Worthington Enterprises Inc (WOR) 2004 Q4 法說會逐字稿

Good afternoon. Welcome to Worthington Industries fourth quarter 2004 earnings results conference call. All participants will be able to listen only until the question-and-answer session. This conference is being recorded. If you have any objections, you may disconnect at this time. I would like to introduce your first speaker for today's call, Ms. Allison Sanders, Director of Investor Relations. Ms. Sanders you may begin.

Thank, Julie, and good afternoon, everyone and welcome to our quarterly earnings conference call. 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 detail on factors that could cause actual results to differ materially. For those who are interested in listening to this conference call again, a replay will be available on the home page of our website at www.worthingtonindustries.com. With me in the room today are; John McConnell, Chairman and CEO, John Christie, President and Chief Financial Officer, Richard Welch, Controller, and Randall Rombeiro, Treasurer.

The format for today's call includes introductory remarks from CEO John McConnell, followed by a review of financial and operating performance from John Christie. The session will then be open to questions from the audience, followed by concluding remarks from John McConnell. Mr. McConnell with begin our presentation now. John.

Allison, thank you, and welcome to everyone. Especially anyone who is joining us for the first time. We had a great fourth quarter which resulted in a very good year. I want to say thank you to our senior leadership team, and to all of our employees whose loyalty and hard work make a significant contribution here every day. John Christie will know now take you through the performance for the quarter.

Thank you, John. Good afternoon, everyone. For our fourth quarter which ended May 31st, 2004, we reported earnings per share of 45 cents, well above last year's fourth quarter of 18 cents per share. And the prior quarter's 28 cents per share. And our prior record quarter of 39 cents per share. This is a record quarter even after incurring special charges that totaled 39 cents per share.

Excluding those items, earnings for the fourth quarter would have been 84 cents per share. The quarterly results of 45 cents per share also exceed the forecast range of 31 to 36 cents that we provided several weeks ago when we announced the sale of our Decatur, Alabama facility, and the cold rolling assets to Nucor for 82 million. The improvement relative to that forecast was driven by a strong final two weeks of the quarter, as well as timing issues for a portion of the charge for the sale of the Decatur assets.

At the time of that release, we estimated that the charge related to the assets at Decatur would be 73 million pretax. While that amount is still accurate, a portion, or nearly 6 million pretax, cannot be taken until the transaction closes. As a result, a smaller charge was incurred in this quarter with the balance to be taken when the transaction closes. Which we currently expect to occur during this, our first quarter.

The press release issued this morning summarizes four special items, including the Decatur charge that are reflected in this quarter's results. And also provides a reconciliation of earnings by identifying the pretax, after-tax and earnings per share impact of each of these items. I encourage you to refer to the press release. In summary, the four special items which collectively had a negative impact on earnings per share of 39 cents include; the first being the 67 million pretax charge related to the sale of the Decatur assets, the after-tax impact was 42 million, or 48 cents a share.

The second was a $2 million pretax charge for the impairment of certain assets in our European pressure cylinders operation. The after-tax impact was 1 million, or one penny a share. The third was a 4 million pretax gain on the settlement of a hedge position with the Enron bankruptcy estate.

The after tax impact of this was $2 million, or $3 a share. And finally, -- or three cents a share, excuse me. And finally, a 6 million income tax adjustment for the favorable resolution of certain tax audits, and the earnings impact of this credit was 7 cents per share. Now let me review the income statement for the quarter.

Record fourth quarter sales of 783 million surpassed last year's record sales of 590 million by 33%, and reflect higher revenues in all three of our business segments. Most of that sales increase, about 3/4 of it, is due to higher pricing, which reflects the higher steel prices that are prevailing this year versus last year. The remainder, about a 1/4, is due to higher volumes in all three segments.

Raw material costs increased relative to last year, but not as quick apply as selling places, and as a result, spreads widened in all flee segments. Raw material costs increased relative to last year, but not as quick apply as selling places, and as a result, spreads widened in all three segments. Wider and spreads and improved demand positively impacted our gross profit margin which rose to 22% from 11.5% earned in the year ago quarter. We benefited from lower priced inventory and a rising price environment while the reverse was true for much of last year.

We estimated that approximately 1/3 of our fourth quarter gross margin is attributed to this benefit. Split fairly evenly between processed steel and the metal framing segments. SG&A expense increased in absolute dollars, and relative to sales rising to 7.6% of sales from 7.3% for the quarter. The 17 million year-over-year increase is primarily the result of higher profit sharing expense, which is up significantly due to record earnings.

