Good afternoon, and welcome to the Worthington Industries' Fourth Quarter 2016 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 like to introduce Ms. Cathy Lyttle, Vice President of Corporate Communications and Investor Relations. Ms. Lyttle, you may begin.

Thank you, and good afternoon. Welcome to our fourth quarter earnings call. A reminder that certain statements made on this call are forward-looking within the meaning of the 1995 Private Securities Litigation Reform Act. These statements are subject to risks and uncertainties, and could cause actual results to differ from those suggested. Our earnings release was issued yesterday. Please review it for more detail on those factors that could cause actual results to differ materially. This call is also being recorded and will be made available later on our website. With me on the call today are, Chairman and CEO, John McConnell; President and COO Mark Russell; and, Executive Vice President and CFO, Andy Rose. John has a few opening comments.

Cathy, thank you and thank you all for joining us today. Obviously we are pleased with our performance. We had a very strong fourth quarter that pushed us into record EPS for the year. Strong performances out of steel, all of our joint ventures, the majority of our cylinder company all helped, those results come to pass. I'd be remiss not to mention the really good work of those in our oil and gas, and engineered cabs business who have done a great job in very difficult industry environments really scaling these businesses. As you know, we don't light switch or scale in either direction. It doesn’t happen that way but their actions have started to catch up to where we need to be. So very proud of everybody's performance across the board in all of our employees, so let's get into a more detail, starting with Andrew Rose.

Thank you, John. Good afternoon everyone. Company delivered a strong finish to the fiscal year to reach record earnings per share of $2.48, adjusted for restructuring and impairment charges and non-recurring gains. Despite declining steel prices early that led to $15 million of inventory holding losses for the year in steel processing and very weak oil and gas and agricultural markets, the company is performing well. Lower commodity input costs across many of our businesses combined with improvement in steel processing, industrial gas, consumer products and all of our joint ventures, including WAVE highlighted the year. Quarterly earnings adjusted for restructuring and nonrecurring gains were $0.86 per share, up $0.33 per share from the prior year quarter. Several unique items in the fourth quarter were as follows. Inventory holding gains during the quarter were estimated at $3 million or $0.03 per share as compared to a loss of $10 million or $0.10 per share in the prior year quarter. Restructuring charges of $1.9 million were spread across several businesses. $6.9 million in miscellaneous income related to the consolidation of our Worthington Specialty Processing joint venture, driven by accounting rules that require us to apply purchase accounting when we assumed control on March 1. Pressure cylinders also had $2.7 million of expenses that flowed through operating income primarily related to obsolete inventory and oil and gas, and the cancellation of long term truck leases no longer required for the business. Cylinders’ operating income, excluding restructuring, was down $2.5 million or 16% to $13.6 million, driven almost exclusively by declining sales in oil and gas equipment, down 67%. Operating margins for the quarter were once again below normal due to the impact of losses in oil and gas and the one-time expenses mentioned above. We continue to reduce costs to match demand…

Thanks, Andy. In steel processing, our direct shipment volume was down 3% excluding WSP, our joint venture with US Steel which was unconsolidated in last year’s quarter. Metals Service Center Institute data for the same period shows direct industry shipments down 5%. Our toll volume in the quarter was down 7% and the mix between direct and toll was 63% direct versus 37% toll, again excluding WSP. Construction was our strongest market segment with shipments up 21% this year. Detroit Three Automotive was down 2% and agriculture was also down 2%. Heavy truck was our weakest segment down 17%. Our tailor welded blanking joint venture with WISCO commissioned their newest facility in Silao, Mexico in the quarter and TWB also received their first production order for lightweight aluminum tailored blanks. Direct volume at our Serviacero joint venture in Mexico was flat compared to last year and toll volume was down by 15% there. Finally, steel processing’s joint venture strip facility with Nisshin and MISI in China is substantially complete and on track for trial production start up in the next few weeks. In our pressure cylinders business, oil and gas equipment revenue was down 67% compared to last year. Despite the recent increase in oil prices, the equipment market continues to be extremely challenged and customer capital budgets for well drilling and completion remain limited. In response, we continue to adjust our cost structure, implementing another reduction enforced during the quarter, our third since the downturn started. Industrial Products Group finished the fiscal year with strong demand for refrigerant, 20 pound propane and 14 ounce cylinders. Margins remained historically high on lower raw material costs. International Trade Commission recently moved to implement duties ranging from 90% to 200% on Chinese refrigerant coming into the U.S. In consumer products, volume was…

Mark and Andy, thank you both. At this point, we will be happy to take any questions that you might have.

