Worthington Industries, Inc.
Q2 2016 Earnings Call Transcript

Published:

  • Operator:
    Ladies and gentlemen, good morning and welcome to the Worthington Industries Second Quarter 2016 Earnings Conference Call. [Operator Instructions] This conference is being recorded at the request of Worthington Industries. If anyone objects, you may disconnect at this time. I would like to introduce Ms. Cathy Lyttle, Vice President of Corporate Communications and Investor Relations. Ms. Lyttle, you may begin.
  • Cathy Lyttle:
    Good morning. Thanks for joining us on our second quarter earnings call and happy holidays. Certain statements made on this call are forward-looking within the meaning of the 1995 Private Securities Litigation Reform Act. These statements are subject to risks and uncertainties and could cause actual results to differ from those suggested. Our earnings release was issued last evening. Please review it for more detail on those factors that could cause actual results to differ materially. If you would like to listen to today’s call again, a replay will be made available later on our website. On today’s call, we will be hearing from John McConnell, Chairman and Chief Executive Officer; Mark Russell, President and Chief Operating Officer; and Andy Rose, Executive Vice President and Chief Financial Officer. John has some opening comments.
  • John McConnell:
    Thank you, Cathy and good morning everybody. Thank you for joining us today. The company performed well in the second quarter and we remain on the pack we desire. Let’s get right into the results of the quarter. We will start with Andy Rose on the financial side.
  • Andy Rose:
    Thanks, John. Good morning, everyone. The company delivered a steady performance in the second quarter of fiscal 2016. Lower manufacturing costs, improved profitability in industrial gas and consumer products and strength in our joint ventures highlighted the quarter. Demand remains healthy in many of our key end markets with the exception of oil and gas and agriculture. Quarterly earnings adjusted for restructuring were $0.60 per share, up $0.05 per share from the prior year quarter. Several unique items were as follows
  • Mark Russell:
    Thanks, Andy. Compared to last year’s quarter, direct volume in our steel business was down 1% and toll volume was down 18%. Combined, our total volume was down 8%. Data reported by the Metals Service Center Institute for this period shows the overall market down 10%, indicating that we continue to gain market share. By segment, service center shipments were significantly up by 65%, heavy truck was up 2%, Detroit Three automotive shipments declined by 2%, construction was down 8% and agriculture was, again, our weakest market for the steel company, down 14%. Our tailor welded blank joint venture with WISCO commissioned their latest facility in Nashville, Tennessee in the quarter with new technology lines that are producing high volume and the curvilinear wells. Additionally, TWB announced what will be their 10th facility in Glasgow, Kentucky. This new facility will utilize TWB’s new rotary system to produce heavy gauge rail blanks, which is another new application resulting from light weighting initiatives. Also development of TWB’s friction stir welded aluminum blanks was building momentum with several OEMs currently testing parts. Our Serviacero joint venture in Mexico once again set a new quarterly shipment record on the back of rapidly growing Mexican automotive market demand. In order to service the growth, we have undertaken expansion projects in our Queretaro and Monterrey facilities, which will add more space and additional splitting capacity. Finally, our joint venture of steel processing facility with Nisshin and MISI in China remains on track to start production by June of 2016. In our pressure cylinders business, oil and gas equipment revenue was down 62% compared to last year. Market demand continues to decline as oil pricing continue to drop through the quarter. Capital purchases by the major producers remain limited and short-term in nature. While we continue to adjust our cost structures in market realities, we are also focusing on market opportunities that rely less on new drilling activity here. In industrial products, revenue was up 2% compared to last year, if you exclude the sale of our aluminum products business in Mississippi. Our industrial business overall continues to improve its product mix and its operating margins. In consumer products, revenue was down by 4% on lower volumes for camping and helium cylinders as well as torches and torch kits. The lower volume can be partially attributed to mild early winter temperatures in North America. Margins were up, however, on lower commodity costs, higher operating efficiencies and margin expansion initiatives. Alternative fuels revenue was up 5% as our Poland operation continued to ramp up production of compressed natural gas fuel systems for the European market. During the quarter, we acquired Trilogy’s CNG fuel systems to add to our capability for over the road and refuse customers. The designed inventory and equipment from this acquisition were immediately integrated into our existing alternate fuel business in Salt Lake City. In