Worthington Enterprises Q2 2024 Earnings Call Transcript

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Provided by Quartr
December 20, 2023

There are 7 speakers on the call.

Operator

Good afternoon, and welcome to the Worthington Enterprises Second Quarter Fiscal 20 24 Earnings Conference Call. This conference is being recorded at the request of Worthington Enterprises. If anyone objects, you may disconnect at this time. I'd now like to introduce Marcus Rogier, Treasurer and Investor Relations Officer. Mr.

Operator

Rogier, you may begin.

Speaker 1

Thank you, JL. Good morning, everyone, and welcome to Worthington Enterprises' 2nd quarter fiscal 2024 earnings call. Results for our Q2 reflect the performance of the pre separation consolidated Worthington Industries, only, including the Worthington Steel business, which became a standalone publicly traded company on December 1. Given the recent separation, Today's prepared remarks will primarily focus on the consolidated results as well as the performance of the remaining business segments within Worthington Enterprises, only including building products, consumer products and sustainable energy solutions. Worthington Steel will be hosting their 2nd quarter earnings call separately on Friday morning of this week at 8:30 am.

Speaker 1

So we'd please ask that you hold any questions about the steel processing business until then. On our call today, we have Andy Rose, Worthington's President and Chief Executive Officer and Joe Hayek, Worthington's Chief Financial and Operations Officer. Before we get started, I'd like to note that certain statements made today are forward looking within the meaning of the 1995 Private Securities Litigation Reform Act. These statements are subject to risks and uncertainties only. We issued our earnings release yesterday after the market closed.

Speaker 1

Please refer to it for more detail on those factors that could cause actual results to differ materially. In addition, our discussion today will include non GAAP financial measures. A reconciliation of these measures with the most appropriate comparable GAAP measure is included in the earnings press release, which is available on our Investor Relations website. Lastly, today's call is being recorded and a replay will be made available later on our website. At this point, I will turn the call over to Andy for opening remarks.

Speaker 2

Thank you, Marcus, and good morning, everyone. What a year it has been. I want to start the call by thanking our employees only. Our people have stayed positive in the face of change only and worked tirelessly to set both companies up for success. I am confident that the work done by our teams to create Worthington Steel and Worthington Enterprises This was best in class.

Speaker 2

I also want to thank our customers for continuing to have confidence in Worthington Steel and Worthington Enterprises throughout this process. Both businesses performed well over the past 15 months and I know these two companies are better positioned for success today as 2 separate entities only and when we began this journey back in 2022. And finally, I'd like to thank our Board of Directors for having confidence in our leadership team only to not only make the decision to separate the companies, but to dig in and help navigate the journey. This was truly a team effort across many constituencies. December 1 marks the end of Worthington Industries, but it really represents a new beginning.

Speaker 2

We've taken one great company and created 2 great companies, Both of which are well capitalized market leading businesses poised for growth and value creation. We will maintain the best only mode. Our philosophy written down over 50 years ago by our founder only. The philosophy is based on the Golden Rule, We treat our customers, employees, investors and suppliers as we would like to be treated. The philosophy's first corporate goal for Worthington is to earn money for our shareholders and increase the value of their investment.

Speaker 2

This is underpinned by our performance based culture and above all our belief in our most important asset, We are excited about our future in Worthington Enterprises and wish our friends at Worthington Steel best of luck in their future endeavors. Joe, you want to take us through the numbers?

Speaker 1

Sure.

Speaker 3

Thank you, Andy, and good morning, everybody. This is a unique quarter for us and as Marcus mentioned, we'll be reporting the earnings of Worthington Industries as a consolidated entity. I'll go over those results then focus a bit more on the business units that now make up Worthington Enterprises and we would ask that any questions related to Wilmington Steel be held for that team We have the earnings call scheduled for Friday morning. In Q2, we reported consolidated earnings of $0.49 a share versus $0.33 per share in the prior year quarter. Only.

