Worthington Enterprises Inc (WOR) 2005 Q2 法說會逐字稿

Welcome to Worthington Industries' second quarter 2005 earnings results conference call. All participants will be able to listen only until the question-and-answer session. This conference is being recorded; if there are any objections you may disconnect at this time.

I would like to introduce your first speaker for today's call, Allison Sanders, Director of Investor Relations. Ms. Sanders, you may begin.

Good afternoon, everyone. 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 homepage 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 Randal Rombeiro, Treasurer.

The format for today's call includes introductory remarks from CEO John McConnell, followed by a review of the 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 will begin our presentation now. John?

Thank you, Allison. We're glad to have you all with us this afternoon. As you saw from our press release this morning, we once again produced record results for the second quarter of fiscal 2004. I am very proud of everyone's efforts here at Worthington and believe that our results speak for themselves this quarter. So without further comment, I'm going to turn the call over to John Christie, our President and CFO, to review our performance for the quarter.

Thank you, John. Good afternoon, everyone. For our second quarter of fiscal 2005 which ended on November 30, 2004, we reported earnings per share of 54 cents, well above last year's second-quarter earnings of 20 cents per share. Record second-quarter sales of 745 million exceeded last year's sales of 540 million by 38 percent and reflected higher revenues in all three business segments.

All of that sales increase is due to higher pricing, which reflects the higher steel prices that are prevailing this year versus last year. Wider spreads between raw material costs and selling prices in processed steel and metal framing positively impacted our gross profit margin, which rose to 16.7 percent from 12.5 percent earned in the year-ago quarter.

As steel pricing has stabilized and, more recently, retreated from its peak, the inventory holding benefits that we saw in recent quarters from having low-priced inventory in a rising price environment has disappeared. SG&A expense rose in absolute dollars but fell as a percentage of sales from 8.4 percent to 7.5 percent. The increase of 11 million was due primarily to an increase in the reserve for bad debts and to higher profit-sharing expense, which is up significantly due to record earnings.

Quarterly operating income more than tripled from 22 million to $68 million, or 9.2 percent of sales. The 3 million year-over-year increase in miscellaneous expense is due to proceeds received in the year-ago period from the demutualization of one of our insurance providers, and to the elimination of the minority shareholder interest in our operation at Spartan, one of our consolidated joint ventures. Spartan was significantly more profitable this quarter compared to the year-ago quarter, which resulted in a larger minority shareholder elimination.

Equity income was up significantly again this quarter. Equity income comes from our seven unconsolidated joint ventures, representing our ownership position in each joint venture's net income. Quarterly results were very strong, and our equity income increased 40 percent to $12 million. Five of the seven had strong double-digit-plus percentage increases in earnings. Collectively, the unconsolidated joint ventures generated approximately 185 million in sales during the three months corresponding with our second quarter.

To conclude my second-quarter income statement review, income tax expense increased due to the higher level of income. The tax provision for the quarter was 33.5 percent of pre-tax income compared to 31.7 in the year-ago quarter. Both periods were favorably affected by revisions of estimated tax liability as a result of recent tax audit settlements and related developments. The favorable effect for this quarter was 1.7 million compared to 1.4 million in the prior year quarter. Excluding this tax liability adjustment, we estimate that our effective tax rate for fiscal 2005 will be 37 percent.

Now let's move on to the balance sheet. Total debt, including the 66 million outstanding on our accounts receivable securitization facility, was down about 5 million on a year-over-year basis, despite significantly increased working capital needs. Our debt to capitalization ratio was 31.4 percent at the end of the quarter, and it was 27.1 excluding the securitization outstanding.

For the quarter, CapEx was 8 million and appreciation was 14 million. 3 million of the 8 million is associated with our ongoing ERP project that we've spoken about 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 second-quarter financial and operating performance for each of the three business segments, beginning with processed steel products, which represented 61 percent of our revenue this quarter. Processed steel sales rose 42 percent, to 455 million from 321 million in last year's second quarter. The year-over-year sales increase was due to higher pricing, up 50 percent, offset somewhat by a volume decline of 6 percent due entirely to our sale of the Decatur assets. Without Decatur, volumes would have been up 2 percent over the prior year quarter.

