Worthington Industries, Inc. (WOR) Q1 2022 Earnings Call Transcript

Worthington Industries, Inc. (NYSE: WOR) Q1 2022 earnings call dated Sep. 29, 2021

Corporate Participants:

Marcus Rogier — Treasurer and Investor Relations Officer

Joseph B. Hayek — Vice President and Chief Financial Officer

Andy Rose — President and Chief Executive Officer

Analysts:

Martin Englert — Seaport Research Partners — Analyst

Phil Gibbs — Keybanc — Analyst

John Tumazos — John Tumazos Very Independent Research, LLC — Analyst

Presentation:

Operator

Good afternoon and welcome to the Worthington Industries First Quarter Fiscal 2022 Earnings Conference Call. All participants will be able to listen only until the question-and-answer session of the conference call. This conference is being recorded at the request of Worthington Industries. If anyone objects, you may disconnect at this time.

I would now like to introduce Mr. Marcus Rogier, Treasurer and Investor Relations Officer. Mr. Rogier, you may begin.

Marcus Rogier — Treasurer and Investor Relations Officer

Thank you, Lisa. Good afternoon, everyone, and welcome to Worthington Industries first quarter fiscal 2022 earnings call. On our call today, we have Andy Rose, Worthington’s President and Chief Executive Officer and Joe Hayek, Worthington’s Chief Financial Officer.

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 risk and uncertainties that could cause actual results to differ from those suggested. We issued our earnings release earlier this morning before the market opened. 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 Joe for a discussion of our financial results.

Joseph B. Hayek — Vice President and Chief Financial Officer

Thank you, Marcus and good afternoon, everyone. Today we’ll be sharing our results consistent with our new reporting segments for the first time. We believe the new structure will provide greater insights into the underlying performance of our businesses. We had a strong start to our fiscal year, reporting earnings of $2.55 a share in Q1 versus $11.22 in the prior-year quarter. Excluding restructuring and one-time items, we generated a record $2.46 per share in earnings in Q1 compared to $0.64 in the prior-year quarter.

During the quarter, we recognized a net after-tax restructuring gain of $5 million or $0.09 a share primarily related to the sale of a shuttered facility owned by our WSP joint venture. That compares to restructuring and impairment charges of $0.16 a share a year ago. In addition, the prior-year results included a net benefit of $10.74 per share related to our investment in Nikola Corporation.

Consolidated net sales in the quarter of $1.1 billion were up significantly compared to $703 million in Q1 of last year. The improvement was primarily due to higher steel prices combined with increased volumes across most of our segments. Gross profit for the quarter increased to $219 million from $113 million a year ago and our gross margin increased to 19.7% from 16.1%. Adjusted EBITDA in Q1 was a record $196 million, up from $75 million in Q1 of last year and our trailing 12-month adjusted EBITDA is now $604 million.

In Steel Processing net sales of $823 million nearly doubled from $431 million in Q1 of last year due to higher average selling prices and increased volumes. Total shipped tons were up 14% from last year’s first quarter when demand was just beginning to recover from COVID-related shutdowns, particularly at our automotive customers. Direct tons in Q1 were 49% of mix, which was consistent with the prior-year quarter. We continue to see solid demand across nearly all of our major end markets, including automotive, construction, heavy truck and agriculture.

Despite the solid demand and year-over-year growth, automotive shipments could have been better, if not for the continuing semiconductor-related slowdowns. Everything we see suggest that while consumer and fleet demand for new cars remain strong, chip shortages will persist for the next several quarters and our automotive demand will be subject to some uncertainty as a result. The demand is clearly there. It would likely just take some time for the semiconductor shortage to resolve itself. Our teams continue to do a terrific job navigating unprecedented market conditions while remaining laser-focused on the needs of our customers.

