Worthington Enterprises Inc (WOR) 2005 Q4 法說會逐字稿

Good afternoon, and welcome to the Worthington Industries fourth quarter and year end 2005 earnings results conference call. [OPERATOR INSTRUCTIONS.] I would like to introduce your speaker, Ms. Allison Sanders, Director of Investor Relations. Ms. Sanders, you may begin.

Thank you, Grace. And 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 home page of our website, at www.worthingtonindustries.com.

With me in the room are John Christie, President and Chief Financial Officer; and Richard Welch, Controller. CEO, John McConnell, is out today with the flu. John Christie will open today's call with a review of financial and operating performance. The session will then be opened to questions from the audience. John?

Thank you, Allison. Good afternoon, everyone. As in the past, we've tried to incorporate a lot of the questions asked over the quarters into our text to help you understand the results of both the quarter and the year better. So for the fourth quarter of fiscal 2005, we reported earnings per share of $0.46. The quarter ended May 31st, 2005, with the second best fourth quarter in Worthington's history, second only to last year. Last year, we reported earnings per share of $0.45, which included the impact of several special charges totaling $0.39 per share, and without which, the fourth quarter 2004 results would have been $0.84 per share. Please note that the press release provides more detail on the impact of these special items for the Company and the business segments.

Fiscal 2005, was the best year in the Company's history, with record annual revenues totaling 3.1 billion and record earnings per share of over $2. Record fourth quarter sales of 817 million, surpassed last year's record sales of 783 million by 4%, and reflect higher revenues in our processed steel products and pressure cylinder segments. Virtually all of that sales increase is due to higher pricing, as volumes, excluding acquisitions and divestitures, were down on a comparative year-over-year basis. The year-over-year volume decline that we experienced is not unexpected given the unusual market activity of last year, when the tight steel market prompted double and triple ordering, which in many cases inflated underlying demand. However, on a linked-quarter basis, we saw sizable volume increases this quarter in all three business segments, which I'll touch on shortly.

Relative to last year's fourth quarter, unit raw material costs have increased more significantly than selling prices, and as a result, spreads have narrowed from the unusually strong levels of last year. The narrower spreads and reduced demand negatively impacted our gross profit margin, which fell from 22%, to a still very respectable 13%. The reduction in gross profit margin is explained by what many have called the inventory holding effect. During the rapid-rising steel pricing run-up of last year's fourth quarter, we benefited from selling lower-priced inventory. We estimated then that approximately one-third of the gross margin was attributable to that benefit. The elimination of the inventory holding gains in the current period explains the change in our gross profit margins.

To digress a moment on this same topic, last year at this time, we quantified our estimates of the benefit of the bottom line of lower-priced inventory in a rising price environment. And please remember that these are estimates at a point in time. That benefit was significant, representing approximately half of the $0.84 per share earned in the fourth quarter of 2004. We are now experiencing the reverse effect, the negative impact of higher-priced inventory in a falling price environment in the fourth quarter of 2005, probably cost us about $0.10 per share. If one were to look at the results of the two fourth quarter periods, excluding these estimated inventory holding gains and losses, this quarter was actually much stronger than the year-ago quarter.

Now, to continue my discussions on the income statement. SG&A expense decreased in absolute dollars and relative to sales, falling to 6.2% of sales, from 7.6% in the year-ago quarter. The $9 million year-over-year decrease is primarily the result of lower profit sharing expense, associated with lower earnings. Quarterly operating income was 55 million, or 6.7% of sales, about half of last year's record results, excluding the impact to special charges in that period. Miscellaneous expense increased $1 million in comparison to the prior year, which was benefited from a $4 million settlement of a hedge position with the Enron bankruptcy estate. A number of smaller items, including the elimination of receivables securitization fees, increased investment income, collectively offset most of that prior period's benefit. Interest expense was also up $1 million, due to higher interest rates and borrowings compared to the year-ago period.

