Worthington Industries, Inc. (WOR) Q2 2018 Earnings Conference Call Transcript

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Worthington Industries Inc. (NYSE: WOR)
Q2, 2018 Earnings Conference Call
Dec 19, 2017 2:30 p.m. ET

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Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Worthington Industries second quarter fiscal 2018 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 like to introduce Ms. Cathy Lyttle, Vice President of Corporate Communications and Investor Relations. Ms. Lyttle, you may begin.

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Cathy Lyttle -- Vice President, Corporate Communications and IR

Good afternoon, thank you, Cynthia. Welcome to our second quarter earnings call. Certain statements we make today 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 news release was issued this morning, with more detail on those factors that could cause actual results to differ materially. We are recording this call, and it will be made available later today, on our website.

With us in the room are Chairman and CEO, John McConnell, President and COO Mark Russell, Executive Vice President and CFO Andy Rose. John has a few opening comments.

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John McConnell -- Chairman and Chief Executive Officer

Well, thank you, Cathy. And, thank all of you, for joining us today. I am pleased to report to you again this quarter that our employees continue to perform at a very high level, in every business segment, with earnings stabilized at near-record levels for the past four quarters. I'll ask Andy Rose to start a deeper look at the quarter. Andy?

Andy Rose -- Executive Vice President and Chief Financial Officer

Thanks, John. Good afternoon, everyone. The company delivered earnings per share of 61 cents, excluding restructuring, the second best second quarter in our history. Results were impacted by a one-time 4 cent catchup charge at WAVE, related to parent company allocation. We saw big improvements in our pressure cylinder segment, from the Amtrol acquisition, and strong consumer product volumes, offset by lower toll volume in steel processing, and lower equity income. Several unique items in the quarter were as follows. Equity income from WAVE was $4.9 million, or 5 cents per share lower, due to higher parent company allocations.

$3.6 million of the allocation increase, or 4 cents per share, were catchup charges for the January to August period. A pre-tax restructuring and impairment gain of $1.4 million, or 1 cent per share, relate to a sale of property in steel, offset by a rate-down of our investment in Worthington Energy Innovations. Our effective annual tax rate was more normalized at 30%, higher than previous periods, as a result of lower stock comp deductions. Our best estimate of a normalized tax rate under the new tax law would be 23 ½%, although we will only get 5 months of the lower rate in fiscal 2018. Annual cashflow would be $20 million higher, at current earnings and investment levels, with the new tax rate.

Cylinders' operating income, excluding restructuring, was up $12.9 million, or 97%, to $26.1 million, driven by a $6.9 million contribution from Amtrol, and significant demand in the consumer products business, as a result of the hurricane relief efforts. This was the best quarter ever for pressure cylinders. The integration and performance of Amtrol continues to go well, but equally important, we have gained some talented people, and a number of best practices that will make all of Worthington's businesses better

Steel processing operating income was down $5 million, excluding restructuring, from the prior year quarter, to $30.8 million. Most of the decline is related to weak tolling business, at two of our consolidated joint ventures, as direct volumes were up 4.4%, during the quarter. Revenue in engineered cabs was up 35%, to $30.4 million, but more importantly, operating losses were only $1.7 million, a $700,000 improvement over the same quarter a year ago.

Volumes continue to improve in this segment, with strength in construction and mining equipment in particular. Equity income from our joint ventures over the quarter was down $10.7 million. WAVE was down $5 million, primarily due to the recently completed agreement with our partner, to increase the allocations charged to WAVE for sales support and back office functions. WAVE's equity income was down $4.9 million from these higher parent company allocations, which were retroactive, back to January 1, 2017, covering 11 months. WAVE also incurred $1 million in fees, related to the sale of the international business.

The good news here is that once the international sale closes, the annual impact to Worthington's from the higher allocations will be roughly $2 million, and not the full $5 million, incurred this quarter. During the quarter, WAVE also announced the sale of its international business, as part of a broader transaction with our partner, Armstrong World Industries. On close, the sale will result in estimated proceeds to Worthington of $45 million, and will reduce our share of WAVE's equity income by approximately $5 million. We expect the sale to close sometime mid-calendar, 2018. The decision to sell WAVE International is consistent with our approach to exit businesses that do not meet our margin and return expectations, as opportunities present themselves, and redeploy that capital in more productive sectors.

In addition to WAVE, equity income at our Clark-Dietrich joint venture was down $3.9 million, from higher raw material prices, but competitive pressure limited their ability to raise prices. A recently announced January price increase of 15% should improve earnings. Artiflex was also down, $1.9 million. The inherent volatility in both of these businesses was a key driver in our decision to convert them to minority interest joint ventures, with partners who can give them a better chance of success. We received dividends from JVs of $19 million, during the quarter. Cash from operations was $19 million, for the quarter.

