Earnings Call
Worthington Enterprises, Inc. (WOR)
Earnings Call Transcript - WOR Q1 2023
Operator, Operator
Good morning, and welcome to the Worthington Industries First Quarter Fiscal 2023 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 Worthington Industries. If anyone objects, you may disconnect at this time. I'd now like to introduce Marcus Rogier, Treasurer and Investor Relations Officer. Mr. Rogier, you may begin.
Marcus Rogier, Treasurer and Investor Relations Officer
Thank you, Rob. Good morning, everyone, and welcome to Worthington Industries first quarter fiscal 2023 earnings call. On our call today, we have Andy Rose, Worthington's President and Chief Executive Officer; Joe Hayek, Worthington's Chief Financial Officer; and Geoff Gilmore, Worthington's Chief Operating Officer. Please note, given the business separation announcement we made earlier this morning, our prepared remarks will be longer than normal. For the Q&A portion of our call, we ask that participants limit their initial questions to our quarterly results in order to allow everyone the opportunity to ask questions. And then to re-queue for questions related to the separation. In addition, we have posted a slide presentation to our Investor Relations website, which provides more information on the planned separation. 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 earlier this morning. Please refer to it for more detail on those factors that could cause actual results to differ materially. Today's call is being recorded and a replay will be made available later on our worthingtonindustries.com website. At this point, I will turn the call over to Andy to kick things off.
Andy Rose, CEO
Thank you, Marcus. Good morning, everyone. In addition to releasing our first quarter results this morning, we announced exciting news that we are pursuing a separation of our Steel Processing Business into a new public company, creating two distinct market-leading companies. It's an exciting day for Worthington. Joe is going to start with our first quarter results and then I'll discuss the separation in more detail. Joe?
Joe Hayek, CFO
Thank you, Andy, and good morning, everybody. We do have a lot to discuss this morning and so we'll get right to it. We started our fiscal year with solid results, reporting Q1 earnings of $1.30 per share versus $2.55 in the prior year quarter. There were several unique items impacting the quarterly results that included the following. We divested our 50% interest in ArtiFlex, which was a non-core joint venture for approximately $42 million, that divestiture resulted in an after-tax loss of $0.25 per share. We took advantage of rising interest rates and annuitized a portion of our inactive Gerstenslager pension plan, which resulted in a non-cash charge that negatively impacted earnings by $0.07 per share. We recognized incremental expenses of $0.01 per share related to our recent acquisition of Level5 Tools in the earnout associated with that acquisition. And finally, we benefited by $0.02 per share due to a restructuring gain recognized in the current quarter, compared to gains of $0.09 per share in the prior-year quarter. Restructuring activity in both periods was primarily related to the monetization of non-core real estate. Excluding those unique items, we generated earnings of $1.61 a share in the current quarter compared to $2.46 per share in the prior year. In addition, in Q1, we had inventory holding losses estimated to be $2 million or $0.03 per share compared to inventory holding gains of $47 million or $0.68 per share in the prior year, an unfavorable swing of $49 million, which is $0.71 per share. Consolidated net sales in the quarter of $1.4 billion were up 27% compared to $1.1 billion in Q1 of last year. The increase in sales was primarily due to the inclusion of Tempel Steel, combined with higher average selling prices across all of our segments. Gross profit for the quarter decreased to $169 million from $219 million in the prior year quarter. And gross margin was 12% versus 19.7%, primarily due to the swing from inventory holding gains to losses in Steel Processing. Adjusted EBITDA in Q1 was $140 million, down from $196 million in Q1 of last year and our trailing 12-month adjusted EBITDA is now $560 million. I'll now spend a few minutes on each of the businesses. In Steel Processing, net sales of $1 billion were up 26% from $823 million in Q1 of last year, primarily due to the inclusion of Tempel Steel combined with higher average selling prices. Due to lower total volumes that are consolidated JVs, total ship tons were down 8%, with direct tons making up 58% of the mix versus 49% in the prior-year quarter. Direct tons were actually up 8% year-over-year. Excluding the impact of Tempel and the facility we closed at Decatur Alabama, direct volumes were up 4% year-over-year due to increases in our automotive and construction end markets. Our team in steel continues to do a great job navigating inflation and supply chain challenges as they