[Operator Instructions] Our first question is from John Tumazos [John Tumazos Very Independent Research]

Congratulations on the record results. It's a great surprise in tough markets. A couple minutiae questions. The tax rate continues in the upper 20s favorably. What should be the normal tax rate we put into our models going forward? I used to be using 32.5, but it seems to never hit there. Then second, in the quarter there was a $37 million gain in cash from longer payables presumably that I guess went out the door in June and we should just reverse or look through that.

Yes, the first question, John, on the tax rate is I kind of like a low 30s number, maybe 31% if I had to predict what it would be on an ongoing basis, but this year we got a bump from early adoption of a change related to expensing of stock, so that drove the lower rate -- a lower rate but I think I would use something around 31% probably going forward. And then the next question?

Should we -- was the gain in -- should the cash rise we should look through it because of the payables?

So the second one, obviously there's a couple things going on here. One is the decline in steel prices, that doesn't necessarily push out the days payable. We also had an opportunity to offer some of our suppliers to supply chain financing and extend terms as a result of that. So we took advantage of that.

The supply chain financing mean you paid the bill earlier?

It basically means we can pay later but they can get paid sooner by a third party.

We have a question from Seth Rosenfeld with Jefferies.

Good afternoon. It's Seth Rosenfeld at Jefferies. Just two questions. First on the cost-cutting side, specifically within your cylinders business with the oil and gas exposure, can you comment how much of the recent cost cutting is sustainable or something we should assume reverts as the volumes do eventually begin to improve, perhaps in 2017, with the most recent reduction in force? Can you put some scale on the benefits behind that? Then on the steel processing side, can you talk a little bit about how your earnings benefited from the spread expansion we've seen between HRC and CRC or Dow. If those margins start to normalize into 2017 or into H2, what would the impact be on that division's profitability? Thank you.

You are pretty echoey on our end. So if we miss anything, just please don't hesitate to jump back in here and I will let Mark and Andy comment further but on the oil and gas side, I think we are at pretty sustainable run rate at this point, that’s worked through the financials and we're at a point that -- as things pick up slightly which I think they're going to do, I don't think they're going to return to anywhere near the levels they were before the industry slowdown. But if it picks up slightly we're at a point we won't have to add any people to be able to service our customers. Mark, Andy, anything further on that.

I would just say that business, principally the cost structure is labor and steel and we unfortunately have had to reduce -- I think our sales are down close to 70% in that business. And so we had to take out labor that closely approximate that from a percentage standpoint. So but as John said I think we're right sized for the time being, we do have capacity to take on new business. Depending on how fast the recovery is or how quick it happens, we may have to ramp up more quickly. But that is a scalable business.

To your second question – this is Mark Russell. Your second question about the spread, obviously that’s the highest spread that anybody around here has ever seen. So we would -- we're not counting on that spread continuing long term, we think it can stay that way for a while. But we think you'll see a mean reversion in that going forward later on. What that does for us in the temporary time period as long as that spread stays that wide, is it increases demand for some of our galv products that we've seen so far. The spread going back to normal would probably take the peak out of that demand and put us closer -- to move back to what we call normal level demand for galvanizing. That affects our Delta -- galvanizing line in Delta, Ohio, galvanizing [Indiscernible] would be the line in Michigan [Indiscernible].

Next question is from the line of Charles Bradford with Bradford Research.

Questions about steel pricing. The spread between domestic and foreign prices is about as wide as we've ever seen it. Are you beginning to see any more offers from overseas? I know they've slowed down a lot with the trade cases, but there are additional countries that seem to have capability. What are you seeing?

