Good morning, and welcome to the Worthington Steel Second Quarter Fiscal 2024 Earnings Conference Call. This conference is being recorded at the request of Worthington Steel. If anyone objects, you may disconnect at this time. I'd now like to introduce Melissa Dykstra, Corporate Communications and Investor Relations Officer. Ms. Dykstra, you may begin...

Good morning, everyone, and welcome to Worthington Steel Second Quarter Fiscal 2024 Earnings Call and our first earnings call as a stand-alone company. On our call today, we have Geoff Gilmore, Worthington Steel's President and Chief Executive Officer; Jeff Klingler, Executive Vice President and Chief Operating Officer; and Tim Adams, Vice President and 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 risks and uncertainties that could cause actual results to differ from those suggested. We issued our earnings release yesterday after the market close. Please refer to it for more detail on those factors that could cause actual results to differ materially. Unless noted, as reported, today's discussion will reference non-GAAP financial measures, which adjust for certain items included in our GAAP results and which are presented on a standalone basis. You can find definitions of each non-GAAP measure and GAAP to non-GAAP reconciliations within our earnings release. Today's call is being recorded, and a replay will be made available later on our website at worthingtonsteel.com. At this time, I'll turn it over to Geoff Gilmore.

Thank you, Melissa. Good morning, everyone, and welcome to the first earnings call for Worthington Steel. As you know, December 1 marked our legal separation from Worthington Industries and our first day of trading as a stand-alone company. Wednesday, we held our first Board meeting and solidified our plans for the remainder of fiscal year 2024 and into fiscal year 2025. I am confident our experienced leadership team guided by our highly qualified Board as we begin our journey as Worthington Steel. I look forward to working with our Executive Chair, John Blystone, Lead Independent Director, George Stoe and the rest of our Board, I'd like to thank our employees across the organization for the work they've done to get us to this exciting time in our history. Our teams continue to prove they are outstanding and dedicated to supporting our customers, suppliers, shareholders and each other every day at Worthington Steel. I'm proud to say I have seen examples throughout the company, reflecting how we continue to use our philosophy and golden rule principles and the Worthington Business System of transformation, innovation and acquisitions to drive growth and shareholder value. Overall, we are feeling positive as we enter our first full quarter as a stand-alone company. We are focused on continuing to serve our customers and well positioned to capitalize on key end market trends, including the decarbonization of transportation, the transition to renewable energy and modernization of our infrastructure. Now I'll turn it over to COO, Jeff Klingler, for a look at our operational highlights.

Thanks, Geoff, and good morning. First, I would like to thank our employees for their ongoing commitment to safety. Our teams continuously work on ways to systematically reduce injuries using data analytics, ergonomic measurement tools and best practice sharing. Our facility leaders are involved in our efforts daily. Their focus and accountability is motivating our teams to double down on their own commitment. Our philosophy guides our daily work and our focus on keeping people safe. Further, we believe and have seen evidence that a safe environment is a more productive environment. Worthington Steel employees have a similar focus on quality, guided by our continuous improvement program, which you will hear us reference often as the transformation, we continue to improve in this area as well. We are always aiming to exceed the expectations set by our customers and the goals we set for ourselves. Results from this effort have led to one of our best performance periods for quality in the past several years. A highlight of the second quarter for us was the acquisition of the Nagold Germany facility from Voestalpine, which establishes an electrical steel footprint in Europe for Worthington Steel. This is an important next step in our global strategy to capitalize on the growing industrial and EV motor markets. I'd like to commend the employees at the Nagold facility for what they've built there and welcome them to the Worthington Steel family. We have teams on the ground working with our employees to begin to integrate our businesses. Recently, we announced the expansion of our electrical steel facility in Mexico. Work is underway at the site as we reengineer our existing production area and add more capacity. This includes a significant expansion of our Focus Factory, which produces highly engineered traction motor lamination cores for electric vehicles. This expansion will create our largest global production site for motor and transformer laminations. We are targeting a start-up near the end of calendar year 2024. Our expansion in Canada to support the growing demand for large transformers remains on time and on budget. We have placed orders for the long lead time equipment and expect to begin production near the end of calendar 2025. Our commercial and operations teams continue to look for new ways to improve, partner with our customers and provide the best quality and service, all while maintaining inventory control and ensuring the safety of all. I am proud of what our team continues to accomplish. I'll now hand things over to Chief Financial Officer, Tim Adams.

