Worthington Enterprises Inc (WOR) 2005 Q1 法說會逐字稿

Good afternoon, and welcome to Worthington Industries' first quarter earnings results conference call. All participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. To ask a question, press star 1. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to your conference host this afternoon, Ms. Allison Sanders, Director of Investor Relations. Ma'am, you may begin.

Thank you, Tray. 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 are John McConnell, Chairman and CEO, John Christie President and Chief Financial Officer, Richard Welch, Controller, and Randall Rombareo, 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 opened to questions from the audience followed by concluding remarks from John McConnell. Mr. McConnell will begin our presentation now. John?

Allison, thank you. Good afternoon and welcome to our conference call reviewing the first quarter results of fiscal 2005. I'm sure many of you have taken the opportunity to read our news release issued this morning and are aware that the results of the first quarter were excellent. Sustained high levels of pricing for commodities throughout the quarter played a lessening but still significant role in our results. But I and all of you on this call with us today would be remiss not to recognize the hard work of all of our employees over the past several years which has positioned us to garner an enhanced benefit from the improving economy in which we are operating. John Christie will now walk you through a detailed look at this quarter.

Good afternoon, everybody. For our first quarter of fiscal 2005, which ended on August 31, 2004, we reported earnings per share of 66 cents. Well above last year's first quarter of 7 cents per share. These results are more than double our prior record first quarter earnings. We did have one special item included in the first quarter results. As we mentioned in our last earnings release, 4 cents pretax charge, primarily related to certain contract termination costs of the Decatur sale would be taken in the quarter in which the transaction closed. The closing of the sale of those assets to Nucor for $80 million occurred on August 1. Excluding that item, earnings for the first quarter would have been 70 cents per share. Record first quarter sales of 769 million exceeded last year's sales of 498 million by 55%, and reflected higher revenues in all 3 business segments. Of that sales increase, about 90% is due to higher pricing, which reflects the higher steel prices that are prevailing this year versus last year. The remainder, about 10%, is due to higher volumes, in our processed steel and pressure cylinder segments offset somewhat by a volume decline in metal framing because of a slow August due to weather.

Wider spreads between raw material costs and selling prices in all 3 segments and improved demand positively impacted our gross profit margin which rose to 20.8% from 9.8% earned in the year ago quarter. As prices continue to rise during the quarter, we benefited from lower priced inventory. But with the pace of the price increases tempering significantly, so has the benefit. We estimate and I emphasize the word estimate, that possibly 1/4 of the gross margin may be due to that effect, although the actual amount is probably lower than that. SG&A expense increased in absolute dollars but remained consistent relative to sales at 8.4% for the quarter. 4 million of the 23 million year-over-year increase is due to expenses related to the implementation of an Enterprise Resource Planning or ERP system that we started last year. The remainder is primarily the result of higher profit sharing expense, which is up significantly due to record earnings. Quarterly operating income excluding the Decatur charge increased 12 fold from 7 million to 95 million, or 12.3% of sales. Both the operating income and margin were just under the Company's records set last quarter.

The 3 million year over year increase in miscellaneous expense is due to the elimination of the minority shareholder interest in our operations of Spartan, one of our consolidated joint ventures. Spartan was significantly more profitable this quarter compared to the year ago quarter, which results in a larger minority shareholder elimination. Equity income was up significantly again this quarter. Equity income comes from our 6 unconsolidated joint ventures, representing our ownership position in each joint venture's net income. Quarterly results were very strong, and our equity income increased 68% to 13 million from 8 million last year. All 6 joint ventures had double - - had strong double digit-plus percentage increases in earnings. As we've said before, 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 generated approximately $180 million in sales during the 3 months corresponding with our first quarter. To conclude my first quarter income statement review, income tax expense increased due to higher levels of income and to the 2005 effective tax rate increase to 38%.