Our equity income came from seven unconsolidated joint ventures which range from entities that are virtually start-ups to those that have been around since the mid-'80s. Quarterly equity income was very strong, at 14 million, down from last year's record 16 million. For the year, equity income reached a record $54 million, up 31% from last year's record 41 million. Collectively, the unconsolidated joint ventures represented nearly $770 million in annual revenues, which were not reflected in Worthington's financial statements. More importantly, they continued to generate strong returns, with annual pre-tax returns on committed capital in the 40% range. To conclude my income statement review, our effective tax rate for 2005 was 38%, which we anticipate will also be the rate for fiscal 2006.

Now, let's go to the balance sheet. Net total debt was 331 million, which is net of 57 million in cash and short-term investments at year end. This is 17 million less than combined net total debt and trade receivables securitizations outstanding at the prior fiscal year end in May of 2004. Our debt-to-capitalization ratio was 32.1, compared to 34% last year, which included the 60 million that was then outstanding under the securitization facility. Debt reduction was made possible by cash flow generated during the year. In addition to paying a generous dividend to our shareholders -- and our yield is over 4% -- we increased earnings this year, supported the rise in working capital, both receivables and inventory, necessitated by significantly higher steel prices.

Inventory remains well controlled, at 57 days, unchanged from last year at this time. In the current falling steel price environment, we anticipate that cash will be generated through the liquidation of higher priced receivables and inventory. These proceeds, as well as our existing cash balance will be available to repurchase shares under our newly authorized $10 million share repurchase program, should the conditions warrant.

Other uses of cash, such as capital spending, remain well controlled. For the quarter, both CapEx and depreciation and amortization were 15 million. For the year, CapEx totaled 56 million, compared to 58 million in depreciation and amortization. For next year, we expect that CapEx, excluding any acquisitions, will be similar to depreciation, in the 60 million to $70 million range.

Now, let's talk about the operating performance of each of our business segments, beginning with processed steel, which represented 56% of our revenue this quarter. Processed steel's quarterly sales rose 5%, or 22 million, to 461 million, from what was a record 439 million in last year's fourth quarter. The year-over-year sales increase was due to higher pricing, up 16%, offset by a volume decline of 9%, due almost entirely to the sale of our Decatur assets. Excluding Decatur, volume was down 2% for the quarter. On our linked-quarter basis, total volume increased by 7%, with increases in both direct and tolling revenue.

In recent quarters tolling business has grown to compromise approximately 45% of total tons processed, compared to 40% last year. Quarterly operating income of 25 million, or 5.4% of sales, represented the second best quarter ever for processed steel, second only to the year-ago period, when they earned 46 million, or 10.4% of sales. For the year, processed steel sales rose 31%, to 1.8 billion, an increase of 432 million, from the 1.4 billion last year. While most of that increase was driven by pricing, volumes, excluding Decatur, were also up 3%. Operating income rose 54%, to $132 million, for the best performance ever of the processed steel segment.

As you know, the automotive industry is an important user of carbon flat-rolled steel, and sequentially, an important customer of this business segment. In the current quarter and for the year, 57% of processed steel's revenues were automotive related. For those companies equipped to meet the exacting needs of this closely-watched customer base, we believe this is good business, and we are not running from it. We will continue to serve this customer base, while growing the rest of our non-automotive business, especially building products at a faster rate. Over time, we expect to see automotive exposure for the Company as a whole, to drop below the current level of 32% for Worthington Industries.

Now to our metal framing segment, which represents 27% of revenue for the quarter. Fourth quarter sales of 223 million were down 4% from last year's record May quarter. Year-over-year volumes were down 13%, but sequential volumes were up 18%, more than the normal seasonal pickup. While, office buildings remained weak, overall commercial construction activity has picked up, a positive leading indicator for metal framing, which typically is used in the latter stages of a project. Operating income of 18 million was down from the record May 2004 quarter, but was easily the second best fourth quarter in Dietrich Metal Framing's history. The operating margin fell to 7.9%, a number more in line with historical averages from the 23% last year.

