Worthington Industries Earnings Call Nuggets: Cylinder Business Margins and Restructuring

Worthington Industries (NYSE:WOR) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Cylinder Business Margins

Luke Folta – Jefferies: Wanted to ask a question about CNG, you and your competitors have some really bullish things to say about what’s going on in market conditions. I remember when you acquired some of these businesses them being interesting growth opportunities, but maybe not the most profitable of cylinder businesses that you owned. There’s been some consolidation in this space. Has that changed at all when you think about margins and profitability for those tanks?

John P. McConnell – Chairman and CEO: I don’t think – we bought three businesses in this space. We bought a company in California, SCI back in 2010. We bought a company in Poland, Stako; and then we brought a business in India. The only one that wasn’t profitable when we bought it was in India and that continues to be a challenging market, which is why we had an impairment charge there. The other two businesses have and continue to be profitable and in particular, the business that we bought in California has been very profitable. While I recognize that that’s a competitive market, I think we continue to expect that to be a good place to do business from a margin standpoint.

Mark A. Russell – President and COO: Those are some of our best margins and that correlates Luke with the fact that shale gas is driving that in North America and that’s not yet global. But if you correlate with that, SCI is doing very well.

Luke Folta – Jefferies: You talked about what’s – I have been pretty excited thinking about the opportunity of you getting involved in the cryogenic cylinders, and you just noted that you – I guess sent some prototype tanks out to your customers. Is there anything more you can tell us about what the feedback has been and what’s your level of confidence is that this becomes a commercial product line for you?

John P. McConnell – Chairman and CEO: We’re highly confident it’s going to be a commercial product line, that’s why we’re entering it. It was kind of one of only holes in the cylinder lineup that we thought was important to close. We’ve looked at a number of opportunities to get into this market, and at the moment, the best way to do is to develop our own. So, yeah, we’re committed to developing a full line of cryogenic tanks, and just do a methodical march until we will get them across the board.

Luke Folta – Jefferies: Then on the investment you are making in Steel Processing, is that based on the cold-rolling and annealing, is that basically kind of more capacity similar to what you have? Are you moving into kind of the more like the ultra-high strength steel type of annealing, something like in U.S. Steel and (Kobe) like the next-generation technology?

Mark A. Russell – President and COO: We are looking at that Luke, but the investments that we’re referring to and ones we’ve talked about in the announcement are in the – that showed up in the press are – these are enhancements to our existing facilities, we’re not going to build any new facilities and they are focused on increasing our cold-rolling and annealing capacity. We are looking at possibilities in ultra-high strength and advanced high strength. These are the ones we’re talking about for cold-rolled strip.

Luke Folta – Jefferies: Just last one if I could. Engineered Cabs, can you give us some sense of what the impact was from by production issues with your customer in the quarter? I guess what I am trying to get at is what is the base level of business at the current demand level and how much of it was just kind of a one quarter phenomenon?

B. Andrew Rose – VP and CFO: When you say the base level, you mean like what is the revenue run rate?

Luke Folta – Jefferies: Yeah…

B. Andrew Rose – VP and CFO: Yeah. I mean, I think where we are right now is sort of a comfortable run rate. I don’t sense and I don’t think our guys sense that there’s a big decline ahead of us. The question at this point is, is there a recovery in the market?

Luke Folta – Jefferies: I thought I read something about a production issue with a customer this quarter in your press release?

B. Andrew Rose – VP and CFO: No.

Luke Folta – Jefferies: Okay. I must have misread that. All right. Well, thanks a lot guys for the color and good luck.

 

Restructuring

Sal Tharani – Goldman Sachs: I was wondering how far are you in your overall restructuring, how much is it going to take because it’s been taking restructuring charges for last couple of years.

John P. McConnell – Chairman and CEO: Well the restructuring that we are doing now is very specific to mostly plants. I mean some of the restructuring that we did four-ish years ago was related to transformation, but now what’s happening is these are businesses that we’ve invested in at least this quarter. Two businesses that weren’t performing and meeting expectations, not so much restructuring related to transformation. The BernzOmatic restructuring charge is really an acquisition that we made it had two facilities then because we had a complimentary facility that made sense to consolidate to become more efficient and more productive. So it’s hard to predict when these things are going to appear but there is not any major restructuring on the horizon that we are aware of. It doesn’t mean something might come up. But at least right now I wouldn’t expect more quarters like this one with respect to restructuring…

Sal Tharani – Goldman Sachs: Also I thought that you are increasing the capacity of strip mills, strip products is that correct?

Mark A. Russell – President and COO: That’s correct. We are doing that Sal.

Sal Tharani – Goldman Sachs: How much are you increasing it by?

Mark A. Russell – President and COO: That will depend on the final decisions on the equipment Sal. But we are looking at an increase in the range of 15% to 25%.

Sal Tharani – Goldman Sachs: You already had it increased when you bought I believe the Gibraltar products, Gibraltar business.

B. Andrew Rose – VP and CFO: Correct, that basically doubled our capacity now we are full again, so we need to increase it.

Sal Tharani – Goldman Sachs: Now, you do a lot of tolling business in auto industry, I just was wondering there has been some talk that over the next few years there will be quite a bit of aluminum in the auto bodies to get involved, and I was wondering if you have started to think about it or talk to any of the suppliers or buyers, if you will be able to provide that service also in terms of cutting aluminum for on tolling?

B. Andrew Rose – VP and CFO: Absolutely, Sal, we actually already are processing small amounts of aluminum and as that transition happens, we will just simply pivot to processing aluminum.

Sal Tharani – Goldman Sachs: Would you be also – do you also do service center of aluminum products and mostly, I’m talking about tolling in terms of your typical service centers, do you do aluminum flat-rolled or just steel at the moment?

B. Andrew Rose – VP and CFO: Well, I can say, we do some aluminum tolling business, it’s a very small. But we do some now, and we’re prepared to increase that as customer needs require.

Sal Tharani – Goldman Sachs: But not sort of stocking aluminum flat-rolled products?

B. Andrew Rose – VP and CFO: No, we’re not in aluminum stock by any means, no but we are prepared to process.

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