Worthington Enterprises Q4 2023 Earnings Call Transcript

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June 29, 2023

There are 9 speakers on the call.

Operator

Hello, and welcome to the Worthington Industries 4th Quarter Fiscal 2023 Earnings Conference Call. All participants 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 Rogier, Treasurer and Investor Relations Officer. Mr.

Operator

Rogier,

Speaker 1

you may begin.

Speaker 2

Thank you, Chris. Good morning, everyone, and welcome to Worthington Industries' 4th quarter fiscal 2023 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 the Steel Company 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.

Speaker 2

These statements are subject to risks and uncertainties could cause actual results to differ from those suggested. We issued our earnings release yesterday after the market close. 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 financial results.

Speaker 3

Thank you, Marcus. Good morning, everybody. We finished the fiscal year with a very strong quarter, reporting Q4 earnings of $2.61 a share versus $1.61 a year ago. There were a few unique items that impacted our quarterly results, including the following. We incurred pretax expense of $8,000,000 or $0.13 per share related to the planned separation of our steel processing business into a new public company, which we expect to complete by early calendar 2024 recognized a modest impairment charge in steel processing related to some equipment we no longer use, which was offset by a one time non recurring gain in our Cabs JV during the current quarter.

Speaker 3

This compares to a small restructuring gain of $0.03 per share in the prior year quarter. Excluding these items that were unique, we generated record quarterly earnings of $2.74 per share in the current quarter compared to $1.58 per share in Q4 of last year. In addition, in Q4, we had inventory holding gains estimated to be $33,000,000 or $0.49 a share compared to inventory holding losses of $42,000,000 or $0.64 a share in Q4 of 2022. Consolidated net sales in the quarter of $1,200,000,000 decreased 19% from the prior year due to lower average selling prices in steel processing combined with lower volumes across most of our segments. Gross profit for the quarter increased to $244,000,000 $168,000,000 in the prior year quarter and our gross margin increased to 19.9% from 11%, Primarily due to improved spreads in steel processing.

Speaker 3

Adjusted EBITDA in Q4 was a record $211,000,000 up from $139,000,000 Q4 of last year and our adjusted EBITDA in fiscal 2023 was $515,000,000 with respect to cash flows and our balance sheet, cash flows from operations was $229,000,000 in the quarter and free cash flow was $212,000,000 In fiscal 2023, we generated $539,000,000 in free cash flow. During the quarter, we invested $18,000,000 on capital projects and paid $15,000,000 in dividends. We also received $51,000,000 in dividends from unconsolidated JVs during the quarter, a 92% cash conversion rate on debt equity income. Looking at our balance sheet and liquidity position, funded debt at quarter end of $693,000,000 was flat sequentially. At interest expense of $5,000,000 was down by $3,000,000 primarily due to interest income we earned on our cash balances And to a lesser extent lower average debt levels.

Speaker 3

We continue to operate with extremely low leverage levels and our net debt to trailing EBITDA leverage ratio is now under 0.5 times. We believe we are very well positioned for the future with ample liquidity ending Q4 with $455,000,000 in cash and over $500,000,000 in availability on our revolving credit facilities. Yesterday, the Board declared a dividend of $0.32 per share for the quarter, which is payable in September of 2023. There's a 3% increase over last quarter and marks the 13th consecutive year we have increased our dividend. We're very pleased to be able to continue rewarding our shareholders as we deliver strong results.

Speaker 3

Will now spend a few minutes on each of the businesses. In Consumer Products, net sales in Q4 were $181,000,000 down slightly were $186,000,000 a year ago. The decrease was primarily driven by lower volumes, partially offset by the inclusion of Level 5's results. Adjusted EBIT for the Consumer business was $26,000,000 and adjusted EBIT margin was 14.2% in Q4 Compared to $29,000,000 15.8 percent last year. Consumers earnings and cash flows for the current quarter were strong And adjusted EBIT increased by 43% on a sequential basis as we saw a return to seasonal patterns.

Speaker 3

While point of sale data suggests that consumers are spending less in stores, our products are typically not considered big ticket items and are used for home projects or to enjoy celebrations, cookouts and camping trips. We believe this dynamic positions us well regardless of economic conditions. The consumer team continues to do a great job managing the business while developing new and innovative branded products. In fact, We launched the Balloon Time Mini Helium tank last month. An outcome of our voice of customer research is patent pending innovative new product is compact and easier to use, opening up more opportunities for distribution and potential new channels.