Speaker 3

There were a few unique items that impacted our quarterly results, including the following. We incurred pretax expense of $22,000,000 or $0.33 per share related to only to $0.14 a share incurred in the prior year quarter. We may have some minor expenses related to the separation in Q3, We believe that the majority of those expenses are behind us. We recognized a pre tax gain of $3,000,000 or $0.04 a share related to the divestiture of the Brazilian business share of our WSP joint venture, which was partially offset by expenses related to an earn out at Level 5. Excluding these items, we generated earnings of $0.78 per share in the current quarter compared to $0.44 a share in Q2 of last year.

Speaker 3

Only. Furthermore, in Q2 estimated inventory holding losses in the steel processing business were $0.52 per share compared to inventory holding losses of $0.81 a share in only 2 of fiscal 2023. Finally, our consumer business recorded a charge of $3,000,000 or $0.05 per share in the quarter related to a voluntary recall on our Balloon Time MiniTech. Consolidated net sales in the quarter of $1,100,000,000 decreased 7.5% from the prior year, primarily due to lower average selling prices in steel processing, combined with a shift in product mix, which was partially offset by higher volumes across most of our segments. Only.

Speaker 3

Gross profit for the quarter increased to $124,000,000 from $106,000,000 in the prior year and our gross margin increased to 11.4% from 9%, only, primarily due to improved spreads in steel processing. Adjusted EBITDA in Q2 was $81,000,000 up from $64,000,000 in Q2 of last year Our trailing 12 month adjusted EBITDA was $556,000,000 With respect to cash flows and our balance sheet, Cash flow from operations was $135,000,000 in the quarter and free cash flow was $102,000,000 During the quarter, we invested $33,000,000 in capital projects, only spent $21,000,000 for an acquisition within the Steel Processing segment and paid $17,000,000 in dividends. We also received $39,000,000 in dividends from our unconsolidated JVs during the quarter, a 93% cash conversion rate on net equity income. Looking at our balance sheet and liquidity position, funded debt at quarter end of $624,000,000 was up $175,000,000 sequentially Due to the Steel Processing segment borrowing on their credit facility at the end of the quarter. A portion of the borrowings by Steel Processing which we in turn used to retire our $150,000,000 20.24 notes earlier this month.

Speaker 3

Adjusting for both of those items, Wellington Enterprises currently has approximately $300,000,000 in debt outstanding averaging 3.6% and maturing between 2029 and 2,034. We ended Q2 with approximately $216,000,000 in cash, which incidentally is yielding over only mode. Net interest expense of $2,000,000 was down by $5,000,000 primarily due to the interest income we earned on our cash balances only mode. We continue to operate with extremely low leverage ending the quarter with a net debt to trailing only. And our cash balance and undrawn $500,000,000 revolver provide ample liquidity.

Speaker 3

Yesterday, the Worthington Enterprises Board declared a dividend of $0.16 per share for the quarter, which is payable in March of 2024. We'll now spend a few minutes on each of the businesses. I won't go into any details on steel processing and would point you to our earnings release from yesterday afternoon for that segment level detail and encourage you to listen to the earnings call the Steel team will host on Friday morning. In Consumer Products, net sales in Q2 were $148,000,000 down 4% from $154,000,000 a year ago. The decrease was a result of lower average selling prices in our outdoor living business and an unfavorable product mix in our tools business.

Speaker 3

Adjusted EBIT for the consumer business was $10,000,000 and adjusted EBIT margin was 6.4% in Q2 compared to $13,000,000 8.8 percent last year. Consumer's earnings during the quarter were negatively impacted by $3,000,000 pre tax which is encouraging since volumes are typically down sequentially in our seasonally slower Q2. In Consumer, September was a down month, but October November saw improved only. The team and consumers weathered the headwinds they're facing quite well and we've taken the opportunity to lean in with our channel partners that led to only listen only to some recent market share gains that we expect will add to our growth in calendar 2024. We expect volumes and margins to gradually improve in our outdoor living business only and we expect to return to more seasonally normal patterns across our portfolio in the coming quarters.

