Worthington Industries (WOR) Q3 2018 Earnings Conference Call Transcript | Fox Business

Worthington Industries (NYSE: WOR) Q3 2018 Earnings Conference CallMarch 29, 2018 2:30 p.m. ET

Prepared Remarks:

Operator

Good afternoon, and welcome to the Worthington Industries Third-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 the 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.

Catherine Lyttle -- Vice President of Corporate Communications and Investor Relations

Thank you, Shaun. Good afternoon. Welcome to our third-quarter earnings call. 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 this morning. Please refer to it for 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 on our website.

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On our call today, President and COO Mark Russell and Executive Vice President and CFO Andy Rose. Andy will start things off.

Andrew Rose -- Executive Vice President and Chief Financial Officer

Thanks, Cathy, and good afternoon, everyone. The company delivered another solid quarter, with earnings per share of $0.61 excluding restructuring and the impact of the new tax law, up $0.04, or 7%, from the prior year. We saw improvement in steel processing and pressure cylinders and modest declines in engineered cabs and the joint ventures. Strength in agriculture and heavy truck helped steel, while cylinders benefited from the colder winter and hurricane-relief efforts.

Unique items in the third quarter were as follows. Inventory holding gains were $800,000, or $0.01 per share, as compared to a loss of $3 million, or $0.03 per share, in the prior-year quarter. Pressure cylinders had a one-time charge of $3.6 million during the quarter, primarily in our oil and gas and alt fuels businesses from obsolete inventory and a legal settlement from a prior acquisition. While our tax rate for the quarter was negative, our current expected annual effective tax rate for the year is 10.3%.

We had several one-time charges that impacted our tax rate this quarter that totaled $41.2 million, or $0.66 per share: $40.6 million was a reduction in our deferred-tax liability, and $7.3 million was the impact of the lower tax rate on current year-to-date earnings. These two benefits were partially offset by a $6.7 million transition tax on foreign earnings. As we mentioned previously, our annual tax rate for fiscal 2019 is expected to be 24%. Cylinders operating income, excluding restructuring, was up $6.4 million, or 58%, to $17.5 million.

Strength in consumer and industrial products was offset by the previously mentioned issues in oil and gas. Revenue and margins continue to improve in oil and gas overall. The integration of Amtrol is largely complete, and while we still continue to focus on extracting synergies, the business contributed $7.3 million during the quarter. Steel processing operating income was up $4.9 million, excluding restructuring from the prior-year quarter, to $31.1 million.

Inventory-holding gains for the quarter were a modest $800,000, but the recent rise in steel prices will likely lead to larger gains in the coming quarter or two. The business continues to be hampered by weak toll volumes and a return to more normalized spreads in the coated business. Engineered cabs operating income fell $2.3 million to a loss of $4.1 million. Higher conversion cost from labor and some underutilized capacity at one of our facilities hampered profitability despite a 15% improvement in sales.

Volumes in key cab end-markets are trending positively, and we are beginning to successfully transition in new business. Equity income from our joint ventures during the quarter was down $2.9 million. WAVE's contribution fell $1.9 million, driven by higher allocations from the parent companies and lower volumes. ClarkDietrich was off $1.3 million but up sequentially and contributed $1.5 million as competitors began to show pricing discipline.

Serviacero's business continues to perform well and contributed $1.3 million. We received dividends from JVs of $22.6 million for 114% cash conversion on equity income. Cash from operations was $100 million for the quarter, driven by solid earnings and a reduction in working capital. We spent $14 million on capital projects, distributed $13 million in dividends, and repurchased 1 million shares of stock for $47 million during the quarter.

Yesterday, the board declared a $0.21-per-share dividend for the third quarter payable in June of 2018. Debt was little changed at $782 million at quarter-end but up to $200 million year over year from our bond issue in the first quarter. Interest expense was up $2.1 million to $9.8 million as a result. Trailing 12-month adjusted EBITDA is now $392 million.

We have consolidated cash of $147 million and almost $540 million available under our recently renewed five-year revolving credit facility and AR securitization. Our net debt-to-EBITDA leverage ratio is a modest 1.6 times. We continue to be quite pleased with the overall performance of the company. The integration and financial performance of Amtrol has gone well, and the addition of their people, products, and processes have strengthened our consumer and industrial products businesses.

Our lean and innovation capabilities continue to spread throughout the company and are beginning to differentiate us in the marketplace. We have a clear vision, an effective strategy, and are optimistic about the road ahead. Recent activity around tax law changes and steel tariffs has created a lot of noise in our business. The tax law changes are positive for us, likely lowering our effective tax rate by 8% or so to 24% over the long term.