Speaker 3

The Balloon Time Mini is currently available in select Meijer stores and will launch more broadly across the U. S. Later this fall. Building Products generated net sales of $142,000,000 in Q4, Down 18% from $173,000,000 a year ago. Decrease was driven by lower volumes, partially offset by favorable shift in product mix.

Speaker 3

Loading products generated adjusted EBITDA of $59,000,000 for the quarter and adjusted EBIT margin was 41.6% compared to $64,000,000 36.8 percent in Q4 of last year. The decrease in EBIT was driven by our wholly owned businesses, which saw operating income decrease by $10,000,000 year over year from record results due to lower volumes in residential construction and maintenance end markets, which continue to see some destocking compared to a year ago. The headwinds in our wholly owned business were partially offset by higher equity earnings contributions from our Building Products JVs, which collectively contributed $50,000,000 in Q4, dollars 6,000,000 more than they did a year ago. Artite trick and Wave both continue to perform well, generating year over year earnings growth, while their end markets are being impacted by interest rates and economic uncertainty. Our Building Products team continues to do an excellent job executing in the current environment, while investing in innovation and long term profitable growth.

Speaker 3

In Q4, Building Products shipped a first of its kind patent pending cylinder called PowerCore. This disruptive innovative new containment solution gives contractors the power to increase productivity by spraying water based adhesives onto a surface with speed and efficiency or previously those adhesives could only be applied manually. In Sustainable Energy Solutions, net sales in Q4 of $45,000,000 were were 10% or $4,000,000 from the prior year driven by higher average selling prices. SCS reported adjusted EBIT of $3,000,000 in the current quarter compared to a loss of $2,000,000 in Q4 of last year. The economy in Europe continues to be challenging and SCS' results will be impacted as a result.

Speaker 3

We believe our team continues to do an excellent job executing in the current environment, while positioning that business as an important part of the supply chain will enable the global transition to low and 0 emissions mobility. At this point, I will turn it over to Tim to discuss Steel Processing's results.

Speaker 4

Thanks, Joe. In Steel Processing, net sales of $860,000,000 were down 23% from $1,100,000,000 in Q4 of last year, Primarily due to lower average selling prices. In Q4 of last year, the market price for hot rolled steel was $1300 a tonne, While in Q4 of this year, the market price was just over $1100 per tonne, resulting in a 23% decrease in our average selling prices. Total tons shipped were down 2% compared with the prior year quarter. Excluding the impact of divestitures, direct sale tons were down 1%, while toll tons shipped were up 8%, primarily due to increased volumes with the mills.

Speaker 4

Direct sale tons made up 57% of the mix compared to 56% of the mix in Q4 of 2022. From a demand perspective, we're seeing modest increases in automotive production, We continue to experience softness in both residential and non residential construction, which have been impacted by rising interest rates. In Q4, Steel Processing reported adjusted EBIT of $96,000,000 which was up $80,000,000 from the $16,000,000 reported in the prior year quarter. In the quarter, we had estimated inventory holding gains of $33,000,000 compared to estimated losses of $42,000,000 last year. We anticipate generating inventory holding gains in Q1 and estimate those holding gains could be around half of what we experienced in the current quarter.

Speaker 4

Our employees remain focused on what's in front of them both near term and long term as they manage the ever changing steel environment of planning for the future. It's an exciting time within steel processing with opportunities for us to capitalize on recent investments in light weighting, electric vehicles and electric grid infrastructure. In fact, we're expanding capacity in Mexico at our Serviccero joint venture in addition to a planned expansion at Temple Steel to capitalize on the growth expected in these markets. We would also like to congratulate our Temple Steel employees, who yesterday received a Global Supplier of the Year award from Dana Incorporated. Dana named Temple the 2022 Lead Electrical Propulsion Supplier of the Year for Temple's efforts to support Dana's global electric vehicle business.

Speaker 4

Our thanks to the Temple team as well as to the broader Steel team for their focus on our future and for keeping our people safe while doing so. At this point, I'll turn it over to Andy.