addition, our Pomona, California composite facility won an exclusive 5-year contract to produce hydrogen cylinders with production commencing in 2016. Fuel spreads continue to provide a challenge in the alternative fuels market, but are focused on diversification and new products has helped us offset the headwinds here. Our cryogenics revenue was up approximately 18% on weakness in the LNG related projects worldwide. Although sales were lower, our Turkey operations were able to improve their manufacturing cost position and the construction of our new manufacturing facility in Turkey is substantially complete and we are beginning to install equipment there. We should be producing by June of 2016. Since the end of the quarter, we have acquired the assets of Taylor Wharton’s Global CryoScience business, which includes the manufacturing facility in Theodore, Alabama. This transaction added biologics, storage, healthcare, pharmaceutical and animal husbandry products to our cryogenic portfolio. The Alabama facility will also become the home of our cryogenic trader business, which is currently located in Boston, Massachusetts. In Engineered Cabs, we completed our consolidation into a more efficient two factory footprint in September and we have since then, reduced headcount by an additional 15% due to weaker and inconsistent customer demand. Major equipment manufacturing customers remain concerned about 2016 and mostly forecasting annual declines of 5% to 10%. Our WAVE joint venture with Armstrong saw slightly stronger shipments in the Americas. Europe was slightly weaker. And Asia Pacific was again the weakest WAVE market for the quarter. Overall, our business showed continued strength in the face of weaker demand in several important markets and we are excited about the renewal of our transformation process, which you will all hear more about in future quarters. John, back to you.
  • John McConnell:
    Thank you, both very much. At this point, we will be happy to take any questions that you have.
  • Operator:
    [Operator Instructions] And first from the line of John Tumazos with John Tumazos Very Independent Research. Please go ahead.
  • John Tumazos:
    Good morning. Thank you for all the good efforts in tough times. Could you tell us how much of the equity income for the three months and six months was from WAVE?
  • Mark Russell:
    $19 million.
  • John Tumazos:
    $19 million?
  • Mark Russell:
    Correct.
  • Andy Rose:
    Yes.
  • John Tumazos:
    And for six months, how much was…?
  • Andy Rose:
    We are checking, hang on. $41 million, John.
  • John Tumazos:
    Thank you. Could you explain the very good performance of some of the other JVs with falling steel prices, it’s really good that the steel related JVs did so well?
  • Mark Russell:
    Yes. I mean I think each of them is slightly different. I know in ClarkDietrich’s case, they have been able to lower their raw material costs ahead of the decline in prices, so that’s helping with margins.
  • John McConnell:
    John, some of those JVs have customers that are priced on a fixed price, so when the price of steel falls sometimes they are getting a little bit of tailwind.
  • John Tumazos:
    Is the $19 million for the current quarter exclude the $4 million legal settlement?
  • Mark Russell:
    That’s ClarkDietrich, John.
  • John Tumazos:
    ClarkDietrich. Okay, super. I will let somebody else have a chance. Thank you.
  • John McConnell:
    Thank you, John. Happy holidays.
  • John Tumazos:
    You too.
  • Operator:
    [Operator Instructions] And our next question is from Phil Gibbs of KeyBanc Capital Markets. Please go ahead.
  • Phil Gibbs:
    Good morning.
  • John McConnell:
    Good morning.
  • Phil Gibbs:
    I had a question on the steel mix in the quarter, was the direct mix a lot higher than normal, were we talking about maybe 65% to 70% of the volume in the quarter, Mark was…?
  • Mark Russell:
    Hang on, I will give you the exact mix, but the total was weaker than direct. We will look up to the exact mix and give it to you.
  • Phil Gibbs:
    And was your direct business down 1% comment, was that organic or does that include some of the acquisitions and investments you have made?
  • Mark Russell:
    All of these numbers are including Rome for steel.
  • Andy Rose:
    65% direct.
  • Mark Russell:
    65%, 35% then Phil.
  • Phil Gibbs:
    Okay. And then if I could just piggyback off of John’s question on the joint ventures in particular, do you have some of these fixed price contracts that would reset on January 1 or at some point next year at WAVE and/or the ArtiFlex or ClarkDietrich that would adjust that transaction price down as those get – meeting some of the tailwind is maybe just a shorter-term issue?
  • Andy Rose:
    Yes. Those businesses really don’t really operate like the steel company where they have fixed prices, Phil.
  • Mark Russell:
    Well. So I would distinguish between the steel company and the JVs because the steel company is running a balanced position, so they don’t have a tailwind. Conversely –typically we don’t a headwinds ones going the other way either, but the joint ventures don’t run hedge positions generally and so they do have the tailwind all the way down.