The impact of the Section 232 steel tariffs on our business varies, but our seasoned purchasing and price-risk management capabilities and our transformation playbook is enabling us to navigate the changes quickly and effectively, so that we can continue our goal of growing our earnings and rewarding shareholders. Mark will now discuss the operations.

Mark Russell -- President and Chief Operating Officer

Thanks, Andy. Our steel processing business had a record third quarter for direct-customer shipments, which were up 5% compared to last year. Our strengthened direct shipments outpaced the 3% increase in direct shipments reported in recent Metal Service Centers Institute data. Toll processing volume decreased 17%, reflecting continued softness in the toll-galvanizing business at our Spartan joint venture.

Combined, direct and toll volume was down by 6%, and the mix of direct and toll was 57% direct versus 43% toll, compared to 52-48 last year. Direct shipments were particularly strong in both the agriculture segment, which was up 28%, and heavy truck, which was up 15%. Automotive shipments to the Detroit Three decreased 2%, while all other automotive shipments increased 4%. TWB, steel processing's lase-welding joint venture with Bow Steel, transitioned their new Monterrey, Mexico, facility to full production, including two state-of-the-art, high-volume rotary lines and a traditional continuous-feed line there.

TWB also continues to expand aluminum-welded blank production at their flagship facility in Michigan. Serviacero, our Mexican steel processing joint venture, saw direct shipments up 5%, while toll shipments were down 20%, with overall shipments combined down 3%. Serviacero started production on their new heavy-gauge blanker in their expanded Monterrey facility during the quarter. In our pressure cylinders oil and gas equipment business, revenue was up 50% compared to last year as market conditions continued to significantly improve in most U.S.

oil- and gas-producing regions. In alternative fuels, the revenue was up 21%, primarily due to higher shipments of LPG cylinders to European automotive manufacturers. Market conditions continue to improve in this business, particularly in North America, where we're seeing the return of spreads between diesel and natural gas sufficient to create a compelling economic case to switch to natural gas, something that has been missing from the market for the last two years. A significant portion of the product lines we acquired from Amtrol are now included in our industrial products business, including the Amtrol Alpha line of LPG products produced in Portugal and sold throughout Europe, Africa, the Middle East, and India.

Revenue in industrial products was up 55% compared to last year. Excluding Amtrol, revenue was up 14%. The balance of the product lines we acquired from Amtrol are now included in our consumer products business, including Amtrol's line of products for residential and municipal water-well systems. Revenue in consumer products was up 51% compared to last year.

Excluding Amtrol, revenue was up 9%. Engineered cabs revenue was up 15% compared to last year as we continued to see signs of strength in the major components of the off-highway equipment market. In our WAVE joint venture, sales volume was slightly weaker in the U.S. and Europe and slightly stronger in Asia.

WAVE imports a material amount of steel from foreign sources. The Section 232 tariffs recently announced in the U.S. may impact the 30% to 40% of WAVE's total raw-steel usage that's imported, particularly for the lightest gauges they use. WAVE has adequate non-tariff sources of supply for this steel, although they are often higher-priced.

Of course, WAVE will also have the option of paying any tariff that may apply to steel from foreign sources. In response to the recently increasing steel-price environment, WAVE implemented a price increase in February and recently announced another price increase for implementation in April. As Andy said, overall we're very pleased with the quarter and also pleased with where we are as a company. Across the company, we have more people actively engaged in transformational improvements and innovation than we have ever had.

Now we'll be happy to take any questions any of you may have.

Questions and Answers:

Operator

[Operator instructions] Our first question will come from the line of Seth Rosenfeld with Jefferies.

Seth Rosenfeld -- Jefferies & Company -- Managing Director

Good afternoon. Thanks for taking the question. Just to start out on the JVs, can you tell us a little bit more about the scale of cost pressure you're feeling at both WAVE and ClarkDietrich? And perhaps give us a bit of sense of your ability to pass on those cost pressures to customers in either of those two businesses? I guess what's been the response of both the first and perhaps now more recent second price hike at WAVE? I'll start there, please.

Mark Russell -- President and Chief Operating Officer

So Seth, your question is, our ability to pass through the recent price increases at WAVE and ClarkDietrich, right?

Seth Rosenfeld -- Jefferies & Company -- Managing Director

Yes, please.

Mark Russell -- President and Chief Operating Officer

All right. So as I mentioned in WAVE, we already announced a price increase in February, and we recently announced another one that will be implemented next month. So that WAVE is easily able to keep up with the price increases. That's historically been the case for the WAVE business.

ClarkDietrich also has announced price increases with the intent also of keeping up with the price. So both of those businesses, we have confidence we'll be able to pass the price increases to their customers.

Seth Rosenfeld -- Jefferies & Company -- Managing Director

OK. Thank you very much. I guess have you seen a differential in your ability to successfully execute those price hikes? I guess, obviously, you were able to announce them, but what's been the response from customers? Do you see different competitive dynamics in those two businesses?

