Worthington Enterprises Inc (WOR) 2007 Q4 法說會逐字稿

Good afternoon, and welcome to the Worthington Industries fourth quarter and year and earnings results conference call. All participants will be able to listen only until the question-and-answer session of the call. This call is being recorded at the request of Worthington Industries. If there are any objections, you may disconnect at that time. I would like to introduce your first speaker, Ms. Allison Sanders, Director of Investor Relations. Ms. Sanders, you may begin.

Thank you, 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 today are John McConnell, Chairman and Chief Executive Officer; John Christie, President and Chief Financial Officer; George Stoe, Chief Operating Officer and acting President of Dietrich Metal Framing and Richard Welch, Controller. John McConnell will begin.

Allison, thank you, thank all of you for joining us today. Relative to your expectations we delivered an excellent fourth quarter. We did so during a difficult environment with softer than normal demand in two major business segments, processed steel and Dietrich Metal Framing. Worthington Cylinders and our WAVE joint venture continued to produce very strong results. We ended fiscal 2007 recording the third-best year in our Company's history in spite of an extremely weak third quarter. I am going to turn the call over now to John Christie to review our financial performance.

Thank you, John. Good afternoon, everyone. We reported fiscal 2007 earnings per share of $1.31 compared to fiscal 2006 earnings of $1.50 per share, which excluded a $0.14 per share benefit from the gain on the 2006 sale of our Acerex joint venture in Mexico. The strong fourth quarter just ended helped to offset a weak third quarter; as a result, as John said, the full-year ended up being the third best year in our history. Earnings per share of $0.45 for our fourth quarter compared to the earnings of $0.53 per share last year, excluding the $0.14 per share benefit from the Acerex gain as I mentioned, were $0.67 on the reported basis.

Fourth quarter sales of $787 million were off 4% from last year's record fourth quarter sales of $822 million but up 16% from our third quarter. The sales decline compared to last year was due to reduced volumes in steel processing and metal framing segments, partially offset by record volumes in pressure cylinders and generally higher pricing. The sales increase compared to the third quarter reflects record pressure cylinders volumes, as well as seasonal volume increases in all three business segments.

Our gross profit margin fell to 12.7%, just over one percentage point from the year ago quarter. The decline was primarily due to lower gross margins in the metal framing segment. SG&A expense decreased by $1 million compared to the year ago quarter despite rising slightly as a percentage of sales.

Quarterly operating income was $42 million or 5.3% of sales, down from $55 million or 6.7% of sales last year. Most of the shortfall was in metal framing partially offset by strong results in pressure cylinders. Operating income does not include equity income in six unconsolidated joint ventures. The most significant of which is WAVE. Quarterly equity income was down $4 million mostly due to weaker results at our automotive related joint ventures, TWB and Worthington specialty processing as well as last year's sale of the Acerex joint venture. But WAVE's results, which were just shy of the quarterly record they set last year did set another annual record as they have each year for more than a decade.

WAVE added some leverage to its balance sheet during the quarter. That financing and strong cash flow made possible sizable dividend payments to the partners. We received $41 million in dividends from WAVE and an additional $4 million from the other joint ventures in the quarter just ended. For the year our joint ventures in total provided dividend income of $132 million.

Income tax expense declined $23 million due to lower earnings and a much higher tax rate in the prior year associated with the gain on the Mexican joint venture. The effective tax rate in the current quarter of 25% was also lower due to a greater mix of foreign earnings, taxed at lower rates and the year end true up tax adjustment. The current estimate for fiscal 2008 effective tax rate is 33%.

Turning now to the balance sheet, net total debt was $213 million, a modest increase of $19 million from last fiscal year end but down $113 million from the February quarter. At the quarter end our total debt to capitalization ratio was 22.8% compared to 21.1% at the end of fiscal 2006. Operating cash flow was over $130 million for the quarter due to earnings, the joint venture dividends and working capital generation, which included a reduction in inventories.