Quarterly operating income, after special charges related to Decatur and Cylinders European assets, increased 75% to $43 million. Excluding those items, however, operating income was up 356% to 113 million, or 14.4% of sales. Both the operating income and margin were records.

The 2 million year-over-year improvement in the miscellaneous income expense account is due to the 4 million Enron hedge settlement in the fourth quarter, partially offset by higher minority interest elimination for Spartan, one of our consolidated joint ventures. Spartan was significantly more profitable this quarter compared to the year-ago quarter. Interest expense was down slightly due to reduced borrowings in the quarter compared to the year-ago quarter.

Equity income was up significantly this quarter. As you may recall, equity income was up significantly this quarter. As you may recall equity income comes from our six unconsolidated joint ventures representing our ownership position in each joint venture's net income. Quarterly results were exceptional, and our equity income increased 120% to 16.5 million from 7.5 million last year. As all six joint ventures were up, and four, being WAVE, TWB, Acerex, and Aegis, all had record quarters. Joint venture income is a consistent and significant contributor to our profitability.

Most of these joint ventures are newer entities with potentially higher future growth rates. Collectively the unconsolidated joint ventures represent over 600 million in annual revenues which are not reflected in Worthington's financial statements. More importantly, over the last three years, returns on capital in these joint ventures have averaged 76%.

Because of these returns, the joint ventures are also a source of cash to Worthington, with annual dividends averaging more than 20 million over the same time period. Because of our success with joint venture business model, we are regularly looking for additional opportunities where we can bring together distinct skill sets and minimize our risk and capital requirements. To conclude my fourth quarter income statement review, income tax expense increased due to the higher income, but was partially reduced by the 6.3 million one-time credit that identified earlier as a favorable resolution to certain tax audits.

You could know that our effective tax rate for fiscal 2004 rose to 38% due to increases in state and local taxes, and to changes in our mix of income. We anticipate that 38% will be the effective tax rate for fiscal 2005. Now let's go to the balance sheet. Total debt including the 60 million outstanding on our accounts receivable securitization facility was down 82 million.

Our debt to capitalization ratio was 30% at the end of the quarter, 34% if the securitization facility of $60 million is included in the calculation. We had no borrowings under our $235 million revolving credit facility. We continue to be very disciplined in regard to capital expenditures.

For the quarter, capex was $6 million. And for the year it was $30 million, against full year depreciation of 67 million. We expect that capex, excluding any acquisitions will be nearly the level of depreciation next year, probably in the $50 to $60 million range. Now we'll talk more specifically about the fourth quarter financial and operating performance of each of our three business segments, beginning with processed steel products which represents 56% of our revenue this quarter.

Processed steel sales rose 25% to 439 million, from 350 million in last year's fourth quarter. The year-over-year sales increase was due to higher volumes, up about 6%, and higher prices, up about 18%.

Total big three automotive production was only up 1% this quarter, over the year-over-year basis. But we experienced strength across all customer segments including automotive, and especially in our tolling volume. Capacity utilization is calculated on a 24/7 basis and this increased from 71% to 74% on a year-over-year comparison. Days in inventory were down a bit from last quarter to 55 days from 56 days, but up from last year's undesirably low 40 days. Obtaining steel on a timely basis is currently challenging, but we've been able to provide for our customers' needs in virtually all cases.

We remain many committed to managing our inventory levels at 45 days, with some variability around that level depending on business conditions. Operating income for processed steel rose to 46 million after excluding the charge for Decatur. Up from 18 million last year.

As a result, operating margins more than doubled in processed steel to 10.4% from 5.1%. The increase was primarily due to a widening of the spread between average selling prices and material costs. We have talked before about the challenges at our Decatur facility, and the strategic limitations presented by the operations there.

With the announced sale to Nucor, this is no longer an issue. We are very pleased with the repositioning of our approach to the Southeast markets from Decatur, the elimination of losses and the drain on management team, as well as the opportunity to redeploy capital more productively. Now let's turn to the metal framing segment, which represents about 30% of our revenues for the quarter.

Fourth quarter sales were 232 million, up 66% from last year's May quarter. Year-over-year volumes were up 11%, a bit better than the 8% improvement in the office construction market would indicate. The difference in our gain in volume is the residential construction segment. Additionally, we have found that our ability to obtain steel under favorable terms contributed to our strong results.

We feel we have maintained share during a volatile market for steel. Operating income soared in metal framing to a new record of 54 million, from essentially break even results in the year-ago quarter. In fact, this quarter's operating income exceeds metal framing's prior record for annual operating income, which was set in fiscal 2000.

As a result, the operating margin exceeded 23%, well above the historic averages of 8% for this segment. We estimate that approximately 1/5 of the operating income improvement is due to our FIFO based accounting in this segment. It is important to note, however, that operating income would have been exception strong, in fact a record, even excluding the FIFO benefit.