For fiscal 2005 -- or, fiscal 2005, represented the best year in Dietrich Metal Framing's history. For the full year, sales were up 28%, to 848 million, from 662 million, due to a higher pricing which helped to offset the full-year volume decline of 16%, caused by a weak commercial and office construction market. Operating income grew 70%, to 109 million, from 64 million, for an operating margin of 12.8% for the year.

Finally, in our pressure cylinder segment, which represented 16% of total Company revenue, sales for the quarter were up 18%, or 20 million, from last year. 18 million of the increase was due to the September 17th acquisition of the cylinder's assets of Western Industries, and 3 million to the relative weakness of the dollar to foreign currencies in Europe and Canada, where we have operations. Total unit volumes were down 14%, excluding the acquisition impact. Weakness in the 20-pound LPG market, business which is highly concentrated in the fourth quarter, more than offset the strength of all other product lines in this quarter. Despite the depressed 20-pound season, total unit volumes were up 15% compared to the prior quarter.

Operating income was flat with the year ago, at 11 million, as softness in the 20-pound market and a high steel raw material cost, caused operating margins to decline to 8.7 from 12%. For the full year, pressure cylinder sales increased $80 million, from 329 million to 408 million. While just over half the 24% increase was due to sales from the acquired assets, without the acquisition, sales would still have been up 10%. Operating income grew 7%, to 34 million from 31 million, due primarily to the Western asset acquisition, for an operating margin of 8.2. We believe there are a number of attractive new product opportunities for pressure cylinders, in addition to the ability to generate consistent profitability and excellent returns on capital.

In conclusion, we think this was a great quarter. It was the second best fourth quarter in the Company history. We have and will continue to control inventory. The initial gains -- or the initial signs of an improving commercial construction market are evident. We had decent demand for all of our products. We reduced debt. And we continue to have a shareholder focus through a generous dividend, and now, a share repurchase program. Now we would like to answer any questions.

[OPERATOR INSTRUCTIONS.] Michael Willemse of CIBC World Markets, you may ask your question. Sir, your line is open.

Sorry. Can you hear me now?

Yes.

All right. On the inventory position, you pared it down pretty good in the quarter. How much did your inventory decline on a tons basis?

On a tons basis, we're just about -- we're down a little, on a dollars basis and actually were up. It depends on what segment. In the -- in the steel area -- well, in the overall Company, we're down 6%. Steel is even from where we were last year, and down from the second -- or the third quarter results. Dietrich was probably the highest inventory position going into the fourth quarter, and they pared themselves quite a bit.

I'm sorry, and what's the change on a quarter-over-quarter basis?

Well, in exact tons, I don't have it. On days, I could tell you on Dietrich we went -- really went from -- we went down approximately 9%.

On days.

No, in tons.

Oh, in tons. Okay. Now, given the trend in pricing now, in the -- each division, the steel processing and metal framing, do you think your material costs per ton has peaked yet?

Our material costs really -- the peaks probably came in September and October of last year, or 2004. As a percentage, you're going to have -- the one thing about the inventory position is because we have done such a good job controlling, we probably didn't get the benefit that other people got in the rising market, the early part of the year, because of the lack of inventory that we had to push in the higher prices. However, that is also going to help us control the downside or the back side of the pricing curve as we go into it with a total Company inventory of 57 days. Now, if prices continue to drop, there is going to be effect on margin, with that inventory going through in a lower-priced environment, but we are going to be in very good shape because of the control we have.

Okay. And in your metal framing, if I back out the material costs on a per-ton basis, it looks like your conversion cost improved quarter-over-quarter. Does that make sense? Was there an operating improvement in the quarter? Or was it just because of the -- a higher shipment sequentially?

That makes sense because we have completed the integration of Unimast approximately a year ago. We have moved into the most efficient plants after the acquisition, depending on the two Companies. And so, yes, our operating efficiency has improved.

Okay. And did you give out the tons from toll processing? I didn't catch that.

I did not. I just gave the percentage.

And that was 45%.

Yes.

And what was it last year?

Really around 40.

Okay. And could you just go over, again, what was behind the weakness in the 20-pound propane market?

