of progress in the current quarter, Really focused in 2 areas, current state analysis and starting to think about future state analysis for both companies. The Probably the next major step for us is to start to populate the teams of both companies. And so that's Likely there'll be some announcements on that after the 1st of the year.

Speaker 2

The No, you're welcome. And just add on one thing, Andy. We said early 2024, we're tracking to

Speaker 7

the

Operator

until the end. The next question is from John Tumazos with John Tumazos Very Independent Research. Your line is open.

Speaker 8

The Thank you very much. Could you describe the $99,000,000 in assets held for sale?

Speaker 5

Yes. Give us a second there, John. We're firing up the supercomputer.

Speaker 8

The While you're working on that one, I see there's no buybacks for 2 straight quarters. Is there a legal restriction on buying back stock because of the separation or is there some other explanation?

Speaker 5

There was a legal restriction up until the Point of announcement, as of today, we're under kind of normal trading windows. So there's no the reason that we cannot be buying back stock. I will tell you that, we have consciously made a decision Not to purchase stock at least up to this point because we wanted to build our cash balance the In anticipation of making sure that both companies are very well capitalized and can get the best credit rating that they the and achieve out of the gate. I don't think that necessarily means we won't buy stock, but that's been our bias Up to this point, I will also say that I think at quarter end we had built upwards of $130,000,000 of cash. The We continue to build cash and a lot of that is driven by the decline in steel prices as we they replace higher priced steel with lower priced steel, but also we continue to earn pretty good money.

Speaker 5

So that the combination of those two things is helping us build that cash.

Speaker 2

And John, just to circle back to your first question, you scared us for a minute there. The Asset sale for sale, it's $5,000,000 I think you might be off one line on your printer there. It's $5,000,000 is just a building the That we have for sale.

Speaker 8

Was the reason for the sale of the Worthington Specialty Products in Michigan that the U. S. Steel shut Great Lakes and at the old Rouge plant, they're running the melt, but not the hot strip melt. The So the sources of steel aren't the same?

Speaker 3

That's not the reason for it, John. I mean, we have a rigorous Capital Management Program and we're always looking at our businesses and do they fit our strategic portfolio? Is it Something that we want to remain in long term and that was a business we just didn't feel like fit the portfolio strategically any longer. So It seemed in the best interest of shareholders to sell that versus continuing to run it.

Speaker 8

Thank you. Looking at the on balance sheet the inventory accounts. The middle account for work in process inventory fell a great deal with steel prices the As one would have expected, the raw materials account at 305 stayed very large the And the finished product inventory at 190 stay very large. Should we assume that Either you accumulated unfinished steel inventory this year because the price was cheap Or else you didn't have enough a year ago. And with the finished products, the Are the customers buying a little less quickly now with the economy slowing down or just give us a little flavor for the movements or the lack of movements in the the Raw materials and finished inventory accounts.

Speaker 2

Yes. So I think some of the answers to your question are embedded in your question, but the the Real sort of driver there on the raw side is we do have some seasonality and you get ready and January tends to be a pretty big month on the steel processing side. The steel prices were going up and then coming down and you're buying in different buckets. The And then on the finished goods side, John, what you had there is really in the the More driven by the consumer and the building product side of things. I mean, a year ago, we couldn't keep any inventory.

Speaker 2

We were the I had more orders than we could satisfy. And so we were literally sending things out the door as soon as we could make them. The And so inventories just have returned to more normal levels, especially seasonally relative to where they were a year ago.

Speaker 8

The Thank you. Thank you. And I don't know what those advisors are charging you for the $3,000,000 a month, but it's a hell of a lot of money to tell you what you already know.

Speaker 2

It is definitely An expensive process, but we're very happy with the teams that we have helping us and we're the Really happy with our own teams and the work that we've done thus far.

Speaker 8

I'm just glad I don't have any advice like that.

Speaker 4

The end of the call. It appears

Operator

that we have no further questions at this time. I'll turn it back to the presenters for any closing remarks.

Speaker 4

The end.

Speaker 5

All right. Well, thanks everyone for joining us today. We wish everybody a Merry Christmas, a terrific holiday season and a Happy New Year. We'll talk to you in 2023.

Speaker 2

Thank you. Thanks.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

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