Speaker 5

Thank you, Tim. Good morning, everyone. Our fiscal 4th quarter adjusted earnings per share results were the best in our 68 year history and our just completed fiscal year was the 2nd best ever. To our customers who make this all possible and our employees who go the extra mile every day to make it happen, We thank you for your dedication to Worthington Industries. As we close in on our Worthington 2024 plan to separate into 2 distinct Financially strong growth companies, we fully intend to continue delivering the same level of quality, service and commitment.

Speaker 5

This project is progressing well and on track for completion in early calendar 2024. We have finalized the corporate structure for both businesses and our employees have all joined a team within 1 of the 2 companies. We believe our employees have embraced the coming changes and are excited about the opportunities in front of them. As evidence of this, we recently received the results of our annual employee engagement survey. We were pleased to learn that participation increased and employees continue to rank Worthington above manufacturing benchmarks in employee engagement and manager effectiveness.

Speaker 5

Responses to questions specifically related to Worthington 2024 were also very strong. Our people and our culture continue to be our greatest assets. The belief in energy regarding the future of the company is palpable. In addition, we hope to announce the names and branding for each company by next Quarter's earnings call. Once complete, New Worthington will be a market leading company with premier brands and fast growing attractive end markets in Consumer Products, Building Products and Sustainable Energy poised to capitalize on key trends in sustainability, technology, construction and outdoor living.

Speaker 5

With higher margins and lower asset intensity, this business should benefit from premium sector multiples. Worthington Steel is and will continue will be a best in class value added steel processor with a unique capability set and excellent growth opportunities in automotive light weighting in Electrical Steel Laminations positioned to take advantage of expanding opportunities in electrification, sustainability and infrastructure spending. To ensure that both businesses begin their new day with low leverage and plenty of available capital, we have built up cash of $455,000,000 as of quarterend. We plan to use this cash to pay down debt and capitalize each business with significant available capital. Once the separation is complete, we are likely to continue with our historical balanced capital allocation strategy.

Speaker 5

Both businesses will 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. Some of you may have seen our recent victory in the DC Circuit Court Reversing a ban unlawfully imposed by the EPA on our refrigerant cylinder. We would like to thank all of those involved in The effort to save American jobs and deliver a practical solution that is better for the environment, HVAC contractors and American workers. Our customers, industry associations, Ohio and Kentucky governors and members of Congress on both sides of the aisle were instrumental in supporting us in this effort. To all of our customers, suppliers, employees, shareholders and other stakeholders, thank you

Operator

will pause for a few moments to compile the Q and A roster. And our first question is from Katya Janchich with BMO Capital Markets. Your line is open.

Speaker 6

Hi. Thank you for taking my questions. First on, can you talk a little bit more about what's driving the Strength in Wave and Clark Dietrich?

Speaker 3

Well, there's A handful of things that are going on, but if you look at their models, if you look at their business models and The way that their businesses have evolved from an innovation perspective, they both run really good businesses and Specifically to kind of their cash flow contributions this year, they tend to do well when prices are going up, but then they have money tied up in working capital. So if you look at their equity income last year, Got you relative to their distributions. We didn't get as much in distributions as we did relative to their income. And so this was a catch up year for them. So They have really well run businesses, but nothing really specific that's driving their results.

Speaker 3

They are facing challenges As are most companies that participate in the building products kind of construction end markets, but It's just a testament to the way that those businesses are run and we're awfully proud to be a part of them.

Speaker 5

Yes. And I might add also that Both of those businesses are leaders in the markets that they serve, Wave being acoustical ceilings and Clark Detrick being metal framing. And They have the best products, the best service, they can do things that other customers can't do and oftentimes that commands a premium in their marketplace.

Speaker 6

So if I look at the earnings this quarter, right, they improved meaningfully sequentially. And I understand steel prices were going higher, so they likely pushed price increases through. Was there any Potential pre buy in those two businesses this quarter?

Speaker 5

Yes, you had a little bit.

Speaker 3

I mean they were up $6,000,000 Collectively year over year, I think $3,500,000 $2,500,000 respectively. But ultimately, they're not Just buying spot. A lot of times they try and sort of understand and kind of hedge their steel buy there. So When you do have price increases, you do see some buy ahead. But I think, Got you.

Speaker 3

The sequential sort of growth there is probably more seasonal than it is something really specific in the businesses.

Speaker 6

Okay. So how should we think about it going into Q1?

