Worthington Enterprises Inc (WOR) 2002 Q3 法說會逐字稿

Good afternoon and welcome to the Worthington Industries third quarter earnings results conference call.

All participants will be able to listen only until the question-and-answer session. This conference is being recorded at the request of Worthington Industries. I would like to introduce your first speaker for today's call, Allison Sanders, Director of Investor Relations. Ms. Sanders, you may begin.

Thank you .

Good afternoon everyone. We want to thank all of you for joining us today. With me in the room are John McConnell, Chairman and CEO, John Christie, President and Chief Operating Officer and John Baldwin, our Chief Financial Officer.

Before we begin our presentation, I want to remind everyone that certain statements made in this conference call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties which could cause actual results to differ from those suggested.

Please refer to the press release for more details on factors that could cause actual results to differ materially. John McConnell, do you have any opening remarks?

Allison, thank you very much. And welcome everybody. Thank you for joining us this afternoon.

If we have anybody new with us, we follow a format where , our Chief Financial Officer will review the financial performance from the quarter, John Christie, our President and Chief Operating Officer will review the operating performance for the quarter. I'll have a few closing statements. And then we'll take your questions.

Overall we are pleased with this quarter. It continues a trend this year of showing improvement year over year, quarter over quarter over last year's performance. At the end of December honestly I wasn't sure I was going to be able to say that to you. It was probably the worst month in our company's history.

In January, however, we began to pick up a little steam particularly in the steel processing business, improvement which continued to gain momentum through February. So, we ended the quarter very strong even though we had less shipping days in February compared to last year.

As a reminder for those of you who didn't see our press release this morning, we did have a significant one time charge during this quarter primarily related to our facility closures which we announced in January. We also had a one time charge in last year's third quarter relating to the partial closure of our Malvern steel processing facility.

As a result of that present you accurate reflection of our ongoing business, we have a lot of information to go through with you today. It's straight forward but there's a lot of volume there. So, please if you get lost anywhere, make some notes. Don't hesitate to ask us to repeat sections of what we've covered here today. We'll be happy to do so at the end of the call. As I said, there's a lot to go through, so let's jump right into it.

John Baldwin, will you get us started with the quarter's financials.

Sure John.

Our fiscal third quarter earnings per share, excluding the impact of the two one-time charges that John mentioned, would have been ten cents compared to seven cents in last year's third quarter excluding the 6.5 million charge that we took last February.

To refresh your memory on the charges, we announced these in January at a conference call, as well, where we announced a consolidation plan that included the closing of six of our facilities and the modification of two others, as well as a workforce reduction of more than 500 employees. The plan resulted in a pre-tax restructuring charge of $64.6 million of which 11.8 million is due to severance and employee related payments and is, therefore, a cash outlay. The remainder represents the write down of assets to their current market value.

Going forward we expect with this plan, despite reducing sales by about $75 million, we'll actually improve operating income by $10 million annually, about four million from reduced depreciation and the $6 million balance due to head count reductions. We also at that time reserved $21.2 million for the potential impairment of the preferred stock and subordinated debt we received when we sold our plastics and cast products business three years ago. As several of the buyers have had difficulty meeting their obligations to us, the result of deteriorating economic conditions.

The after tax impact of both of these charges reduced our net income in the February quarter by $54.5 million. The smaller $6.5 million pre-tax restructuring charge was taken last year in the third quarter when we closed a portion of our Malvern, Pennsylvania facility. As you might recall, last year's February quarter was severely impacted by reduced volumes consistent with the economic slowdown.

Weakness certainly remained this quarter, especially in pricing, but we have seen generally improving volumes throughout the business segments and in our joint ventures. That, combined with the reduced costs, drove the improvement in year-over-year recurring earnings.

For the company as a whole, third quarter sales of $406 million represent a three percent decrease from the year ago quarter, reflecting revenue declines in each of our business segments. At $50.9 million, our gross margin in the third quarter was 12.5 percent of sales, down slightly from 12.8 percent in the year ago quarter, as selling prices primarily in steel and metal framing declined more rapidly than material costs.