This segment continues to benefit from good customer demand across a variety of customer groups. As most of you know, automotive represents the largest customer base of this group, ranging from 50 to 60 to (technical difficulty) percent of processed steel. Although it is logical to assume that processed steel volumes will move in conjunction with Big-Three automotive production, that is not always the case. During this second quarter, our automotive-related businesses were up 4 percent while Big-Three production was down 8 percent. Our outperformance is due to market share gains and our exposure to the faster growing platforms of the OEMs.

(indiscernible) in inventory were up 7 percent from the year-ago period, but very similar to the year-end 531 levels and down from last quarter. Operating income for processed steel rose 21 million, and as a result, operating margins nearly doubled to 7.6 percent from 4.3 percent for the prior-year quarter. The increase was primarily due to the widening of the spread between the average selling prices and material costs.

Now turning to the metal framing segment, which represented 26 percent of our revenues for this quarter. Second-quarter sales of 192 million were up 35 percent from last year's November quarter. Year-over-year volumes were actually down 24 percent as Dietrich's distributor customers curtailed purchases starting in September due to ample inventory, and as construction projects in general had been delayed due to higher construction costs and weather. Feedback from these same customers indicates that more normal purchasing activities will resume shortly, as they have been bringing their inventories back in line.

Dietrich's units or pounds in inventory were up modestly 2 percent from a year ago, and from year-end up 5 percent, but are down 8 percent from last quarter. Current inventory levels are partially attributable to the stronger demand forecasts earlier in the summer and fall, and will be rationalized as forecasts are adjusted going forward.

Despite the volume decline in the quarter, pricing remained very strong. Dietrich's efforts to bring higher pricing levels has been successful. As a result, operating income rose to $25 million from just $1 million last year, and operating margins to 13 percent from 1 percent in what continues to be a challenging environment from a demand perspective.

Certain commercial construction indices, although down a bit from last quarter, have generally trended higher from the year-ago period. This bodes well for future demand in the metal framing market. In addition, we are seeing the first signs of a pickup in the Florida market as the hurricane rebuilding effort gets underway. It is important to note that commercial construction activities have been depressed over three years, and that any increase in demand will be beneficial to this business segment.

Finally, in our pressure cylinders segment sales for the quarter were up 30 percent, or $22 million from last year. 12 million of the increase was due to the September 17th acquisition of the cylinder assets of Western Industries, and 3 million was due to the relative weakness of the dollar to foreign currencies in Europe and Canada. Overall, unit volumes were up 9 percent, and that is excluding the units from the acquired Western assets.

Business generated from our new acquisition was also good. Strengths in the variety in virtually all product lines offset weakness in the North American 20-pound propane tank line. As a result, operating income for this segment rose $2 million, or 30 percent, to $9 million from 7 a year ago.

In conclusion, it should be clear from my comments today why we are optimistic about the future. Each of our primary business segments and our joint ventures have good organic growth opportunities.

Processed steel continues to make inroads in key customer segments and is looking at numerous new business opportunities. Metal framing should soon benefit from a pickup in commercial construction activities and from entry into new markets such as Canada and military housing. Pressure cylinders is just beginning the process of optimizing the possibilities of its new acquisition. And our joint ventures are doing extremely well, and we are finding new ideas and partners on a regular basis.

In addition, our employees are successfully executing several projects such as the ERP implementation and Sarbanes Oxley, both consuming time and money, and our financial position is as strong as it has ever been.

John?

John, thank you very much for that very thorough review. Now, for the past few quarters I have reviewed information with you drawn from published indices on broad segments of the economy in which we are involved. I want to just continue that practice this quarter for two reasons.

First, the indices we quote are published, and we have referred to them long enough that you know what we look at for views on the macro trends. They are easy to access, and frankly, I'd be surprised if you weren't already revealing them.

Secondly, we believe based on follow-up questions received from some of you after our calls, my providing broad indices information has at times resulted in confusion rather than outlook clarification that it was intended to produce. In many if not most of the markets we serve, we are involved in specialty, highly value-added segments of the broad commodity indices that we have been referring to. We can and often do produce results that run counter to the broader trend.

Now, as I said in my opening, we're very proud of our second-quarter results and all the employees here that helped produce them. At this time we would be happy to take any questions that you have.

(OPERATOR INSTRUCTIONS). Robert Lagaipa, CIBC World Markets.

I had a few questions for you. One, I was hoping you could maybe provide some light on what you're seeing sequentially. I know you has given quite a bit of detail on the year-over-year performance, but maybe if you could just review with us -- if we go through the segments, specifically in processed steel and metal framing, from a spread perspective, from a demand perspective, kind of what you're seeing in those end-markets?