We also received $16 million from the sale of real estate, that was the previous site of PSM. We completed no acquisitions, spent $24 million on capital projects, distributed $13 million in dividends, and repurchased 1.5 million shares of stock, for $67 million, during the quarter. Today, the board declared a 21 cent per share dividend for the third quarter, payable in March of 2018. Debt was essentially flat from the prior quarter, at $781 million. Interest expense was up $2.4 million from the prior year quarter, to $10 million, as a result of our 15-year, 200 million bond offering, completed in July, at a rate of 4.3%. Our current annual run rate of interest is $40 million. We have consolidated cash of $122 million, and almost $600 million available under our revolving credit facilities.

Our net debt to trailing EBITDA leverage ratio is now roughly 1.7 times. Despite a bit of noise in our numbers this quarter, we continue to be quite pleased with the performance of our overall business. We are operating near record earnings, and cashflow levels, despite limited contributions from our cabs and oil and gas businesses. The company generated $92.5 million of EBITDA, comparable to the same period last year. Trailing twelve month adjusted EBITDA is now $381 million. We will continue our balanced approach to investing in our business, earn new businesses, and returning capital to shareholders, as opportunities present themselves. We have a lot of work in front of us, but the foundation of our people, our philosophy, and our strategy continue to drive us forward.

Mark will now discuss operations.

Mark Russell -- President and Chief Operating Officer

Thanks, Andy. Steel processing direct customer shipments, increased by 4%, compared to the prior year quarter. That matches the 4% increase in direct industry shipments, noted in recent Metal Service Center Institute data. Toll processing volume decreased 23%, reflecting continued softness in toll galvanizing volume at our Spartan joint venture. And, more recently, a small, and we think temporary reduction in toll pickling volume, reflecting a production issue in one facility. Combined, direct and toll volumes decreased by 10%. And, our mix of direct and toll is, of course, now more skewed to direct, with 57% of our volume being direct, versus 43% toll, this quarter. That compares to 49% direct, and 51% toll, last year.

Direct shipment increases were particularly strong in heavy truck, which was up 29%, and agriculture, which was up 25%. Direct automotive shipments decreased just slightly, with the Detroit Three down 2%, and all other manufacturers off an average of only 1%. Overall, volume still reflects considerable market strength, even if volumes are modestly lower than last years record high levels. Our expanded survey serojoint venture facilities in Mexico, as well as the newly expanded Mexican footprint of our tailor-welded blanks-joint venture, continue to take advantage of the strong growth of the Mexican automotive market.

As Andy mentioned, our pressure cylinders business had a record fiscal second quarter, excluding Amtrol, and including the Amtrol acquisition, an all-time record quarter. In oil and gas equipment, our revenue was up 124%, compared to last year. Volume in this business has increased now for the fourth straight quarter. As current oil and gas prices, and in particular, a stronger forward price curve underpin renewed capital investment by many key customers, across several of the producing plays in the United States.

In alternative fuels, revenue was down 11%, primarily due to lower European automotive buying. Our industrial products business now includes a significant portion of our Amtrol acquisition, and revenue there was up 60%, compared to last year, with Amtrol included. Excluding Amtrol, revenue was still up 14%, compared to last year, primarily on higher LPG volumes, and partially driven by a demand that was hurricane related. Our consumer products business now includes the other significant portion of the Amtrol acquisition. Excluding Amtrol, revenue in the legacy portion of the consumer products business was up 22%, on higher 16-ounce, 14-ounce, and helium volume. With the increase in 16-ounce sales driven partially by hurricane-related demand.

Including Amtrol in the numbers, our consumer products revenue was up 64%. In engineered cabs, the overall off-highway equipment market continues to see growth, especially in global construction and mining markets, with slight increases showing in North American agricultural demand. We're also seeing an increase in demand for after-market parts for cabs. At WAVE, which remains our largest joint venture, volume was extraordinarily consistent, but down just slightly worldwide, off by about 2% in Asia, 2% in Europe, and 2% in North America. John, back to you.

John McConnell -- Chairman and Chief Executive Officer

Thank you, Mark and Andy. At this point, we'll be happy to entertain any questions you might have.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you wish to ask a question, please press * then 1, on your touchtone phone. You will hear a tone, indicating you've been placed in queue, and you may remove yourself from queue at any time, by pressing the # key. Once again, if you do have a question, please press * then 1, at this time. And, one moment for the first question. Our first question comes from the line of John Pumuva, please go ahead

John Pumuva -- Analyst.

Thank you, very much, and happy holidays, merry Christmas.

John McConnell -- Chairman and Chief Executive Officer

Merry Christmas to you, John.

John Pumuva -- Analyst

Will the entire $45 million WAVE proceeds be a capital gain, for book accounting and taxes, or would the gain be even larger, since the equity-carrying value of WAVE on the balance sheet is negative, dividends are greater than cost?