We are seeing other favorable trends in this segment. Improving demand, elimination of integration costs associated with the Unimast acquisition, and the realization of acquisition synergies. Which make us confident that we are in a much more favorable operating environment than we have been for quite some time. We are particularly pleased that we have maintained the combined market shares of Dietrich plus Unimast.

Finally in our pressure cylinders segment, sales for the quarter were up 12% or $12 million from last year. 2 million of the increase was due to the relative strength of the Euro to the dollar. Overall unit volume was up 7%. However, unit volumes in North America, which accounts for 80% of total unit sales were up 17% for the quarter.

We are pleased that cylinders' demand has not lessened significantly as most expected once the OPD valve change benefit disappeared. Strength in North America was partially offset by a significant decline in our European facilities, where the strong euro made it unattractive for our customers to export product.

The European market has been difficult for more than just currency reasons. We have enjoyed success in our high pressure and our refrigerant cylinders. But the LPG market is plagued with overcapacity and declining demand. As a result, an impairment charge of $2 million on certain of our European LPG assets was taken this quarter.

Operating income for pressure cylinders, excluding the one time charge, increased from 11million to 13 million dollars. And the operating margin from 11.7% to 12%. Our pressure cylinder section continues to be a great business for us with consistently excellent profitability and return on capital. In summary, this was an exceptional quarter as the numbers indicate. John?

Well, John, thanking you for providing an in depth look at the fourth. It was a quarter in which we performed well across all of our business segments, a quarter in which excluding special charges produced record results without the benefit of steel pricing. And a quarter that including the effects of rapidly rising steel prices and significant special one-time charges for the quarter produced records in both quarterly and annual sales. As well as quarterly earnings.

Obviously we're very pleased with our performance. Later this afternoon, we will review the quarter one last time with our employees. And after an appropriate deep breath, some pats on the back and a few yahoos, this quarter will be given its proper place in our history as a new target to improve upon. Now as we look forward and we go through the basic economic indicators that we've been sharing with you, we see continued strength in our nation's economy and the steel markets in the months ahead.

Gross domestic product continued to grow quarter over quarter. It's 10th straight quarterly increase. While the rate of the increase slowed during the fourth quarter to .4%, growth over previous year's quarter was a strong 4.4% increase.

Both industrial production and the industrial production manufacturing indexes continued to improve quarter over quarter, their fourth successively quarterly improvement. Big three automotive production improved 18% from last quarter, and as John already said 1% from previous year's quarter. Both nonresidential and office construction indexes continued to reflect a stable to modestly improving environment.

Both have improved over previous year's quarter for two successive quarters now. Its worth noting that that's the first time that has happened in three years. That's a good time for me to shift gears for a moment to our metal framing business. Throughout fiscal '03, and into the opening two quarters of '04, we struggled in the face of two significant issues.

The first being the severely depressed commercial construction market, and the second digesting the acquisition of our number one competitor. Of course the depressed market position was a critical element in creating the opportunity for the acquisition. The expenses associated with merging these are two large companies are behind us, and we're beginning to realize the expected synergies.

The organization will only continue to improve from here. Between the information I just provided reflecting activity in the commercial construction market, and again that's the first year-over-year two quarter improvement in three years, and when we look at our quotation and booking activity in this business, we believe that the commercial construction activity has begun a period of recovery. It will be slow, but as the metal framing industry continues to consolidate, we are very well positioned in this business.

We remain very confident that we have done and we will continue to do what's required to deliver on the long-term growth potential we envisioned when we entered the metal framing business in 1996. Now, going back to outlook items. We believe that pricing of hot rolled steel, our primary raw material, will continue to be relatively flat with some upward pressure during the first quarter. Several mills have announced modest increases for the July, August time frame.

And given the current supply and demand relationship, we believe these increases will be effective. Assuming continued strength in the economy, which we believe is likely, additional upward pressure on hot rolled pricing will be felt as several mills take capacity offline for long postponed maintenance projects between June and September. So when we combine all of these factors that I just read through, we view our first quarter as being very strong relative to historic time frames and results. At this point we'll be happy to take any questions you have.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1. You will be prompted to record your first and last name. To withdraw your request, press star 2. Once again, to ask a question,please press star 1. One moment please for our first question. Our first question comes from Michael [Morthrow] with Bear Stearns. Sir, you may ask your question.

Thank you very much. Just had a question. I guess, looking ahead on the metal framing. If you could help us out with margins. I know you alluded to FIFO being about 1/3 of the improvement there. Can you just, given your outlook I guess for pricing, help us out a little bit with -- are margins expected to come down to a more normal level?