Charles, same thing that you described in terms of trade cases the activity has slowed dramatically. So even though there seems to be a lot of incentive, we don't get a lot of looks at that and we don't import very much steel, in fact, almost none, just some very special grades. So we are not an active importer but with the spread where they are, there is a lot of incentive there, certainly.

I think we are anticipating seeing more products made of steel show up in the United States, as a result of the trade cases which takes a little time to manifest itself but that’s another way to get steel into this country regardless of trade cases.

Some of the trade publications are starting to talk a little bit about maybe flat rolled prices having peaked. Are you seeing anything like that -- domestic pricing?

No, we don't have any crystal ball for prices but we base our planning on the forward curve and the forward curve does look like it’s a little bit backward dated. So the market is saying that the future prices are going to be weaker right now.

[Operator Instructions] We have the line of Phil Gibbs with KeyBanc Capital Markets.

A lot of moving pieces in the joint venture lines, but obviously a lot of them did -- all of them did well substantially year on year. Can you help us in terms of that momentum maybe relative to the May quarter moving forward because the way we're thinking about it right now is that there were maybe some pricing -- or, some cost benefits from the lower steel prices from last year and maybe a little bit of a benefit on the inflection and pricing for some of the more service-oriented businesses that you have. Any way that we could think about that?

I think that’s right, Phil, ClarkDietrich is an example, WAVE is an example that obviously as steel prices came down in the first half of the calendar year, that benefit them and then when prices start to rise, it takes a while for that lower cost inventory to work through the system so that increases their spread. So there is some benefit there. Obviously eventually prices go up and those businesses they have announced price increases in anticipation of their costs eventually going back up. So I think you're right.

What about on some of the businesses like ArtiFlex and Serviacero? I know ArtiFlex is kind of more the manufacturer in there, but –

Yeah, ArtiFlex is a little bit different than the rest of the portfolio there. Serviacero certainly mimics what happens in our steel processing business. They'll have the sort of FIFO accounting benefit that flows through their business but they do run their business somewhat in a similar fashion as we do. ArtiFlex frankly is just benefiting right now from a very strong automotive market which is good.

And jumping to the cylinder side of the business, the consumer volumes this year were down a bit, I want to say mid-single digits or so, maybe 3% to 5% for the year. What drove that? Because I know you're doing more in terms of innovation and new product offerings. And so what drove that this year and should we expect that to reverse?

For the year, Phil, the thing that we didn't have, that would be more normal for us was the cold winter. So the warm winter affected demand for several of our smaller cylinder products. But other than that our innovation work there is building momentum. So we expect good things to come out of the innovation work that’s going on in our consumer products business. And the kind of seasonal variation that we saw this year, longer term we expect that to return to an average.

And Andy, I just wanted to clarify. Did you say there's about a $3 million holding gain in steel this quarter?

Yes, for the quarter, correct.

Okay, perfect. And then just more of a philosophical or global economic question. The recent Brexit, if I could use that word, obviously a lot of impacts that people are trying to speculate on. Anything that would directly or potentially impact your business overseas? I think the only thing that I could think of right now is the cylinders business and maybe a little bit of WAVE exposure, but anything from that perspective that you are thinking about or that may impact the business?

I think that’s right. I mean we have some European exposure in our cylinders business. Right now, those businesses are performing pretty well. WAVE does have a small operation in the U.K. but it’s very small relative to the overall business. And frankly I think the growth dynamics for that business are pretty good. So irrespective of what happens with the kind of English or European economy. So it's hard to measure, Phil, to be honest but I wouldn't anticipate a major impact on our business from what’s going on there.

I’d just add, I mean this is a very new development that I don't think anyone really understands where it leads to and what subsequent actions may be in and around it, or people’s responses are. And I think the world will continue to do business as normal [indiscernible] as further things change.

We have a follow-up question from John Tumazos.

Now that you've got a record year under your belt and things are okay as we begin 2017 and there could be a shot at another record year, certainly without the different impairments, et cetera, do you think you might hold some extra inventory in case the economy strengthens or look for another good new business to buy or feel confident doing anything else?