Andy Rose -- Executive Vice President and Chief Financial Officer

The entire -- the entirety of it is not a gain. I think it's around two-thirds, John, is probably a gain. And, I heard the second part of your question, around --

John Pumuva -- Analyst

I said, this part of WAVE must've had a positive tax basis, or cost, where some of the other parts have a negative basis, because dividends are greater than investment.

Andy Rose -- Executive Vice President and Chief Financial Officer

Correct.

John Pumuva -- Analyst

Why is Servia-Sero dropping off so much this year?

Mark Russell -- President and Chief Operating Officer

They're not dropping off in volume, John. The margins are a little tighter, but the --

John Pumuva -- Analyst

And, we care about earnings.

Mark Russell -- President and Chief Operating Officer

Could you repeat that?

John Pumuva -- Analyst

I just said, we care about earnings. Earnings are down about 80%.

Andy Rose -- Executive Vice President and Chief Financial Officer

Us too.

Mark Russell -- President and Chief Operating Officer

Yeah, us too. We continue to invest there, I think reflects heavy investment. This is the third expansion for us in Monterey, if you count the original investment. We expanded that twice, after we built that plant. Now, the second expansion's coming online, here. And, the volume, across Mexico continues to grow, driven by the continued growth from automotive demand. The margins are a little bit compressed, that reflects, I think, partly, an increase in steel costs there that didn't get passed through, but we watch those margins carefully.

John Pumuva -- Analyst

Could you give us a little more color on why the alternative energy cylinder volumes fell 10, 20%? And, why the steel processing, tolling business is down so much, are their particular auto models, or some customer issue, there?

Mark Russell -- President and Chief Operating Officer

I'll take those separately. So, the first question, with regards to --

Andy Rose -- Executive Vice President and Chief Financial Officer

Alt fuels.

Mark Russell -- President and Chief Operating Officer

Alt fuels, volume being off. That reflects the softness in Europe, which is automotive, and reflects a very large customer we have there, who had a recall, that was going on. It wasn't related to our products, but increased demand, temporarily, for our product. That recall's over, so that temporary demand has gone away, and we're back to normal conditions there. So, the comparison, year-on-year reflects the extra demand of the recall last year at this time, rather than unique weakness this year. The second question was relating to --

John Pumuva -- Analyst

Why the steel processing tolling was off so much, if there was a customer or auto program not doing well?

Mark Russell -- President and Chief Operating Officer

No. So, that reflects softness on the galvanizing side, at our Spartan joint venture. That reflects the loss of one customer particularly, there. And, I wouldn't say it's a market change. And then, on the pickling side, softness was concentrated at our Monroe, Ohio facility, where we have a production issue, on the pickle line. Which we think is largely resolved, so we believe that that volume will go back to normal levels.

John Pumuva -- Analyst

Thank you, and best of luck in 2018.

Andy Rose -- Executive Vice President and Chief Financial Officer

Peace out.

Operator

Thank you. Our next question comes from the line of Phil Gibbs, with Key Market Capital -- with KeyBanc Capital Market, please go ahead.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Hey, either one works. How are you guys doing?

Andy Rose -- Executive Vice President and Chief Financial Officer

Great.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Good. So, biggest thing that stood out to me -- and, maybe you touched upon this, because I'm jumping on the call a little bit late, here. But, the cadence changed in consumer and industrial volumes, and in cylinders. Q1, maybe a little bit weak, but Q2 revenues really surprised us on, like I said, on the consumer industrial side. Anything to think about, in terms of that moderating, into the third quarter for you, or is this a good rate to use, moving forward?

Andy Rose -- Executive Vice President and Chief Financial Officer

I would say, on the consumer side, Phil, there's a lot of good things happening in the consumer space. But, this quarter in particular, we saw a pretty significant uptick in volume, related to the hurricane relief efforts, so our customers' been pulling a lot of inventory, there. We've been producing, you know, at maximum capacity. I think that will continue for some period of time, it's not gonna continue in perpetuity, at current levels. But, maybe another quarter, maybe a little bit after that. It's probably fair.

On the industrial gas side, a lot of that uptick I think is related to Amtrol. I think the business, even X-Amtrol, is up for industrial, if I remember back from Mark's comments, but I'm not sure there's anything specific that comes to mind, unless you --

Mark Russell -- President and Chief Operating Officer

Yeah, the hurricane demand was limited to the 16-ounce camping cylinders, and our 20-pound and 30-pound LPG products. And --

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Okay, that's helpful. Andy, any thoughts on the tax reform side, in terms of what that may do? I know your cash tax rate, or your cash tax is paid over your pre-tax has been kinda low. Or, you know, or I would say optimal. Kind of in the high teens, low 20s, the last several quarters. But, is that high teens, low 20s rate on a cash basis, is that doable, based on what you seen outlined right now?