In the current quarter, steel generated adjusted EBIT of $108 million and adjusted EBIT margin of 13% compared to $14 million and 3% in Q1 of last year. The large year-over-year increase was primarily driven by increased demand, higher spreads and arbitrage gains. In the quarter, we had pre-tax inventory holding gains estimated to be $47 million or $0.68 per share compared to holding losses of $7 million or $0.09 a share in Q1 of last year. Based on current steel prices, we expect inventory holding gains again in Q2, but we will also continue to see the impact of the widening scrap gap. In Consumer Products, net sales in Q1 were $148 million, up 10.6% from the prior-year quarter. Legacy consumer products revenues were up slightly and the inclusion of sales from GTI, which was acquired in January, drove the balance of the growth. EBIT for the consumer business was $21 million and EBIT margin was 14%, down from $24 million and 18% in the prior-year quarter. The decrease in EBIT was due to higher labor and input costs. Our consumer business has some longer fixed-price contracts with customers, which can create a short-term drag on margins when input rises — when input prices rise as rapidly as they have. These dynamics are typically short term and we do expect margins to improve moving forward.

Building Products generated net sales of $115 million in Q1, which was up 30% from $88 million in the prior-year quarter. Increase was due primarily to higher volumes as the prior-year quarter was impacted by COVID-related disruptions. Building Products EBIT was $49 million and EBIT margin was 42%, up significantly from $23.4 million and 27% in Q1 of last year. We saw significant growth year-over-year in our wholly-owned Building Products businesses but the majority of the upside was driven by strong results at WAVE and ClarkDietrich that contributed $26 million and $17 million respectively in equity earnings. WAVE and ClarkDietrich both had better demand environments than in Q1 of last year and all of our teams in Building Products are doing an excellent job managing dynamic supply chains and continuing to execute in challenging conditions.

In Sustainable Energy Solutions net sales in Q1 were $25 million, down from $28 million in the prior-year quarter. Largest end market for this business is transportation and the semiconductor chip shortage created a headwind for them with respect to demand. In addition, the economy in Europe is recovering, but very slowly. The business reported a negative EBIT of $3 million in the current period as volumes were too low to absorb fixed costs. We remain very excited about this business and its prospects over the long term as its innovative products and solutions are poised to grow quickly serving hydrogen ecosystem and adjacent sustainable energies like compressed natural gas.

With respect to cash flows in our balance sheet, operations used cash of $50 million in the quarter, which was driven by $149 million increase in working capital, primarily associated with higher steel prices along with annual accrued compensation being paid out during the quarter. Absent further increases in steel prices, we would expect the significant working capital increases to subside in the next quarter or two. During the quarter, we received $20 million in dividends from our unconsolidated JVs, received $27 million in proceeds from asset sales, completed one acquisition for $105 million, invested $24 million in capital projects, paid $15 million in dividends and spent $61 million to repurchase 1 million shares of our common stock. Following the Q1 purchases, we have 8.3 million shares remaining under our share repurchase authorization.

Looking at our balance sheet and our liquidity position. Funded debt at quarter end of $706 million was relatively flat sequentially and interest expense of $8 million was in line with the prior-year quarter. Ended Q1 with $399 million in cash and we continue to take a balanced approach to capital allocation focused on growth and on returning capital to shareholders. Earlier today, the Board declared a $0.28 per share dividend for the quarter, which is payable in December 2021.

At this point, I will turn it over to Andy.

Andy Rose — President and Chief Executive Officer

Thank you, Joe. Good afternoon everyone. It’s great to start fiscal ’22 with another record performance. However, the operating environment remains quite challenging with the continued rise in steel prices, supply chain issues in steel and other components and the continuing labor shortage. Our people continue to showcase their commitment by going the extra mile to ensure that we are working safe and doing their best to meet our customers’ needs. Demand levels are good across almost all of our end markets and backlogs remain at elevated levels. We continue to raise prices in many of our product lines to offset rising input costs, particularly steel. Higher working capital needs had a meaningful impact on free cash flow this quarter, but this will reverse if steel prices begin to decline as we expect in coming quarters.

This is the first quarter reporting our three new operating segments, Consumer Products, Building Products, and Sustainable Energy Solutions. Hopefully you will find, as we believe, that each of these segments is an attractive business with unique advantages and compelling strategies to grow for years to come. We will continue to leverage our transformation playbook, new product development and innovation and M&A to drive above-market growth and higher returns on capital. While our innovation and M&A growth initiatives continue across the portfolio, the M&A environment is proving challenging with elevated purchase multiples and difficult earnings analysis due to the unpredictability of the COVID environment. To the extent we do find compelling targets, our balance sheet remains strong with significant cash and borrowing capacity.