Thanks, Jeff. I would also like to thank our employees for staying focused on serving our customers during the second quarter. Our results reflect the hard work put in by all of you. As a reminder, the quarterly and 6-month results are prepared on a carve-out basis, which will differ from the segment results reported by Worthington Enterprises. On a carve-out basis, we are reporting a loss of $6 million or $0.12 per share in the second quarter as compared with a $15.8 million loss or $0.31 per share in the prior year quarter. There were several unique items that impacted our quarterly results, including the following. First, we incurred pretax separation expenses of $14.9 million or $0.23 per share as compared with $8 million or $0.12 per share in the prior year quarter. Additionally, the prior year included a restructuring gain of approximately $0.04 per share related to the divestiture of the historical WSP joint ventures remaining operating facility. Excluding these items, we generated earnings of $0.11 per share in the current quarter compared to a loss of $0.23 per share in the prior year quarter. In addition, in the current quarter, we had estimated pretax inventory holding losses of $34.8 million or $0.52 per share compared to estimated pretax inventory holding losses of $53.1 million or $0.80 per share in the prior year quarter, a favorable swing of $18.3 million or $0.28 per share. In Q2, we reported adjusted EBIT of $6.6 million, which was up $21.5 million from the adjusted EBIT loss of $14.9 million in the prior year quarter. This is primarily due to higher gross profit, offset by increased SG&A expense, largely wages and profit sharing. Steel pricing reached a calendar year low in October, and since that time, the price of steel has increased $400 per ton to almost $1,100 per ton. We expect estimated inventory holding losses in Q2 will flip to inventory holding gains in Q3 and anticipate those gains will be slightly larger than the gains in our Q1 results. Net sales in the quarter were $808 million, down 7% from the prior year quarter, primarily due to lower average selling prices, partially offset by higher direct volumes. During the quarter, the price of hot rolled coil fell to approximately $660 per ton, its lowest level in calendar 2023, resulting in an 11% decrease in our average direct selling prices. We shipped 969,000 tons during the quarter, which was up 2% compared with the prior year quarter. Direct sales tons made up 56% of our mix compared to 55% in the prior year quarter. Toll tons were down 2% year-over-year, primarily due to the divestiture of the historical WSP joint ventures remaining operating facility. Excluding the impact of the divestiture, toll tons were up 6% as compared with the prior year quarter, primarily due to increased tolling volumes with the mills. Direct sales tons were up 4% over the prior year quarter despite the UAW strike at the Detroit 3, which began in mid-September and was not completely settled until early November. Our commercial team did a nice job of securing additional volumes in other markets to minimize any impact of the UAW action. We increased shipments to the construction market, which were partially offset by decreases in shipments to the ag and heavy truck markets. On a year-over-year basis, our automotive shipments were actually flat. Turning to cash flows and the balance sheet. Cash flow from operations was $139.9 million, and free cash flow was $121 million. During the quarter, we spent $18.9 million on capital expenditures, with the majority of that going towards the previously announced electrical steel expansions in Mexico and Canada. As Jeff Klingler noted, we also acquired an electrical steel lamination facility in Nagold, Germany for approximately $21 million. On a trailing 12-month basis, we have generated $261 million of free cash flow and Wednesday, we announced a quarterly dividend of $0.16 per share payable on March 28, 2024, to shareholders of record March 14, 2024. Regarding our balance sheet, our teams managed operating working capital very well during the quarter, delivering $127 million of cash from receivables, inventory and accounts payable. During the quarter, we finalized a 5-year $550 million revolving credit facility. We borrowed on that credit facility on November 30 in anticipation of issuing a $150 million cash dividend to Worthington enterprises on December 1 in connection with the separation. In summary, Worthington Steel had an excellent second quarter and all of our teams performed at high levels. We navigated the UAW strike very well and continue to meet our customers' needs as the Detroit OEMs return to normal build schedules. I'm proud of our teams for their dedication and for their continued commitment to safety. At this point, I will turn it back to Geoff Gilmore.

