Worthington Enterprises, Inc.

Thank you, operator. Good morning and welcome to Worthington Steel's third quarter fiscal year 2025 earnings call. On our call today, we have Jeff Gilmore, Worthington Steel's President and Chief Executive Officer, and Tim Adams, Vice President and Chief Financial Officer. Before we begin, 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 closed. Please refer to it for more details on the 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 available later today on WorthingtonSteel.com. And I'll turn it over to Jeff Gilmore.

Good morning and thank you for joining us. I'd like to start today's call with a heartfelt thank you to the Worthington Steel team. In a quarter filled with uncertainty and change, our employees showed remarkable flexibility and resilience. I'm proud of all they did this quarter to focus on what they could control while maintaining a strong commitment to safety and serving our customers. In the third quarter, we generated adjusted EBITDA of $41.9 million compared with $82.8 million in the prior year quarter. Earnings per share came in at 27 cents versus 98 cents per share in the same period last year. Results were impacted by both lower volumes and lower average selling prices. As we expected, many of the headwinds from Q2 continued into the third quarter as customers managed uncertain macroeconomic conditions. However, we saw signs of improvement during the last month of the quarter, and we believe most of the volume improvement at the end of the quarter was due to fundamental demand improvements rather than a buy-ahead effort to beat potential steel price increases. Taking a look at our key markets, Our shipments to automotive were down 3% in the third quarter. Given the level of current uncertainty, we are cautiously optimistic about the North American auto market in calendar year 2025. Calendar year 2024 ended the year at 15.4 million units produced, solid given the challenges occurring late in the year, but still below pre-COVID levels. The latest calendar year 2025 forecasts are showing flat builds on a year-over-year basis at approximately 15.3 million units produced. However, there's likely some upside to that forecast due to lower interest rates and lower inflation. Our commercial teams continue to aggressively pursue and win new incremental automotive business. Our shipments to the construction market were down on a year-over-year basis. We believe part of the decrease compared to last year was due to lower demand resulting from economic uncertainty. When looking at the overall construction market for calendar year 2025, we see it as more of a first half, second half story. In the first half of 2025, we expect the construction market to be fairly flat, then begin gaining momentum later in the year. Certainly, the construction market will benefit from interest rate cuts in 2025, which we are keeping a close eye on. We expect the agriculture market to remain soft for a while. The ag industry continues to be held back by interest rates, commodity prices, and tariffs that further delay farmers' decisions to purchase new equipment. Demand in the heavy truck market continues to be slow, but we are starting to see signs of improvement. Based on what we see today, we think the heavy truck market will show GDP-type growth for the rest of calendar year 2025. Overall, we sense a bit of unease in some supply chains as customers deal with the current uncertainty. However, we are seeing normal buying patterns from many of our customers. In the long term, we have the right strategy and solid growth plans. First, we remain bullish on the first pillar in our strategy, focused investments in the electrical steel market. AI initiatives and more data centers mean more demand for power and the infrastructure to carry it. There's a two-year backlog on transformers, which use the electrical steel cores we make, and the need for power is expected to grow at more than 6% per year over the next 15 years. 2024 saw the continued surge in electrified vehicles, particularly hybrids. Worthington is in a very good position to benefit from this preference as we process steel for both the clutch plate and the electrical motor laminations in hybrids. Additionally, we have made excellent progress for closing on our 52% ownership stake in Seedem, a leading European electrical steel lamination manufacturer. A few weeks ago, Tim and I had the opportunity to tour Seedem facilities in Italy and Switzerland and to meet the local management teams and many other employees. I was impressed by Seedem's culture and how closely their values and approach to people match Worthington's philosophy. Seatham's technical expertise and know-how will add to our electrical steel laminations offering and strengthen our position as a market leader. I am excited to have the folks at Seatham combine their expertise with Worthington. We hope to close on this transaction in the next few months. Our second strategic growth pillar includes a strong commercial focus, strategic CapEx, and acquisitions. Our capital investments in the expansion of our electrical steel capabilities in Canada and Mexico continue to move forward. In Mexico, where we manufacture electrical steel laminations