Finally, we just published our second corporate citizenship and sustainability report. Since our inception, we have worked hard to be a good corporate citizen for all of our constituencies and in our communities, as well as to minimize our environmental footprint. While we are a relatively clean manufacturing operation overall, in 2012 we started our successful GreenStar initiative that aims to recognize our manufacturing facilities for environmental conservation and stewardship. In fiscal ’21, 64% of our facilities achieved a four or five star performance rating. We are working towards an even more robust approach to reducing our environmental footprint and expect to have more details in the future regarding our goals.

It is often difficult to follow a record year but we were off to a fast start and our teams remain focused on continuing to deliver for our customers and creating value for our shareholders. Thanks again to all of our employees for their hard work and dedication to operating safely and effectively.

We’ll now take any questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Martin Englert with Seaport Research Partners.

Martin Englert — Seaport Research Partners — Analyst

Hi. Good afternoon, everyone.

Andy Rose — President and Chief Executive Officer

Good afternoon, Martin.

Martin Englert — Seaport Research Partners — Analyst

I just want to come back and touch on inventory holding gains that were about $47 million within Steel Processing for the quarter. Could you discuss maybe the magnitude or some goalposts on what you might anticipate for the current quarter?

Joseph B. Hayek — Vice President and Chief Financial Officer

Sure. It’s Joe, Martin. We think that will be significant again, but not as high as they were in Q1.

Martin Englert — Seaport Research Partners — Analyst

Okay. And anything as far as the partial offsets from the scrap gap?

Joseph B. Hayek — Vice President and Chief Financial Officer

Yeah, the scrap gap is historically run plus or minus $300 and it’s four times that now or more. And so significant — we do everything we can to offset that in terms of trying to buy and sell in different buckets, but we’ll continue to see that. It’s — we don’t call it out, but we know it’s there.

Martin Englert — Seaport Research Partners — Analyst

Okay. Thanks for that. And then just shifting and looking at the automotive supply chain. Can you provide a little more detail regarding what you are seeing there today in the current markets if that environment is improving or deteriorating? And maybe more specifically, what’s your read on the downstream channel inventories there within autos? Do you get a sense that they are building inventories or do you think that they are still managing pretty tight turns?

Andy Rose — President and Chief Executive Officer

I would say, Martin, this is Andy, the supply chains are still pretty backed up. It’s hit or miss depending on the models that are being manufactured. I’m sure you’re tracking it and we are doing our best to stay on top of it. But it changes kind of daily depending on the facility that we’re shipping to and who the customers are.

My sense, we don’t track sort of cars on lots, if that’s what you’re asking. But my sense in my little world of Columbus, Ohio and other places is that inventories — dealer inventories are still very, very light. There is way more demand than there are available cars and it’s likely to be that way for the foreseeable future, assuming the demand — the end market demand stays the same.

Joseph B. Hayek — Vice President and Chief Financial Officer

Yeah. And, Martin, our automotive tons, our direct tons into automotive were actually up 14% year-over-year, including our TWB joint venture, which had a decrease there and the most impacted of our groups based on the platforms that they’re on [Phonetic]. Andy said it. I don’t think it’s getting worse, but it’s not getting materially better yet either in terms of the supply chains generally.

Martin Englert — Seaport Research Partners — Analyst

Okay. And how about — you may not have a read here, but more so the intermediate inventories, the OEMs or the stampers, do you get a sense of the cadence of steel that you’re shipping, is it matching what the production is out there or do you think that they are building that inventory before it gets produced into a vehicle, whether it’d be steel sitting there or stamped pieces and parts or partially produced vehicle?

Joseph B. Hayek — Vice President and Chief Financial Officer

Yeah. We clearly don’t have a global view there, Martin, but I certainly don’t think that there are warehouses — point warehouses full of coils of steel at this point based on where things are.

Martin Englert — Seaport Research Partners — Analyst

Fair to say that it still seems like a lot of just-in-time inventory from a lot of folks in the supply chain?