Now, let's move on to the balance sheet. Total debt, including any outstandings on our accounts receivable securitization facility was down 71 million, on a year-over-year basis. Our debt to capitalization ratio was 28.4% at the end of the quarter. At that time, we had no outstandings under our 190 million securitization facility, or any borrowings on our long term revolving credit facility. During the first quarter, we negotiated an amendment with our bank group which increased the size of our revolving credit facility, from 235 million, to 435 million and eliminated certain covenants. That facility matures May of 2007. For the quarter, CapEx was $11 million and depreciation was $14 million. 6 million of the $11 million is associated with the ERP project I mentioned before. We expect that CapEx excluding any acquisitions will be nearly the level of depreciation, probably in the 50 to 60 million range for the year.

Now, to talk more specifically about the first quarter financial and operating performance of each of our 3 business segments beginning with processed steel products which represents 59% of our revenues this quarter. processed steel sales rose 58% to 458 million from 287 million in last year's first quarter. The year over year sales increase was due to higher volumes, up 14%, and higher pricing, up 39%. Total Big 3 automotive production was down less than 1% this quarter on a year-over-year basis, but we experienced strength across across almost all customer segments including automotive and especially in our towing volume. Capacity utilization is calculated on 24/7 basis and this increased from 62% to 67% on a year-over-year comparison. Days in inventory increased from 53 days to 62 days. Although the days in inventory number is higher than we typically target, on a forward basis, using forecasted purchase and shipment information, inventory levels in processed steel are where we would like them to be. Operating income for processed steel rose $41 million, after excluding the charge for Decatur, from 8 million last year. As a result, operating margins tripled to 9.1%, from 2.8%. The increase was primarily due to a widening of the spread between average selling prices and material costs. The wider spread was partially due to a positive impact of lower priced inventory in a rising price market.

Of note, though, processed steel uses neither FIFO nor LIFO, but specific identification for inventory accounting purposes. And as a result, it is more difficult to quantify this impact. Turning now to metal framing segment which represents 31% of our revenues for the quarter. First quarter sales of 238 million were up 69% from last year's August quarter. year-over-year volumes were actually down 10% as Dietrich's Distributor customers curtailed purchasing due to excess inventory on delayed projects. In addition, between 10% to 15% of metal framing, sales go to the Florida market, which has been severely disrupted due to the hurricanes. We expect that both of these events will be temporary.

In the first instance, our customers indicate that their demand is beginning to pick up, pricing continues to be very good and that the prebuying that was necessary to protect project quotes due to extended lead times for steel products is no longer an issue. In Florida we expect that the initial slow down will be followed by a significant period of rebuilding that will most likely benefit our business later in the next quarter and beyond. Dietrich units or pounds in inventory increased just 6% year-over-year in a period where that - - the outlook of commercial construction is much improved from what it was. However, the days in inventory number rose from 61 days to 90 days. As with our processed steel segment, the days in inventory calculation is based on trailing activity and was negatively affected by the unusual weather conditions throughout the Southeast and the East Coast. Despite the volume decrease in the quarter, pricing remained very strong and operating income soared to $52 million, from a $4 million loss last year during the early integration of the Unimast acquisition. As a result, operating margins were 22%. Well above historical averages of 8% in this segment.

We estimate that approximately 1/3 of the operating income in metal framing is due to a FIFO basis of accounting. It is important to note that operating income would have been exceptionally strong, even excluding the FIFO benefit and it was obtained for an overall construction demand was anemic. Certain commercial construction indices, like the census bureaus which we cite in the press release, have trended higher in recent months.Which bodes well for the coming demand in the metal framing market. It is important to note that commercial construction has been depressed for over 3 years, and that any increase in demand will be beneficial to this business segment. Which is doing quite well. Finally, in our Pressure Cylinders segment, sales for the quarter were up 10%, or $7 million from last year. Just under 2 million of the increase was due to the relative weakness of the dollar to foreign currency. Overall, unit volumes were up 2%. Relative strength in the European market offsetting 3% decline in North American volume. In North America, weakness in the 20 pound gas grill market offset excellent results in all of our other cylinder product lines.

