Worthington Steel, Inc. (NYSE:WS) Q3 2024 Earnings Call Transcript

Worthington Steel, Inc. (NYSE:WS) Q3 2024 Earnings Call Transcript March 22, 2024

Worthington Steel, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Worthington Steel’s Third Quarter 2024 Earnings Conference Call. [Operator Instructions] Thank you. And I will now turn the conference over to Melissa Dykstra, Vice President of Corporate Communications and Investor Relations. You may begin.

Melissa Dykstra: Thank you, Operator. Good morning, and welcome to Worthington Steel’s third quarter fiscal 2024 earnings call. On our call today, we have Geoff Gilmore, Worthington Steel’s President and Chief Executive Officer; Jeff Klingler, Executive Vice President and Chief Operating Officer; and Tim Adams, Vice President and Chief Financial Officer. Before we get started, I’d like to remind everyone that certain statements made today are forward-looking within the meaning of the 1995 Private Securities Litigation Reform Act. These statements are subject to risks and uncertainties that 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.

Unless noted as reported, today’s discussion will reference non-GAAP financial measures, which adjusts for certain items included in our GAAP results and which are presented on a standalone basis. You can find definitions of each non-GAAP measure and GAAP to non-GAAP reconciliations within our earnings release. Today’s call is being recorded and a replay will be made available later today on worthingtonsteel.com. At this time, I’ll turn it over to Geoff Gilmore.

Geoff Gilmore: Thanks Melissa. Good morning, everyone, and welcome. I’d like to start the call today by thanking our 4,600 Worthington Steel employees for the work they do every day to support our customers, shareholders, community, and each other. Their hard work and dedication led to a great third quarter for Worthington Steel. Over the quarter, I had the opportunity to visit several of our facilities where I experienced our focus on safety, and saw transformation in action. Transformation, our system of continuous improvement to increase margins, reduce working capital, and add capacity, is integral to our strategy. Our teams clearly recognize this and incorporate it daily into their work. I’ve talked with dozens of employees around the company.

I am energized by the pride each of them takes in their work and their role in our company. We have a team that is focused and intent on creating value for our shareholders. Together, we continue to help our customers ensure the products the world uses every day are stronger, better performing, and more durable. In our first quarter as a standalone company, our teams executed on our strategy and continue to make progress on our safety, quality, productivity, and sales goals. We are off to a great start, but we have much more to accomplish. I am confident in our team and our strategy and look forward to sharing updates in the future on how we perform. Now I’ll turn it over to Chief Operating Officer, Jeff Klingler for a look at some of the highlights of the quarter.

Jeff Klingler: Thanks, Geoff. I’d like to begin my remarks by thanking our employees for their continued commitment to safety. As Geoff said, we continue to see positive trends in our safety metrics supported by our SafeWorks program. We use data analytics, ergonomic measurement tools, best practice sharing, and daily involvement from our entire team to continuously improve our performance. The same kind of commitment and focus on metrics helps us improve our quality as well, ensuring our customers receive the best possible product and service with every interaction. An example of that, in January, Tempel received the zero PPM Award from Mahle Electric Drives India, recognizing our commitment to manufacturing excellence and quality assurance.

Tempel provides electrical steel laminations to Mahel for use in the electrical motors they supply to Ather Energy’s EV two-wheelers. Congratulations to our Tempel team for this achievement. Our integration at Nagel Germany is going well, and we’re making great progress in many areas. Along those lines, we are already seeing commitments from our customers for when our recently announced expansions in Canada and Mexico come online. We kicked off a multi-year ERP implementation at Tempel, moving to a solution that’s consistent across all divisions. Similar to what we’ve seen with the rest of our business, we believe this move will help us reduce risk, improve processes, and better drive decision-making with more real-time, effective operational and financial data.

This is another example of our long-term commitment to transformation. On the technology front, TWB has signed a licensing agreement with ArcelorMittal Tailored Blanks for the use of its patented ablation technology in the production of hotform tailored blanks. We will install a fully automated ablation line at the TWB facility in Monroe, Michigan, making Worthington Steel one of the only two companies in North America to offer this technology to our customers. Congratulations to all our teams on these impressive achievements. Now I’ll turn it over to Tim Adams.