John, I mean our mission is to increase the earnings of our shareholders’ and continue to drive share price forward. So we're looking at all those things and we won’t probably speculate [indiscernible] likely anybody just – what we try to do is capital deployed in that manner possible and continue to make great strides and then lowering it. I don’t know, Mark and Andy have other thoughts. But we’re going to continue to drive, we will do our best to produce those results.

I think that's right, John. I mean we continue to look at acquisition opportunities, there is a little bit of a frothy market right now. So we're trying to be disciplined around price. In the past year we continued to buy back stock. We like our company, we are very excited about the next phase of transformation 2.0 and to John’s point, one of the goals of that process is to run our business with excellent quality on-time delivery and with as little inventory as possible. So we're not inventory speculators. We're not going to -- we're not going to do that just because we think prices are low, we don't think that’s the right way to run our business. So at the end of the day we want to have the flexibility to flex up if the business does improve, and I think we've got that.

If you have an extra $50 million or $100 million in your hip pocket because things came up roses, which business line do you think you'd spend it on?

We had a board meeting this morning, John and we had a very healthy debate on that. The short answer is just about every business we own, there are opportunities to deploy capital. Some of those businesses like oil and gas and engineered cabs have been focused on right sizing our own operations. So we haven't put as much capital there but at the end of the day we try not to ignore any of our businesses with respect to opportunities, because sometimes the best opportunities come when markets are weak. So at the end of the day that we need to have open mind.

Including businesses that we are not involved [ph]. So we’ll look across the board including share buybacks. We'll continue to use the same quiver of arrows that we have to keep driving share value.

Should we assign any significance to the -- we didn't buy back the usual 1 million shares this quarter and the debt balance fell this past year by $85 million or so. So the balance sheet is in good shape for however your judgment leads you.

I wouldn't assign too much significant there other than during the quarter we saw some pretty dramatic improvements in our stock price and we try and be disciplined in our share buybacks too, right? So with that big run-up we’re excited to go ahead and put our heads in the sand for a quarter and see what happens.

So John, it’s largely -- one of the main governors on that is other opportunities to deploy capital whether we end up executing on those or not. We have opportunities on the horizon, that we are investigating that require some larger capital being used and we will fuel back a little bit on that side.

The reason I asked the question is with one record year just printed today and another one looking like it has a chance, interest rates so low around the world, your earnings are worth more than your valuation. Worthington is worth more. So we should be seeing a record stock price when you're printing record earnings and alternative interest rates are so low.

Certainly one of the goals.

And we have a follow-up question from Phil Gibbs, KeyBanc Capital Markets.

I'm not a shareholder, but I can't be, unfortunately. I do have a follow-up question just in terms of the net gain on sale of assets, Andy. It was $5.4 million. How should -- what was that, one? And then, two, how do we think about where that falls within the business segments?

That’s a little bit of a complicated one, Phil, but the short answer is there's a few things in that category -- in this quarter there happened to be a fair amount of mark-to-market gains on hedges, principally around our steel hedges. And that was the best place to put it on the cash flow statement. And where that falls in the income statement is within steel processing.

So the gain on the sale of assets largely reflects your hedging?

Yes, so we have hedges that are qualified for hedge accounting, which is probably 75% or 80% of what we do. And then we have some hedges that are unqualified, and because they're unqualified for hedge accounting they flow through the income statement. But they are non-cash essentially, they're non-cash in the quarter. Eventually they convert to cash down the road. So it's really just pulling forward a little bit of income from the next quarter or two or three depending on how long the hedge is.

Okay, so it didn't connect to a specific asset being sold is what you're saying.

Majority of it did not, correct. Just for this quarter, Phil. If you go back to the yearly number there are asset sales in there. So we're talking just about for the fourth quarter number. End of Q&A

And at this time there are no further questions in queue.

Again, thank you all for joining us and again thank all of our employees. They did an outstanding job this quarter for our shareholders and we will continue to stay focused and drive our earnings forward. Thank you.

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