Andrew Rose -- Executive Vice President and Chief Financial Officer

The competitive dynamics are different between WAVE and ClarkDietrich. The metal-framing side of the business historically has been much more competitive. There's a number of -- there's many, many more competitors in that market. I will say that, historically, both of those businesses, when there are rapidly rising steel prices, are very successful at moving price increase.

And I think the one thing that I see in this one is, obviously, there's not too many people on the planet that aren't aware that the U.S. has implemented these tariffs because it's so -- it's been so broadly displayed across the news media. And so I think the acknowledgment among their customer base is this is a reality, and at the end of the day, I think not only are their customers are aware but also their competitors are aware and they're viewing it as an opportunity to move the price up.

Mark Russell -- President and Chief Operating Officer

Seth, I'd even say in the businesses where we have a hedged price of steel, we still are going to be able to have some price movements because the environment allows it. As Andy mentioned, everybody knows that the price is going up.

Seth Rosenfeld -- Jefferies & Company -- Managing Director

Great. Thank you very much. And then going back to the steel-processing business, please. Can you just give us a little bit more color on the current dynamics within the automotive customer segment? You highlighted the differential between the big three and non-big three customers, could you perhaps talk a little bit more about your expectations for volumes this year?

Mark Russell -- President and Chief Operating Officer

We use the same kind of forecast for forward volume in terms of build rate that most people do. And so you can see that as well as we can. As I mentioned, the Detroit Three volume for us is off just slightly, just a couple of points. And the non-Detroit Three, which, for us, is the new domestics typically, that's the largest component of that, we're actually up.

So overall, automotive is pretty steady for us at the moment.

Seth Rosenfeld -- Jefferies & Company -- Managing Director

OK. Thank you very much. I'll leave it there.

Operator

Thank you. Our next question will then now come from the John Tumazos from Very Independent Research.

John Tumazos -- Very Independent Research -- Chief Executive Officer

Thank you very much for taking my question. Recently, we've had near-record steel prices. Why do you think your JV earnings, many of whom are steel-processing companies with seal [ph] inventory, haven't surged nor your steel-processing earnings as much as in the past. And your shares, which made a record a year or two ago when the stock market was lower before the Trump election, haven't gone up with the market or the higher steel prices where, in the past, they had.

Is your hedging program that good?

Andrew Rose -- Executive Vice President and Chief Financial Officer

So I guess the first part of your question, John, is the run-up in the steel prices really hasn't flowed through the income statement of both the steel company and our other businesses that you called processors. There's a -- there's -- you have to remember there's a lag effect of, let's call it, a quarter or sometimes two, maybe a quarter and a half, because of the way they buy steel and the way they sell steel. So it's going to happen. There's just a little bit of a lag there.

And then the -- your question on the stock price. It is interesting. We actually just recently ran a correlation between us and the mills, and I think it was around 60% maybe that our stock price moved in correlation. Ironically, today, it seems to be moving in lockstep with the mills.

So I think we've maybe disassociated ourselves a little bit from the mills and are viewed a little bit more like a metals-manufacturing company by a number of investors so that may explain part of it, but it's an interesting question. Hard to explain sometimes.

John Tumazos -- Very Independent Research -- Chief Executive Officer

You know how much of your shares are owned by ETFs that might clump you with the mills?

Andrew Rose -- Executive Vice President and Chief Financial Officer

Off the top my head, I do not, but it's a pretty high percentage.

Operator

Thank you. [Operator instructions] And we have a question from the line of Phil Gibbs from KeyBanc Capital. Please go ahead.

Philip Gibbs -- KeyBanc Capital Markets -- Vice President

Hey, good afternoon.

Andrew Rose -- Executive Vice President and Chief Financial Officer

Hey, Phil.

Philip Gibbs -- KeyBanc Capital Markets -- Vice President

Just had a question on the comments you made on some of the inventory. I think there were some losses in the oil and gas business, so maybe you could explain some of that? I don't think that's something we were anticipating.

Andrew Rose -- Executive Vice President and Chief Financial Officer

Yes. So there's really two things going on there. There's about $1.2 million of essentially a legal reserve that we took related to the settlement of an escrow around an acquisition we did several years ago. And then the balance of that $3.6 million, which would be $2.4 million, is basically inventory write-offs for products that we were carrying that we thought we could sell that we just couldn't.

And it's primarily in oil and gas, but there was also one specific product in our alternative fuels business. So think of it as obsolete inventory that was written off during the quarter.

Philip Gibbs -- KeyBanc Capital Markets -- Vice President

OK. And maybe, Mark, if you could give some color in terms of what you're seeing in the oil and gas business right now in terms of the trends and maybe the regions and the backlog?