Tim Adams: Thanks, Jeff, and good morning, everyone. I would also like to thank our employees for staying focused on safety, as well as serving our customers during the third quarter, our first as an independent public company. As a reminder, with this being our first quarter reporting results as a standalone company, our consolidated results for the third quarter are compared with the prior year data, which were prepared on a carve-out basis. For our third quarter, we reported net earnings of $49 million or $0.98 per share, as compared with $5.4 million or $0.11 per share, in the prior year quarter. Our third quarter results included pre-tax separation expenses of $1 million, or $0.01 per share, as compared with $4 million, or $0.06 per share, in the prior year quarter.

I expect this will be the last quarter we recognize expense associated with the separation. Excluding these items, we generated earnings of $0.99 per share in the third quarter, compared to $0.17 per share in the prior year quarter. In addition, in the third quarter, we had estimated pre-tax inventory holding gains of $19.3 million, or $0.29 per share, compared to estimated pre-tax inventory holding losses of $26.6 million, or $0.40 per share, in the prior year quarter. A favorable pre-tax swing of $45.9 million, or $0.69 per share. In the third quarter, we reported adjusted EBIT of $66.9 million, which was up $56.2 million from the prior year quarter of $10.7 million. This increase is primarily due to higher gross margin, which benefited from increased material spreads, including the impact of estimated pre-tax inventory holding gains.

Our SG&A was up $3.1 million from the prior year, primarily due to incremental costs associated with being a standalone company. Next, I’ll provide some content on the market and our shipments. Similar to what we experienced over recent history, steel market pricing was volatile over the quarter. Steel prices increased from $700 per ton in October to $1,100 per ton in January, then decreased sharply throughout March. The current price for hot roll steel is approximately $750 per ton. We expect estimated inventory holding gains in the third quarter will flip to inventory holding losses in the fourth quarter, and we estimate those losses could be approximately $5 million to $10 million on a pre-tax basis. Net sales in the third quarter were $806 million, up 3% from the prior year quarter, primarily due to slightly higher direct pricing, combined with increased volumes in both direct and total.

We shipped 986,000 tons during the third quarter, which was up 4% compared with the prior year quarter. Direct sale tons were up 1% over the prior year quarter. Volumes were up in construction and energy, primarily due to spot orders and continued ramp-up of certain business. Direct sale volume to the automotive market was down 4% compared to the prior year quarter. The decrease was primarily due to several programs reaching their end of life, combined with the replacement platforms experiencing launch delays. Our automotive book of business continues to be healthy. Our technical and commercial teams work closely with our customers to help them overcome challenges and provide solutions that meet their needs, resulting in increased collaboration and a strong partnership.

We expect to continue growing our leadership position within the automotive industry. Total tons were up 9% year-over-year, primarily due to increased tolling with the mills, as well as several new automotive programs. Direct sale tons made up 55% of our mix in the third quarter, compared with 56% in the prior year quarter. Turning to cash flows and the balance sheet, cash flow from operations was $44.7 million, and free cash flow was $22.3 million. During the third quarter, we spent $22.4 million on capital expenditures related to a variety of projects, including the previously announced electrical steel expansions in Mexico and Canada. On a trailing 12-month basis, we have generated $175 million of free cash flow. Thursday, we announced a quarterly dividend of $0.16 per share, payable on June 28, 2024.

In regard to our balance sheet, operating working capital increased $41.5 million during the third quarter, as receivables and inventory increased as a result of higher steel prices, partially offset by an increase in accounts payable. We ended the quarter with $60.8 million of cash, which is down from the second quarter, due to the $150 million dividend we paid to our former parent, in connection with the separation. Our ABL debt at February 29, was $147 million, down $28 million from the second quarter. In summary, Worthington Steel had an excellent third quarter, and all our teams performed well. Everyone at Worthington Steel continues to be focused on driving stakeholder value, on both a near-term and long-term basis. I’m proud of our teams for their dedication and for their continued commitment to safety.

At this point, we would be to take your questions.

Operator: Thank you. [Operator Instructions] And we will take our first question from Phil Gibbs with KeyBanc Capital Markets. Your line is open.

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Q&A Session

Phil Gibbs: Hi, good morning.

Geoff Gilmore: Good morning, Phil.

Phil Gibbs: What’s the typical volume seasonality for the May quarter? I know it’s usually your strongest from a volume perspective, given the timing of your customer buying patterns?