for use in industrial motors and electrified vehicles, we have installed the first five presses and testing is underway. We remain on track to begin production late this calendar year. Construction of our expansion in Canada, where we manufacture transformer cores, continues to move forward. We expect to begin production early in calendar year 2026. We have new commercial initiatives underway to grow, share, and volume. We are just starting to see the effects of this effort. All the while, we continue to consider M&A opportunities that complement our business and fit both our strategy and our culture. The third pillar of our growth strategy is the transformation, our systematic approach to making base business improvements. The transformation mindset is part of our ongoing workflow, and simply put, if we find something that's good, We look for ways to double it. If we find something bad, we find ways to cut it in half. This quarter, teams came together across the company using collaboration, standard work, and data analytics to reduce press changeover times, work-in-progress inventory, and streamline HR functions. This is just a sampling of the transformation activities happening throughout the company and can lead to reductions in both working capital and cost. while at the same time increasing efficiency and capacity. Before I conclude my remarks, I'd like to touch on a few highlights from the quarter. This quarter, our teams continue to grow market share with new automotive OEM business, which ramps up over the next coming months. In January, our electrical steel operation was awarded the Best Supplier of the Year award by Molle, a leading global automotive parts manufacturer. This marks The third consecutive year, our team, based mainly in India, has been honored by Malle for their exceptional performance in quality, delivery, and support of new product development. I'd like to congratulate them on this achievement. We collaborated with Cleveland Cliffs to develop a lightweighting solution to reduce weight and optimize cost and battery trays for electric vehicles. A battery in an electric vehicle typically represents 20 to 25% of the vehicle's overall weight, and our tailor-welded blank solution helps OEMs achieve weight savings. Our Mexico steel processing joint venture, Servicero, commissioned its new slitter in Monterey and is now running production orders. Lastly, Worthington Steel leadership team kicked off our AI journey. We are exploring how to incorporate AI into our operating model, the Worthington business system, expanding our advanced analytics portfolio with targeted experimentation and introducing generative AI education for our corporate and functional employees. To summarize, due to the amount of uncertainty in many markets, we are cautiously optimistic about the near term. However, we think clarity will improve as the year moves forward, and we are more optimistic about the second half of 2025. I believe we are well positioned to grow our business. Once again, I offer my thanks to the entire Worthington Steel team for keeping safety, quality, performance, and our customers front and center each and every day. Now I'll turn things over to Tim Adams to discuss financials.

Thank you, Jeff, and good morning, everyone. For the third quarter, we are reporting earnings of $13.8 million, or 27 cents per share, as compared with earnings of $49 million, or 98 cents per share, in the prior year quarter. There were several unique items that impacted our quarterly results, including the following. The current quarter results include $7.4 million, or 7 cents per share, of pre-tax asset impairment charges related to two discrete items. The first was for the operational consolidation of our Worthington Samuel Coil Processing's coal pickling facility in Cleveland into WSCP's remaining existing facility in Twinsburg, Ohio. The consolidation resulted in an asset impairment of $6.1 million. The second item is the impairment of an in-process research and development intangible acquired in connection with the 2021 TWB Shiloh acquisition. The write-off of the R&D intangible resulted in an impairment charge of $1.3 million. Additionally, we recognized pre-tax restructuring expenses of $900,000 or one cent per share related to a voluntary retirement plan at our Taylor Wooded Blank Joint Venture. The prior year results included pre-tax separation expense of $1 million or one cent per share. Excluding these unique items, we generated earnings of 35 cents per share in the current quarter compared with 99 cents per share in the prior year quarter. In addition, in the third quarter, We had estimated pre-tax inventory holding losses of $1.2 million, or 2 cents per share, compared to estimated pre-tax inventory holding gains of $19.3 million, or 29 cents per share, in the prior year quarter, an unfavorable pre-tax swing of $20.5 million, or 31 cents per share. In the third quarter, we reported adjusted EBIT of $25.3 million, which was down $41.6 million, from the prior year quarter adjusted EBIT of $66.9 million. This decrease is primarily due to lower gross margin and, to a lesser extent, higher SG&A expense and lower equity earnings at Servi Acero. Gross margin was impacted by lower volume and