Operating income declined modestly to $3 million, after costs related to the closure of our Portugal LPG line was incurred as well as some margin decline due to steel cost increases. Earlier this week, we closed on our recently announced acquisition of the cylinder assets of Western Industries. With this acquisition, we became a leading producer of disposable 14 and 16 ounce cylinders that are used for camping stoves, portable heaters, table-top grills, lanterns, and handheld torches. The acquisition expands our product line as we did not manufacture these cylinder sizes before. While Western is currently generating more than $50 million in annual revenues, we see opportunities for growth going forward. In summary, we had another excellent quarter as the numbers indicate. John?

John, thank you very much. Well, I'm sure you will all agree that this was an excellent quarter. But I believe that you are likely to be more interested in where we're going. While we continue our policy of not providing forward guidance, we will provide information which we believe is helpful to understand our general forward view. First of all, let's talk about basic commodity steel marketing pricing. We see a moderate softening in demand and pricing to be near or at its peak. We expect commodity hot roll prices to begin lowering modestly over the next 60 to 90 days. We do not expect this to be a cliff fall, but a beginning of a gradual adjustment in pricing over 12 month or longer period to sustainable levels that are well above historic norms. Now looking at 3 broad indicators of our economy, we continue to see strength across the board. The GDP has continued to expand quarter over quarter, and has produced its fifth quarter of year-over-year increases above 3%. Both industrial production and the industrial production manufacturing indexes have produced their fifth quarter over quarter improvement.

Year-over-year gains have also occurred for the past 4 quarters and exceeded 5% growth in the most recent quarter. Consistent with normal seasonality, Big 3 automotive production fell significantly in the most recent quarter compared to the strong increase in the previous. Looking year-over-year, Big 3 continues to show a weaker trend. The broader automotive production index, however, shows positive year-over-year growth in 10 of the last 11 quarters. This is also very important to us as we supply the majority of Tier 1 suppliers to the automotive industry. Turning to construction markets, the 3 major indexes, The Dodge Construction Index, The Nonresidential Construction, and Office Construction Indexes, all have posted their third successive quarter of year-over-year growth. While now this is clearly good news for our metal framing segment, the overall market remains weak on a historical basis. These 3 year-over-year quarterly increases are following nearly 3 years of year-over-year declines. Office construction in particular experienced 7 successive quarters during that 3 year period that exceeded 20% year-over-year declines, and 3 of those quarters that exceeded 30% levels.

So while we believe the construction markets have clearly bottomed and turned the corner, there remains significant upside as we look forward. The metal framing business is very well positioned to benefit from those continued improvements. I have also consistently said that the actions that have been taken by our Company had positioned us very well to benefit across the board from any upturn in the economy. As the economy has been improving I believe that we have demonstrated that we are well positioned. And we look forward to participating in additional strengthening in all of the markets that we serve. At this point we'll be very happy to take your questions.

At this time, we're ready for the question-and-answer session. If you have a question, please press star 1 and you will be announced prior to asking your question. To withdraw your question, press star 2. Again, at this time, if you would like to ask a question, please press star 1. Our first question does come from Michelle Applebaum from Michelle Applebaum Research. You may ask your question.

Hi. It was a very nice quarter. And a lot of really good disclosure in this discussion, as always. My first question is there has been a flurry of noise about contract prices for next year. And I know that you guys buy a lot of your steel for your processing business on these fixed price contracts, and you sell your steel on these fixed price contracts. Do you want to venture John, a guess on what you think is going to happen with pricing?

Michelle, I really don't want to venture a guess on what is going to happen with pricing. I would say, however, that ending this period of rapid escalation around the contracts that had been in place and turning to new contracts, I think is healthy for our customer, it's healthy for us and healthy for the supply base. So we're looking forward to it. As you know, they are currently working mills direct automotive at the moment. And when we look at our contractual buys, just to be clear, from the way you said that, we always link the supply, the purchase to the sale on a direct basis. One is not speculated against the other.

Yes, I'm aware of that. And it showed through the many years I've been working with you, so yeah. Okay, so you don't want to endorse these 20 to 25 or more kind of numbers you're hearing some places?