Geoff Gilmore: Yes, I think you kind of answered your own question. You’re right. It tends to be higher. It’s usually our strongest quarter, from a volume perspective. Q3 tends to be on the lower side, because you’ve got automotive shutdowns in December, and Q4 tends to be on the higher side.

Phil Gibbs: More so just curious on the historical magnitude. Is this plus or minus high single-digits, low double-digits in terms of what you expect from a volume pickup?

Tim Adams: I would say it’s low single-digits. It’s not huge.

Phil Gibbs: Okay. And then from the spin, is your commentary effectively pointed to the fact that we should use 3Q, as a good baseline for the adjustments in your go-forward cost structure?

Tim Adams: Yes, I think what you see in there is SG&A is probably a little light. Q3, tends to be a little light, because you’ve got that December month in there. So, travels down, you have vacations in there. So, Q3 from an SG&A perspective is usually down a little bit. Plus, we had some things that hadn’t quite ramped up fully, from an SG&A standpoint. So, if you look at a go-forward basis, probably on a little bit higher than what it was in Q3.

Phil Gibbs: And then as we think about net working capital in the fourth quarter, is that expected to be a user source of cash? And then just update us on the CapEx outlook, maybe for the fourth quarter and year?

Tim Adams: Yes, typically what happens when you have inventory holding gains, you’re going to build working capital. And when you have inventory holding losses, you’re going to release. So, we would expect to release some working capital in Q4.

Phil Gibbs: And then on the CapEx side, for the fourth quarter and then maybe for 2025, as we think about some of these growth projects that you’re working on in the next few years?

Tim Adams: So, what we’ve been signaling is $100 million for 2024, 2025, and 2026. We’ve run about $60 million to-date in 2024. Depending on how the projects come in, in Q4, I think we’re actually going to get pretty close to that $100 million number. We’ve got some additional CapEx. We’ve got the ablation project that we announced last week. We’ve got an ERP project that we’re doing at Tempel. It’s probably going to add another $10 million to the $100 million estimate we had in 2025, as well as another $10 million to the $100 million estimate, we had for 2026.

Phil Gibbs: That’s really helpful. And then on the ablation business win and the operational piece in Monroe, what could it mean for you all in terms of the investment and timing? It sounds like it’s spliced a bit into this $20 million pickup in CapEx, along with the ERP over the next two years following this one. But what does it mean for you financially, and how big of a differentiator is it? Just trying to figure out what this possibly means from a mix, or a profitability standpoint as you guys put it in play?

Jeff Klingler: Sure. Good morning, Phil. This is Jeff Klingler. We’re obviously very excited about this project. We are only one of two companies now that, are able to offer this product in North America. We do believe that this market opens up new products and new opportunities, by about 30% to our existing welded blank market. So, again, very excited about this technology and this project. It’s going to take, from a timing standpoint, by the time you install the equipment and win an award, it’s a typical automotive type award cycle that takes about 24 months, to get to full production. So, it’s a little bit out there, but – we’re pretty excited about all the activity that’s happening right now, and pretty confident we’ll fill that line. In years three and four, we expect to feel the full benefit.

Phil Gibbs: Thank you.

Operator: [Operator Instructions] And we will take our next question from John Tumazos with John Tumazos Very Independent Research. Your line is open.

John Tumazos: Thank you very much for taking my question. And thank you for your good efforts for the company. Just for explanation, could you explain, what is ablation and what ERP stands for?

Jeff Klingler: Good morning, John. Jeff Klingler again. I’ll take those very quickly. I’m not going to fully explain ablation, but I will tell you it is – a patented process that uses lasers, to remove the silicon coating prior to welding the press-hardened steels, so that the weld remains intact.

John Tumazos: That’s for electrical steel?

Jeff Klingler: No, no. That is for tailor-welded blanks for press-hardened steel for automotive parts. ERP simply stands for Enterprise Resource Planning system. So, it’s our computer system.

John Tumazos: How big of a hit is the computer system?

Jeff Klingler: I think in total, those two projects, I’m just going to lump them both together. They’re probably $15 million to $20 million in total. I don’t have the breakout for each, but we were using, when I was given the CapEx numbers going forward, John, that’s basically adding $10 million to the next two years, to cover both those projects.

John Tumazos: Is ablation part of what you’re licensing from ArcelorMittal, or is it a separate item?

Jeff Klingler: It is exactly what we are licensing from. It’s their process. We are licensing the ablation process, the patented process, for the removal of the aluminum silicon coating.