I think across the board we have seen very strong demand. As we said last quarter, we expected to see some seasonal weaknesses. We have. We also see perhaps a little stronger season as it just begins here in December than we have in the past. There's clearly some weakness there. Our belief is that the economy and the markets we serve are going to be very strong when we head into next year, certainly going into the latter parts of January and into February. So we expect demand to stay strong and we expect -- we are not going to probably get into too much spread information here, but we expect to be able to do well in the environments that are out in front of us here. John, do you want to add anything to that fairly broad question?

No. As I said, our tons shipped in processed steel without Decatur are up 2 percent from a year ago. They are down about 1 percent from last quarter. So the slowdown that people started to experience in October and November -- really we didn't see that. Our tons were just off 1 percent from last quarter versus up 2 percent from the year-ago. Dietrich, as I said -- our volumes started to trend down in probably mid-September. We have seen pickup now later at the latter part of November, and we think that the system has their inventories adjusted. Our margins have slipped a little in Dietrich, but not to any great extent. That would be the same in steel. In cylinders, every item, every product category we have other than the 20-pounders has shown very nice increases and margins have increased.

And when you mention in the metal framing business, the margins -- the margins look like they have fallen sequentially, from roughly 22 percent to 13 percent. How much of that do you anticipate recovering on a go-forward basis, if any? If we look at pricing, and maybe if you just shed some light on the pricing front as well, both in processed steel and metal framing. With the pricing starting to come off here, what do you anticipate on a go-forward basis in terms of your margins?

We have always indicated that we had an acquisition of course in Unimast, and we had acquisition costs and restructuring costs to get through. A year ago our margins got to 1 percent; they went to 21.4 percent, I think, that one time. We think the stabilized are of that would be between 10 and 12 percent -- would be stable margins for metal framing.

For steel we have said that stable margins were between 6 and 8 percent, and I think we were at 7.9 or 7.6 this quarter. And for cylinders, cylinders would stabilize at between 7 and 10 percent. They have kept right in that. The only one that is fluctuating wildly has been Dietrich metal framing, and through that we have really had the acquisition, which threw a lot more inventory on us at the very start of that acquisition. But we think it's stabilized at 10 to 12. And the reason for that is we have expanded a lot of proprietary products that we are selling as a package into a whole system, and in those proprietary products we have larger or higher margins than we do on the more commodity type products of the basic step (ph) business.

And last question, just a follow-up on that. From a pricing standpoint, what are you seeing in the marketplace? Are you seeing additional import pressure causing pricing to maybe fall a little bit further? Are you seeing signs that pricing potentially could rebound on the steel side? What are you seeing out there and what is your visibility related to pricing on a go-forward basis as well?

Last quarter, as you know, we talked to forward pricing. And frankly, you all have access to a lot more people than we do. You talk to everybody in the industry; you know that price increases have been announced for January by all the mills. We (indiscernible) that, as I said earlier, we think demand will stay strong and we think those increases will be supported, but aren't going to get into what we think pricing does beyond that.

Mark Parr, Keybanc Capital Markets.

I'm just wondering if you have any input or intelligence on how much incremental business hurricane repair could contribute in the first half of ‘05.

I'm not sure we can quantify that for you, Mark. It's a very good question. Clearly, it slowed everything down for a good while. Things are starting to head back and getting to some more robust construction going on there. One of the biggest problems I know in the beginning was just a shortage of labor. People spent weeks and weeks and weeks trying to get a commitment from anybody just to come and look at their project, let alone start repairing it. So, I can't -- we can't quantify what the rebound is going to be. It certainly will be there. There has been suppressed demand, and it's going to show up.

Do you think there is an opportunity for unseasonably strong results from metal framing in the February quarter as a result of this?

I think we'll need to see a continued pickup in commercial construction to bolster that and get to the levels that you're talking about, beyond a pickup in (indiscernible). And we think that is gradually coming back. I don't expect it to just leap out of the trough it's been in, but I think it's gradually going to continue to come up. And we feel good about through how fiscal '06 -- the rest of '05 and going into '06.

I thought I saw on the release, and I'm trying to find the number here right now, but about the mix between buy/sell (ph) tons and toll processed tons -- do you still release that number?

It is not in the press release but it's running just around what it normally does, which is 45 (technical difficulty)

45 percent toll?