No, I think we ought to wait and see where they settle out. And again, we're looking forward to starting to continue - - I'm sorry, to end up with our contracts and get pricing where we wanted. And by the way, I wasn't correcting you, I was just making sure everybody else understood your comment.

No, that's fine. I know you wouldn't have the nerve to correct me. Anyway, then my next question is, the Dietrich business fascinates me. Because these margins are - - I would have expected a business that is as steel price sensitive as that business is; even adjusting for FIFO, which is kind of bizarre to begin with, to have some margin pressure in an escalating steel price market. How are you - - your volumes are down 10%. How are you passing on those kinds of prices?

Well, again, Michelle, I think you have to look at that industry and understand what has happened over the last 2 years. Beginning with our purchase of Unimast and 2 other major distributors and manufacturers of this product also consolidated. We have a very good distributor base that we have been working with for some time and you add on top of that increased demand of these products. You mentioned that our volumes were down 10% and they were. Again, severely affected with Florida, essentially shutting down, which varied depending on the seasonality between 10% and 15% of our sales through metal framing. So that was a significant issue. We also had a lot of prebuying going on, as John mentioned in his comments, that is now working through the inventory. So on both cases we think those were temporal events that will pass and that market demand will continue to increase.

Michelle, on another note, our leadership at Dietrich does a lot of work on improving the product, getting patents on their improvement. And the improvements usually take a tremendous amount of labor out of the construction process. So through that, we have been able to introduce higher margin products into the marketplace other than just the commodity stud business.

Oh, okay. And that's making a difference right now?

Yes.

Okay. What about - - you know, you've been doing some incredibly exciting things in terms of putting the studs into residential. And I know that, you know, we spent some time talking about this not that long ago and the steel prices were very different than the kind of more than doubling we've had year to date. What's going on in terms of that penetration? How did steel prices compare to wood for that particular stud application? I understand in commercial it is a nonissue. But for residential, what is steel doing to itself in terms of pricing itself out of that market?

Well, I think we are close to a point where you price yourself out of the market, Michelle, but we are right underneath it. And we've paid a lot of attention to that. We're also looking at fully installed costs as opposed to fixed sales, which gives us an advantage as we go forward. Wood has also increased tremendously but steel has clearly increased more. So we remain very excited about where we are with that. We do not think we priced ourselves out of movement in those markets. Doing a lot of good things in California right now, and continue to focus on our mid rise product, another patented product that John mentioned, that the 3-8 story construction of buildings. So all those things are continuing to move forward. And that's some exciting things to talk about as we go forward into the next year.

Great. Okay. Thanks.

Robert LaGaipa of CIBC World Markets. You may ask your question.

Hi, good afternoon. I just had a couple quick questions for you. One, I was hoping you could - - I was hoping we could explore the comments you made relative to the pricing and the moderation in demand levels. You know maybe you could provide a little bit more color there in terms of, you know, what do you think is driving the pricing, you know, to maybe soften up a little bit here? Is it imports? And if so, from where? Or - - and if you could also tell us, you know, which demand - - or which markets where demand is starting to really fall off a little bill bit?

As we said in our remarks Bob, it is a great question, certainly automotive has softened. We were pretty clear about that, in the Big 3, which is a big part of what we do. We saw some softening in Dietrich. And then I would say there is just kind of a general softening in the economy, in the order book right now. Nothing severe. How much of that is driving, I think that is driving part of it. You also see a lot of people, we mentioned prebuying in the metal framing industry. I think you will find - - certainly I've read from reports that you all have produced that there is a suspicion that a lot of service centers, not necessarily right in our niche of the business, but are fairly loaded with steel over the past 6 months. So some of that is just letting the rat work through the snake, so to speak. Imports clearly have affected pricing in more finished products of cold roll and galvanized. Not so much on the commodity hot roll side but almost to finished products where there are no quotas in place. I don't think pricing is quite as disparate as I have read recently. Landed import prices would be representative of some of the comments I've read. But everybody's got to remember those things were ordered 6 months or more ago. If were you ordering today, imported steel, the price would be closer to the domestic market. There is still a gap there. I think we see continued strength in Europe and European pricing coming up. I think demand in China is going to remain pretty strong, and all those things together I think will support a very gradual decrease in pricing to the degree that it is going to occur.

