Worthington Enterprises, Inc.

Welcome to the Worthington Industries first quarter fiscal 2024 earnings conference call. All participants will be able to listen only until the question and answer session of the call. This conference is being recorded at the request of Worthington Industries. If anyone objects, you may disconnect at this time. I'd now like to introduce Marcus Roge, Treasurer and Investor Relations Officer. Mr. Roge, you may begin.

Thank you, Julianne. Good morning, everyone, and welcome to Worthington Industries' first quarter fiscal 2024 earnings call. On our call today, we have Andy Rose, Worthington's president and chief executive officer, and Joe Hayek, Worthington's chief financial officer. In addition, we also have Tim Adams, who is currently the vice president of strategy and corporate development for our steel processing business, and who will become the CFO of Worthington Steel after we complete the planned business separation. Before we get started, I'd like to remind everyone that certain statements made today are forward-looking within the meaning of the 1995 Private Securities Litigation Reform Act. These statements are subject to risk and uncertainties that could cause actual results to differ from those suggested. We issued our earnings release yesterday after the market closed. Please refer to it for more detail on those factors that could cause actual results to differ materially. Today's call is being recorded, and a replay will be made available later on our worthingtonindustries.com website. At this point, I will turn the call over to Joe for a discussion of the quarterly financial results.

Thank you, Marcus, and good morning, everyone. We started the fiscal year with a strong quarter, reporting Q1 earnings of $1.93 per share versus $1.30 a year ago. There were a few unique items that impacted our quarterly results, including the following. We incurred pre-tax expenses of $6 million, or 9 cents a share, related to the planned separation of our steel processing business into a new public company, which we are now targeting to complete as early as December of 2023. We took advantage of our strong cash balance, using $244 million to pay off our 2026 bonds. The early extinguishment of debt resulted in a $2 million pre-tax, or 2 cent per share, non-cash charge, as the debt was called at par. We recognized $1 million in pre-tax or $0.02 per share of impairment charges in steel processing related to idle equipment that we no longer use, as compared to a $0.02 per share restructuring gain in the prior year. In addition, the prior year quarter was negatively impacted by $0.33 per share due to several items, including a loss on the divestiture of Artiflex, a pension settlement charge, and expenses related to an earn-out at Level 5. Excluding these unique items, we generated earnings of $2.06 per share in the current quarter compared to $1.61 per share in Q1 of last year. In addition, in Q1, we had inventory holding gains estimated to be $15 million or $0.24 a share compared to inventory holding losses of $2 million or $0.03 per share in Q1 2023. Consolidated net sales in the quarter of $1.2 billion decreased 15% from the prior year due to lower average selling prices in steel processing combined with lower volumes across most of our segments. Our gross profit for the quarter increased to $197 million from $169 million in the prior year, and our gross margin increased to 16.6% from 12%, primarily due to improved spreads in steel processing. Our adjusted EBITDA in Q1 was $165 million, up from $140 million in Q1 of last year, and our trailing 12-month adjusted EBITDA is now $539 million. With respect to cash flows in our balance sheet, cash flow from operations was $60 million in the quarter, which we achieved despite the $73 million increase in working capital levels, primarily in our steel business. Free cash flow was $30 million in Q1. During the quarter, we invested $29 million on capital projects and paid $16 million in dividends. We also received $65 million in dividends from unconsolidated JVs during the quarter, a 119% cash conversion rate on that equity income. Looking at our balance sheet and liquidity position, funded debt at quarter end of $448 million was down $244 million sequentially due to the payoff of our 26 bonds that I mentioned earlier. Net interest expense of $3 million was down by $6 million, primarily due to interest income we earned on our cash balances and, to a lesser extent, lower average debt levels. We continue to operate with extremely low leverage, and our net debt-to-trailing EBITDA leverage ratio remains under 0.5 times. We believe that we're well-positioned for the future with ample liquidity, ending Q1 with $201 million in cash and $500 million million in availability on our revolving credit facility, which was recently amended to extend the maturity to September of 2028. Yesterday, the board declared a dividend of 32 cents per share for the quarter, which is payable in December of 2023. We'll now spend a few minutes on each of the businesses. In consumer products, net sales in Q1 were 149 million, down 21% from 189 million a year ago. The decrease was a result of lower volumes, which was partially offset by favorable product mix and higher average selling prices. Adjusted EBIT for the consumer business was $9 million, and adjusted EBIT margin was 6% in Q1, compared to $21 million and 11% last year. Consumers' earnings during the quarter suffered as volume was down 24% from the record volumes achieved in Q1 of last year due to a number of factors. We have seen consumer demand moderate in the past several months, and this summer's poor air quality caused by hot, smoky weather conditions depressed outdoor activities for many Americans. We've also seen some additional stocking at our customers. While the quarter presented significant headwinds for our consumer business, that team continues to execute well and remains laser-focused on delivering new and value-added products for consumers over the long term. While there is significant uncertainty related to the outlook for consumer spending, we do expect volumes and margins to gradually improve and anticipate that they will return to more seasonally normal patterns. Building products generated net sales of $134 million in Q1, down 11% from $150 million a year ago. The decrease was driven by lower volumes combined with lower average selling prices. Building products generated adjusted EBIT of $54 million for the quarter, and adjusted EBIT margin was 40% compared to $53 million and 35% in Q1 of last year. The increase in adjusted EBIT was driven by higher equity earnings from Wave, which increased by $5 million year-over-year and contributed a record $28 million during the quarter. The increase in Wave's equity earnings was partially offset by strong but lower equity earnings from Clark-Dietrich, which contributed $17 million during the quarter. Despite lower volumes in our wholly-owned businesses, higher gross margins drove margin improvement, and those businesses generated operating income of $9 million in the quarter. The team in building products continues to do an outstanding job executing in the current environment while focusing on long-term growth as they continue to partner with customers to develop new and innovative solutions in their markets. In sustainable energy solutions, net sales and Q1 of $29 million were down 7% or $2 million from the prior year, primarily due to lower volumes as the economy in Europe remains challenged. SCS reported an adjusted EBIT loss of $5 million in the current quarter as volumes were simply too low to absorb the fixed costs in the business. This compares to a loss of $1 million in Q1 of last year. We believe our business is well-positioned and one of only a handful of companies globally with the scale and expertise to effectively serve the hydrogen ecosystem and adjacent sustainable energies like compressed natural gas. That said, this market is unlikely to develop quickly, and until then, sustainable energy solutions results will be impacted. The SES team is talented and experienced, and we're confident in their ability to navigate the current environment and set the business up for long-term success. That team recently took action to reduce costs as we focus on aligning our costs with both legacy market demand and the coming growth driven by the transition to low and zero emission transportation. At this point, I will turn it over to Tim, who will discuss steel processing results.