For the year and the quarter capital spending is essentially in line with depreciation. We expect fiscal 2008 CapEx and depreciation to be similar to that of fiscal 2007.

Now to speak more specifically about financial results by segment, beginning with steel processing which represents 46% of total revenues this quarter. Fourth quarter results in steel processing were significantly improved from a weak third quarter. Compared to last year's fourth quarter steel processing quarterly sales fell 14% to $360 million from $418 million. The sales decline was caused entirely by lower volumes which were down 14%.

Automotive and construction, the two major end markets served by this segment were weak compared to the prior year. The spread between average selling costs and material costs expanded despite the much lower volumes primarily because of the positive impact of PSM's stainless processing business we acquired in August of 2006. As a result, quarterly operating income for the steel processing fell just $3 million to $15 million this quarter. For the year steel processing sales fell 2%. The sales decrease was due to 9% lower volumes, partially offset by an 8% improvement in average selling prices, again due mostly to the acquisition of PSM. Operating income of $55 million for the year was down 10% from last year.

Now turning to our metal framing segment which represented 25% of revenue this quarter. As with steel processing, metal framing's results were significantly improved on a sequential quarter basis as higher priced inventory was depleted, and there was some seasonal strengthening. However, unlike steel processing, Dietrich's results were still much weaker than normal. This business segment remains challenged by the increased number of low-cost competitors, the attractive pricing of alternative materials and the residential building slowdown. Compared to last year's fourth quarter sales fell $23 million to $196 million. The sales decline was the result of lower volumes, which were down 8% and lower pricing which was down 3%. The spread between average selling prices and material costs fell 26% compared to the year ago quarter but recovered 37%, on a sequential quarter basis approaching a more normal level.

Operating income was essentially breakeven, representing a significant turnaround from the $22 million loss last quarter. Dietrich ended the year with a $9 million operating loss on sales of $771 million. Sales for the full year were down 3%.

Finally, in our pressure cylinders segment which represented 21% of total company revenue, sales for the quarter were up $32 million from the last year to $169 million. Volumes were strong in virtually all productlines, up 10% for the overall segment. Volume growth and higher average pricing contributed to record profitability. Operating income increased 29% to $26 million, and the operating margin as a percentage of sales rose from 14.7% to 15.4%.

For the full-year pressure cylinders sales increased 18% to $545 million. Operating income grew 72%, beating last year's record of $49 million. It is clearly an exceptional year when profitability exceeds the prior year record by 72% as pressure cylinders did in fiscal 2007. Now I would like to turn it over to George Stoe.

Thanks, John. I'd like to open with two key points regarding companywide initiatives before I provide a metal framing update, which I know you're all interested in hearing. First, our focus on providing our employees a safer work environment continued to reap financial benefits. Workers compensation claims are down 31% or $1.2 million savings compared to the prior year. Treating our employees as we would like to be treated, accepting nothing short of driving to zero accidents is in everyone's best interest.

Second, we told you during last quarter's call that we were implementing more robust inventory controls in all three business segments. Days in inventory for the whole company were 62 days at the quarter end, down from 68 days at the end of our February quarter. I am pleased to report that our inventory levels at the end of fiscal 2007 were precisely where we planned them to be. With the leadership of Bob Mowery, our Corporate Vice President of purchasing and the team he has assembled, we have made great improvements in our purchasing and inventory practices. We will continue to see improvements in those areas.

Now regarding Dietrich Metal Framing. As we announced on June 5, I was named interim President of the metal framing segment upon Ed Ponko's resignation. I am devoting my full-time efforts to this position. My approach will be similar to the one I took with steel processing during that transition, and I expect to hand off to a new President in the same fashion with me having a clear understanding of the business, running the business and maximizing its performance.