Thanks, Tim. As you heard, it's an exciting time to be at Worthington Steel. We have a defined strategy with a strong focus on organic growth, strategic M&A and driving continuous improvement using our proven transformation process, and we already have taken action on that strategy. We believe our expansions in Mexico and Canada, along with our acquisition in Nagold, Germany will accelerate our growth in several key markets. Worthington Steel is truly a unique steel processor with highly technical, value-added products and services. We are a market-leading supplier to attractive end markets, and we are driving that strategy with a strong experienced leadership team. We have the right team, the right strategy and a laser-like focus on doing the right thing for our employees, customers and shareholders. Now we'll open it up for questions.

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

Hello. Good morning, everyone. Through the quarter, any estimated volume impact from the strike from your comments, it sounds like there is quite a bit of offset with your gaining volumes elsewhere. But maybe more specifically just on the automotive front.

Martin, Geoff Gilmore here. Your assumption is correct. Fortunately, impact from the automotive strikes were relatively insignificant. I think there's probably pull ahead in anticipation of the strike. Fortunately, a lot of the Tier 1s and 2s use that as an opportunity to catch up and get inventories rightsized at their facilities. So we continue to see orders there. And we also saw a pickup from some of our automotive customers that are not on strike. But I think the most important thing we would like to highlight is just the great work of our analytics team and our commercial team. Because of that targeted approach that the union was taking with the strikes, we were able to quickly identify obviously, which facilities were going on strike, more importantly, what vehicles are they producing and parts? Are we producing some of the steel going into those vehicles and parts if we are at what facility and will there be holes in the order book. So we were able to quickly do that with our analytics group and then we were able to get our commercial team very focused on those facilities where there was open capacity, and they did an excellent job going out to different customers in different markets and offsetting that lost volume.

It's helpful. Question on the Voestalpine Automotive acquisition. How did the annual volumes look there and profitability?

Martin, this is Tim. It's a relatively small facility. What we're trying to do is just get a footprint there. So it's a facility, it's about 60,000 square feet and it's got about 130 people. So it's a relatively small facility, and we'll be ramping up volumes there as we win business. We've been asked to be in Europe for a long time. Tempel’ has been asked for years to be there. So we're just starting to go through the integration part of that, but we'll let you know on volumes in the future.

Okay. Any comments on profitability for the business?

No, I would say it's in electrical steel. So it's a similar profitability to Tempel.

Okay. within the release, there's the steel supply agreement, $1 million was booked in the pro forma adjustments. Can you provide some more details on that agreement such as duration? Is the margin variable? Or is this something that's fixed and related volumes are on this annually?

Yes. Martin, obviously, we'll have a multiyear agreement with Worthington enterprises. We're excited to continue supporting them as a customer of ours. They will consistently be a top 10 customer to us. As far as profitability, that's not something that we would answer for any of our customers. And as everybody should know and understand all those agreements are put in place at arm's length, but we're certainly excited about supporting them.

Are you able to comment as a percentage of group sales, what they would have accounted for on a pro forma basis?

I don't know what percentage of the top of the top of my head. I just would tell you, I'd go back to, again, consistently, they will be in our top 10 as far as volume shift.

Okay. I appreciate it. If I could, one last one here. What's your read on customer sentiment and their budgets looking ahead to calendar 2024.

Martin, this is Jeff Klingler. I think from a high level, our customers from the automotive standpoint, the -- with the strike activities behind us, they are looking forward to production returning to more of a normalized level and increasing in 2024 by 6% to 7%. In other markets, we do expect construction to improve modestly on a year-over-year basis. And then our other 2 major markets, heavy truck and ag, they're coming off several record years in a row. So we do see a little bit of softness going into the year in both those sectors.

Okay. But in general, your largest end markets here expecting growth to some degree.

That's right, Martin. As Jeff said, we're anticipating automotive up anywhere from 5% to 7%, which would put automotive build rates at $16.3 million. So obviously, it would be a bright spot for us.

Okay. Excellent. I appreciate all the comments and congratulations on the separation.

Your next question comes from the line of John Tumazos of John Tumazos Very Independent Research.

Congratulation. I feel like I'm 40 years younger, and it's the old Worthington.