Joseph B. Hayek — Vice President and Chief Financial Officer

I mean that’s traditionally how they’ve been. And again, we don’t think that there are mountains of coil somewhere that people don’t know about.

Martin Englert — Seaport Research Partners — Analyst

Okay. That’s helpful. I appreciate that. If I could just one quick last one, on the blanking facility acquired, any goalposts as far as the volume contribution that we should expect there for steel processing?

Joseph B. Hayek — Vice President and Chief Financial Officer

Yeah. That’s part of Shiloh obviously and that’s one facility. The other facilities went into the TWB joint venture. It’s not going to be massive in that regard, but we’re really happy with it. Shiloh’s assets were impacted during the quarter by the semiconductor shutdowns in a similar way that TWB was, but so far so good there and we’re excited about what that does. They were profitable pretty close to an adjusted plan assuming the semiconductor shortages. So, feel good about that one thus far.

Martin Englert — Seaport Research Partners — Analyst

Okay. Excellent. Nice job navigating the market there and congratulations on the results.

Joseph B. Hayek — Vice President and Chief Financial Officer

Thank you, sir.

Operator

Your next question comes from the line of Phil Gibbs with KeyBanc Capital Markets.

Phil Gibbs — Keybanc — Analyst

Hey. Thanks. Good afternoon. Hi, guys.

Andy Rose — President and Chief Executive Officer

Hi, Phil.

Joseph B. Hayek — Vice President and Chief Financial Officer

Hi, Phil.

Phil Gibbs — Keybanc — Analyst

So, in terms of the scrap gap, I know Martin asked about it, but can you help us in terms of just some level of magnitude in the first quarter or the way to think about it why in terms of it impacts you all? I don’t understand it I guess completely.

Joseph B. Hayek — Vice President and Chief Financial Officer

Sure. [Indecipherable] won’t be a perfect explanation, but effectively we have scrap in the processing that we do ranging from 2% or 3% whether it’s the beginning of a coil or the end of a coil, up to upwards of 12%, 13%, 14%, 15% and our cold roll business where there just happens to be more and that’s more of a stamping operation and so historically that scrap gap has averaged around $300, right. There is [Phonetic] delta between what we buy the steel for and what we can then ultimately sell the scrap for. It’s not a lot end up [Phonetic] being roughly 8% of the total across the steel facilities.

And then as that scrap gap widens, there are curves and charts you can plot on different services, but we actually ultimately have an impact there. And so we think it will be a greater impact on us in Q2 than it was in Q1, but nothing that is going to kind of by itself create giant issues for us. I mean — I think it could be, based on the lag in steel prices, it could be kind of order of magnitude bigger in Q2 than it was in Q1. But again, we can try and offset that with some things that we can do on the hedging side or going into different buckets. And so, it’s there and we pay attention to it.

We try and manage around it, but it will create a headwind for us. I can’t really quantify it for you because it depends on a lot of things but that’s directionally the way that it works.

Phil Gibbs — Keybanc — Analyst

Okay. And then I saw you made an acquisition in the quarter. Can you kind of talk about what that may have contributed to the bottom line in the quarter and maybe strategic fit and then how it’s — how we should be thinking about it moving forward?

Joseph B. Hayek — Vice President and Chief Financial Officer

I guess we’re talking about the Shiloh acquisition.

Phil Gibbs — Keybanc — Analyst

Yes. Yes.

Joseph B. Hayek — Vice President and Chief Financial Officer

Sure. So, fantastic laser welding and blanking operation, fits very well with our TWB business. Anything having to do with light-weighting, anything having to do with all those ongoing efforts within automotive really kind of blend themselves towards businesses like that. That business — that was did a nice reasonable slug of EBITDA during the quarter. It was impacted by the semi chip shortage because its customers are similar to TWB’s in that regard. But really happy that it takes us even further in a direction around light-weighting, around hybrids, around where the future that we see in automotive. And so, so far so good there. And we — it was accretive in the quarter. We expect it to be accretive in the quarters to come.