Speaker 3

The markets we serve are robust, and we are well positioned heading into calendar 2024. Booking products generated net sales of $123,000,000 in only queue, down 13% from $142,000,000 a year ago. The decrease was driven by a less favorable product mix combined with lower average selling prices. Coating Products generated adjusted EBIT of $40,000,000 in the quarter and adjusted EBIT margin was 32.8% compared to $41,000,000 29.1 percent in Q2 of last year. The fact that EBIT decreased by less than $1,000,000 while revenues were down almost $20,000,000 is encouraging and was a result of higher gross margins in our wholly owned businesses.

Speaker 2

We

Speaker 3

are experiencing some destocking in our heating, cooling construction end markets, particularly in the large format propane business as our customers are rightsizing inventories. The weakness there was offset in Q2 by EBIT growth in most of our other end markets, Driven by some of the initiatives we put in place months ago that are starting to have a positive impact. Wave contributed equity earnings of $21,000,000 quarter, up from $19,000,000 a year ago as their volumes increased and gross margins improved. That improvement was offset by a $2,000,000 year over year Triste at Clark Detrick, which continues to perform very well and contributed $14,000,000 in equity earnings for the quarter. Both Wade and Clark Dietrich are showing real resilience as they leverage opportunities related to infrastructure spending and their efforts in NPD and Innovation.

Speaker 3

In Sustainable Energy Solutions, net sales in Q2 of $28,000,000 were down 28% or $11,000,000 from the prior year, only, primarily due to lower volumes and an unfavorable product mix. SCS reported an adjusted EBIT loss of $3,000,000 in the current quarter only as volumes remain too low to absorb the fixed costs in the business as compared to adjusted EBITDA of $1,000,000 in Q2 of last year. By how quickly the emerging hydrogen and CNG ecosystems develop. Quoting activity and interest in our solutions remains high, which gives us confidence in that business going forward. As I mentioned earlier, this is a unique quarter for us and it is the last quarter that we'll report our segments as we're into Industries.

Speaker 3

In preparation for the separation, this fall we introduced a reconciliation for revenues and EBITDA at Worthington Enterprises It represents our best estimates for Williamson Enterprises results on a pro form a standalone basis and the separation of our steel processing business been completed Prior to the beginning of each period presented. We believe this reconciliation will help provide increased transparency and insights into our quarterly results. Looking at Enterprise's results for Q2 of 2024 in that same way, pro form a adjusted EBITDA would have been $51,300,000 versus fifty $7,700,000 a year ago. For the trailing 12 months ended November 30, Enterprises pro form a adjusted EBITDA would have been only to $280,000,000 a slight decline from the $287,000,000 in trailing 12 months pro form a adjusted EBITDA as of August 31st. Only and our pro form a adjusted EBITDA margin was unchanged at 21%.

Speaker 3

The above figures do include a $3,000,000 charge related to the recall that I mentioned earlier. CapEx for Woodington Enterprises in the quarter was $12,000,000 in the business segments, $3,000,000 of which was related to the one time CapEx that we've discussed previously and we'll be spending to modernize 2 of our facilities. Only. Wellington Industries also had approximately $4,000,000 in one time CapEx related to IT and other systems that enabled the separation of our steel processing business. At this point, I will turn it back over to Andy.

Speaker 2

Thanks, Joe. Now that the separation is complete At Worthington Enterprises, we are laser focused on maximizing the long term growth potential of our consumer products, building products and sustainable energy businesses. Only. We have more focused strategic priorities as a designer and manufacturer of market leading products and brands that enable people to live safer, healthier only mode. We are a growth company with transformation, acquisitions and innovation as our strategic enablers.

Speaker 2

We believe in innovation in everything we do. We expect to launch more new and enhanced products every year to better serve our customers. Only. We are a disciplined acquirer of market leading niche businesses that will bolster our consumer and building products brands. We transform our operations and use technology both in our operations and increasingly in the products we deliver to our customers.