We're glad you're excited. Clearly, we are as well.

I want to try to understand the higher math of the balance sheet. So the balance sheet is November 30. On December 1, the cash goes down $150 million, and the shareholders' equity to controlling interest goes down $150 is the offsetting item, but the debt doesn't change, right?

That is correct.

So with the gain in steel prices and inventories and receivables going up in the next quarter. and maybe payables going up. In the February balance sheet, should we expect, for example, 40% larger inventories and receivables and 40% larger payables?

I don't know that I would peg it at 40%. But yes, you will see an increase in inventory, receivables and payables just to -- as the price of steel runs up, that's just what happens, as you know.

So debt might be $150 million more on February 30 or something like that.

I don't know if it will be $150 million more, but that will be up to fund those, yes. I mean that's the beauty of having an ABL, right? It's -- it moves and gives you the ability as steel prices move up, right, you just -- sorry, relying on your revolver to fund those.

In terms of the balance sheet I think the value of the company is more than tangible net worth. And I'm going to ask a series of questions trying to flush out some of those underlying values. How much of the $159.4 million goodwill and intangibles is Tempel Steel?

I would say the vast majority of that is Tempel Steel.

So Tempel Steel is at least $100 million of the $159.4 million.

I would say that's accurate. I don't have the data in front of me, but that seems about right.

How much would be Shiloh blanking?

Probably most of the rest of that, most of the rest of the difference.

So anything else is insignificant, less than $5 million.

Again, I can't tell you the numbers, but all I can tell you is those are the most recent acquisitions. Those were the biggest acquisitions we've ever done. We did the Rome acquisition in 2015. We did the acquisition of the cold-rolled strip assets from Gibraltar in 2010. So those will -- there will be some leftover goodwill from those items. But the 2 biggest ones we've done would be the Shiloh and the Tempel acquisition. So those would represent the vast majority of what's in goodwill.

Those Rome and Gibraltar might have been near or below historic book value. They were not glamor businesses per se, right?

They were solid businesses.

They weren't sexy like Electrical Steel today.

You could say that, I suppose that's one way to look at it.

It seemed sexy back then.

And those are good businesses. So...

So I'm looking at the accumulated depreciation account of $687. And the old Worthington spent about $700 million in CapEx, '99 -- '96 to '99. So I think the biggest CapEx of the history. And maybe $400 million was the Delta, Ohio galvanizing line, which from '96 to present, probably would be fully depreciated. What do you think are the 2 or 3 biggest pieces of the accumulated depreciation account? I'm sure you're Delta galvanizing line is a big part of your business. If it's depreciated to 0, it's probably worth a lot more than 0.

It's not depreciated to 0. We're constantly refreshing that. So it is not like you build it and you don't continue to upgrade it and expand capacity. So we've done a number of projects at Delta and Spartan and all of our facilities over the years to keep the -- we've said before, we want to keep our assets in market-ready condition. So because of the success of Delta, we're constantly looking for ways to increase efficiency and spend capital to do that, so we can get more capacity out of it.

I wasn't trying to say it was a dog s**t asset, excuse me.

No, no, not at all. We don't...

Depreciation is Delta and Spartan.

That's something we will have to circle back to you on. I don't know that number off the top of my head.

The reason I'm asking the question, I was thinking back to one of LTVs emergence from bankruptcy, not to use that as a bad comparison. And fresh start accounting one of the adjustments they did is they just added back the accumulated depreciation. So I'm looking as though there is some value in that accumulated depreciation account, but I'm not sure -- I don't think it's 100 cents on the dollar, but it's something. So I'm trying to reconcile between the tangible book value and the book value adding back accumulated depreciation and that steel price rebound interim to the quarter 2 after November 30 books. I'm just trying to figure out if the tangible book value, $15 or the adjusted book value is $30. And where is the good value to buy the stock, Tim. That's all.

Yes, you bet. Thank you.

There are no further questions at this time. I will now turn the call over to Geoff Gilmore for some closing remarks.

I just wanted to thank everybody for participating and showing interest in Worthington Steel. We'll look forward to talking to you again in a few months and wish everybody a Merry Christmas.Thank you.

This concludes today's conference call. You may now disconnect.