Phil Gibbs — Keybanc — Analyst

Okay. And then just on the non-processed steel businesses. I think you said in Consumer Products, you saw a little bit of a pent relative to last year. You expect margins to normalize, but then you’ve got some businesses in probably Building Products that benefited from the timing on the front end of getting pricing versus your raw materials. So is there kind of a two-quarter — kind of a two-quarter thought process prospectively where you’ve got margins creeping back up in the Consumer Products and then you’ve got margins probably normalizing at some point as the steel catches up to the selling price in the downstream businesses on the Building Product side?

Joseph B. Hayek — Vice President and Chief Financial Officer

Yeah. I mean, it’s a tough question to just make a blanket statement on, Phil, because each business is a little bit different and just as an example and for our joint ventures, WAVE and ClarkDietrich, most of their business is spot-oriented. They have the ability to raise price when they need to as long as the market is receptive to that and it has been.

And then you contrast that with some of our Consumer Products businesses where we’re selling to big-box retailers and there is sort of brackets around when and how price increases are implemented. And so there is a lag effect when that occurs. And that’s really what we’re talking about where margins can be compressed on a short-term basis, but will ultimately catch up. And that’s usually a quarter, maybe two of lag. It’s not a substantial delay, but it does take some time.

Phil Gibbs — Keybanc — Analyst

Okay. And then lastly and I’ll jump off. Just remind us, I guess, of your liquidity position, cash available, credit that sort of thing. And then if you’re — I know you’re typically acquisitive, what may be some things that you’d be interested in in a general sense? Thanks so much.

Joseph B. Hayek — Vice President and Chief Financial Officer

Sure. So, ended the quarter with just under $400 million of cash, $500 million on our revolver that is undrawn. So feel pretty good about that. We’ve, in the last three quarters — Phil, just simple — using simple working capital metrics, just the inventories, receivables and payables in the last three quarters, we’ve added $330 million to working capital. So we feel like as steel prices moderate or in the eventuality that they decline some of that cash will come back to us as well. Really happy with our balanced approach to capital allocation. So paying a dividend, we bought back 1 million shares in Q1. We’re looking at M&A opportunities. We’ve made three thus far in calendar 2021 and we continue to look for attractive targets that meet our cash return on investment thresholds and are good strategic fits or additions for us. So we are going to continue to pursue all of those strategies simultaneously without overly stressing the balance sheet certainly.

Phil Gibbs — Keybanc — Analyst

Thank you.

Joseph B. Hayek — Vice President and Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of John Tumazos with Tumazos Very Independent Research [Phonetic].

John Tumazos — John Tumazos Very Independent Research, LLC — Analyst

Thank you for the great results. It’s just incredible how much money you are making. Last week, a wood company Weyerhaeuser had an investor day and they predicted 25% five-year growth in lumber with a slug of it coming from displacing steel in what they call tall buildings. Couple of days ago I was taking New Jersey coastline and I saw a six-story apartment building entirely wood framed up to the roof. Do you think that the high steel prices are hurting ClarkDietrich badly? I know the earnings were a record, but there could be some substitution visible and are there other businesses where you see your customers looking for some substitution?

Joseph B. Hayek — Vice President and Chief Financial Officer

Yeah. John, we explore that on the surface anyway. And I don’t expect — I mean, look, there is a lot of dislocation right now in terms of price volatility with wood and with steel as you well know. And historically there has always been a little bit of substitution here or there. But for the most part, the markets are kind of pre-established in terms of whether the buildings are built out of wood or out of steel. Now if steel were to stay at $2000 a ton and wood were to continue declining and the spread really increase maybe that would change. But I don’t — at least our guys don’t foresee kind of a systemic change going forward in that. I don’t know who was building the building on New Jersey shore, but I would encourage them to understand that hurricane codes are much more difficult for wood — to meet with wood than they are with steel framing. So there is a separate issue related to that. But I understand the thought process. I think a lot of it sort of depends on where this thing settles out price wise over the long run in a more normal environment.

John Tumazos — John Tumazos Very Independent Research, LLC — Analyst

Adding up the units of the three new segments to the old cylinder segment, the units were about 3 million more in the volume category. Do you include WAVE or ClarkDietrich units in construction? Can we compare those total units to the old cylinder total units?