effectively manage complex programs for our customers. In Q1, steel generated adjusted EBIT of $35 million compared to $108 million in the prior year. The large year-over-year decrease was driven by lower direct spreads, which were negatively impacted by the inventory holding losses I mentioned earlier, estimated to be $2 million in the quarter compared to gains of $47 million last year, an unfavorable swing of $49 million. The inventory holding losses in this quarter included a $4 million charge to write inventory down to net realizable value due to the expected future decline of steel prices at quarter end. Steel prices continue to be volatile and hard to predict, having fallen over $300 a ton since our Q4 earnings call in late June. Given the recent steep decline in steel prices, we will have meaningful inventory holding losses in Q2, which we believe could be as high or higher than the $42 million estimated loss we had in Q4 of 2022. In Consumer Products, net sales in Q1 were $189 million, up 28% from $148 million in the prior-year quarter. The increase was driven by higher average selling prices and higher overall volumes, which benefited from the acquisition of Level5 Tools at the start of the quarter. Adjusted EBIT for the consumer business was $21 million and EBIT margin was 11.1% in Q1 compared to $21 million and 13.9% last year. Adjusted EBIT in the current quarter was negatively impacted by $3 million of expenses related to the Level5 acquisition, and included the write-up of inventory to fair market value. In addition, production delays and ongoing inflationary pressures including higher wages and input costs were a drag on margins for the quarter. While this quarter could have been better for our consumer business, that team has executed very well in a challenging environment and continues to be focused on growing our business with new and innovative products that provide value for our partners and end consumers. Building products generated net sales of $150 million in Q1, up 31% from $115 million in the prior year. The increase was driven by higher average selling prices. Building products generated adjusted EBIT of $53 million for the quarter and adjusted EBIT margin was 35.1%, compared to $49 million and 42.5% in Q1 of last year. The overall improvement was driven primarily by our wholly-owned businesses. The reduction in adjusted EBIT margin was driven by inflationary cost pressures in the wholly-owned business as well, which partially offset the benefit of those higher average selling prices. Our Building Products JVs contributed EBIT of $44 million in Q1, an increase of $1 million over the prior year quarter as higher contributions from ClarkDietrich were partially offset by a decline at WAVE. While ClarkDietrich continues to perform very well, with the declining steel prices, we do expect the results to moderate moving forward. In Sustainable Energy Solutions, net sales in Q1 of $31 million were up 21% compared to $26 million in the prior year quarter, due to increased volumes and higher average selling prices. The business reported an adjusted EBIT loss of $1 million in the current quarter compared to a loss of $3 million in the prior year. The operating environment in Europe continues to be exceptionally difficult, as inflation, fuel shortages, and war-related dislocations continue to place a burden on that entire population. As a consequence, the financial results for Sustainable Energy Solutions are likely to remain challenged in the near term. However, we continue to be very excited about SES's end markets, which are poised for above-average growth over the long term. Our integrated solutions position us very well to enable the hydrogen ecosystem and adjacent sustainable energy. With respect to cash flows and our balance sheet, cash flows from operations was $81 million in the quarter and free cash flow was $60 million. We've now generated over $200 million in free cash flows in the last two quarters. During the quarter, we invested $56 million to acquire Level5 Tools, spent $21 million on capital projects, paid $14 million in dividends, received $48 million in proceeds from asset sales and received $75 million in dividends from our unconsolidated JVs. The dividends we received from our unconsolidated JVs exceeded their equity earnings during the quarter, as their working capital levels have started to normalize and they were able to pay out earnings that were not distributed in the prior fiscal year. Looking at our balance sheet and liquidity position, funded debt at quarter end of $706 million decreased $39 million sequentially. Interest expense of $9 million was up slightly due to higher average debt levels associated with short-term borrowings during the quarter. We ended Q1 with $36 million in cash and $664 million in availability under our revolving credit facilities, positioning us with ample liquidity for the future. Yesterday, the Board declared a dividend of $0.31 per share for the quarter, which is payable in December 2022.