Only a short time into a broad and intense review of the business I share the view of all of us in this room. We have great confidence in the products and people of Dietrich Metal Framing, and we believe their ability to restore this segment to a strong contributor of our future earnings. I am working closely with the Dietrich management team, which includes our new VP of sales, John Roberts. John's industry knowledge of our customer base from his former position at head of national accounts with Owens Corning is making him a strong early contributor to our management team. We are well into a review of the business to thoroughly understand our current state from a customer, product, cost of delivery and manufacturing footprint perspective to make it stronger. That effort is ongoing and intense.

We stated during last quarter's call that we expected Dietrich to be profitable during the quarter. While the results were still below our expectations, we were able to turn a significant third quarter loss into virtually breakeven results in the fourth quarter. It is clear that market conditions remain challenging while office construction is up year-over-year it is not consistent in markets across the country, and high-rise multi-family construction is down some 25% year-over-year.

Also the slowdown in residential construction is hurting sales in our accessory line of corner bead, lath and vinyl. Along with reduced demand, we are facing a significant increase in the number of competitors; having said that, we are developing a plan to maximize our market leadership position. The rollout of UltraSTEEL is now complete in all drywall product lines. Importantly, all of the necessary code approvals in the US have been granted for UltraSTEEL. In addition, our sublicensee, Clark Western, continues to rollout UltraSTEEL in their markets.

In summary, we expect our metal framing segment to continue to improve in spite of growing competition and weakness in the residential sector. Our steel processing business will also continue to improve based on their cost reduction efforts and their focus on increasing volumes. They have been successful in creating 72 net new accounts adding to our goal of diversifying their customer base, and we expect continued strong results in cylinders and our joint ventures going forward. I will now turn it back over to John McConnell.

George, thank you. I said in my opening that we performed very well relative to the consensus view for the quarter, and we did. We did not, however, live up to our own expectations. We are obviously very proud of our cylinder group and the WAVE joint venture as they continue to deliver excellent results; and we can and we will improve the overall performance of our other core businesses.

We made several leadership changes over the past several months, including the Presidents of both our steel and metal framing businesses. You read in our release this morning that we are going to permanently remove $35 to $40 million in cost from the organization. We will do so through a combination of facility closures, productivity improvements and employment reductions.

Every operating division within the organization has been assessed and underperforming locations will be closely monitored through the year to ensure they are meeting higher and clearly understood expectations. In the case of metal framing, we were close but we failed to bring the operation to profitability, which was our stated goal. We have made George Stoe acting President of Dietrich handling the leadership transition as we did with Worthington Steel. Broadly speaking we have many good people and good products in this business. We are confident in our ability to return this business to be a strong and solid contributor to the Corporation.

We will have more to say on Dietrich in the September call. Simply put, we're going to reduce our cost structure, drive improvements in underperforming areas and improve our overall performance. Our balance sheet is strong and will support our initiatives to drive increased margins and increased value for the organization and for our shareholders. At this time we would be very happy to address any question you might have.

(OPERATOR INSTRUCTIONS) Michelle Applebaum, Michelle Applebaum Research.

First of all, can we talk about Dietrich? I am presuming that a lot of what you're talking about, the $35 to $40 million in cost reductions are coming from Dietrich?

Everybody, Michelle, is going to be in the process of review, including Dietrich but I would not target all that there. And as far as how we're going to go about that, we have some extensive employee communications out in front of us yet and beyond that, so we are really not going to get into a lot of detail.

Okay, if the review process hasn't been completed how do you get to 35 to 40?

That's what I'm saying. We know what we're going to do, and we know how we're going to go about it but we have a fairly extensive communications in front of us internally, and we need to do that before we start.

Got it. Can you give some guidance in terms of what the impact on the revenue potential of the Company will be from some of these changes? Because when you talk about closures I know you lose potential to revenue.

I don't expect there to be a potential, much impact on the revenue side. We're going to be focusing on the margin side more than top line, but I don't expect that to be an issue.