Joseph B. Hayek — Vice President and Chief Financial Officer

Yes, you can. WAVE and ClarkDietrich volumes are not in there. You do have the acquisitions that took place specifically, the PTEC acquisition and then the GTI acquisition, the tools company, that’s going to be a large percentage of that increase, John, although volumes were up across the board in the legacy businesses as well with the exception of Sustainable Energy Solutions, which we talked about earlier.

John Tumazos — John Tumazos Very Independent Research, LLC — Analyst

Are the revenues of WAVE and ClarkDietrich there or just the incomes?

Joseph B. Hayek — Vice President and Chief Financial Officer

Just the equity income in the reported numbers.

John Tumazos — John Tumazos Very Independent Research, LLC — Analyst

In terms of the Sustainable Energy loss and a $600,000 loss in the other parts of the equity affiliates, could you sort of explain that? Are there margin squeezes from inputs that could go away in a quarter or two or those are little details, but every penny adds up.

Joseph B. Hayek — Vice President and Chief Financial Officer

Sure. So, specifically to Sustainable Energy Solutions, a year ago they lost $600,000. And so that business, we expect over the course of time, will be profitable and so some pretty specific things hitting them in this quarter. Seasonal slowdowns in our Q1 just because it’s Europe and it’s July and August, and it’s kind of the vacation, slower season, but on top of that the largest market being transportation, automotive and the semiconductor shortage hitting a couple of its very large customers, just some headwinds there. But ultimately, we think that resolves itself and that business will be profitable and ultimately has a lot of runway relative to the next several years in terms of hydrogen and the alternative fuels economies.

On the other line, John, those are really just some odds and ends. Nothing really dire. I mean, it’s the legacy engineered cast [Phonetic] business, the pieces that are left. So nothing that we would point to as being real material there.

John Tumazos — John Tumazos Very Independent Research, LLC — Analyst

What are the Sustainable Energy Solutions products in sort of simple way? I’m still learning the new segments.

Joseph B. Hayek — Vice President and Chief Financial Officer

Sure. So I certainly invite you to bounce on to the website or one of the presentations. But they make vessels that kind of house and make mobile, if you will, gases like hydrogen and CNG and others through the PTEC acquisition. So it’s a German company that we acquired in January. They actually have a lot of the sensors and valves and accoutrements that enable transportation vehicles, actually the CNG or hydrogen systems, that enable those vehicles to use fuel other than diesel. So, it’s all around the transportation market using fuels other than traditional diesel fuels.

John Tumazos — John Tumazos Very Independent Research, LLC — Analyst

Thank you very much.

Andy Rose — President and Chief Executive Officer

Thank you, John.

Operator

[Operator Instructions] Your next question comes from the line of Martin Englert with Seaport Research Partners.

Martin Englert — Seaport Research Partners — Analyst

Hi. Thanks for taking my follow-up. I wanted to touch on the question about substitution between lumber and steel for like metal framing on construction. Can you speak to maybe some of the labor aspects to it because if I remember right, I think maybe some of the metal framing in pursuing that path was a bit more labor intensive and offered some efficiency gains on that front and just thinking about that dynamic and kind of rising wages in the labor market as well.

Joseph B. Hayek — Vice President and Chief Financial Officer

I am sorry. Martin, are you saying metal framing is more labor efficient or less efficient?

Martin Englert — Seaport Research Partners — Analyst

Is more labor efficient —

Joseph B. Hayek — Vice President and Chief Financial Officer

Yeah.

Martin Englert — Seaport Research Partners — Analyst

On the metal framing side versus the lumber. Is that a true statement?

Joseph B. Hayek — Vice President and Chief Financial Officer

Yeah. I think that’s true, generally speaking. There’s other things you can do and construction companies do as well as they will pre-fabricate some of that stuff which they also do in wood by the way. But both WAVE and ClarkDietrich with respect to the labor shortage are very focused on developing whether it’s methods or products that require less labor, easier to install, less on-site cutting, trimming etc. and they both have been quite effective at doing that. In fact, some of the acquisitions, ClarkDietrich made a few smaller acquisitions that are adding products and accessories that kind of accelerate that effort. But the labor shortage is real. Everybody is facing it right now. But the construction industry, frankly, has been facing it even longer than sort of the COVID impact. So I don’t think that’s going anywhere and the trends toward building efficiency are very important ones. So we do think that’s an important aspect of what they’re trying to accomplish.