Thank you, Joe. In steel processing, net sales of $881 million were down 15% from $1 billion in Q1 of last year, primarily due to lower average selling prices. In Q1 of last year, the market price for hot-rolled steel averaged approximately $975 per ton, while in Q1 of this year, the market price for hot-roll was approximately $875 per ton, resulting in a 17% decrease in our average selling prices. Total tons shipped were up 3% compared with the prior quarter. Direct sale tons were down 1%, while total tons shipped were up 8%, primarily due to increased volume with both mills and service centers. Direct sale tons made up 56% of our mix, compared to 58% of our mix in Q1 of 2023. From a demand perspective, we experienced significant increases in automotive shipments, primarily due to increases in year-over-year automotive production. However, the growth in our automotive volume was offset by year-over-year decreases in both residential and non-residential construction. In Q1, steel processing reported EBIT of $78 million, which was up $43 million from the $35 million reported in the prior year quarter. This is primarily due to increased direct spreads as well as an incremental $7.2 million of equity income from our unconsolidated joint venture, Servicero, as well as compared to the prior year quarter. For the quarter, we had estimated inventory holding gains of $15 million compared to estimated inventory holding losses of $2 million last year. As noted last quarter, steel prices increased approximately $500 per ton over the first four months of calendar 2023, but softened in May through August, decreasing $400 per ton over that same time period. We expect the inventory holding gains of Q1 will flip to inventory holding losses in Q2 and anticipate those losses could be similar in size to the holding gains we had in Q4 of 2023. The steel business had an excellent first quarter, and all of our teams performed at very high levels. Specifically, our teams did a great job launching several new programs for automotive customers. We recognize there could potentially be some near-term challenges in the automotive market that may impact our results in Q2, but we are confident our employees will meet any challenge arising during the contract negotiations taking place in Detroit. Similar to other market disruptions in recent years, we will manage through the situation and be prepared to meet our customers' needs when the Detroit OEMs return to normal build schedules. Despite some potential near-term challenges, it's a very exciting time to be at Steel. Our teams are experienced and focused, and they will continue to meet any short-term challenge with hard work, collaboration, and innovative ideas. I'm proud of our teams for their dedication and for their continued commitment to safety. At this point, I will turn it over to Andy.