Well there's a shift in the structure of that channel. We used to do a very large business with the OEMs, the manufacturers of grills. The grills have gone to tank out, a lot of them. We have now shifted more to the exchange systems and to the retail side of cylinders. And as the exchangers build up their float patterns for the exchange, I think they built them up sooner than they would have, because of the change. So our fourth quarter is usually when the OEMs take most of the tanks for spring shipment. That market has shifted over to the retailers, who stock earlier.

Okay. That's good. Thank you, very much.

John Tumazos of Prudential, you may ask your question.

I have a reasonably good respect that Worthington's close to its customers and is a well-managed Company. It makes me wonder about the general economy when same-store volumes are slightly less than all three of your lines of business. Do you think that reflects a general economic slowing -- auto sales not being as robust, construction not rebounding the way many of us thought it would have by this time a year ago? Or do you think your particular customers were trying to hold less materials because steel prices rose so much last year?

I think it's a little bit of all of those, John. I think, definitely, people try to lower inventories, and taking -- thinking that prices were going to turn around, without question. But we actually know that the commercial construction and office market has been down since 9/11, did not rebound as fast as we had anticipated. Now it is showing pickup coming into this first quarter and signs that later in the fourth quarter that the office and the commercial market has picked up a little -- still not near back to where it was prior to 9/11. And I think we can pick up the paper every day and see that North American auto production is going to slow here for the next quarter, at least.

Thank you.

Evan Steen of Eos Partners, you may ask your question.

How are you doing? That was a very nice quarter, given the environment. My question was revolving -- or slanted towards the processed steel. And, obviously, the margins reflect the inventory profits that you had last year and you didn't have them this year. But I was curious, could you explain -- I was a little bit confused why the average price per ton has been relatively flat over the last three quarters, given the volatility in the steel market. And I know you don't give guidance, but are we about to start entering a few quarters where, actually, prices year-over-year will be down year-over-year and volume will be flat, slightly up, slightly down? I would have thought the average price would have -- would have been moving more than just around -- I guess it's around the $500 per ton range.

Well, we have a combination in this business of both spot market and contract market. And I think our relationship with our customers and the way we have treated our customers through this huge spike that took place through, really, late-fall to early-winter, we kept the loyalty of several of our customers. And now, as prices are going down, I mean, we have renegotiated some of the contracts starting in the early part of the year. It used to be that we would say our contract versus spot was 50, 50. I think that has changed going into this year because, as the anticipation of where prices were and where they might go. So we probably have more quarterly business right now than we did, what we had called extended terms, over six months. So it's hard to extrapolate from that, because of our maintaining those spot end market and our contract and our loyalty to the customers that we have tried to show through a very tough time, not only of peaking prices, if you recall, a year ago, there was also an awfully tight market for steel demand, and we tried -- we did get all of our customers steel.

Okay. But -- but if I -- if I went out -- went out one or two quarters, is it fair to say that you're going to start cycling here, where sequentially and year-over-year, we're going to start to fairly quickly see some quarters that actually the average selling price on a year-over-year basis is going to be negative as opposed to positive?

You mean from the previous quarter?

Both from the previous and the year-over-year.

Well, it depends on what steel pricing is doing. But if steel pricing continues to go down, we -- you are going to see price per ton go down for us. But you also see material costs go down.

Right, no, I know it's about the margin.

We are in the margin business.

Right. No, I know it's the margin along with the tons. Okay. And then my only other question was -- you announced -- the announcement of the stock buyback, that's a substantial percentage of the shares outstanding. Was it -- maybe you could tell me over the course of how many years and in addition to that, at what -- what point you -- you feel your stock is attractive enough that you'll -- you'll use that free cash flow to buy the stock, as opposed to making acquisitions or paying down debt? Or maybe the metrics on when you start to pull the trigger? A lot of times, companies make announcements, but it's unclear at what point, when, or how quickly or how slowly they're actually going to commit to the share buybacks they have announced.