You stated a goal of acquiring in steel processing and we talked about consolidating in steel processing. And your second largest competitor in that business just went to another company, so that won't be consolidated. And then there have been some other kinds of transactions. What are you doing along that front, and why is consolidation in steel processing not happening?

I really can't answer the latter question for the industry, but generally speaking our focus again in the steel company -- and we did I think two quarters ago or last quarter talk about keeping an eye on that in our industry and taking a look at some of our competitors whether it made any sense or not. But again right now we are really focused on getting our margins back in the steel business to the area that we would like to see them. And it is unlikely there would be any certainly significant moves in consolidating with our competition.

Then also, my last question at least for this go round is you had I think guided to a 33% tax rate in the quarter and it ended up being 25%, and that provided a nickel. What was the difference in the tax rate?

Michelle, the amount of income, you saw the increase in operating income in our cylinders division, about .

(inaudible)

Right, about 50% of that is coming out of Europe and it is taxed at a much lower rate than here. So it is the size, the percentage of the income coming out of Europe.

Okay, so you had a big surprise then in Europe?

Europe had a much -- had a great fourth quarter, yes, more than we expected.

Was any of that currency?

For the quarter currency was about $1 million.

Okay, thanks. I'll let someone else have a turn.

Michael Willemse, CIBC.

Thank you. To your comment on new competitors entering metal framing, if your competitors would look at your results the last couple quarters I would be surprised if they would want to be entering the segment right now. Why are there are new competitors going into the business?

When we talk about new competitors we're really talking about from 2005 forward. They aren't -- there is no huge proliferation right at the moment, but if you look back to kind of late '04 '05 and actually for the same season you're talking about; if we looked at the results in the industry generally they were very robust and induced other people to come into the market. And I think you're also correct they would not have seen much new generation here in the last six to nine months, 12 months.

So would you assume that some of these competitors coming in are probably experiencing challenging times, as well?

I would assume that they are. A lot -- and when we talk about it, a lot of them are relatively small if not even just running one roll forming line. So the infrastructure they have to support probably isn't very high and can run easily from cash. But I suspect the reason that they came into this market has certainly greatly diminished.

Okay, and I would assume that some of your competitors in steel processing are struggling right now, as well.

I think when we look inside at the direct competition we feel our performance is okay. And so I would guess their performance is some of them are worse and some of them may be slightly better than steel right now, so we have some room to get better there.

Have you seen many exiting? Some of the smaller players exiting the industry yet or do they still have a decent amount of cash built up from say two years ago?

I can't address the last question, but there are certainly opportunities in the market if you wanted to enter with people looking to exit.

Just on the cylinders business, the volumes kind of move around quite a bit quarter-to-quarter. Obviously the seasonality is part of the reason there. When we look at seasonality is it safe to assume that in the last quarter you should hit about 30% of volumes out of the full year? Or how should we look at -- going forward what should we think about your best quarters for cylinders and your kind of lowest volume quarters?

When you look at volume you're looking at units, and our unit mix has changed a lot over the last three or four years. If you noticed a press release we did about adding more consumer oriented product to the line. We have just introduced another direct consumer product. We have switched our twenty pound tanks from an OEM to more of a retail exchange business. So the cyclicality is going -- we had back when we used to build up twenty pounders in the early spring for the spring shipments, I think that whole pattern for us is changing. So I wouldn't want to put a stake in the ground right now on how that would be.

What do you think volumes will do in the next quarter just given all the seasonal impact?

Certainly in my experience with the cylinders business our strongest two quarters were normally of the calendar year, not our fiscal year -- the second and third quarters were the strongest -- the fourth and the first quarters were slightly weaker. As John said, that has changed somewhat with the change in some of the product lines we have. And I think also some of the volume numbers that you look at are a little misleading. We bought that business up in Wisconsin a few years ago, and there is an awful lot of volume there that sort of distorted that picture. We have those small, one pound propane cylinders that greatly changed those numbers during the time that we acquired that.