Andy Rose, CEO
At this point, I will turn it back over to Andy. Thanks, Joe. We're off to a good start in fiscal 2023, with our second-best first quarter ever. Adjusted earnings per share of $1.61 and EBITDA of $140 million are solid accomplishments in the face of the declining steel prices and continued challenges throughout our supply chains. We continue to pare our non-strategic assets with the sale of our 50% ownership interest in ArtiFlex during the quarter. We are approaching the end of this multi-year process of repositioning our businesses for growth by exiting non-core and underperforming operations and beginning to invest in higher returning products and markets. We had almost $60 million of free cash flow during the quarter and our net debt to EBITDA is very modest at 1.2 times. End market demand remained steady across most of our products and markets but recent market volatility could lead to changes in this outlook as higher rates impact various markets. Our employees continue to go above and beyond to deliver for our customers, despite the many challenges the world has faced over the past few years. Today, we announced an exciting plan to separate our Steel Processing business into its own separately traded public company. The remaining business, which we are calling New Worthington for now, has market-leading products and services in Consumer Products, Building Products, and Sustainable Energy. This side of our business was recently re-segmented to better align with the attractive markets it serves and develop broader growth strategies to leverage our strong market positions. New Worthington is poised to capitalize on key trends in sustainability, technology, remodeling, construction, and outdoor living and will continue leveraging its robust new product pipeline of sustainable technology-enabled solutions to disrupt mature markets. We believe that New Worthington's high margins and lower asset intensity will provide the opportunity for premium sector multiples. Worthington Steel is a best-in-class steel processor with excellent growth opportunities in automotive lightweighting solutions and electrical steel laminations, positioned well to take advantage of fast-growing trends in electrification, sustainability, and infrastructure spending. It deserves its own platform and capital structure to accelerate its growth and value creation opportunities. This business will be run by Geoff Gilmore and the existing Steel leadership team. Geoff is currently our Chief Operating Officer and previously ran Steel Processing and the former Pressure Cylinders. He has a broad skill set and is well qualified to lead Steel as its own public company. Geoff is here to answer questions later and will join us for future earnings calls as well. We do not anticipate any material changes to our modest leverage and ample liquidity mindset for both companies, and we are likely to continue with similar capital allocation strategies. Both businesses will be run with our philosophy and Golden Rule principles and utilize the Worthington business system of transformation, innovation, and acquisitions to drive growth and shareholder value. This is a historic decision for us. So, I thought I might try and answer two simple questions for you. Why are we doing this and why now? The team and board are laser-focused on shareholder value. And it has become clear that we have two very distinct businesses that should be valued differently and will benefit from their own strategic focus and capital allocation priorities. Secondly, both companies are now big enough to succeed on their own as independent public companies. And we are coming at this from a position of strength; we just had two of the best years in the company's history and the business is performing well. We have low leverage and both businesses have robust growth strategies and are well positioned for the future. Our team and the Board collectively made this decision, and we are confident that both businesses will thrive as their own separately traded public companies. In doing so, we will be able to better service our customers, provide more and better career opportunities for our employees, and deliver stronger returns for our shareholders. I am in my 14th year at Worthington Industries and could not be more excited about our future. Our business is well capitalized, performing well and poised to embark on a journey to take one great company and create two great companies. To all of our customers, suppliers, employees, shareholders, and other stakeholders, I hope you share in our excitement for where we are headed. I'm sure there are lots of questions and we'll try to answer them all, but I would ask that you limit questions to the quarterly results until we answer all those. And then you can re-enter the queue, and we'll discuss the separation. All right.
Operator, Operator
Your first question comes from Martin Englert from Seaport Research. Your line is open.
Martin Englert, Analyst
Hi. Good morning, everyone.
Andy Rose, CEO
Martin, good morning.