The last time we did this was we made the announcement in 19 -- I think '99, and we bought back up to around 7 million shares through about 2001 or 2002. We did it over time. We are going to do it when it is prudent to do it. There are acquisition candidates out there. There is a dividend requirement for our stockholders. And we will make that decision, which is in the best decision for the stockholder to maximize their value. There is no set number.

Okay. Fair enough. Okay. Thank you, very much.

[OPERATOR INSTRUCTIONS.] Dick Henderson of Pershing, you may ask your question.

Yes, John, I had a question on your automotive business. Could you tell us the importance of the heavier vehicles, that is, the SUVs and the -- and the -- that comprise the light vehicle market? And with the shift of mix to lighter vehicles, what impact that would have on you guys?

Well, I couldn't tell you specifically, but we, like everybody else that would supply the auto industry, have been supplying into their hot models, so to speak. There are new models coming out, and they are transforming that. And our work is actually picking up with certain areas, based on the new models coming out in 2006. So naturally, I would say that we had items going into the SUVs, but we are also going to have steel going into the new models. I can't give you a breakdown on that.

Okay. Fine. And along those lines, have you guys been making progress in securing business with the transplants?

Oh, we have been making progress, yes.

Last question. On the -- your framing business, could you comment on the trends in the residential side?

We see positive trends on the residential side. Of course, it's slower than we would like. We'd like everybody to convert the steel housing tomorrow, but on the military housing side, we see a strong conversion to the military housing side. We see in areas where building codes have changed that there is movement to -- particularly interior walls, Florida, almost all the housing is going to interior wall metal framing. We see a movement in Southern California. So we're excited about it. It's slower than we want, but we do see the movement starting.

Okay. Thank you.

Michael Willemse of CIBC World Markets, you may ask your question.

Yes, I just had one more question on the cylinder market. Just, can you give us a picture of what the competitive environment is like now? Are you seeing more incomp -- foreign competition in the cylinder market?

Not really. We have a strong market position. We have added to our customer base. Our market share across all product lines is very strong. And in that market, we have added new product lines over the last two years, and we have been able to bundle products across several ranges of pressure vessels. And so we aren't seeing the heavy competition from foreign product in those markets.

Do you see the potential for Asian suppliers to come in the market and be pretty competitive? Or what's that look like right now?

I think there's always potential, but it's hard to ship air at a -- empty tanks at a reasonable cost. So I think we know they're there. We are working on our costs every day, to be competitive. And we aren't worried. I mean, we're worried, but we can beat them at this game over here. Okay. Thanks.

Patrick Anderson of LCG, you may ask your question.

Hi, thanks for taking my call. Since you -- just going back and not harping on spreads, but just trying to get a better sense, you first said that the gross margin of 13% was pretty respectable. And that's with the higher prices that we're currently seeing, whether it be on a per-ton basis in processed steel or in metal framing. Is -- I guess, when you think of this spread that you should be earning, can you put a dollar term on it? If -- if I look at the per-ton basis for processed steel, it was $26 of EBIT -- EBIT per ton, which is still very good with competitors or with even historical levels. Can you talk to, sort of, excluding all of this inventory, up or down, where you think the cost structure positions you today?

Well, I would tell you, I'm glad to hear you ask that question about percentage, because with steel prices going up and down and the cycles becoming shorter, a percentage is not a very good accurate number. We do have a target number for margin. That's in dollars, but I am not going to talk about it.

Okay. Is there -- is there anything you can talk to in regards to -- you said you lost probably about $0.10 this quarter due to falling steel. With a lot of the news of hot-rolled coil falling to the low-400 level -- or low-400, maybe 450 level, what would -- is there a way to quantify what we should be thinking about for fiscal year '06, if it stabilizes there, what sort of impact that would be? I guess I look at the inventory you have and I could take a percentage of that, but -- but I know a lot of your business is contracted so that's not quite accurate. You're not going to necessarily not sell those tons that the contracted -- or some of that inventory will be sold at contracted prices, so that inventory isn't really at risk. Is there a way to think of, is 50% of that inventory potentially at risk? Or can you help me think through that?