Margins in the current and comparative periods continue to run well below historical norms for our businesses. Offsetting the negative trend in the gross margin, SG&A expense declined $5.2 million representing 9.1 percent of sales compared to 10 percent a year earlier. Almost all SG&A categories were reduced by double digit percentages from the prior year including lower depreciation and amortization expense resulting both from lower capital spending -- lower capital spending as well as the elimination of good will amortization due to the new accounting rules.

The improvement in SG&A drove the $2.4 million increase in operating income excluding the restructuring charges. Our financing costs were down as well, the result of both lower debt levels and lower interest rates. Interest expense was down almost $1-and-a-half million or 20 percent during the quarter. And securitization fees for our trade receivable facility which show up in miscellaneous expense were down almost a million dollars, half of what they were a year ago.

Outstandings under our trade receivable facility were $100 million by the end of the February quarter. John Christie plans to elaborate on the operating results but let me take a moment to touch on some of the financial highlights from each of the three business segments beginning with our processed steel segment.

For the quarter, processed steel sales fell one percent to $263 million which is a decrease of $3 million from last year's third fiscal quarter. Despite the modest decline, half of our 12 facilities experienced increasing revenues. This contrasts with the last several quarters when only had consistently seen improving year over year revenues.

On a volume basis, tons processed in our steel business increased year over year by 11 percent with total processing gains of 18 percent and direct volume increases of five percent. Processed steel's operating income of $10.4 million was therefore up $4 million from last year and as a result, it's operating margin improved from 2.3 percent to 3.9 percent.

Turning now to our metal framing segment. Third quarter sales of $69 million were down 12 percent or $10 million from last year's February quarter. The dollar sales decline in metal framing is entirely attributable to a decline in unit sales price.

In fact, volumes were actually up during the quarter. The severe pricing pressure we are experiencing in our metal framing segment should more than offset the higher unit volumes and favorable has resulted in operating income of less than $1 million which is a fall of 89 percent, over $3 million from last year.

As a result, the operating margin deteriorated to less than one percent from 4.7 percent last year. continues to expand its leading market share position and has introduced price increases effective this month which appear to be sticking.

Finally, in our pressure cylinders segment sales for the quarter were off three percent as well to $71 million down from $73 million last year. The decline in cylinders revenues is due to volume decline, not to deterioration in pricing as in the other segments. The domestic cylinder business is largely driven by general economic conditions. Despite the more challenging times, this business segment has been better able than our other businesses to maintain pricing.

On another positive note, our European operations are significantly improved and our Austrian business is operating at near capacity. Consequently, operating income for pressure cylinders increased by $2 million or 67 percent as the volume decline was mitigated by favorable material pricing. As a result, the operating margin in cylinders increased from 4.0 percent last year to 6.9 percent this year.

Equity income from our unconsolidated joint ventures increased modestly from $5.3 million dollars to $5.4 million. Our newest joint venture, Aegis Metal Framing, began operations on February 1st and broke even in the first month and while our joint venture income has been consistent throughout the economic , the February quarter represents the third consecutive quarter the first in the year-over-year gains in the joint ventures.

During the quarter, our debt increased $23 million; this was primarily to fund the investment in the Aegis joint venture as well as a $10 million reduction in outstandings under our trade receivable facility. The debt-to-capitalization ratio, including the receivable facility, was 41.8 percent, well within our mid-40's target despite the sizable one-time charges that we took during the quarter.

Total debt, including the receivable facility is down by $76.5 million from this time last year. Our success at keeping debt levels low has been partially a result of improved working capital management. Working capital has declined nearly 25 percent year-over-year as accounts receivable and accounts payable have all been managed advantageously.

Our capital spending, as well, continues to be restrained in light of economic conditions. During the quarter we incurred $8 million in capital expenditures excluding the $21 million invested in the formation of the Aegis joint venture. This compares to $17 million in depreciation. We have the flexibility to curtail capital spending in the near-term, due to the major investments we've made in recent years.

As the economy improves, we would expect capital expenditures to ramp up to $75 to $100 million per year. This flexibility in capital spending has allowed us to generate enough cash flow to fund our dividend without further borrowings.

John Christie is now going to provide some operational highlights on the quarter.