One last question. Your sales and other were up quite a bit in the quarter. Any particular reason you can point to?

Two, really. Our Worthington integrated building systems group has increased revenues and also Gerstenslager, which is our metal stamping operation also improved during the quarter over last year.

And do you think that is sustainable, the improvement you saw in both businesses?

Yes.

Okay, great. Thank you.

Sal Tharani, Goldman Sachs.

Good afternoon, guys. Can you give us some view on the demand side on the process steel sector? Generally the last couple of years generally August quarter has about a 10% decline in the volume. Are you seeing some unusual weakness in there, or you think it is just a normal seasonality?

It wouldn't be normal seasonality. We just came out of what would typically be a very strong period but relative to our third quarter, obviously it was much stronger. But not nearly as strong as this quarter typically would be volume wise. There is definitely softness in the market. And I read your release this morning so I know you believe it is soft in automotive and construction, and I would say you are correct.

But we don't see it getting much softer than where it is; we will see how everything goes forward. There is certainly a lot of headwinds out there economically right now and some uncertainty so that may drive into some other things, but the volumes at the moment are pretty soft in different areas. And that is why we have to get very aggressive about our sales effort and as George pointed there is 7 net new accounts this past year. That is a result of that kind of focus, and that will help us grow this business and improve the margins over time. '

And, how are the pricing? What are you seeing in the pricing on the flat side?

Pricing, well you read about it as much as I do with that stuff. I think that again, we talk about this every quarter, but the mills have certainly demonstrated an ability over the past 12 months to maintain pricing, not directly relative to demand. So I would think that as if it were to soften further the prices may drift down some but I don't think you're going to see any big radical fall off a cliff kind of move out there. So we are kind of viewing pricing to be fairly stable going forward. I think that is in everybody's best interest longer-term.

That's great. Thank you very much.

Chris Olin, Cleveland Research.

Just a little more clarity on metal framing. I guess what you are really describing doesn't seem like a great environment. When do you think metal framing can get to a positive EBIT margin once again, and how are you going to get it there?

George, why don't you take that? Again keeping in mind that while George has always been working with metal framing and familiar with the markets to some degree has really begun to get not underneath the covers, we're taking the covers off the bed here. So George, you can go ahead and address that.

Chris, I think that we certainly look during this last quarter that our volumes were off probably slightly from where we thought they would be. As you know, there were several price increases announced during the last quarter. There was one at the beginning of March, another at the beginning of April. And the softness in the marketplace didn't allow us to capture all of those increases.

We believe that the continued strength of the UltraSTEEL rollout that we have is going to continue to gain position for us in the marketplace. We think that is going to help us going forward, and obviously we are going back to basics with the customers we've had in the past in an effort to try to regain some of the share that we've lost during the last year or so.

Can you help me out in terms of a goal to get to a positive margin? I'm assuming that is going to take a couple quarters.

No, it won't. I expect us to be profitable this quarter.

Okay. Thanks a lot.

Timothy Hayes, Davenport & Co.

Two questions on metal framing. During the quarter what was your mix of buying secondary versus primary? I know you changed that mix in the prior quarter, doing very little secondary buying. What was that mix in this recent quarter?

We were probably in the neighborhood of about 35% for the quarter of secondary purchases. (multiple speakers) We are shipping between 30 and 40 million pounds a month of the UltraSTEEL product. So I have heard some questions in the short time I have been involved asking us about UltraSTEEL and the success, and we feel very, very bullish about that product going forward.

Right, and on UltraSTEEL I thought one of the competing advantages that you'd be able to make it make out of the thinner gauge and therefore actually keep your costs lower. But yet you cite that new competition is at lower costs. Are they doing it through some other technology or why are smaller new startups able to come in and be so effective on the cost side?