Thank you, Tim. Excuse me. And good morning, everyone. Our fiscal 2024 first quarter adjusted earnings per share results were the second best first quarter in our 68-year history after adjusting for restructuring and non-recurring items. We have a lot of our people putting in extra hours to make the separation of our steel processing business a success, all while continuing to ensure that our businesses perform at a high level. Thank you to our employees across the organization who continue to prove they are outstanding and dedicated to supporting our customers, suppliers, and shareholders every day. Earlier this week, we released our fourth annual sustainability report on the back of being named Investor Business Daily's 100 Best ESG Companies in 2022 and Newsweek America's Most Responsible Companies in 2023. We continue to expand and evolve our approach to profitably improving our ESG performance to benefit all of our stakeholders. As we close in on our Worthington 2024 plan to separate into two distinct financially strong growth companies, we are pleased to report that we are ahead of schedule and on track to complete the separation before the end of 2023. There is still a lot of work and a few key milestones in front of us, but we are getting close. Our employees continue to embrace the coming changes and are working hard to position both companies for success. We also announced the names and branding for the two businesses, Worthington Steel and Worthington Enterprises. We decided to keep Worthington in both names and celebrate our philosophy and culture, which will continue in both businesses, but change the names to reflect the unique growth prospects of both businesses. Worthington Steel has significant opportunities to grow its core market and develop higher growth markets such as electrical steel for electric vehicles and transformers. Worthington Enterprises will continue to build out its market-leading positions in building products, consumer products, and sustainable energy solutions. To ensure that both businesses begin their new lives with very strong balance sheets and plenty of available capital, we made several moves to renew credit facilities and pay down debt. Our cash position also remains strong at $201 million. Once the separation is complete, we are likely to continue with our historical balanced capital allocation strategy in both businesses. Both businesses will also be run with our philosophy and golden rule principles and utilize the Worthington business system of transformation, innovation, and acquisitions to drive growth and shareholder value. We are excited to announce that on October 11th in New York City, we will be hosting an investor day for both Worthington Enterprises at 9.30 AM and Worthington Steel at 1 PM. We are looking forward to showcasing the exciting prospects for both of these companies as they embark on their own independent growth strategies. To all of our customers, suppliers, employees, shareholders, and other stakeholders, thank you for your continued partnership. And we look forward to shared success in the coming months and years as we continue as Worthington Steel and Worthington Enterprises. We will now take any questions.

If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Katia Jancik from BMO Capital Markets. Please go ahead. Your line is open.

Good morning. Thank you for taking my questions. Good morning, Katja. Can you talk a little bit more about the current auto market environment, specifically what impact you're seeing from the strike? And is there anything or are there any steps you can take to potentially minimize the impact?

Hey, Katja, it's Tim. Thanks for the question. So, yeah, obviously this situation is front and center for us. So far, we've seen little impact to our business given the scope of the strike has been limited and it's actually been a short period of time. We recognize that there's risk associated with the strike, but there's also opportunities for us. So if the strike expands, our facilities have playbooks that will address volume slowdowns. So as you would expect, the playbooks are going to align with the Worthington philosophy and the golden rule of doing things the right way for our customers, our employees, and our shareholders. But one of the things I want to point out about the strike is these are opportunities for us as well. So our recent history shows we do a great job putting ourselves in position to win new business when markets rebound. Our commercial and supply chain teams do an excellent job helping our customers navigate all the moving parts that occur when a supply chain suddenly stops, but then, more importantly, when that supply chain suddenly turns back on. Customers absolutely remember which suppliers did the best job helping them navigate through these tough situations.

Okay, thank you. And then just on the consumer product segment, you mentioned that you expect volumes and margins to gradually improve from these levels. What's giving you confidence that that will happen?

We believe, Katja, that the demand moderation that we've seen It was a little episodic, right? Some of the things that were happening this summer, people just didn't spend as much time outside, whether that was in their backyard or on a camping trip. And so we think that, you know, consumer is going to have a lot of the sort of Demand softening was really more in our camping gas segment, and so with that being said, you get into the winter season. We think that Q2 will probably have some continuing headwinds for the consumer business, but we do absolutely expect that volumes will return to seasonally normal patterns just because we have seen this movie before, and typically people... respond. Our products don't cost $1,000. You don't need a home equity line of credit to afford what we have. And we've seen some softness throughout retail and certainly throughout the outdoor category. So we're not immune to some of those things, but we believe our value proposition is awfully good. And, you know, kind of heading into the late 23 and early 24, we'll feel much better about volumes returning to some more normal patterns.