Martin Englert, Analyst
So just to clarify, the holding losses in steel for the quarter was about $1.5 million for the absolute value, correct?
Joe Hayek, CFO
That is correct. And part of that, Martin, was a bit of a bring forward if you will of losses that we could identify that we knew we were going to have in Q2 and we brought those forward into Q1, up $4 million.
Martin Englert, Analyst
Okay. And then your forward-looking comment was losses comparable or potentially exceeding the prior year gains, which were I think was $42.1 million, is that correct?
Joe Hayek, CFO
So the number is right; what we actually said was that they could be as large or larger than the losses that we had in Q4 of '22, which were $42 million, but your number is exactly right because in Q2 of last year, we had $42 million in gain, so that's the way that we're thinking about it, just given the really steep decline that we've seen in steel prices, as we all know, they were coming down and then the Russian invasion of Ukraine; they popped back up to $1,500, $1,600 and then since then, they've resumed their rather steep decline into under $800.
Martin Englert, Analyst
Got it, thanks for clarifying that was in relation to the fourth-quarter loss of $42.3 million, or potentially more. That's helpful. Can you provide some insights on the end markets in both the Steel business and the Consumer and Building Products? What incremental changes are you observing in margins, and how are order books looking? Is there still a backlog of activity related to steel demand as we’ve seen exiting COVID for much of this year, and has that changed at all?
Joe Hayek, CFO
By end market, there are some unique factors to each. However, one commonality across all businesses is inflation, which brings higher prices along with significantly higher costs. In both Consumer Products and Building Products, we see increased costs in Building Products. In Consumer Products, aside from the purchase accounting for the Level5 acquisition, we observed rises in EBIT dollars, yet EBIT margins declined, reflecting the inflationary trends we're experiencing. Steel has unique challenges due to the effects of rapidly changing prices on market behaviors and pricing strategies. The Automotive sector is beginning to display some improvement, though we’re cautious about declaring a full recovery. While semiconductor issues appear resolved, other supply chain constraints still hinder progress, as noted by the Detroit Three recently. The construction and agricultural markets remain reasonable. Overall, we recognize signs of a slowdown across various markets, but the decline isn’t severe or disastrous. As previously mentioned, the economy currently faces higher prices and potential slowing growth. We are closely monitoring the situation, and businesses are well-informed about current conditions. Additionally, despite the broader economic context, sectors like electrification, decarbonization, and infrastructure, particularly those relevant to Tempel, are expected to continue growing robustly. We actively track multiple end markets and, while we remain optimistic about our position, we are acutely aware of current market conditions and future uncertainties over the next six to twelve months.
Martin Englert, Analyst
When you comment about kind of from a high level things are slowing a bit on the margin. Were you seeing this in construction and Ag, I mean auto seems like it might be a little bit better on the margin incrementally here, but what about other key end markets as it pertains to steel, if you think about construction and Ag?
Joe Hayek, CFO
Nothing, really specific that we would say, strong growth or decline, Martin.
Martin Englert, Analyst
Okay. All right. Thank you for that color. I'll get back in queue.
Joe Hayek, CFO
Sure.
Operator, Operator
Your next question comes from the line of Phil Gibbs from KeyBanc Capital Markets. Your line is open.
Phil Gibbs, Analyst
Hey. Good morning.
Andy Rose, CEO
Good morning, Phil.
Phil Gibbs, Analyst
I have a question about the consumer portfolio. I've noticed that the volumes have remained quite strong over the past 12 to 18 months. I'm also curious if you've observed any trends regarding how some of the larger retailers might be reducing their inventories as we approach the end of the year. We’ve been following what Walmart and Target are reporting, and I'm interested in how this is impacting your consumer businesses.