Thank you John. Good afternoon everybody.

The third quarter is generally our most challenging quarter as all three business segments process steel, pressure cylinders and metal framing are seasonally slow. As with most manufacturing companies, December is the worst month of all twelve and this year was no exception. In fact, our sales in December fell 10-and-a-half percent from a less than average year last December. Given the severity of that month, we are encouraged by results in both January and February which equaled last years in sales with significantly reduced pricing, higher volume and fewer shipping days.

Our recent focus on cost control, productivity improvements and capital use -- capacity utilization culminated in a consolidation plan that we announced in late January. We are actively involved in the execution of that plan and I'd like to give you a brief update.

On an overall basis all equipment and property has been reviewed and final determination has been made to a disposition. Equipment and real estate brokers have been engaged. One of our six targeted facilities has been closed and the five others are being phased out as customer employee and contractual commitments are honored. At this point everything is happening as scheduled and nothing has occurred to derail us from our anticipated completion date of six to 12 months.

Now to update you on each of our business segments with a few highlights starting with the processed steel segment. While the market conditions continue to be difficult, we did note improvements in the last two months of the third quarter. As you heard from John Baldwin, sales for the quarter were down only one percent from the previous year's quarter. The volumes or tons process excluding Gerstenslager were actually up 11 percent.

Volumes are the combination of both direct and tolling sales both of which were up this quarter. Tolling increased significantly again this quarter by 18 percent and for the first time in several quarters direct sales increased five percent. Unfortunately, competitive pricing continues to erode some of the benefits of these increased volumes. Our direct to toll mix is now 54 percent direct, 46 percent tolling versus 57 percent direct and 43 percent tolling one year ago.

The automotive sector continues to be the largest end user for our processed steel representing about 50 percent of sales in this segment. During the quarter sales to this sector were four percent better than last year at this time but still 18 percent off from the fiscal 2000 third quarter. Appliance and lawn and garden were also up but construction and furniture and office equipment where the two sectors with the largest percentage volume drop.

The consolidation plan that we talked about will take care of several of the weaker facilities within processed steel. The major challenge remaining is to maximize our Decatur, Alabama facility. Despite a 50 percent improvement in operating income year to date, it continues to be a drag on overall performance. As spreads and volumes return to the market and capacity utilization moves beyond 50 percent, we would expect profitability. The scheduled move of our North Carolina's processing equipment to Decatur, as part of our consolidation plan, should help as well.

Excluding Gerstenslager, which just started production at its new Clyde, Ohio facility, overall capacity utilization in steel processing increased to about 64 percent from 57 but offers ample opportunity for improvement. Working capital management and the emphasis on controlling inventory continue. Process steel inventories are down eight percent or about 14 million from the quarter ended one year ago. Days in inventory stood at about fifty-six, down from fifty-eight last year but up from our target of 45 days due to intentional purposes of inventory to settle the and accounts. Raw material turns continue to improve from seven to nine times, year-over-year.

Now, let's turn to metal framing. We definitely saw evidence of the slower commercial construction this quarter at Dietrich Metal Framing. Despite the slower building pace, volume in all of our product lines were up, especially for our proprietary products, the trade ready floor and roof systems and the new spacer bar, which collectively were up 200 percent over last year. Together, unit sales of all products were up six percent. Severe price pressure continues in this segment.

During the February quarter, average selling prices in our core building products were 15 percent lower than last February's quarter and have fallen 25 percent in the last 24 months. The sales price decline has more than offset the volume increases and favorable material cost to erode profitability as John Baldwin pointed out earlier. Fortunately, price increases of 15 to 20 percent put into effect March 15th are in the market now and show definite signs of holding. We expect another price increase in the next few months as well.

Despite the short run fluctuations brought about by the changing economic environment, Dietrich continues to focus on its longer run goal of penetrating the residential framing market. Just this quarter, Dietrich announced that Homes has committed to building all of it's classic and Renaissance series homes in central Ohio, with the Dietrich trade ready floor system. This could represent up to 200 homes during the calendar year 2002 and is the first partnership between our companies. This is the sort of commitment that we can imagine being repeated with different builders in many different builders in many different markets.