  • Phil Gibbs:
    I am just asking from the perspective of – so WAVE has a project, its $1 million top line and that’s the fixed price for the year, that’s given the steel price, it’s – does that same price even though the base price stays the same or the fabrication value stays the same, does that go to $900,000 or something?
  • Andy Rose:
    No, their business doesn’t work that way. They don’t have individual fixed price contracts.
  • Phil Gibbs:
    Okay. So it’s largely a negotiated piece based on – okay, based on market conditions?
  • Andy Rose:
    Yes, they are selling them to a market price across the market and adjust across the market all the ones.
  • Phil Gibbs:
    Okay, that’s helpful. And was there anything within the numbers, particularly in cylinders that was related to some – maybe some relocation of assets, I know you have been moving some things around and maybe internally consolidating and just wondering if anything was in the numbers in terms of continued internal rationalization efforts that was not called out.
  • Andy Rose:
    No. There are some things that haven’t hit but those costs will end up being capitalized.
  • Phil Gibbs:
    Okay. I appreciate it guys. Thanks.
  • Operator:
    And we will go back to John Tumazos. Please go ahead.
  • John Tumazos:
    Could you talk a little bit about the alternative fuel and cryogenic segments of the cylinder business, I know they are far along and not start-up businesses, are they roughly the same profitability as a percent of sales or assets as the consumer or industrial cylinders?
  • Andy Rose:
    They are no way near, but yes, I will quantify it. At normal volumes, they would be at those targets and in some cases better, John. But in the current environment with such low volume, the profit is not there. The margins are not there.
  • John Tumazos:
    So they are near breakeven or something like that?
  • Andy Rose:
    That would be correct.
  • John Tumazos:
    Concerning the Energy and the Engineered Cab end markets where the commodity prices are up and basically the customers dormant, could you give us a little granularity about how you are repurposing the assets to try to find better hunting grounds?
  • Andy Rose:
    Well, we are not repurposing anything in terms of trying to move within the different markets or make different products. We are just –we are trying to give them as lean as possible and reduce the variable costs as much as possible so that we can still make money at these levels. And we are generally being successful with that actually. We scale those two businesses, in particular way down. And in the case of the cab business, as you know, we sold one facility, we shut one down, so we are down to half of the footprint we were when we bought that business.
  • John Tumazos:
    And a lot of the mining businesses now – many plants are idle just like this steel business, sort of 64% operating rate and mining companies tend to shuffle their trucks or machinery from the idle plan to the other plants and not buying anything for a while, do you have the ability to gear the cab business back up whenever cycle works through the tough year to it?
  • Mark Russell:
    That was our intended plan, John in doing the rationalization is to be it how the smaller footprint, but have a little bit more capacity in those existing facilities, but more flexible so that we do have the ability to meet demand when it comes back, but we are more efficient in this down part of the cycle. That was our strategy with the cabs business. And as I said, it’s basically been executed. We are now down to the two plants and the costs are significantly lower and we should be able to run lean here for a while.
  • John Tumazos:
    Thank you.
  • Operator:
    [Operator Instructions] And we do have a follow-up from Phil Gibbs. Please go ahead.
  • Phil Gibbs:
    Thanks. How did the backlogs at WAVE and ClarkDietrich look at this point? I was trying to get a gauge on how the commercial construction momentum is going from your perspective?
  • Mark Russell:
    Yes. Those businesses are slightly different just in terms of the demand drivers, they are both commercial construction obviously. But in ClarkDietrich’s case, their volume outlook for the year as I think up may be 7%. There is a lot of multifamily construction going on which they benefit from. WAVE doesn’t benefit as much from that multifamily demand and so their outlook, which I think Armstrong actually talks about directly is kind of a market opportunity number, which is kind of flat to maybe slightly up this year.
  • Phil Gibbs:
    It’s been flattish for a while, right?
  • Mark Russell:
    Yes.
  • Phil Gibbs:
    Okay. Thanks so much.
  • Operator:
    And with that, we have no further questions in queue.
  • John McConnell:
    Alright. Thank you all for joining us. Again, we have a very solid quarter and we are going to continue on this path, continue to improve the company from a cost basis and our efficiencies on the delivery side. So, happy holidays to all and Merry Christmas, have a great and safe holiday with your family. Goodbye.
  • Operator:
    Ladies and gentlemen, this conference is available for replay. It starts today at 12

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