Joe Hayek, CFO
Everything you mentioned is accurate, Phil. Our customers' inventory levels have gone up. This sometimes leads them to want to reduce the amount of inventory they hold or how they manage their stock. This has likely had a more significant effect on our Tools business, as those products usually have longer supply chains and do well in retail settings. On the other hand, our camping fuel and Torch business remains strong. We believe these products will benefit if people choose to travel less and stay home more. Regarding the helium business, there's currently a global shortage of helium. We're fortunate to maintain strong relationships that allow us to keep producing it domestically. As we monitor the changes in retailer and consumer behavior, we have solid data and insights to make appropriate adjustments. Overall, nothing seems alarming at this point, but we are staying vigilant.
Andy Rose, CEO
Maybe just one other comment, Phil, on the one-pound propane cylinder business, for a long time, we were kind of allocating product because we were behind. We are no longer on allocation, but I'm not sure inventory levels at some of the retailers are excessive for that product. That's the highest volume product that we have. And then the other thing, which I never really like talking about, but that business does benefit from natural disasters, so there'll probably be some uptick in this quarter related to the hurricane in Florida.
Phil Gibbs, Analyst
Thank you, Andy. For my last question regarding the industrial portfolio, could you provide insights on what you're observing there? I understand it's fairly diversified, primarily in North America, but also with some presence outside the U.S. Please share your thoughts on the industrial sector, and then I'll conclude. Thank you.
Andy Rose, CEO
Sure. I think you're talking about Building Products, right?
Phil Gibbs, Analyst
I was thinking about more of your industrial-type cylinders.
Andy Rose, CEO
Sure. So, Phil, yeah, so those are embedded in Building Products. Those larger propane cylinders continue to benefit from our team's really good work, and our exposure to end markets that are continuing to grow rather nicely. The JVs are a little sort of distinct, WAVE and ClarkDietrich behave a bit differently. I think we mentioned in our prepared remarks that ClarkDietrich has been doing exceptionally well. But they are a bit more susceptible to declines relative to steel prices. And so we do expect their results to moderate a bit going forward. Their outlook and their execution remains very strong, as does the execution for WAVE. WAVE had to lap, I think some of the lagging indicators they had relative to demand and some pricing dynamics that they had a year ago, and we do expect them to continue doing a good job as well. The other businesses there are refrigerant, foam, and adhesive-oriented and a bunch of other things. And while there will always be pockets of issues that could be specific to product lines or anything else, overall, we feel like those businesses are solid GDP growers and we obviously hope to do better than that through taking share and thinking about things that we can enhance relative to our products.
Phil Gibbs, Analyst
Thanks, guys.
Operator, Operator
Your next question comes from the line of Seth Rosenfeld from BNP Paribas. Your line is open.
Seth Rosenfeld, Analyst
Good morning. Thanks for taking my questions. On the demand side, as we can follow up to your earlier comments on what you've seen across Europe. Just a bit of color on the scale of decrease and weakness you've witnessed of late, does that kick in just recently in autumn or much earlier in the year when energy costs first started to increase, and what your expectations are with regard to activity levels looking ahead through winter? Thank you.
Andy Rose, CEO
Sure. It's a great question, Seth, and obviously, you have a probably a better window to it than most of us. But the economy, there are two economies that we have to really pay a lot of attention to in Europe. One is the general economy, and obviously, the other is for hydrogen, CNG, and alternative energies. Long-term, what's happening for alternative energy solutions, it's going to accelerate adoption of hydrogen and all fuels for all the reasons that we know about. Short-term, there is going to be a fair amount of dislocation and I don't say this lightly, but some economic pain and some real hardship for people and for businesses. When we look at that economy, it was slow six months to nine months ago. We anticipate it will be even more challenged moving forward as you mentioned, as you get into colder weather and you have scarcity issues with respect to energy, raw materials, and things like that. Our businesses are doing everything they can to take care of their people, take care of our customers, and try and source things where they are available, and that's happening, I think everywhere. But I don't think we would have kind of an order of magnitude because our business there is relatively specific, but we don't see it getting terribly worse than it has been; it probably be is kind of an incremental down but not much.
Joe Hayek, CFO
The other thing there is, Seth, it's not a huge revenue component for the overall business of our exposure there.