I think you'll see margins come down somewhat through the year. But again, I think there are two factors that will help it from not falling too far, and support continued growth here, and that's -- we do see an increase in the activity levels out there. There are more buildings going up, more opportunities for everybody. And there has been consolidation in the industry. Which just puts less players looking at what's out there to bid on and work with.

Okay. And do you alluded to the proceeds from Decatur being redeployed. Can you talk about some areas that you might be thinking about with that cash?

Well, we're looking at a number of different things in really all of our businesses right now. None are to a point that we're able to would be appropriate for us to discuss them. But we do have different things of different sizes in each business that we're looking at currently.

I'm assuming that means external? Is that why you wouldn't be able to disclose it?

Yes.

And on the cash flow statement, the other adjustments, can you just talk about what, exactly, that is there, almost 50 million negative?

On the earnings release?

Yeah, on the cash flow statement.

The biggest change in there, the difference is relative to the undistributed equity in joint ventures. We took -- we had some large dividends from our joint ventures last year, which we didn't have this year, or weren't as large. And we also -- the provision for the deferred taxes, has been -- you know, has been greater this year, so that's really what caused the fluctuation there that are in that line item.

Okay. Thanks.

Chris Olin with Longbow Research. You may ask your question.

Good afternoon. A little confused. I'm reading through your press release here, and it says while future earnings called be impacted by the reversal of steel price trend. However, during your comments a couple of minutes ago, you said that you're looking at pricing flat to up. What are you projecting for second half hot rolled band pricing?

Well, you're taking two things and trying to apply them to the same time period. As we look forward, I think we were trying to be very clear that we see pricing stable to having upward pressure on it. And I think that we're certainly talking about next quarter, and that probably extends into the following quarter. The comment in the press release just indicates that at such time when pricing does reverse, without saying when it may be, is that there could be some negative impact from that. Did that clear that up for you?

Yeah, sure. What do you see in terms of the imports coming into the market? Has that been a factor as of yet? When do anticipate the market to start to see that?

At the moment, again, hot roll bands being our primary raw material, you see very little hot roll availability external to North America available, and we continue to look. There's's some small supplies available. Just starting to see more cold roll and galvanized material starting to enter the markets. And we expect that to continue to some degree.

That's helpful. Thanks. Also just look at overall automotive demand. I get the sense that it might be weaker than expected during this upcoming quarter. Any sense from your customers how that's looking out thus far?

Well, I think that we are not looking for a lot of weakness out of our primary customer base here domestically with the big three. Certainly we have good programs going with the transplants as well. But we are not seeing a pull back in schedules or any significant indication of that at this point.

Great. And lastly, can you give us a feel for the total impact FIFO had on the earnings this past quarter? And any guidance you can give us on the next two quarters?

Well, as we said going through the comments, and first of all,, I hope you appreciate it's very hard to be specific, like to a penny a share kind of issue about the impacts of -- because each business segment has a different accounting method, for one thing in inventory flow. But I think using the approximate 1/2 is a pretty good guideline that you can rely on for the last quarter. As pricing stabilizes, of course that gain starts to go away.

Chris it's been 1/2 of operating income.

Half of the total operating?

It would be a third of the gross margin.

One third of gross margin. That's very helpful. Thank you.

John Tumazos with Prudential. You may ask your question.

Congratulations on everything.

Thank you, John.

the Decatur cold mill sell was well timed in the current strong market. It's always a good time to sell inventory or assets when prices are up and business conditions are good. Are there any more parts of the company that might be sold? Or would you be willing to sell the whole company now? It could be a good time to play golf, John. In fact, returns on playing on golf might be much better than building rolling mills.

We -- you know, as we went through the consolidation in '02 time frame, and completed it then, we said that we were significantly done. And not saying it was complete was really having Decatur in mind as a possibility if we couldn't get it on its feet the way we wanted it. Beyond that, I would say that we are complete with anything that's on our radar screen that we think is not performing well and needs closure or consolidation of any magnitude of the company. After completing the Unimast integration with very small pieces of that perhaps left, and looking back at the '02 consolidation, and prior to that by vesting of what we considered nonstrategic assets, I think the company is very well positioned right now, and don't have anything on the radar screen that we need to do interally John.

Thank you. And congratulations on all the results.

Thank you.

Once again, to ask a question, please press star 1. Gentlemen, we, have no further questions.

Well, again, I want to thank everybody for joining us. I'll assume the lack of questions was from a complete press release have and a very good review from Mr. Christie as we went through our numbers. And we'll look forward to seeing you here again next quarter. Thank you.