To succeed in residential framing market, improved distribution and products as well as user friendly software will be essential. Decreased success in Hawaii which is much more heavily residential than other markets, a significant growth in its trade ready floor and roof products and a newly formed Aegis joint venture with they gave it the industry's leading software package are establishing that platform for Dietrich growth.

Aegis, as John Baldwin said started February 1 is performing 25 percent above our expectations for its first two months of operations. While we are concerned about the economy over the upcoming months we expect seasonal growth and price increased to help in the short run. And in the long run we expect to make major inroads into the new markets we've targeted.

In our last segment, pressure cylinders, unit sales volumes were down six percent from the previous third quarter. Cylinder's largest product categories, steel portables for the gas grill market and the helium product category were the only two product categories that were up. And they were up a modest two percent.

All other product categories were down significantly with weaknesses in the economic sensitive product lines of aluminum and steel forklift and industrial high pressure. The current weak demand is a function of a number of factors including the slower economy and the higher inventories at our customers. Neither of these factors are expected to improve immediately so there are a number of sales initiatives and cost reduction efforts under way and the success of these efforts was apparent in the significant improvement in the financial performance that John Baldwin noted.

We are heading into the seasonal peak in this sector during the fourth quarter and we expect good comparisons to last year. In fact, 40 percent of our yearly volume of our 20 pound grill cylinders business is usually shipped in the fourth quarter. Capacity utilization was 42 percent in the quarter, down a bit from 44 last year in the slower part of the cycle. But our consolidation of refrigerant production into Columbus, Ohio from Claremore, Oklahoma is starting to show synergy that we expected.

We've been mentioning for several quarters now that we have been intentionally building inventory in our steel portable product in anticipate of the increased demand that will result from a mandated product design change that will go into effect in April 2002 requiring a new overfill detection device for our 20 pound portable product.

As a result, our inventory levels for this product peaked in December 2001 at 21 million and has since declined to 16 million at quarter end. We are prepared for the increased demand this regulation will generate in the coming quarters and our inventory reduction plan is being through February.

On another positive note, we saw significant improvement in our European operations in Austria, the Czech Republic and Portugal, which have been underperforming for quite some time. New accounts realized in the last round of annual contracts and new products such as compressed air tanks were responsible for this gain. Because of our sizable domestic market share, in what is a mature market, we feel our growth opportunities are concentrated abroad.

Domestically, we are focusing on improving productivity, maximizing cylinders asset utilizations and eliminating costs wherever possible.

Don.

John and John, thank you very much. That was thorough.

I opened the call today, saying that I was pleased with this quarter and that's a good word for it, it's not either overstating or understating our feelings. We're certainly not going to try to place a 10-cent quarter on a real high pedestal here. We have a ways to go and we know that and we're going to get there but the trends right, clearly improving each quarter over the previous year.

Now, I do get excited when I look forward and I do that because I believe our economy has turned a corner. It's somewhat sooner than I would have predicted earlier, probably by about six months. It's going to be a slow walk on fragile ground out of this valley but I believe the economy is headed in the right direction. Our steel company was the first to feel the effects of the recession and, I believe, it is also leading us out now.

I also get excited because our earnings platform is much better than it was a year ago, two years ago, three years ago and I'm anxious to show what we can do when we have a chance to perform on a good track and that time is not too far out in front of us.

At this point, we'll be happy to take any questions that you have.

Thank you.

If you would like to ask a question, press star, one on your touch-tone phone. You will be announced prior to asking your question. To withdraw your question, press star, two. Once again, to ask a question, press star, one on your touch-tone phone.

One moment for our first question.

Our first question comes from Michele Applebaum with Salomon Smith Barney. Ma'am, you may ask your question.

Hi. Can you hear me?

Yes ma'am. How you doing ?

I'm on a cell phone on a rainy street in New York.

I wanted to ask you, I saw that your was quoted in a couple of different trade stories with a price increase on galvanized steel. I was wondering what this was about, that's kind out of character for you guys.

Well, I'll avoid tunnels while we're talking. We, are going to be aggressive in the marketplace with pricing at this point. We just simply are not going to absorb anything coming our way. And in the galvanized side that -- the market tightened up a little bit and I think most people are out there with an increase at this point.