Speaker 2

We believe in a balanced approach to profitably improving our ESG performance to benefit all stakeholders, only and we are enabling a lower carbon economy with our products and services. As evidence, we recently released our 4th annual sustainability report only and in conjunction, we're awarded Newsweek America's Most Responsible Companies and Greatest Workplaces for Diversity for 2024. Only. And finally, we are good stewards of capital, investing thoughtfully to deliver higher margins, more free cash flow and higher returns. Only mode.

Speaker 2

We are proud of our history and who we are today, but we know we will be defined in the future by our ability to leverage these capabilities Thanks for your time today. We'll now take any questions related to the separation or Worthington Enterprises.

Operator

Thank Your first question comes from the line of Phil Gibbs of KeyBanc Capital Markets.

Speaker 2

Yes, sir. Thank you. Lots

Speaker 3

to be proud of, lots to look forward to. And as Andy said, lots of people only In the building that we're in and all over our company deserve all the credit.

Speaker 2

Awesome. Congratulations.

Speaker 4

The construction markets last quarter, you had bifurcated between aftermarket and retrofit with Wave Hanging in there, being solid and Clark Dietrich tapering off. Any update on that thought? Any further only. Weakness in Clark Dietrich's backlog per se versus Wave's, any color you can provide there?

Speaker 3

Only. We're just sticking with Q2, Wave was up a couple of $1,000,000 Cartierc was down a couple of $1,000,000 Bear in mind, only. Both of those companies are doing really well. Wave is 65%, seventy percent repair and remodel, Clark Dietrich is a little bit more focused on new. But if you look at the only.

Speaker 3

There are lots of different kind of construction market trackers and analysts that are out there. Some of them That we've looked at said that in November, commercial was still down a bit, but most of the other end markets and both of these companies play in a variety of different end markets. We're actually up year over year. So not at all a market prognosticator, but with only. Interest rates possibly being at a peak and people getting a bit more optimistic about what 2024 might look like relative to The fears that were out there in 6 months ago, we're pretty optimistic.

Speaker 4

Thank you. And I'm not asking a direct question on Worthington Steel, but how is the relationship between the companies going to be moving forward just in terms of steel procurement. I know that was obviously something that was important to you all with the cylinders portfolio and some of the other businesses. Only.

Speaker 2

Yes, we have a long term purchasing agreement with Worthington Steel. So we will be only One of their larger customers, Phil, and we obviously they have to make money on the steel that we buy, but we've been able to only. We'll also have a look at the benefit that we get from having them having a close customer

Speaker 3

supplier relationship with them.

Speaker 4

Thank you. And then just lastly, I know on the kind of investor presentations from a couple of months ago, you had talked about A decent amount of growth CapEx the next couple of years for the business post separate. You update us on

Speaker 3

what CapEx looks like over

Speaker 4

the next year or 2 on these growth projects and really what you're

Speaker 3

Sure. So we have talked about what what we call kind of a one time facility modernization CapEx. It's 2 different facilities. It's roughly $80,000,000 and it's intended to modernize, automate and make those facilities only Ready and able to continue to grow and do exceptionally well for the next 20 to 30 years. Only.

Speaker 3

The way that that will roll out in the CapEx, our run rate CapEx for the business excluding only. Those two projects is going to be in kind of the mid-30s, roughly, we think about it as about 3% of sales. Only. Those different and then we I think we called it out this quarter about $3,000,000 in the quarter was related to that. And so To exclude that $3,000,000 that gives us at enterprises roughly $9,000,000 in the quarter, only.

Speaker 3

$8,000,000 in Q1, so that's $17,000,000 for the 1st 6 months tracking right on that kind of mid-30s number. Only. That $80,000,000 depending on supply chains and other factors, will kind of only be underway in the next sort of several months in earnest, but it'll probably take 18 months to 24 months to flush all the way through and what we will do is we'll keep everybody posted on the spending on those projects only. And then the spending on all the other parts of the business in the same way.