Well, I think there is two things. I think, as John mentioned earlier, there are some people that have come into the marketplace that have one or two roll formers to be in the business. And quite frankly, there are parts of the country where there are people that are in the marketplace where they are supplying material that doesn't meet specifications. That is something that Dietrich and Worthington Industries refuses to do. And will never do.

And then on the two other questions, PSM, what is their percent of volume out of the steel processing segment?

It would be very small. I don't know if somebody's got a percentage, but it would be -- it is very small.

Last question on the P&L, the miscellaneous expense, was there something unusual there because it seemed a little higher than, a bigger expense than normal.

We did some accounts receivable line borrowing where that goes in there. Plus we had less interest income as opposed to last year, we were in a cash position for quite a bit of the last year until our inventory buildup at the start of the first and second quarters. So the difference between less interest income and some borrowing costs on the accounts receivable line. And then our earnings, that is where we pay our partner, and our earnings from one of our joint ventures, the Spartan joint venture.

Okay. Thank you.

[Phil Gibbs], KeyBanc.

I am actually on the call with Mark Parr, and we had a question regarding how many days of inventory the steel processing segment had as of May compared to February; and then what should we expect over the next three months.

I think that was in George's remarks, so George.

That was total for the company.

Sorry.

I believe that -- I have to go back and check this but I believe that at the end of the fiscal year our number was like 66 days inside the steel processing company, and back in February I think it was probably 71 days.

Okay, and directionally looking forward for the next few months?

As I said, we had our inventories at the end of fiscal year precisely where we wanted them to be. And we will just adjust that as seasonal needs come into play, but we feel we've got all the inventories in the three major businesses exactly where we think they should be going forward.

Thank you very much.

(OPERATOR INSTRUCTIONS) Michelle Applebaum, Michelle Applebaum Research.

Thanks for letting me have another turn. I have two questions, follow-up. You were talking about the steel prices, and you said that you don't think steel prices are going to be falling much anymore on a kind of longer-term basis?

I said I didn't expect that they would fall off a cliff.

Off a cliff, okay I was just wondering if you can quantify what off a cliff means.

It would be a long fall, wouldn't it. I don't think you will see pricing get anywhere near 450, for instance. I think that would be falling off a cliff.

Will prices drop from -- where have they been -- where is the high recently, 580?

580,595, in that neighborhood, Michelle.

So you don't think they will get to 450?

No.

Okay, and what is your kind of -- it sounds like that is sort of long-term multiple revaluation kind of argument that the mills are making. What is your kind of near-term outlook for the direction of pricing? And then in particular what kind of pricing opportunities do you think there are going to be with the automotive side, which is so critical for you?

Well I think I said earlier that I think in the near-term they are definitely soft. You may see some downward movement in price. I don't expect it to be very much. I think it will be incremental and gradual if it occurs. Opportunity in pricing with automotive, I am not sure really what you are asking me.

Just because a lot of that is contract and you start negotiating that the end of summer, early fall and I know you are kind of -- you try to lock in spreads. Where are opportunities in that business? Is it about the same it has been or are there any kind of improvements in that?

I think our opportunities to look at the margin side of this are internal as much as anything. I think we can lower our cost and perform better than we will have to meet in the marketplace on a pricing basis. We have good opportunities I think with all the automotive companies. We have good relationships there. We continue to be a key player in their supply chain and look forward to continuing to do so.

Okay, great. Then my other question was, and I hope I know the answer to this already, but when companies go through kind of restructuring and kind of thing that you are talking about sometimes you are putting losses from operations into other accounts. There was none of that in the quarter because you haven't identified anything, right?

That's correct.

Okay, cool. Very good. Nice to see the results.

Thank you.

At this time I am showing no further questions, sir.

Thank you very much, and again thank you all for joining us. We will continue to report back to you in our progress on the cost side as well as our efforts to expand our markets and our margins in the future. We feel very good about the performance this quarter, and we will continue to build on that as we go forward. Thank you all very much.

This concludes today's conference and we thank you for your participation.