Release Date: June 27, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Worthington Steel Inc (WS, Financial) reported strong fourth-quarter earnings of $53.2 million or $1.06 per share.
- The company achieved a 25% reduction in recordable injuries, reflecting its commitment to safety.
- WS was named a top workplace in Columbus, Ohio for the 12th consecutive year.
- The company secured significant new business for its electrical steel facilities in Mexico and Canada.
- WS received multiple accolades, including Supplier of the Year from General Motors and John Deere Partner-level supplier for the 12th consecutive year.
Negative Points
- Fourth-quarter earnings were down from the prior year, which reported $67.3 million or $1.37 per share.
- The company experienced estimated pretax inventory holding losses of $3.4 million in Q4.
- SG&A expenses increased by $10.6 million due to incremental costs of being a stand-alone company and higher incentive compensation.
- Steel market pricing was volatile, with hot rolled prices fluctuating significantly during the quarter.
- WS anticipates higher estimated inventory holding losses in the first quarter of fiscal 2025, potentially ranging from $15 million to $20 million.
Q & A Highlights
Q: Can you discuss the sustainability of the underlying EBITDA, excluding the holding losses for the quarter?
A: Tim Adams, CFO: The quarter had a very favorable mix, including additional galvanizing tons and tailor-welded blanks. We also picked up some spot business in the construction market, which had higher margins. These factors contributed to the strong EBITDA, but it may not be sustainable at this level every quarter.
Q: How is the automotive plan downtime looking for July compared to last year, and any comments on inventories in the auto supply chain?
A: Jeff Klingler, COO: We expect the normal summer slowdown with roughly two weeks of downtime for most automakers. We remain optimistic about the automotive sector for the remainder of 2024, anticipating a modest increase of 1% to 2% over 2023 builds.
Q: Can you provide an update on the electrical steel lamination business and its growth initiatives?
A: Jeff Klingler, COO: We are pleased with the progress in our Mexico and Canada expansions. Both projects are on time and on budget, with significant commercial interest. Geoff Gilmore, CEO, added that this business will be our highest margin segment, and we expect substantial growth over the next 7 to 10 years.
Q: Would you consider going further downstream, potentially partnering with someone to produce transformers?
A: Tim Adams, CFO: Currently, we are focused on our core strategy and the growth opportunities in front of us. We want to be best-in-class in our current operations before considering further downstream ventures.
Q: How should we think about the evolution of net working capital over the next couple of quarters, especially with substrate costs coming down?
A: Tim Adams, CFO: As steel prices fall, we expect to release working capital over time, which should improve quarter-over-quarter.
Q: Can you elaborate on the structural initiatives for cost and efficiency improvements mentioned at your Investor Day?
A: Jeff Klingler, COO: We are applying our transformation process to corporate functions like IT, HR, finance, and indirect purchasing to identify and eliminate waste. This systematic approach aims to streamline operations, reduce costs, and improve service to the business units.
Q: Should we expect Worthington to generate cash in the August quarter from working capital given the fall in steel prices?
A: Tim Adams, CFO: Yes, as prices fall, we expect to release working capital, which should result in cash generation.
Q: What are your plans for securing more business for the new presses in Mexico and Canada?
A: Jeff Klingler, COO: In Mexico, we are actively pursuing business ahead of equipment installation due to the long sales cycle. In Canada, we have secured 50% of future capacity and will balance securing long-term commitments with maintaining flexibility for surge demand.
Q: How do you view the value of leaving some capacity open versus securing firm commitments for the new presses?
A: Geoff Gilmore, CEO: For Mexico, which is highly automotive, securing long-term contracts is ideal. For Canada, having 50% of capacity presold provides a strong base, and we will continue to sell the remaining capacity while maintaining some flexibility.
Q: Can you provide more details on the seasonality of your business and how it impacts quarterly performance?
A: Tim Adams, CFO: Q1 tends to be an average quarter, Q2 and Q3 are typically down 3% to 4% from the average, and Q4 is usually up 6% to 8%. This seasonality is driven by factors like automotive production schedules and construction activity.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