Right.

So you haven't really seen any divergence in that spread in the last couple of months?

It did get -- the tolling did get a little higher a quarter ago, but it's still been in that range really for about the last year.

Just one last question and I'll pass it on. Could you just remind us again in your metal processing business, you said the automotive side of that represented upwards of half. How much of that is Big-Three-related as opposed to transplant-related?

Direct? Direct to the Big-Three is less than 8 percent of Worthington Industries' business, so it would be less than 15 -- well, let's see -- about 15 percent of the steel business. That is direct. That's not Tier 1 going Tier 2, etcetera.

That would not include Tier 1 and Tier 2?

Right. That would just be direct to the Big-Three.

What I was trying to get some insight into, John, was we're seeing some reduction of Big-Three production schedules 4Q, first quarter, there's possibly some corresponding offsets or partial offsets with rising transplant demand, and also looking at the overall transportation market, clearly, continuing pickup in the Class A market and some of the medium-heavy truck markets. So, you characterize your automotive business as, round numbers, half of the steel processing operation. I was just trying to get a sense of how much of that might be negatively impacted by reduced production as opposed to the areas of the market where there is potential offset?

I'm going to jump in here, and John I'm sure will finish something else up, Mark. Again, if you go back to why we quit giving you the kind of trend – broad trend information, and why we think that kind of misleads you as to what we do, I'd refer back to what John said during his comments -- the automotive production is off 8 percent during this quarter while our volumes to automotive are up 4. It doesn't mean we can't be effective as volumes decline on the production side, particularly with Big-Three, but I think we have very good penetration, I think we are on the right platforms, I think we're with the right courses right now, and feel very good about what's going to happen there. We also are very, and I can't give you a percent participation, but we do a lot of transplant business through Tier 1 suppliers and Tier 2 suppliers. So we definitely have some offset and enjoy some of the growth that they have going on as well. And, John, I don't know if you (technical difficulty). Does that answer your question okay, Mark?

Thank you, that's very helpful. And congratulations on solid performance.

John Tumazos, Prudential.

Congratulations on the good results. It's interesting how steel processing had about the same operating income as the August quarter, and metal framing, while it was only about half as much, was still way up, while cylinders was relatively stable -- not a double. I guess we're spoiled if something isn't a double or more; it seems kind of slow. I would just like to confirm first that the costs of steel and procurement practices are identical for each division, and that the difference in performance reflects relative competitive conditions, market conditions in each business, and invite you to elaborate, John.

John, I will take that. This is John Christie. The material cost in each division is not the same, even though our steel company does supply our cylinders company with their steel. However, you will recall that in Dietrich, we have our own processing units in Dietrich. They by both prime and secondary. In rising markets of steel, the secondary processing we do gives us a material advantage over somebody buying all prime. When it got back to steel was 280 or 260, we did not get that advantage. We do get some of that now. However, with our new product lines inside Dietrich and with the shortage of secondary that happens in a tight steel market, we have bought more prime. And I think we're probably buying about 50 percent prime in Dietrich and about 50 percent secondary. Then we track that secondary as to the cost it takes us to convert that to steel to go into our roll formers. So that's a whole different procurement process than we use in steel.

John, let me just add, while clearly everything John said is correct, the other way to also address it is to say I think the leverage we bring in the marketplace we do apply across all business lines. The pricing differentials, as John just told you, are largely the result of different products that are being bought.

Is the grade of steel for the average cylinder significantly different or our competitive conditions significantly different in the cylinder business? And maybe you're selling to somebody like Wal-Mart that doesn't let you raise price when the cost of steel goes up. Could you explain why that business is stable when everything else is just blowing our socks off?

They, I think, worked very aggressively and did pretty well with price increases. But you're also correct; their end markets were difficult to pass it on to completely. It is a special grade of steel. We worked very hard to have it developed with the vendor that supplies it, and have difficulty at times having other people replicate it.

Who is that vendor?

We aren't going to divulge that. I'm not sure why, John just shook his head at me. It is a proprietary product so we'll just leave it alone there. I don't know if you have anything to add to that, John?

Our cylinder is very -- in part of our cylinder business, sometimes we are on an annual contract with the cylinders and we buy steel to support that contract. So there was really a mock locked in margin through the period of time. And we did do a good job of passing on steel price increases in that, but it really just maintained the margin. And we have said over time that the cylinders business is a steady -- we aren't going to see margins fluctuate a lot. It's a steady, consistent business. And when we grow the topline we will also grow the bottomline at a consistent margin. And that was the reason for the Western acquisition which is going to add about 60 to $65 million in topline growth, and we think we can maintain the consistent margin we've had in the past on that new business.