Speaker 3

Well, Both those businesses are under, kind of some of the same pressures or facing some of the same headwinds that others are with wins that others are with interest rates and economic uncertainty. So they're going to kind of continue doing what they're doing. But I would say that the sort of fundamentally without kind of trying to get into guidance, which we don't do, They're going to keep doing what they're doing and try and take share and maintain share and take care of their customers. In what I would say is challenging end markets.

Speaker 6

Okay. Just one last one. What's your expectation for CapEx this year?

Speaker 3

Sure. So I mean the best place to start there is probably where we ended 2023. We had $86,000,000 in CapEx for the year. It was down got a $9,000,000 from 2022. The way that that kind of breaks down It's a little more than fifty-fifty, dollars 46,000,000 or $45,000,000 of that was in the steel business.

Speaker 3

The rest of the business was around $40,000,000 We think that's a good run rate for the businesses on a go forward basis, but we have some pretty significant Growth CapEx investments that we're making. Tim mentioned a couple, one in Mexico and then one that will The North America centric for the Temple business, we think overall looking at Fiscal 20 24 CapEx could be 50% or slightly higher than that relative to the way it was in 2023.

Speaker 6

Okay. Thank you very much. Sure.

Operator

The next question is from Martin Englert with of Seaport Research Partners, your line is open.

Speaker 1

Hello. Good morning, everyone. Good morning, Martin. Just I think I asked a similar question a year ago, but I'm going to revisit it. And it comes back to the underlying profitability in steel processing.

Speaker 1

And when we removed the holding gains, Steel processing was strong at $75 per tonne of EBITDA, I think,

Speaker 6

for the quarter, dollars 62 for the fiscal year.

Speaker 1

What do you believe is maybe normalized unit profitability through cycle for this business?

Speaker 4

Mark, we don't look at the business

Speaker 5

that way. I mean, that's

Speaker 4

a tough one to answer.

Speaker 1

Okay. Maybe ask it a different way. I guess, how do you look at it? Are you looking at it on a margin basis or when you think about like the True cycle ability for that business.

Speaker 4

Yes. I think the best way to think about that is we look at It's really the gross on materials for each product and think about gross on material would be the average selling price Minus the material costs, and we think of it that way.

Speaker 1

Okay. And do you think that's Materially changing on a year has been and maybe will continue to on that spread on a go forward basis.

Speaker 4

Certainly, what we try

Speaker 3

to do is, it's part

Speaker 4

of our strategy to push price wherever we can and to Add more profitable products. So when you see Tempo being added, their gross on materials is much higher than, say, a hot rolled product. Yes, the strategy continues to be let's push price and let's push that spread as much as we can.

Speaker 3

Yes, but you do see kind of Improvement there in the last couple of years, I think that's the nature of your question, Martin. But it's really a testament The job that team does and honestly how unique that offering is because when you do as much As we do from a value added perspective and from a partnering with our customers' perspective, it's simply worth more and it's less commoditized And that's something that we do pretty well and we're pretty proud of.

Speaker 1

Yes. That's exactly the point there. The other question, what I was Trying to highlight there, in prior years looking at pulling out holding gains and losses, you'd be maybe $40 $50 a Fine, but fiscal 2022 was at 56, fiscal 2023 was at 62 and this would have Temple baked in there. So it seems like it's been stepping up some and maybe that long term Normalized through cycle possibility is improving. So, all right, thank you.

Speaker 1

That's helpful there. You already touched on holding gains and then sustainable energy segment unit EBITDA That's also generally improved this past year despite a challenging market. I guess You did call pricing was a function of this, but do you feel that the 4Q unit profitability was an anomaly here or Is this going to be something that's more reflective of improved run rate when we look out over the coming quarters?

Speaker 3

Yes, I would say it wasn't an anomaly, but it's also not the beginning of a trend, Martin. The Q1 for that business is always going to have some headwinds because of the August shutdowns in Europe and things like that. But Ultimately, that business is continuing to invest in The transition that we talk about, the global transition to low and 0 emissions mobility, but in the meantime, They're buffeted by what's happening in Europe and some of the other things that are kind of challenged them. So we expect them to They're certainly going to do their level best, right, to do better every month and every quarter and we hope to see them grow Their profitability, some in the next year, but it's going to be in fits and starts and it's going to be a little choppy.