This was a little bit of the perfect storm of, you know, bad weather this summer, hot fires, as well as big box retailers, de-stocking inventory and consumers may be having a little extra inventory as a COVID hangover. So that's why we feel confident that things will return to more normal levels in the coming months.

Okay. Thank you.

Thank you.

Our next question comes from Martin Englert from Seaport Research Partners. Please go ahead. Your line is open.

Hello. Good morning, everyone. Morning, Martin.

I wanted to also touch on consumer products and profitability. I was a little bit surprised, at least relative to what I was expecting on the quarter there. And I know you called out volumes as a key driver there on a year-on-year basis, but just looking at the sequential volumes there, Last quarter, I think you were mid-teen, even down margins. Then a sequential drop into this queue, I think of about 15% on volumes. And that drove, seemed like it drove margins below 10%. Is that the right way to read it as far as like the underlying key driver on the sequential change there was really the volumes there and, you know, fixed costs?

Yeah, I think you're exactly right, Martin.

Got it. Underlying steel processing profitability, and I've mentioned this, I think, several calls in the past, but, you know, I've typically kept it in the back of my head, like, excluding inventory holding gains and losses, historical underlying EBITDA, maybe $50, $60 per ton. It's been a bit better than that in recent quarters, including this quarter. Any thoughts on, you know, is this a structural shift, something sustainable going forward, or not necessarily yet to be determined?

Martin, I think you're thinking about it the right way by taking out the inventory holding gains and losses. But for us to target a specific dollar per ton is fairly difficult because of a number of factors, including the mix. I think the way you're thinking about it of pulling out inventory holding gains and one-time items is the right way to think about it.

Anything else worth highlighting on the mix that maybe isn't presented in the release here that you could discuss that's um been changing yeah i know we get the rush versus toll um maybe we can you know get in some idea there but anything else that's going on with like a positive new shift that might sustain uh i think there we think of it in terms of the electrical steel business right that's a business that's going to continue to grow and we're investing in that business so that will have a positive impact on our

our profitability going forward. So I think that will happen over time. I think with tolling, tolling bounces around a little bit because we are often an outsource for the mills and other customers. So that one's a little more difficult to predict. For example, we had an increase in tolling this quarter, and mostly that was due to an increase in tolling in Northeast Ohio at our pickling facility. So that one's, again, tolling's a little bit more difficult to pin down. But In the long term, as we invest in the electrical steel business, you should see our margins increase.

Waste profitability also, that was a bit better than I expected. What are you kind of seeing today, and how does that compare to the year-ago period? And I'm referencing the fiscal kind of 2Q window. to date and how that compares year on year?

Yeah, well, in Q1, I think as you mentioned, Martin, volumes for wave were up slightly from where they were in Q1 of last year. Keep in mind that they're about two-thirds repair and remodel, and so you're starting to see some pretty reasonable stability. You know, those end markets are certainly not growing at 10 or 15 percent per year, but They're low single digit or flat-ish, and that's a good environment for Wave. Honestly, the reason that they're able to grow has a lot to do with how innovative their products are and how they really think about the pain points of their customers and think about speed of install. If you're trying to put up 10 floors of acoustical ceilings, your highest cost is not your materials. Your highest cost is your labor. And Wave has historically done an absolutely terrific job of understanding how people need to do their jobs and how to make them more efficient. And so I think you're just seeing some really a reflection of some of that goodness show up in the way that they're able to perform and continue to have really good margins.

Okay. I appreciate it. Thank you very much. You bet.

Our next question comes from Phil Gibbs from KeyBank. Please go ahead. Your line is open.

Hey, good morning. Phil, good morning.

So as it relates to the joint venture portfolio in totality, obviously wave is a big piece, but we probably do have some seasonality as we enter the fall and winter seasons. And I'm not exactly clear what spreads are doing across the portfolio because you've had a lot of volatility in the results over the last 12 months. So how do we think about just the joint venture portfolio? bucket as we look at the next couple quarters. Is seasonality a bigger factor? Are spreads a bigger factor? Are they both factors? Trying to think about everything as it relates to that bucket.

So I think specifically the JV portfolio in building products, I think Tim can certainly speak to the JV portfolio within steel. But within building products, with Wave, we just talked about that. You know, don't expect anything that's substantial one way or the other. Clark Dietrich, we've talked about this. You know, they're a little bit of a different mix than Wave is. You know, they're two-thirds-ish new construction. And so they're seeing some more headwinds related to their exposure to that market versus somebody who's maintenance, repair, and remodel focused. And so we've talked about this. We do expect Clark-Dietrich is a phenomenal business and a great team. But they will more than likely be down year over year for the next several quarters, just coming off of a great year that they had in our fiscal 23.