Martin Englert — Seaport Research Partners — Analyst

Okay. Thanks for the color there. And one other kind of along the same lines, if I remember from the past, I think a lot of the substrate that’s going into metal framing there for buildings, a lot of that’s purchased on the secondary market at a discount. So while it would see the same inflation versus — it would see inflation alongside the other flat-rolled products but it’s typically always kind of bought at a discount for a large portion of that, is that right?

Joseph B. Hayek — Vice President and Chief Financial Officer

I would tell you that historically, meaning a number of years ago that used to be the case. Today, they still do buy secondary but they buy their fair share of prime steel as well. So it’s not quite as prevalent as it used to be and one of the things that changed, and we were instrumental in driving that, was the code regulations and enforcement of those code regulations because while you can use secondary steel for some of those applications, your — the code requires that you don’t for a number of others. So it’s still relevant, but it’s not like 80% of their steel is secondary steel if that makes sense.

Martin Englert — Seaport Research Partners — Analyst

Okay. Yeah. No, that’s helpful to understand that shift. And then, are you sourcing typically the substrate for that solely from the North American market or have you been playing in the import market at all and taking advantage of the arbitrage?

Joseph B. Hayek — Vice President and Chief Financial Officer

Yeah. Both of those companies, both of those joint ventures do import some of their steel and there’s really two reasons. One is price arbitrage but the other is having secondary and tertiary sources, especially when you get into the really light gauge steel here in the US. There just isn’t a large supply of it. And so from a strategic standpoint, it makes sense to have some alternative sources. But with some of the tariffs and other things, the percentage of imported steel has declined but both of them still buy in those markets.

Martin Englert — Seaport Research Partners — Analyst

Did you ever have any appetite for other downstream fabrication? I mean, I understand it’s part of JV now, but thinking about other products that have done well in recent history with data center buildouts and warehouse and kind of the joist and decorating on that sort of thing?

Joseph B. Hayek — Vice President and Chief Financial Officer

In terms of products or markets?

Martin Englert — Seaport Research Partners — Analyst

Yeah, if there is anything you ever considered like participating more farther on the downstream?

Andy Rose — President and Chief Executive Officer

Well, we certainly look at a number of downstream manufacturing operations, many of them are metals based. They don’t have to be necessarily — we have a pretty strict criteria that involves trying to raise our margins and our, as Joe said, our cash return on investment. So it just depends on how attractive the business is.

We’ve been in around some of those in the past. You may recall we had a cold-formed steel building company where we actually built mid-rise buildings for a while. And it just wasn’t a great market for us. It didn’t prove out the way we had hoped and so it wasn’t a fit. But we continue to look at things like that. But I will tell you part of our focus is also around M&A. I think Phil asked the question earlier what’s attractive. We are looking at a lot of different M&A opportunities. And part of the segmentation of the former Pressure Cylinders segment is to help us focus where we want to go there.

The Consumer Products business, we feel like has a tremendous amount of opportunity to continue to leverage the brands in the markets that they’re in and enhance our relationships with our customers. The challenge right now is just a lot of those businesses are extremely expensive. Their earnings have exploded with COVID. So it just makes it a tough market to find a business and get it priced the way we would like to buy it. So — anyway, it’s an interesting market for sure. I think we had a person on in the inside say somewhat of an M&A frenzy going on out there right now and so we just have to be careful.

Martin Englert — Seaport Research Partners — Analyst

Is it a dynamic where people that are sellers are trying to get some more normalized cycle multiple or something work into that on the peak cash type earnings and you’re not really having conversations where sellers are willing to base the sales multiple more on like a forward through cycle EBITDA opportunity?