Seth Rosenfeld, Analyst
Great. Thank you. Maybe just coming back to the other question on orders. Can you give any additional color on the scale of the pickup you're witnessing? I think the feedback from many of your peers has been continued delay in the pickup we expected much earlier in the year. Any additional color on the scale would anticipate and what your customers are telling you might happen looking forward as well?
Andy Rose, CEO
Yeah. We think sequentially, it's pretty flat, Seth, the supply chain challenges; it seems as though most OEMs have solved or addressed their semiconductor shortages and those should get better. At the same time, there are shortages for other products and their ability to produce is founded by lots of different things, and so we actually see automotive sequentially up slightly but from a low base. So I would call it creeping along the bottom searching for some upside, and the first half of 2023 calendar certainly looks better. And I think some of the commentary was on Q3, which for a lot of those folks ends tomorrow, so.
Seth Rosenfeld, Analyst
Thank you very much.
Andy Rose, CEO
Sure.
Operator, Operator
Your next question comes from the line of Katja Jancic from BMO Capital Markets. Your line is open.
Katja Jancic, Analyst
Good morning. Thank you for taking my call. Can you...
Andy Rose, CEO
Sure. Good morning.
Katja Jancic, Analyst
Can you please talk a little bit about the inflationary pressures, specifically, what do you think, how these will develop through the rest of the year, and maybe are you taking any actions that you could mitigate those? Thank you.
Andy Rose, CEO
Sure. We, like others, have seen inflation everywhere, whether it's in our business or at the grocery store or at the pump. And so, we have taken kind of actions across the board with understanding that our input costs, everything from materials to labor have gone up. We have tried to pass along those costs so that we're able to execute on our business plan and we pay attention to the elasticity of demand and we pay attention to what's happening out there, but suffice it to say, we don't see it sequentially going up by 10%. But we also don't see it going down; I think we feel like we're at a relatively high level, and the signs we're seeing are that it will be relatively plateaued for at least the next several months.
Katja Jancic, Analyst
Okay. Just maybe one more on the steel prices are coming down. Shouldn't that benefit the former cylinder businesses a bit or is there a delay that we should be looking at?
Andy Rose, CEO
That's exactly right; we try very hard to understand and we've got to take care of our customers with fixed-price contracts for anywhere from nine months to a year. And so, anytime prices go down like this, there is absolutely a bit of a delay in terms of the potential benefit that we would have there.
Katja Jancic, Analyst
Okay. Thank you very much.
Andy Rose, CEO
Sure.
Operator, Operator
Your next question comes from the line of John Tumazos from JTI Research. Your line is open.
John Tumazos, Analyst
Hi. Did we buy any…
Andy Rose, CEO
Good morning, John.
John Tumazos, Analyst
Did we buy any shares back in the current quarter?
Andy Rose, CEO
We did not.
John Tumazos, Analyst
Are you benefiting from a rebound in vehicle output, either on the programs that Worthington supplies or your competitors getting busier leaving you other business, given that the chip shortage is easing?
Andy Rose, CEO
Yeah. We definitely feel like we have done well and our ability to manage these complex solutions is increasingly attractive to our customers. When you see it, our direct volumes are actually up a bit; that's, we believe, our market share gain. And so, we don't anticipate automotive recovering to pre- or post-COVID levels just because those supply chain challenges are persisting, John. But we do feel pretty good that there won't be any worse volume rise than they have been the last six months or nine months.
Joseph Hayek, CFO
Yeah, I mean, end market demand is still pretty good. I think the SARS rate is in the $14 million, mid-14s. But dealer lots are still very low with respect to inventory. So, even if there is some softness on the sales side, we expect at least for the next several quarters that demand will be good in the steel business.
John Tumazos, Analyst
Will ArtiFlex be gone in the November quarter entirely?
Andy Rose, CEO
Yes.
John Tumazos, Analyst
Is Serviacero the only JV that will be with the steel processing company?
Andy Rose, CEO
The majority-owned JVs that are embedded in Steel today will certainly also remain with Steel, TWB, Spartan, Samuel, WSP.