Great. And a follow-up if I could. I just was wondering, you know, what the impact from Decatur was in the quarter, both from a sales and also an income - - from an income perspective?

John, I will let you answer that. Generally, obviously, from the sales side, we're operating on a much smaller basis this quarter than we were last, and I think incomewise, it materially isn't going to make much difference one way or the other this past quarter. I don't know John --

During our past 2 quarters, of course we only had Decatur for 2 months of the last quarter.

Yup.

It had a very good impact. I can't tell you the percentage. It is not right in front of me. But it was a positive impact on our processed steel division, as that we had at one time down there about 90 million tons of steel - - 90 million - - or 90,000 tons of steel that moved through the system prior to our sale that was taking advantage of an increased pricing market. So the timing indicator was very good from that standpoint to move our steel through the system, through our own facility before sale.

Okay. Terrific. Thank you very much.

It is fair to add on to that, that on a continuing basis, the spread between hot roll and cold roll and cold roll pricing as I mentioned earlier began to fall domestically significantly. It was an appropriate window, and we're also glad it closed.

Great. Thanks, guys.

Once again, if you have a question, please press star 1. Our next question comes from Randy Hoag from Prime Resource Group. You may ask your question.

Good afternoon. 2 quick questions. First question, and I joined the conference call a little bit late, but I was wondering if you could give us just a brief update on Steelpac? How that business is doing? And secondly, you guys have done a great job with acquisitions, the last several years, have really integrated those well. Do you see the pace of acquisitions staying the same, make maybe picking up, decelerating, you know, in the next 3 to 5 years?

Randy, it surprised me there with a question about Steelpac. I don't think we ever really talked about it on this call. And only - - this is a Company for those who may not know, that we started in 2000. It specializes in metal container packaging, is the best way I can say it. And we started making pallets and shipping envelopes for motorcycles. It has been covering its costs in the last 12 months. We have some very exciting projects under way that are in test. So I would rather not go into them. But dealing with pallets in volumes that are significant. And we are just about to begin the production of the trials of about 30,000 units that will go and test for probably about 90 days. We're very confident that we will come through that well. And will probably cause us to be talking about Steelpac more directly in the future. But overall, that business is doing very well. There are a lot of other environmental things or things around it environmentally that help with - - you have insects arriving on wooden pallets from abroad. And you look at the food service industry, there are some particular places where you can't afford really to have absorption of materials that may be spilled into them. And that causes them to go out of service. And we're very confident our pallets can sustain many times the terms that wooden pallets currently do. So the future there is very bright. And I appreciate you asking about it.

From a financial standpoint, a year ago, it was an operating income drain. We have had year-over-year almost a $.25 million operating income turn-around. It generates positive cash flow, and positive operating income for Worthington Industries.

And then Randy, I don't want to forget your second question. Our acquisitions going to increase - - you know, we are always out there looking. We, as John reiterated, the Western acquisition, and we continue to have a number of things that we're looking at, and as soon as they mature to the point of announcement, we will get them out there. But certainly relative to the past 3 years, I think the simple answer to that is yes, the acquisitions are going to increase.

So there are things you are looking at as - - on a steady basis?

Yes, sir. And a number of things that we do will fit somewhat of a pattern you saw with some smaller things that fit the shoe and the foot very well for us. But yes, we're continuing to work a number of different things.

Thank you very much.

Anthony Rizzuto of Bear Stearns. May ask your question.

All right good afternoon. Several of my questions have been answered. But with regard to the processed steel segment, I'm struck by the comment about the capacity utilization in that segment of being about 67%. And I wonder, you know, with the economy being fairly good, the last several years, where do you see that capacity utilization rate kind of moving over the next several quarters?