Joseph B. Hayek — Vice President and Chief Financial Officer

Yeah, I mean everybody wants to pay off whatever the highest number or sell off whatever the highest number is, right. And I certainly would want to do that too, if I were selling a business. But what we’re having a hard time doing is filtering how much of that is sustainable versus how much of that is because there was a temporary change in behavior over the last two or 2.5 years. And we don’t, we — it’s hard enough to make money and build your capital base and we’re trying to be conservative and make sure that we — when we do spend dollars on M&A that we feel confident that that EBITDA is sustainable.

Martin Englert — Seaport Research Partners — Analyst

No — I think that’s a good prudent approach. So, I’m sure that your investor base appreciates that. One last one here, I’m just curious on your thoughts on flat-rolled steel prices. And looking ahead, over the next medium 5, 10 years versus where hot-rolled coil prices have been at through cycle, do you think there is a structural change in the US, North American and/or global market where you have a different through cycle, flat-rolled steel price?

Andy Rose — President and Chief Executive Officer

One of my favorite learnings, I’m not that old but I’ve been through three sort of major business cycles in my career and when somebody says, oh it’s different this time, that’s usually when I get skeptical. There are some fundamental changes going on in the steel market right now with the mills. Capacity has been taken out with some of the older legacy integrated mills and there is continued evolution into the mini-mill market and expanded capacity there.

It’s hard to say really. I mean, you also have the tariff impact that has sort of restricted imports into the US. But I don’t think fundamentally anything has changed with respect to the fact that there is — there’s too much capacity globally in steel production. And — so for us people sort of forget for Worthington Industries generally, we want low stable steel prices. And so we obviously make a lot of money when steel runs up and it’s great and so we certainly enjoy it.

But at the end of the day for all of our businesses, it’s better to have those low stable steel prices. We’re at all-time highs right now in this country and I don’t know when it’s going to go down. But I would certainly be willing to predict that at some point, probably in the not too distant future, we’re going to start to see some downward pressure.

Joseph B. Hayek — Vice President and Chief Financial Officer

And, Martin, the only thing I’d add is, we look at the forward curve, right. We’re not steel price prognosticators. But if you look at the forward curve and you look at how it evolved over the last year, I think I saw in one of the sell-side publications an estimate for 2023 year-end hot rolled of over $900 a ton.

And that’s the very first time that I’ve ever seen something that’s two years out that’s that high. And so, again, we think our teams are world-class and we’ll do better than most in any steel environment. But there definitely has been a shift in how people spend their time and spend their money over the last couple of years.

Andy Rose — President and Chief Executive Officer

It’s hard for people to remember that not much more than a year ago steel was under $500 a ton for hot roll.

Martin Englert — Seaport Research Partners — Analyst

Yeah. That’s had quite a run so far. Look, I think you are one of the biggest purchasers of flat-rolled, hot-rolled coil in the U.S., North American market. So, I imagine you’re not really having too much trouble getting into mill order books, but maybe if you could just touch on the dynamic there and broadly the availability and like how lead times are looking.

Andy Rose — President and Chief Executive Officer

Yeah, I mean it’s still a challenging market to some degree on supply and most of the mills are pretty full and supply chains are obviously complicated right now. For us we do have great relationships with our mill partners and the reason we have great relationships is we’re a good customer, we’re a loyal customer but also sometimes the mills need help with filling up order books and other things. And we try and work with them to be helpful when they need help as well. So I think times like these when we do need to call on a partner for steel supply, I think we have people that are willing to listen and that does help us out in the marketplace and enable us to service our customers. But I think that’s a — that’s a part of our philosophy and who we are as Worthington. We treat others the way we would like to be treated and I think that pays off in times like these.

Martin Englert — Seaport Research Partners — Analyst

Okay. Excellent. Appreciate all the color there. So very helpful. And again, congratulations on the results.

Andy Rose — President and Chief Executive Officer

Thank you.

Operator

At this time there are no further questions. I would like to turn the call back over to Worthington Industries for closing remarks.

Andy Rose — President and Chief Executive Officer

Thanks, everyone, for joining us today. I hope everyone continues to stay safe and we look forward to seeing you hopefully at our upcoming Virtual Investor Day, which is going to happen later this fall. Everyone have a great day.

Operator

[Operator Closing Remarks]