John Tumazos, Analyst
One irony is that the other large distribution company, Reliance, seems to have outperformed Worthington a great deal in terms of share price. With this separation, do you think the new Steel Processing will be in a better position to match or exceed Reliance, in terms of...
Andy Rose, CEO
I mean that's part of the thesis here, John, is more focused leadership teams and more focused capital allocation. We do expect the business to accelerate its growth, and obviously, hopefully outperform; we don't control the share price, but there is obviously some intent here to unlock value for both businesses.
John Tumazos, Analyst
Thank you.
Operator, Operator
And your next question comes from the line of Martin Englert from Seaport Research Partners. Your line is open.
Martin Englert, Analyst
Hi. If you're okay with taking some questions on the separation?
Andy Rose, CEO
Yeah, John. John provided us a great segue, so absolutely. Go ahead, Martin.
Martin Englert, Analyst
Excellent. Thank you for that. Any anticipated preparation costs or goalposts that we can use?
Andy Rose, CEO
Yeah. We don't have a great feel for that. We're not going to disclose that, but we absolutely will keep you posted. And we'll disclose that number, every quarter as we go forward.
Martin Englert, Analyst
Okay. What about thoughts on loss of synergies separating here, whether it be purchasing power or the corporate overhead aspect of it?
Andy Rose, CEO
Yeah. We absolutely know that those are real. We don't believe that any of those numbers or amounts will be material.
Martin Englert, Analyst
Okay.
Andy Rose, CEO
They are not trivial, but we are incorporating that into our assumptions, and we are confident that it will not affect either company's ability to achieve its objectives.
Martin Englert, Analyst
Okay. That's all I had on that. Thank you very much.
Operator, Operator
Your next question comes from the line of Seth Rosenfeld from BNP Paribas. Your line is open.
Seth Rosenfeld, Analyst
Thank you for taking the questions again. First, with regard to the separation. Can you touch on it, if there is any need to refinance any of the debt in order to complete the spin, given that they're two different businesses? I'll stop there, please.
Joseph Hayek, CFO
I think you said the need to refinance, Seth, if I understood correctly?
Seth Rosenfeld, Analyst
Yes, please.
Joseph Hayek, CFO
So we have not finalized capital structures for either company. What we can say is that we expect both businesses to be conservatively capitalized. We use the phrase modest leverage and ample liquidity, and so we want both companies to come out of the gate with plenty of capital to meet the needs of growing the business. We obviously are going to be very focused on trying to preserve, most if not all, of the attractive financing that we have in place. Some of that will have to be refinanced. Hopefully not all of it.
Seth Rosenfeld, Analyst
Okay. Thank you. And a separate question please, would we think about this business over the last two years have been exceptional, but Worthington Steel historically has seen more volatile windfall gains and losses than perhaps the industrial business and the guidance for Q2 is a sharp reminder of that. How do you think about how Worthington Steel operates going forward? Is there an effort to adjust inventory management, try to limit the risk of inventory losses on a standalone basis or do you view it as being adequately stable and that you don't see a change in strategy?
Andy Rose, CEO
I do not anticipate a change in strategy. I should probably let Geoff answer this question, but the reality is, we are always focused on trying to minimize the amount of inventory and hence the amount of price swings or volatility in earnings related to that. You know, we've talked about this historically, we run kind of a balanced position, when we sell to a customer, we match it up with a mill contract where we have inventory in our system and that's where we get this volatility. But we have an amazing price risk management team and a sales team and purchasing team that work tirelessly to minimize that volatility as best we can. But the reality is, at the end of the day, we're always going to have some of it.
Seth Rosenfeld, Analyst
Okay. That's very clear. Thank you.
Operator, Operator
Your next question comes from the line of Phil Gibbs from KeyBanc Capital Markets. Your line is open.
