Worthington Industries Inc. (WOR)
Q2 2009 Earnings Call Transcript
December 18, 2008; 1.30 p.m. ET

Executives

John McConnell - Chairman of the Board, Chief Executive Officer
George Stoe - Executive Vice President and Chief Operating Officer
Andy Rose - Vice President and Chief Financial Officer
Bob McMaster - Senior Financial Adviser
Richard Welch - Controller
Allison Sanders - Director, Investor Relations

Analysts

Michelle Applebaum - Michelle Applebaum Research
Chris Olin - Cleveland Research
Bob Richard - Longbow Research
Charles Bradford - Bradford Research
John Tumazos - John Tumazos Very Independent Research
Timothy Hayes - Davenport & Company
Leo Larkin - Standard & Poor’s
Mark Parr - KeyBanc Capital Markets
Sal Tharani - Goldman Sachs

Presentation

Operator

Good afternoon, and welcome to the Worthington Industries second quarter earnings results conference call. (Operator Instructions) All participants will be able to listen-only until the question-and-answer session of the call. This call is being recorded at the request of Worthington Industries. If there are any objections you may disconnect at this time. I’d like to introduce your first speaker, Ms. Allison Sanders, Director of Investor Relations. Ms. Sanders you may begin.

Allison Sanders – Director Investor Relations

Thank you Judy and good afternoon everyone. Welcome to our quarterly earnings conference call. Before we begin our presentation, I want to remind everyone that certain statements made in this conference call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ from those suggested. Please refer to the press release for more detail on factors that could cause the actual results to differ materially. For those who are interested in listening to this conference call again, a replay will be available on the home page of our website at www.worthingtonindustries.com.

With me in the room are John McConnell, Chairman and Chief Executive Officer; George Stoe, President and Chief Operating Officer; Andy Rose, Vice President and Chief Financial Officer; Bob McMaster, Senior Financial Advisor; and Richard Welch, Controller. John McConnell will begin. John.

John McConnell – Chief Executive Officer

Allison thank you and good afternoon everybody, I appreciate you joining us today. Now as you know, Worthington Industries is operating in the opening months of the severe economic retraction that quickly wrapped its arms around the world. Given this environment, we provided more information in this morning’s earnings release than normal, but these are not normal times. Shortly, I look forward to introducing you to Andy Rose, our new Chief Financial Officer who along with George Stoe will provide additional information on the company from a financial and operating perspective. Since Andy’s in his third week with us you may also hear from Bob McMaster who has been working with us for the past three months as the Senior Financial Advisor and Richard Welch, our Controller.

But before I turn the call over to them, I’d like to remind you that beginning in October we made a series of announcements which are indicative of our mindset and the depth and speed of the retraction we face. The announcements included closures, permanent reductions in workforce and temporary shuttering of several locations in an indefinite period of time. Our most recent announcements included two significant non-cash write-downs, the first lowered inventory values at both Metal Framing and Steel Processing and the second eliminated goodwill from the Metal Framing balance sheet. While difficult, all of our actions over the past two months openly place us in a better position to deal with the economic crisis that we face.

The future course of the economy remains unclear and until the depth and breadth of the retraction begins to clarify, we will continue to operate under the assumption that the economy will continue to weaken and that it will be an extended period of time before it begins to recover. Given this uncertainty, we feel fortunate that on a relative basis our balance sheet was strong when we entered the retraction and that we were well over a year into our work with an outside consulting group to improve our business model. The knowledge gained during these efforts has allowed us to act very quickly on additional opportunities, to reduce cost and improve our operations.

I’m now going to turn the call over to Andy Rose, our Chief Financial Officer. Considering his years of experience in private equity and value creation, we are excited to have Andy on board with the company. Andy.

Andy Rose -- Chief Financial Officer

Thank you, John. Good afternoon, everyone. I’m excited to be here as CFO of this great company and I look forward to working with all of you. As this quarter’s results clearly demonstrate, there are some significant issues in the U.S. economy that are creating challenges, particularly for our two main business segments. We’ve been working hard to mitigate the effects of the economic downturn. Those efforts when combined with the efficiencies gained from the transformation plan should enable us to emerge as a stronger company in the future. For our second quarter of fiscal 2009 which ended November 30, 2008, we reported a net loss of $2.02 of share. There were four charges contributing to this loss which I’ll touch on momentarily, but excluding charges in both periods earnings per share, would have been marginally profitable compared to $0.22 earnings last year.

The four pretax charges in this quarter included a $98 million inventory write-down, a $97 million goodwill impairment, $12 million in restructuring charges and $3 million in increased bad debt reserves. Second quarter sales of $745 million were up 4% from $714 million for the same period last year. Compared to the prior period, the sales increase was due to much higher pricing, almost entirely offset by weaker volumes, especially in the Steel Processing and Metal Framing segments where the volume declines were unprecedented. The gross profit margin was eliminated by a combined $95 million inventory write-down in the Steel Processing and Metal Framing segment, that impacted the material cost and the cost of goods sold line. This lower of cost to market adjustment had the effect of recognizing losses in the current quarter that would have been realized over the next several months as inventory on the balance sheet at November 30, 2008 was sold. As required by accounting standards, those future losses are required to be recognized in the current quarter. Had we not taken the adjustment, the gross profit margin would have been 5.4%, down from 9.8% in the comparable quarter last year.

SG&A expense fell $6 million to 6.5% of sales from 7.6%. The decline was primarily due to reduced compensation expense related to lower earnings, partially offset by the $3 million increase in the reserve for bad debt. The increase in reserves for bad debt is principally tied to the automotive industry. We believe our reserve is sized appropriately based on where we are today. We continue to monitor the developments in Detroit and Washington and will adjust our reserves as the situation warrants. Excluding the four charges, we would have had an operating loss of $5 million. Operating income does not include $11 million in equity income from joint ventures. Equity income fell $4 million from the prior year period, because of an inventory write-down at our Mexican steel processing joint venture, which otherwise would have been profitable. Our share of that write-down was $3 million.