Now, sometimes in inflection points I've seen Worthington's which is one of the better buyers that I've seen through the years get some margin squeeze because the market gets a lot tighter, a lot quicker since you were getting the better deals that no one necessarily knew about publicly you could get up from a lower base. Are we not going to see that this cycle?

There are a couple things that I think work in the factor that if there is any compression in our margin and there may be a little, it will be minimal compared to where it's been in the past. One is our inventory levels are much leaner. So, we have to react quicker and it flows through quickly.

And secondly, is we are taking as you said maybe a little different stance where we are being very aggressive on the pricing side of our market. The places that we have some potential squeeze is on contractual business where we have a several year look at steel on both sides of the equation but on a few of those cases we have an escalator on the purchase side that will come in over the next -- over the life of the contract in incremental steps.

So, that will deteriorate that price a little bit of that margin a little bit. But on all the spot prices and all the rest of the contractual business I think we're in good shape and we shouldn't see any compression.

I'm hearing a lot of noise and even getting like cold calls and cold e-mails from buyers of you know who thought they had contracts they obviously were not talking about companies as large or as stable as Worthington you know from getting the cold calls -- it must bubbling up pretty bad out there. Do you think that you may be -- may have situations where you think you're hedged and you're not? And related to that question, are there any of the major integrative companies that you're not buying from ?

On the first side of it, I don't believe we have any threat of having people break contracts with us on the supply side. I am confident that that's the case. And if -- if any of that would ever happen, I guarantee they'll be on the -- we're not buying from list that you just asked for in the second part of your question. And I can't -- I'm going to look at John Christie here -- there -- I'm sure there are some of those we aren't buying anything from right now but none are leaping to my mind.

Not really. The market is getting tighter as I'm sure realizes. And with our appetite we have to find access to steel across the board last quarter we probably bought from 20 different sources.

OK. All right, thanks.

Thank you.

Our next question comes from Mr. with McDonald Investments. Sir, you may ask your question.

Thank you. Hey, can you hear me OK, guys?

Yes, sir.

Hey, first of all, I just want to say congratulations on meeting expectations. I mean, it's been quite an environment out here and it's nice to see where things are looking a little better.

My question related to Decatur. I missed the comments, John Christie, that you were saying about Decatur, you know, related to capacity utilization. Also, you know, is there some - if you could talk a little bit about where you see that going in the next 90 days, that'd be great and also provide some more detail on some of the equipment you're going to be moving down there, that would be helpful also.

OK, Mark.

We're running around 50 percent utilization in Decatur. That would be really a combination of all our processes in the slitting side of the business. We're running very full at Decatur on the slitting side, annealing we're running a lot higher than we have ever had and so across the board we're running about 50 percent but on the value added part we're much higher. We are going to be moving a cut-to-length line to Decatur, which will increase our product offering out of that facility and are also considering maybe a slitter from one of our consolidated or closing facilities.

OK. All right.

Any sense of how quickly you think could start producing hot rolled material for you guys?

The sense we've heard is, probably, fourth quarter toward the end of the year.

OK. All right. Terrific. Hey thanks, again and congratulations on a good quarter.

Thank you Mark.

Once again, to ask a question press star, one on your touch-tone phone. One moment please.

Our next question comes from Ms. Becky Heights with Salomon Smith Barney. Ma'am you may ask your question.

Hey can you guys just elaborate a little bit on the outlook, particularly in metal framing and those margins. What you see the next quarter and the next of the year bringing.

Well as, I think it was in John's comments, we do have a price increase that we just put into effect in March and keeping in mind, I should start here, margins are a very low level in metal framing. Volumes sustain themselves largely because of giving up price.

So, we have a price increase that's going to help bring that back. And as we look out we are -- have in mind to probably have at least one more round of price increases over the next three to four months here.

So you'll see some margin return I think that market's going to firm up as a result of that a little bit. We have definitely been followed on that price increase in March and it's holding and doing well. John Christie or John Baldwin if you have anything to add, jump in.