Speaker 1

What are you hearing from your customers in the euro footprint for that business? And I understand there's a strong Seasonality on a sequential basis that you just highlighted coming up here, but What are you hearing? What are you seeing, anticipating, maybe thinking about like the current quarter fiscal 1Q Relative to last year, like the demand level of activity, is this something that's going to be slightly down or comparable? Or is it That is starting to pivot and kind of come up off the bottom even.

Speaker 3

Yes. I'd say with SCS, I mean the conversations that we have with Customers, Martin, on a regular basis are further out than that. These are our plans. This is what we hope to be able to accomplish in the next 3 or 4 years. We ultimately believe the inflection point for that industry is still are several years away from that kind of hockey stick.

Speaker 3

And so we're going to continue to Participate, help innovate and drive some of those conversations forward. But ultimately, We feel really good about the investments we've already made that will have us as a key part of that supply chain, But the market still has to grow and when there's an ongoing war and all of the disruption that you have, everybody's plans get kind of thrown out and you have to think a little bit more about what's in front of you and the European economy has reflected that the last year and a half and we see that continuing.

Speaker 1

Okay. Excellent. One last one. Any budgeted tax rate for fiscal 2024?

Speaker 3

No reason to thank you to be materially different than it was this year.

Speaker 1

Okay. Congratulations on the results. Thank you.

Speaker 5

Thank you.

Operator

The next question is from Phil Gibbs with KeyBanc Capital Markets. Your line is open.

Speaker 7

Hey, good morning.

Speaker 3

Good morning, Bill.

Speaker 7

On the side of Wave, profits were up nicely year over year. Was that largely driven by spreads or volume or do we have a little bit of mix of both?

Speaker 5

Yes. I mean, I think as you know, Phil, this business kind of goes in cycles around what steel pricing is doing. So this quarter we saw a little bit of margin expansion from the business. They're in market. While it's remained pretty steady, you heard Joe's comments earlier, we're kind of waiting to see some volume softness there, we haven't seen a ton of that yet, but commercial construction, most people anticipate either the back half of this year or early in 24 that you're going to see some softness there.

Speaker 5

But for the time being, their business is pretty good and margins are pretty good.

Speaker 7

Thanks, Andy. And then more for the steel folks, but automotive Kind of a lot of mixed signals there. I think a lot of it seemingly like a couple of steps forward, couple of steps back, changes in mix, that sort of thing. But what are you all seeing in your automotive business in terms of pulls and expectations and or any model changes that you're focused on, just kind of an update on the broader Mosaic?

Speaker 4

Yes. From an automotive standpoint, Year over year, we were up about 7% and North American production was up about 7% as well. For the year, We follow IHS and they're predicting 15,000,000 units for calendar 2023, which is up 5% over last year's 14.3 15,000,000,000 units sounds like pretty strong, but at the end of the day, it's still quite far behind the units that were produced on average 18 and 2018, so they did about 16.6 in 2019 and 2018. And as you say, supply chain problems, they're not talking about as much, but they're still there. So there's lots of varying things out there.

Speaker 4

Interest rates are going up. Dealer inventories improved a little bit. So there's lots of things happening out there. But

Speaker 5

But at the end of

Speaker 4

the day, we think automotive is going to be up about 5% this year.

Speaker 7

Thank you. And then as it relates to the separation coming in the next Couple of quarters. Is there anything that you all need to do in terms of IT investment or transition there? I would assume most of that stuff was pretty fresh and clean the last several years, but any sort of systems modifications you guys need to do that are Material before that point in time or you feel like you're pretty set?

Speaker 5

Well, it's an opportunity to give a shout out to the folks that work in our IT group because we have an excellent group of people that keep us up and running consistently and they're shouldering a lot of the burden of the separation because that's where a lot of it has to happen. But the short answer is there's a little bit of investment, But it's somewhat of a rounding error relative to our total CapEx in terms of what we need to do to separate. And that some of that will happen Before we separate, but some of it will also happen post separation, but it's not a material amount of investment that's got to happen to do that. That makes sense.

Speaker 3

Yes. Phil, it's a little unique to us, but the business is actually run on different ERP systems today, so they're a bit more portable than a situation where you would have to kind of carve something out of A different company, but more broadly on W24, everybody asks about timelines. We did As we thought we would, we did file our initial Form 10 with the SEC during our Q4. Are kind of in that process and then certainly our fiscal year just ended. And so We'll get our audit done in the next kind of month or 6 weeks and then hope to get that on file with the SEC and start those conversations and we'll go from there.