And then, Tim, on the steel side?

Yeah, I think the unconsolidated JV in Mexico, Servicero Worthington, I think they are going to see similar headwinds and impact, maybe not to the same extent that we do in the U.S., but automotive strike is going to potentially impact them as well, right, because it can have far-reaching effects. I think our other joint ventures, there's a lot of automotive in there as well. Two of those are toll processing. So Spartan and Worthington Specialty Processing or Worthington Samuel Coil Processing, WSCP is how we refer to it usually. Those have a lot of automotive in there as well. And then TWB, Tableau de Blanc operation, is 100% automotive. So I think it really depends on how the strike goes will dictate how the North American joint ventures go for steel.

You'll still have some of the some of the kind of the normalization and metal spreads happening, though, in those businesses, irrespective of the strike, though, I would imagine, right?

Spartan is toll processing. WSCP is toll processing. TDBB has a pretty decent-sized order book in tolling, and a lot of that is directed by, so there really is no metal margin impact there. And then at Servicero, they do have a high toll processing order book, but they're also fairly large and direct, and so they will be exposed to the metal margin changes.

Very helpful. Thank you so much. See you guys soon. Thanks, Phil. Thanks, Phil.

As a reminder, if you'd like to ask a question, please press star followed by the number one on your telephone keypad. Our next question comes from John Tomazos from John Tomazos Very Independent Research. Please go ahead. Your line is open.

Thank you. Congratulations on the great results. Thank you, John. In 2022 to 5, there's 3 million tons of sheet and plate capacity coming on each year. Steel Dynamics, Nucor, US Steel, then Nucor again. While this year's steel demand has rebounded from the November-December lows, It looks like the apparent demand is going to be about 7 million tons less than the 2017-18-19 average pre-pandemic, which doesn't help to absorb 3 million tons a year for four years. How are you managing steel processing differently to access these new mills Do you anticipate that some of your suppliers, your prior suppliers may disappear? And are you going to deliberately hold lower inventories out of concern that we don't see $2,000 a ton or $1,500 a ton anytime soon?

So there's a lot of questions packed in there. So I would say we are deliberately always trying to drive down our inventory in terms of tons, right? We recognize that the price of steel is volatile, and we want to keep those tons as low as possible at all times, right? Because it's just sleeping money. And that becomes even more important when we're standalone. I think in terms of new capacity coming online, What we envision is, and we don't participate in the plate market, but in the sheet market, I would say that we will use those mills. I'm not worried or we are not worried about any potential suppliers going away. We welcome the new capacity. We think it's great, and we will try to use those mills to gain access to customers we don't already have. So if those mills are located in southern Texas, we will attempt to go after business that's down there that we haven't traditionally had access to.

I can ask another question or the same question that was asked earlier but a little bit differently concerning consumer. In the last four quarters in the container board market, the market shrank 10%. It's historically unusual for container board to fall more than steel on a slowdown, but the consumer is under pressure. About half of container board goes to supermarkets and drugstores. Historically, it's a very stable market, unlike manufacturing or autos or steel. Is it fair to say that consumer being down 21%, greater than 10%, might reflect poor outdoor activity. But if you were only down 8%, you'd be heroes. In other words, the sector is systemically down.

So I think, John, down 24%.

Keep in mind that's down 24% from record volumes a year ago. So tough compare. But, yes, we absolutely have seen and you've seen from exporting goods and from other folks that participate in the outdoor category in particular that spending is down and activities this summer were down. Andy referred to it exactly right. It was a bit of the perfect storm. One of the things for us was also that we did really well in Q1 of last year, so we created a tough comp for ourselves.

Are you doing anything to cut costs in the consumer segment in view of the consumer being strapped everywhere? Mortgage rates are almost 8% today for 30-year mortgages.

Yeah, every single day, John, regardless of market conditions, we are using our transformation playbook and our continuous improvement mindset to try and get better, not just when things aren't going as well as we want them to, but every single day.

Thank you. We have no further questions in queue. I would like to turn the call back over to Andy Rose for any closing remarks.

Thanks everyone for joining us today. We are super excited about our future and look forward to speaking to you on October 11th at our Investor Day in New York City. Thanks everybody.

This concludes today's conference call. Thank you for your participation. You may now disconnect.