Well, I think it's hard to really explain from our peak we have dropped over 45 percent on unit pricing the last 24 months we dropped 25 percent since last February so we have been had bottomed out. We definitely feel the price increase will last. Also, during this time our ability to keep operating profits coming in has been facilities. And so our throughput numbers probably 15 percent from a performance standpoint so we've also done a lot of work on the .

OK. And one other thing that's important to throw out percentage basis doesn't take that much however these price increases .

How much can you quantify -- I mean you told us, I guess, $15 and another increase on the horizon. For the year last year how much on a per ton basis did you give up?

For the year, it was about 30 percent 30 percent on the year not $30 30 percent.

going back and trying to look at what you said, how you gave us the price increase. Because I don't think you gave us that on a percent basis. I thought you gave us that on a volume basis.

, it's usually about a 45 percent .

Right, but I'm looking at the price increase for March.

Fifteen to 20 percent increase for March .

OK. OK.

But it's obvious it's starting from a lower base.

Sorry?

Right, that's fine. I got the whole story.

Can you also talk a little bit about their press about doing a joint venture and trying to emphasize metal framing? Is that going to be kind of competitive with your or is it better because now you have more people working on selling that market and you'll get synergy?

I think it can come - we'll definitely have some competition that are taking place on an even they're doing to concentrate more on the heavier gauge type framing .

Are they going to add - this is a very frank so they're going to be another player and that we certainly have good balance sheet . So, in the respects of maybe in the force of canceled buyer we'll be business wise so that's .

All right. Thanks.

Our next question comes from Doug Christopher with Proul Company. Sir, you may ask your question.

Hi. Thank you very much.

Just a follow up on the last question. You were mentioning, maybe about 30 percent of per ton last year, is that consistent with let's say over the nine months '01 over drop in the margin 12 level to approximately the eight level.

was the first time it was .

Yeah.

Last year was .

Are you talking about 30 percent? OK.

And, then, would it be reasonable just for modeling purposes to assume that you're going to get back up to a margin of let's say four to five percent for the next 12 months ?

Well, preferably the margin in that business as much of the industry's found, eight percent and 12 percent...

Yes.

Very much steel prices. it can be more than any of our other businesses sequentially. That's why you saw that sending their margin out to 12 percent a couple of years ago it's attracting considerably over the last two years now .

OK.

Kind of lagging .

And then you mentioning in the systems, approximately 200 hundred homes, I think, possibly in Hawaii. How substantial is that in the overall ?

The Hawaii 200 homes are two different issues.

They are two different issues. OK.

We opened that facility in Hawaii about a year ago. The largest as a percentage largest percentage out there and we started our facility there which came up in . that we've got here .

Right.

an introduction test facility so to speak. We're doing this a larger magnitude. This will be a project over the next several years.

And has any of that begun yet or started to ?

No. We have -- we have several homes up and starting April 1 is when the major construction period starts here .

All right. Very good. Thank you very much.

Our next question comes from Mr. with McDonald Investments. Sir, you may ask your question.

OK. Thank you very much. I had additional questions related to the market. In Ohio right now many places of Ohio there is no longer any going on shut down of . I'm just curious what Worthington's opinion on their raw material situation if Cleveland east were to restart you know with the ability to ship some reasonable volume some time in the third quarter.

you know that's going to be a good question . If they come back up I think one of the things that was really one of the turning points getting to the old .

OK. I just though it would be interesting to see I know it's very difficult to assess the potential impact. John, I wondered if there's another question -- I've asked this before. I just wanted to ask it again. Given the -- some of the barriers to entry for the steel framing business you know how do you feel about you know the overall character of this business from Worthington, you know, in terms of your ability to maintain, you know, proprietary nature. I know you've got the flooring system and you were making some strides on the roofing area, do you still feel comfortable that's enough to really want to remain, you know, heavily focused on growing this business?

Yeah.

OK. All I wanted to know. Thank you very much.

At this time, we have no additional questions.

OK.

We thank you all for joining us today. As I said, I think the horizon is looking bright, you know, slowly, slowly . I guess there and into a stronger economy so we can turn this .

Thank you again for joining us and enjoy the rest of the day.

That concludes today's conference call. Thank you for participating.