Well, it's different. We have FIFO accounting in both cylinders and Dietrich. We have identified coiling in steel. I really can't help you think through that, other than we are a margin business and we know the dollar amounts that we have to operate under on the spread between our cost of material and our selling price, and that's our target. And as you or the gentleman before that said, percentage doesn't mean anything, it's constant dollars, and that's our target.

Okay.

But I'm not going to get into detail on that.

Okay. I just look back to 2001 to 2003, and EBIT per ton was 10 to 20, but I know that you've also lowered OpEx per ton today. 93 is better than the operating expense of around 100 per ton in that time frame. Is that difference going to be additional to -- or have targets changed? Has mixed changed in any ways?

Well, if you look back and you're trying to do a trend of Worthington steel over the last ten years, we spent about $1.2 billion from '96 through 2001, and we had some great successes in the galvanizing area. And then our charge or our extraordinary item last fourth quarter was the Decatur cold mill that we had sold.

Yes.

As we had that in operation from '98 to when we disposed of it. The spreads between cold roll and hot roll in that plant was doing between 200 and 250,000 tons. That skewed our average margin as the way we put it in segment reporting. So it's very hard to go back and get a trend line. That -- that facility is no longer in our portfolio. We're back to the strength, which is processing and forming hot roll product. And so I think the trends that we're establishing now should be able to continue.

Okay. And finally, the debt-to-cap ratio, do you think it's appropriate for Worthington? Did you feel that in any way you're under level -- levered?

I think it gives us the opportunity to be as flexible in a market where there are going to be opportunities to make acquisitions or to buy back stock. And I think that our balance sheet is as strong and makes us as flexible as we've been in a long time.

Okay. Thank you.

Evan Steen of Eos Partners, you may ask your question.

Yes, just a follow-up question with regards, you mentioned some people were talking about the auto, and from a distance, given your exposure there and what the results have been there, they're extremely impressive. I was just curious if you could give us a little bit more color on how -- I think at some point in the past you said -- I forget, maybe 15% of your business, of your steel segment was with the big three -- and everybody sees the cutbacks they're making -- how you've been able to be successful in that business, either with getting on the new platforms of the big three or expanding your business with the transplants, and how you will be able to continue that in the future?

Well, we don't have a single customer in Worthington Industries that's more than not -- 3.9% of our total sales. So the diversity of our customer base is great. The direct business we have going to the big three direct is less than 10% of our total sales. Now, we know that a lot of material that we send to the tier-1s and tier-2s are absolutely directly tied. But we are a Company that has spent a lot of money -- I mentioned the amount of capital we spent on upgrading and new equipment. We also have always prided ourselves on a great sales team and a strong metallurgical and engineering group attached to that sales team. So we work very hard at materials substitution, of finding ways for those people, in particular, to take costs out, which is their driver. And I think that's where our Company has been quite successful over the last three or four years with helping them in their mission of taking costs out. And so we are doing more volume than their production figures show because I think we're adding value to it. That's what we're doing.

Okay. But from a strategic -- from more of a five-year outlook, their market share, obviously, has been declining fairly consistently. So in order to grow the business, you either got to do more business with them, as you have been, or you've got to continue to do more business with these transplants. Could you talk a little bit with regards to the transplants? And I have no idea what percentage it is today. But how that might look or what you're doing there to focus on that area from a five-year perspective?

Doing business with the transplants is a long-term perspective. We probably didn't do the -- a good job in the mid-'80s and the early-'90s of trying to penetrate that business. We are certainly doing that now. We have got a foothold in that. And we are growing the business. I'm not going to get into the percentages we have with them, but without question, it is a market that we are going to grow in, and we -- starting about seven or eight years ago -- are taking a slow and consistent and high-quality approach to doing more business with them.

Okay. Okay. Thank you, very much.

Sir, at this time, I have no further questions.

Well, hearing no further questions, I appreciate everyone being on the call today. I'm sorry that our CEO, John P. McConnell, was not with us, as we usually have some very good closing comments by John. But since he's not here, I thank you all very much, and we'll see you next quarter. Thank you.

Thank you for participating in today's conference.