Speaker 1

Thanks guys. Good job.

Speaker 3

Thank you.

Operator

The next question is from John Tumazos with John Tumazos, Very Independent Research. Your line is open.

Speaker 8

Thank you very much for $12 or $13 of earnings the last 2 years with steel prices falling $12.50 a ton. It just boggles my mind. You did so well. Congratulations. I wish I could shine your shoes.

Speaker 5

That's very kind of you, John. But We believe our steel processing business is the best around. So they're showcasing what they can do.

Speaker 8

How much was the total percentage for 2023?

Speaker 4

Total percentage in 2023 for Entire well, I'll tell you in Q4, Q4 was 43%.

Speaker 3

So it was Yes, it was probably not a lot higher than that, John, for for the fiscal year, this was the first quarter where we saw year over year growth in tolling, Mostly having to do with the geographies where they are and some of their mill partners getting back up and going.

Speaker 8

So in the fiscal year just ended, the steel processing volumes fell 272,000 tons. If we have a 5% rebound in fiscal 2024 In line with the auto production, for example, it would only make up about half of that lost ground. What are the segments in steel processing that are Declining, I would have thought that reshoring and lower steel imports would be helping you.

Speaker 4

We had some divestitures in there in prior quarters. So we exited our facility in Decatur, Alabama. That was a direct facility only, direct sale facility only. We also exited a toll processing Facility in Jackson, Michigan. So you've got some divestiture noise in there that you've got overcome.

Speaker 4

I don't have the figures in front of me, but that's you're seeing some of the impact of that in When you look at them on a consolidated basis.

Speaker 3

Yes, John, in Q4 specifically, excluding divestitures, Our direct tons were down 1% and toll tons were actually up 8%. And I think Tim mentioned this that we are seeing some headwinds in the construction space and automotive is kind of from recessionary levels growing A bit. And since that's our largest end market that makes that picks up some of the slack and some of the year over year weakness that you see in construction.

Speaker 8

Concerning the demerger, Do you think it would be unreasonable for to estimate $300,000,000 or larger buybacks the 1st year from the combined companies. And let me just elaborate. I'm estimating Steel Dynamics is under a PE on current earnings and Nucor Under 8. So I'm worried the steel processing business have a discounted PE and sympathy to that. And I'm a little worried That the remainco of diverse construction and cylinder and waive and Dietrich businesses doesn't have an exact comparable and might get misunderstood like a little mini conglomerate.

Speaker 8

So it's not clear to me that the combined valuation is a lot more. Maybe I'm just saying tongue in cheek, Your legal and banking advisors encourage you to do it to charge you these big ass fees, 24,000,000 But do you think it's unreasonable to expect much larger buybacks in the coming year out of concern that 2 companies don't trade as well as your current 10 PE ish?

Speaker 5

Well, a couple of things there, John. First, we didn't do this spend because our bankers and lawyers encouraged us to. We did it because we believe it's the right thing to do for our shareholders and for the long term value creation of the company and for Our employees and other stakeholders. I will say, while we have not been buying back stock This year because we are trying to fortify our balance sheet, so that when we do separate both companies have A tremendous amount of liquidity and low leverage to take advantage of opportunities, but it's a little difficult to say right now What those opportunities might be, if you have followed us, which I know you have for a long time, You know that we allocate capital based on where we think the best opportunities are. And sometimes those opportunities are acquisitions.

Speaker 5

Sometimes those opportunities are to repurchase our shares when we think there is value there. And it's a little bit of a black box in terms of where these companies will trade when we separate as you sort of correctly identified. Now we actually are extremely bullish that both of these companies are going to trade at premiums to their peer groups. But at the end of the day, we'll have to wait and see how that shakes out. And when that does, that'll sort of determine where we think the best value to invest our free cash flow is.

Speaker 8

Thank you. I'm just lazy and cranky. I don't like to rebuild my models when you change your segment to spin codes.

Operator

If you'd like to ask a question. And it appears that we have no further questions. I'll turn it back over to the presenters any closing

Speaker 6

comments. Well,

Speaker 5

great. Thanks everyone for your time today. We appreciate you joining us and encourage everybody to have have a great 4th July holiday and we'll speak to you in September. Thanks guys.

Operator

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

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