Phil Gibbs, Analyst
Hey, guys. As we look to this potential separation in early calendar 2024, we've obviously got some time before then, before that occurs, perhaps a year and a half. Will you continue to essentially operate your capital allocation structure as the current enterprise as the way you've done in the past, which is be very opportunistic in terms of the stock buybacks? And then, we also focus on M&A or will some of those things be put to the sidelines as you sort of get your arms around capital structures and how you want to work those businesses moving forward? In other words, business as usual for you all in the next 18 months, where you can almost operate with the mentality that they're already separated?
Andy Rose, CEO
Yeah. I mean that's a little bit of a difficult question to answer, Phil. What I would say is, both companies, well historically we've had sort of a balanced capital allocation strategy. We've deployed capital in the CapEx, we paid dividends, we bought back stock and we pursued M&A, that's really just part of our strategy in our DNA. And that will likely continue for both companies. I will tell you there is some focus right now on trying to make sure that when we do separate that both businesses are very well capitalized, to go forward. Now that doesn't mean we're not going to deploy capital, it just means that we're going to be cognizant of making sure that both businesses are set up for success. At the same time, I will tell you, we still want to keep the gas pedal on our businesses and our strategies. We don't want to just stop pursuing growth and generating strong returns for shareholders. So there will be a delicate balance to trying to find the right mix for that, which could be more of the same, but it also could change things up a little bit.
Seth Rosenfeld, Analyst
Thanks.
Andy Rose, CEO
Sure.
Operator, Operator
And your next question comes from the line of John Tumazos from JTI Research. Your line is open.
John Tumazos, Analyst
I didn't rename my business by the way. For the new companies going forward, how clear will the demarcations be in terms of new acquisitions? For example, a business like your Dietrich industries that was acquired over three decades ago, it became the new JV, subsequent JV, would that be considered an old Worthington business or a new Worthington business?
Andy Rose, CEO
I'm not exactly sure how to answer that question, John, but for the Steel Processing business, which we refer to as Worthington Steel, there are several opportunities for consolidation. When we acquired Dietrich a long time ago, we were following a hub-and-spoke strategy, focusing on purchasing downstream steel-consuming businesses. The Steel Processing business may pursue some of that strategy or continue to consolidate in higher growth markets like electrical steel and automotive lightweighting, along with laser welding, where there's significantly more growth and margins compared to the core business. There is definitely a component of consolidation involved. For the new Worthington, our M&A strategy focuses on building strong, branded Consumer and Building Products while also targeting high-growth opportunities in Sustainable Energy. This approach is somewhat asset-light, aiming to find excellent businesses that require less capital and pursuing growth in that manner. However, once the spin occurs, ClarkDietrich will remain with New Worthington.
John Tumazos, Analyst
I recall calling on the late Bill Dietrich in '94 to take in public, before Worthington bought the business, and he described it as buying non-prime galvanized and running it through a dye that was prime for steel framing but not prime for automotive or metal buildings. So, he conceptualized the business like a secondary Steel business. So, there's a lot of cracks if you would. In terms of the two new companies going forward, will there be a common director and a procedure to make sure the two companies aren't bidding against one another for the same deal because of the overlaps?
Andy Rose, CEO
That's something we haven't really talked about; as you know this separation is going to take 12 months to 15 months or so. I don't actually expect there to be much, if any, conflict between the M&A strategies of the two different businesses. I think we're part of the thesis behind this separation is that the businesses are very different in terms of their strategic focus and where the growth is going to come from. So, I don't expect that's going to be an issue.
Joseph Hayek, CFO
Yeah. But John, with respect to your question on common directors. One of the common things that we will have is our largest shareholder, right, who today owns a third of the company will own a third of both companies, and so that piece of what has always been inherent and appreciated by the company will stay in place.
John Tumazos, Analyst
Exactly. Thank you.
Operator, Operator
And there are no further questions at this time, I will turn the call back over to Worthington Industries' management for some closing remarks.
Andy Rose, CEO
Great. Thank you everyone for joining us today. This is an exciting day for all of us here at Worthington and hope you're sharing that excitement. We will keep you posted as things develop, and look forward to speaking with you soon.
Operator, Operator
This concludes today's conference call. Thank you for your participation. You may now disconnect.