lower direct material spreads, primarily due to year-over-year pre-tax inventory holding losses. I will touch on markets and volumes in a moment. SG&A increased $1.8 million over the prior year third quarter, primarily due to higher wage and benefit costs, as well as incremental professional fees associated with the announced FEDM acquisition. Equity earnings from Servicero decreased due to lower direct volumes, as well as the impact of exchange rate movements. Next, I'll provide some perspective on the market and our shipments. The market pricing for hot-rolled coil has been in a relatively tight band between $650 and $700 per ton from July through January, with a modest increase in February to the mid-$700 range. Hot-rolled coil pricing in March increased to approximately $950 per ton and is expected to remain at this level in the near term as a result of tariffs. With the recent increase in market pricing, we expect estimated inventory holding gains in the fourth quarter of fiscal 2025. We estimate those pre-tax holding gains could be approximately $20 to $25 million as compared with $1.2 million of estimated pre-tax holding losses in the third quarter of 2025. Net sales in the quarter were $687 million, down $118 million, or 15% from the prior year quarter, primarily due to lower direct volumes and lower direct market pricing. We shipped approximately 881,000 tons during the quarter, which was down 11% compared with the prior year quarter. Direct sales volume made up 57% of our mix in the current year quarter, as compared with 55% in the prior year quarter. Direct sale volume was down 7% over the prior year quarter, with shipments down in most markets. Our shipments to the automotive market were down 3% compared to the prior year quarter. As we discussed last quarter, our automotive book of business has been impacted by production cuts at one of our Detroit 3 OEM customers as they right-size their inventory levels and adjust their commercial strategy. We are optimistic the OEM is moving in a positive direction. The OEM's year-over-year production cuts of approximately 25% continue to impact our results in Q3. However, it appears the OEM is making progress to replenish their supply chains in anticipation of improvements in sales. We believe the OEM is making progress towards a more normal build schedule later in the calendar year. The impact of reduced shipments in the quarter to this OEM were partially offset by increases in shipments with others. As we've noted over the past few quarters, we have won new programs and increased our share in the automotive market. We are beginning to see the volume impact of some of those new programs. These platforms will continue to ramp up over the next several quarters. Similar to last quarter, our year-over-year shipments to the remaining Detroit 3 grew despite a drop in OEM unit production. Our teams are doing a great job working with our automotive customers to deliver solutions that meet our customers' market objectives. We look forward to continuing to grow our partnership with our automotive customers. Turning to the construction market, our volumes decreased 20% on a year-over-year basis. The decrease was a combination of several factors. First, in the prior year, we successfully pivoted to a more construction heavy mix as part of our contingency plan related to the D3 automotive strike and its potential near-term aftermath. We also believe overall economic uncertainty impacted construction volumes as well as volume in many other markets. We believe many buyers took a wait and see approach in December and January. We saw volumes pick up throughout February, We believe our February volume increase may have included some pull-ahead demand. However, the feedback from our customers leads us to believe most of the increase was due to fundamental improvements in demand. Full tons were down 15% year-over-year, primarily due to a general slowness in many markets, including automotive. As is typical during volume slowdowns, some of our customers pulled toll processing jobs back in-house because they had open capacity. When the end market demand picks up, we expect our toll processing volumes to increase. However, we expect to see a decrease of approximately 100,000 annual toll processing tons as a result of the WSCP consolidation from Cleveland to Twinsburg. Turning to cash flows in the balance sheet, cash flow from operations was $54 million and free cash flow was $25 million. During the quarter, we spent $28.6 million on capital expenditures related to a variety of projects, including the previously announced electrical steel expansions. On a trailing 12-month basis, we generated $82.3 million of free cash flow. Wednesday, we announced a quarterly dividend of 16 cents per share, payable on June 27, 2025. We ended the quarter with $63 million of cash, and our outstanding debt at February 28 was $112 million resulting in net debt of $49 million. Finally, I would like to thank our team for making safety the highest priority at every facility and for driving results in a challenging quarter. I look forward to working with our entire team to continue driving value for Worthington Steel stakeholders. At this point, we would be happy to take your questions.