Mark Russell -- President and Chief Operating Officer

Obviously, much stronger across the board, as everybody can see from the publicly available information. We are ideally suited to serve customers in the Marcellus and Utica in the east. And obviously, the strength there with -- the strength there not only coming from the increase in price but also the availability of gathering lines now. So there's so much of that acreage that was not drillable and completable because it couldn't be hooked up to the pipeline.

That's now caught up. And so the strength there is increasing. And then, of course, we are also ideally suited in the West for the Eagle Ford, the Denver-Julesburg, and then the Bakken. And all of those are doing very well at the moment.

So it looks like we're seeing strength return to those markets, and that's reflected in our forward order book. It's up significantly double digits.

Philip Gibbs -- KeyBanc Capital Markets -- Vice President

This is the tanks or the separation equipment, or both? Is there a differentiation between the backlogs there?

Mark Russell -- President and Chief Operating Officer

It's both, Phil.

Philip Gibbs -- KeyBanc Capital Markets -- Vice President

OK. Terrific. And Andy, any color you could provide us on the potential magnitude of FIFO holding gains for Q4, if we assume that steel prices hang out around, call it $800, $850?

Andrew Rose -- Executive Vice President and Chief Financial Officer

Yes. I mean, it's definitely going to be double-digit millions. So let's call it north of $10 million. But there's still a few months left in the quarter, so the actual number is to be determined.

But it's going to be meaningful.

Philip Gibbs -- KeyBanc Capital Markets -- Vice President

OK. And one more for me, if I could. So the toll-processing volume's down quite a bit in the steel business domestically, and I think you had mentioned that the Serviacero toll-processing business is down quite a bit. Is there any correlation or link that you could draw between the two in terms of why the direct might be strong and the tolling isn't? Or is there something, broadly speaking, going on in the sourcing in automotive?

Mark Russell -- President and Chief Operating Officer

Phil, I don't think that there is a broad change in the market. I think that the differences in tolling that we're seeing are more specific to facilities for us. And as I mentioned, our galvanizing-toll business is down at Spartan. We believe that that will turn around in future quarters.

Our pickling toll business is down, particularly in our Middletown, Ohio, facility, down by Cincinnati. And that was related to the quality issues we were having on that particular pickle line. We've got those sorted out now. But while we were sorting through that, we had to reduce the volume on that line and, of course, lost some volume there.

So we think those two things are temporary and pretty much individually applying to facilities for us.

Philip Gibbs -- KeyBanc Capital Markets -- Vice President

Thank you.

Operator

Thank you. Now we have a question from the line of John Tumazos from the Very Independent Research.

John Tumazos -- Very Independent Research -- Chief Executive Officer

Could you give us a little color on the engineered cabs and other segment? The losses there were each a little bigger.

Andrew Rose -- Executive Vice President and Chief Financial Officer

Sure. Engineered cabs, they are going through a period where they've been transitioning business out from a large customer and replacing that business with a number of smaller programs. The good news and the bad news about the cabs businesses, when they win business, it takes somewhere between 12 and 18 months to bring those new programs online. And so while their end-markets are up, as we saw with revenue up 15%, it's taking some time to bring those newer programs online.

The other thing that's going on in engineered cabs is in one of our facilities, we have a pretty significant labor challenge in terms of finding good labor that we can keep around. And so we've had a lot of temporary labor that has significantly higher cost which we're working to address right now. So there, the cost of producing a cab in that one facility is way up as a result of labor. That's something we think we can work through, and so expect to decline in the future quarters.

And then your second question was on the other. There's only one business left in other, which is our energy innovations business. It's a very small business. The -- typically, what you're seeing there in terms of fluctuations is related to unallocated overhead that we have as a company.

So oftentimes, we have accounts that we will accrue things at corporate, and then in the next quarter, we'll allocate them out. A good example is some of our healthcare charges. And so those are a little bit hard to predict, but I expect that number to be less negative in the future quarters.

John Tumazos -- Very Independent Research -- Chief Executive Officer

Thank you.

Operator

Thank you. And at this time I'm showing no further questions in queue.

Catherine Lyttle -- Vice President of Corporate Communications and Investor Relations

Great. Well, thank you all for joining us today. We look forward to speaking with you in June for our fiscal year-end earnings call.

Operator

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thanks for your participation and for using AT&T teleconference.

Duration: 26 minutes

Call Participants:

Catherine Lyttle -- Vice President of Corporate Communications and Investor Relations

Andrew Rose -- Executive Vice President and Chief Financial Officer

Mark Russell -- President and Chief Operating Officer

Seth Rosenfeld -- Jefferies & Company -- Managing Director

John Tumazos -- Very Independent Research -- Chief Executive Officer

Philip Gibbs -- KeyBanc Capital Markets -- Vice President

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Questions and Answers:

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