Andy Rose -- Executive Vice President and Chief Financial Officer

Artificially low the last few quarters, because of the stock comp deduction. Rising stock price, you get option exercises, stock vesting, that kinda thing. Our kind of normalized rate is around -- currently around 31%, but we are, as best I can tell, one Senate vote away, and a President signing, from our normalized rate being around 23 1/2 %, on a going forward basis. And, that probably means, at best guess, $20 million of additional cashflow for the company, a year.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Okay. That's very helpful, and --

Andy Rose -- Executive Vice President and Chief Financial Officer

They just said the House passed the bill, so we're getting there.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Alright, well, there's some more cash for the stocking. And then, last question, in terms of what your view is on automotive, just looking into next year. And, I know the second half was tough, because of the model adjustments, and supply side cuts from some of the producers. But, are you seeing that, seasonally speaking, or -- I don't wanna say cyclically, but seasonally speaking, moving stronger into the first half of the calendar year? Seeing any signs that that's bouncing back?

Andy Rose -- Executive Vice President and Chief Financial Officer

I think, year-over-year, our thoughts around automotive, is it's gonna be relatively stable. We're in the low 17 million per auto sales, I think that's what folks are expecting next year, so it's gonna bounce around a little bit, quarter to quarter. Certainly, for us, December is always a soft quarter, because of the holidays. Now, once you get into the first of the year, I think things start to ramp back up again. Go ahead.

John McConnell -- Chairman and Chief Executive Officer

There is a little bit of a mix change, going on there, Phil, with the increasing skew to the trucks and SUVs. And, away from the smaller cars, which is actually a good thing for us, typically.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Okay, and then last question, you know, Andy, I think the other segment, X-restructuring, was I think a $4 million headwind, or something. It was a bigger number than normal. Is there something in that line, that you've reclassified away from some of the segments, or it was sort of a one-time thing, just trying to think about that, moving forward?

Andy Rose -- Executive Vice President and Chief Financial Officer

Yeah, I mean, the only business that's in there right now is Worthington's Energy Innovations, which is small. It loses money, it's actually modestly profitable, but after we put corporate allocations on it, it's not. And then, what? Yeah. And then, we have our captive insurance company is in there, so that thing bounces around a little bit, between being a negative and a positive, just based on what our insurance captive is doing. So, it's a little hard to predict, even for us, quarter to quarter. But, it shouldn't be a big swing, one way or the other, going forward.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Okay, so this is kind of more of a one-off, OK. Thank you.

Operator

Thank you. And, for any other questions, or comments, press * and then 1, that's * and then 1 for your questions or comments. And, we will go to the line of Charles Bradford, with Bradford Research. Your line is open.

Charles Bradford -- Bradford Research -- Analyst

Good afternoon.

Andy Rose -- Executive Vice President and Chief Financial Officer

Good afternoon.

Charles Bradford -- Bradford Research -- Analyst

Hi, as the automobile companies seem to be focusing on moving toward a high strength, advanced steel product, in more places in a car, will that impact your business in any significant way?

Mark Russell -- President and Chief Operating Officer

It will, Charles, the trend will play to our strengths, to the extent we just renewed our capacity to process in our Cleveland facility, and that equipment that will be coming online next calendar year will be high-strength capable. We've also upgraded our galvanizing facility, in the Spartan joint venture, to be able to process higher-strength steel. So, part of that family, we will be able to process there, with the additional front capacity that we have. So, we're anticipating that demand increasing, and we're trying to be prepared to be able to meet it.

Charles Bradford -- Bradford Research -- Analyst

What happens to volume, as steel becomes stronger, therefore probably lighter, and parts become lighter? Would that have a negative impact on volumes?

Mark Russell -- President and Chief Operating Officer

I think you'd see the tonnage impacted just slightly, Charles. I think it's not gonna be a huge drop in tonnage.

Charles Bradford -- Bradford Research -- Analyst

Thank you very much.

Operator

Thank you. As a final reminder, you may press * and then 1 for your questions or comments. And, allowing a few moments, I'm showing no further questions in queue, please continue.

John McConnell -- Chairman and Chief Executive Officer

Thank you all for joining us this quarter, and we look forward to talking to you again next quarter. Have a good holiday.

Operator

Thank you. Ladies and gentlemen, that does conclude your conference call for today, thank you for your participation, and for using AT&T Executive Teleconference Service. You may now disconnect.

Duration: 24 minutes

Call participants:

Cathy LyttleVice President, Corporate Communications and IR

John McConnell -- Chairman and Chief Executive Officer

Mark Russell -- President and Chief Operating Officer

Andy Rose -- Executive Vice President and Chief Financial Officer

John Pumuva -- Analyst

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Charles Bradford -- Bradford Research -- Analyst

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