Operator

Only. Thank you. Your next question comes from the line of Daniel Moore of CJS Securities. Your line is open.

Speaker 5

Thank you. Good morning. Thanks for taking the questions and congrats again. A lot of color though. Thanks, Dan.

Speaker 5

Yes, absolutely.

Operator

You gave

Speaker 5

a lot of color on the segments, but maybe we can drill down a little bit. Consumer to start, revenue in Q1 was down 20%, but only down 4% this quarter and flat sequentially. So, maybe just talk about to what extent that business is impacted by inventory destocking? Is that now large only. Your expectations sound like you expect to get back to growth with some share gains.

Speaker 5

Is that the case for the next two quarters or maybe take a little bit longer to inflect positively?

Speaker 3

Yes, I don't I think it's definitely that's calendar only. 2020 4 business for us, Dan. But you're right and I know that only. We're not kind of unique right with outdoor living focused and consumer focused brands and companies had Some real headwinds over the summer. We've talked about that, right, with the consumer being a bit more careful, spending more time and money on experiences versus only and outdoor activities, but then also the summer weather Didn't help matters.

Speaker 3

We did absolutely see that kind of moderate. We talked about September. September really we think was the trough for only. That leg of the real pronounced headwinds, so October November got better for us. Only.

Speaker 3

We're not totally through the woods, right. The consumer is not back to spending the way that they were in 2021 2022, but we do expect to see more seasonally normal trends. And for us in Q3 and into Q4 that typically means sequential growth. So we're looking forward to that. And as we said, the team did a nice job of kind of being there and and being real thought partners with their customers.

Speaker 3

And so that led to some incremental share gains and some placement wins, which we think will be helpful as well.

Speaker 5

That's helpful, certainly. And then switching gears to building products, revenue for only. It still remains pressured when you obviously excluding the JVs because we don't count that revenue, but and then excluding JVs profitability was a little bit softer. So maybe your outlook there, we talked about Harteetrick and WAVE, but kind of the core only. Fully consolidated building products, just talk about your visibility that you have in that business over the next couple of quarters and when you expect to maybe get back to sort of positive year over year growth?

Speaker 3

Sure. So that business and we talked about this, there was the large format, propane tanks, which is things that would sit outside buildings or be used for construction projects or be used to heat homes. Only. That's when we talk about mix, right, that's those are more expensive products, which is why we talk about a negative mix and the revenue side of things. Saw some destocking there.

Speaker 3

It started in Q1. It continued in Q2. We expect that will only. Moderate a bit and we should be we think we'll be through that by the end of Q4. We'll certainly see some of it in Q3, only But it ought to get to where it has historically been.

Speaker 3

We think by the time we get into only. The summer months and so feel good about that business, just need to get through some of the inventory rightsizing that our customers are going through. Only. The upside in building products really was being down less than $1,000,000 all in, some really good work on Management side in addition to the gross margin side, the other end markets that were in there really picked up a lot of the slack only and we expect and certainly hope that that type of activity will continue, which gives us cause for optimism as we head into 2020

Speaker 5

only only mode. And it's more of a longer term sort of question on Clark Dietrich specifically. Obviously, as we talked about the last 2 years of that business, only. And started to normalize a little bit. But just Talk about what's changed in that business over the past few years that gives you confidence that the contribution will remain well above the sort of pre pandemic levels?

Speaker 5

Thanks again.

Speaker 3

Clearly, that business has changed in terms of its equity income contribution for us. They've done a terrific job of understanding who their customers are, understanding what their customers really value, and that's being full service. It's being thoughtful about only. The entire kind of ecosystem that their customers participate in, not just delivering a load of steel, but helping think about only. How those connectors and how the other accessories that they sell are important, how they can save contractors time.