(OPERATOR INSTRUCTIONS). Mark Parr, Keybanc Capital Markets.

Just a follow-up. Is there any color, John, that you would like to give us regarding the outlook for the February quarter, anything in general to perhaps give us some clues as to how we ought to try to put out some estimates?

Mark, I think we'll just stick with where we've been, which is we're not going to give any kind of forward guidance. When we tried to give some of the broader macro look at things, as I said earlier, I think it kind of confused everything. I said earlier that I believe -- you know, you have announced price increases from the mill. I think that's good. And we believe that the economy and the demand out there will support those increases. And as we go into -- through the winter and into spring, I think we're going to see a strong economy and strong demand from a manufacturing standpoint, and provide very steady growth.

Neal Horhan (ph), Info (ph) Capital.

I just had a question. Going through your release -- and I'm sure you've said this on the call -- you did not include any inventory holding benefits this quarter. And then going through, I see that you're saying that there's a widening in the spread between the selling prices and material costs. I'm just wondering if you could clarify that.

There was no widening of the spread. (multiple speakers) year-over-year there was, but as someone asked about getting a trend, spreads or -- margins or spreads narrowed between our first quarter of this year and our second quarter. We kind of peaked just as the steel market did, sometime in the middle of September to the latter part of September. And then prices had come down as we thought they would at our same conference call at the end of the first quarter. And we have seen some margin reduction, but we have also tried to do a very good job of managing our inventory.

So when you say a widening of the spread between selling prices and material costs (multiple speakers)

Last year between this quarter and the same quarter of last year.

Okay. I was just wondering if you could just clarify if that's not from a holding benefit (multiple speakers) just where that's coming from.

Really in the same quarter of last year there was really no holding benefit. We realized that type of a FIFO type of gain. We realized that in the fourth quarter of '04 and the first quarter of '05 were the ones that we had the largest impact. And I will just go back. We said in the fourth quarter of '04 we thought approximately 1/3 of our gross margin and about 1/2 of our operating income (indiscernible) fairly split between processed steel and metal framing came from lower-priced inventory being sold in a higher-priced market. Then in the first quarter of this year, first quarter of '05, that started to reduce. And we said about 1/4 of gross margin and about 1/3 of operating income was coming from FIFO. And now this time we have said that we got the benefit in the fourth quarter, we got the benefit in the first quarter, but we did not get any benefit in this quarter. That has been the history of the FIFO really carrythrough we've had on lower-priced inventory, fourth quarter last year, first quarter this year.

Simply put it simply means that when he talks about spread, that what we buy at and what we sell at compared to last year -- those points have changed and stabilized at those levels, and we've managed to those levels.

Verna Larche (ph), ACI (ph) Capital.

You know, we obviously heard a lot of news about consolidation, further upstream in the steel business. And I was curious if you could comment on what you think the opportunities may be in consolidation in your steel business further downstream in the chain, or whether or not there are synergies to be had? Because obviously it's pretty fragmented. There's a bunch of small cap companies out there like Olympic and Metals USA, and there's a whole bunch of private companies out there that are doing what you do in processing. And I'm curious whether or not there are synergies to be had, like people are seeing sort of upstream in the integrated?

I think you're exactly right when you talk about the fragmentation of the market. It's very difficult. If you intended to go out and roll up a significant portion, 30, 40 percent, it would be a difficult chore. So I don't -- while I do think there will be some consolidation that occurs, I don't think you'll see that kind of mass movement by anybody. I think opportunities exist in specialty niches.

If you wanted to look at strip production, there are a few players that do it well. Things could happen in a specialty niche like that. So we are looking at all kinds of opportunities, and largely looking at strengthening the steel company through either capability additions or geographic, and primarily geographic additions that broaden us out, as opposed to making single large plays. But we're looking and considering everything and I'm sure other people are as well.

At this time we have no further questions.

Again, I want to thank you all for joining us. We're very proud of the quarter we had. I think all of our people did an excellent job and we're very proud of them. And again, I want to thank you for taking the time to be with us, and we look forward to talking to you next quarter. Thank you.

This concludes today's conference. You may disconnect at this time.