Let me make sure that - - and we debate this internally, as to what numbers to use. Do keep in mind, John, that is on a 24/7 basis. I'm not sure how - - I think other people measure that differently. If you look at that on a 5/7 basis, we're running in excess of 90% capacity utilization. So the weekends have some open time in other facilities. So it is there and we can use it. But clearly, you wouldn't want to be working people without adding a lot of people to go to swing shifts, 7/24. And I don't know if there was any confusion over how we were measuring 67% utilization rate or not. Was there?

Well, I was wondering if, - - you know, so that would be more reflective of almost effective utilization or effective capacity? In other words, with maintenance and all the other things that are required?

That would be minus downtime for maintenance. At that, I think it is - - as John said, we debated, it is very misleading. Our galvanized lines are running very high capacity. Our pickle lines are running high capacity. We introduced a new product a couple of years ago. A dry lube process that would be running 40% of capacity. So that is a roll-up of all the equipment and all the plants. So some are running full-out, some with new product introductions are running less.

Okay. All right. I appreciate you shedding some light on that. Thank you.

Once again, if you have a question, please press star 1. One moment, please. At this time, we show no further questions.

Are there any other questions at all at this point?

We do have an audio question at this time. Harden Bevia, you may ask your question.

Hi, my question is actually related to the consolidated joint venture income. How much of that line item would you say comes from the same price - - pricing benefit - - I guess selling higher price product on a lower cost base?

That would be very tough, but I would - - you know, because I - - let me just say it this way. The 2 large - - every unconsolidated joint venture we have is making very good operating income. The 2 largest would be WAVE, which is the ceiling grid joint venture we have with Armstrong and the other largest is TWB, which is our Tailor Welded Blank joint venture. Those 2 would be the largest. One is in the commercial product - - commercial construction business, and the other is in the auto blank business. So we said that about 25% overall was probably benefited this year. About 30% - - less than 25 in steel, and probably about a 1/3 in Dietrich, so WAVE would wave would be probably very similar to that.

Okay. Great thank you.

Jim Kellogg from the Marion Group, you may ask your question.

Yes, hi. My question was regarding your inventory. Given the fact that steel prices have gone up, just trying to get a sense of your original cost of your inventory and how that affects your outlook going forward.

Well, --

In terms of the current prices.

I don't understand - - you know, in steel division, we're at 62 days of inventory. If we are near the peak, for the last several years we've talked about trying to get our inventory control in much better shape right before the peak in 2000, when we've had these very short cycles, if you've been following the industry from peak to peak. But the last peak, our inventory coming into the peak was about 104 days. And then in 2002, when it peaked again, our inventory days were 78 days. And now, for near the peak, we're at 62 days. So as we said, looking at further shipments, and our orders, we feel very good that 62 days is much better than we have ever been able to do at the peak before. And we feel we're in pretty good shape.

Right. So what you're saying then is that your current inventory is relatively under valued compared to what the contracts are going forward? In other words, your macro view is that they are going to moderate slightly over the next 6 to 12 months? You're saying that usually it's been short cycles but you're not seeing that?

If - - I don't know exactly - - if steel prices would drop, you know, over time, an extended period of time, a little bit each month, I think our inventory is in good shape. We, as we said, we used identified coil, specific identified coil for our processing. So our average cost of inventory we think is in pretty good shape to handle a slight decline in pricing.

Okay. Thank you.

Once again, we show no further questions.

Well, I thank you all for joining us today. Again, I'm very pleased with our performance and the people here who helped produce it. I think as we look forward, which is what we're all doing at this point, we do feel good about where we are. We do see a moderate decline in steel pricing that will begin some place 60 to 90 days from now. We think it will be gradual. We think we're in the right position to handle and deal with it in the steel Company and in particular in the metal framing industry. Though inventories are somewhat higher there, we feel very good about our position to work with price on the way, wherever these markets go on the metal framing side. So overall, we're very confident in finishing a year that is off to a really tremendous start. Thank you again. We will talk to you next quarter .