Speaker 3

Only. And so, yes, and we've talked about this, right. We don't expect that those results will stay forever only or grow forever from where they were in 2022. They moderated some in 2023. We've talked about the moderating only Some in 2024, but long term we're very bullish on that business.

Speaker 3

They've got a great management team. We're very happy to be a part of that JV.

Operator

Your next question comes from the line of John Tumazos of John Tumazos Very Independent Research. Your line is open.

Speaker 6

Congratulations on the $90 combined value of the 2 companies with enterprises trading at more than The old Worthington before you announce it. Well done.

Speaker 2

Thank you, John. Thanks, John.

Speaker 6

I have a question on Quarterly dividend set at $0.16 or half of the old company dividend. I was I thought that was very low. I was in the context of the only balance sheet allocation between the two companies where there's almost no net debt only. In enterprises and you explained how there isn't very much capital spending only relative to your cash flow, where the other company has the preponderance of the net debt and only. The imminent capital need to fund working capital because steel prices just rose.

Speaker 6

So in that context, why isn't the dividend payment only. Larger since the balance sheet is so good. And could you some people might be concerned, Andy, that only. You're not confident in earnings. That's not really my worry.

Speaker 6

My worry, if you could address, only. The balance sheet is super strong and the dividend is low to save up $500,000,000 or more firepower For a transformational acquisition or above average pot for future acquisition

Speaker 2

I think there's a question in there somewhere, John, but I'm going to take an attempt here. No,

Speaker 3

I want to

Speaker 6

be more blunt. Only. Are you going to make a corporate exchange acquisition? Are you going to transform the company and that's why the dividend is so low and the balance sheet is so good?

Speaker 2

Only. Well, let me start by saying the past year or so, year and a half It's been about working towards the separation and you've seen us very purposefully delever the business. Only. We were very focused on maintaining our investment grade credit rating. And you're correct in that we certainly could only I would tell you that historically we've kind of revisited our dividend payout ratio only in the June timeframe around that Board meeting.

Speaker 2

And so we go through strategic planning in the spring. We do our operating plans and kind of look at only cash flow forecast and those types of things and that's where we make those decisions. I will tell you, we do believe that only. M and A is going to be an important part of our growth strategy. I don't expect that anytime soon we're going to do some transformational position that's going to double the size of the business.

Speaker 2

That's not historically what we've done. We've very much pursued kind of smaller only Acquisitions that we can get our arms around pretty easily and plug them into our Worthington business system and only, which includes transformation, innovation, and I think that's likely to be the strategy going forward. Only. We look at a lot of different types of companies. We look at a lot of different sizes of companies.

Speaker 2

But we've had a lot more success only buying smaller tuck ins and really accelerating their growth. So that's kind of the plan right now. And so I do think only. As the company continues to grow, we have very high free cash flow for the business. So we can support only higher dividends or potentially share buybacks.

Speaker 2

But right now, our focus is let's get the company separated, that's complete, Let the dust settle and let's refocus and then kind of figure out what makes the most sense in terms of capital allocation.

Speaker 6

If I could follow-up. With the very successful separation in the stock price only. Enterprise is more than the old stock price of the old Worthington, which maybe in hindsight was only. Should we expect that buybacks are going to be less of a

Speaker 3

only. Hey, John, it's Joe. As Andy said, we'll ultimately determine the best capital allocation strategies for the business going forward. We've been balanced before. We've been opportunistic when it comes to buybacks, but it's still it will be an arrow in our quiver and only.

Speaker 3

Ultimately, the Board and the management team will decide how best to deploy that.

Speaker 6

Thank you.

Operator

There are no further questions at this time. I will now turn the call over back to Andy Rose for some closing remarks.

Speaker 2

Only. Well, thank you everyone for joining us today. It's exciting time for us and appreciate everybody's interest in Worthington Enterprises. We wish everybody a terrific holiday season, a safe and happy New Year, and we'll look forward to speaking to you in 2024. Thanks everybody.

Operator

That concludes today's conference call. You may now disconnect.

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