Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to the Worthington Industries Second Quarter Fiscal 2019 Earnings Conference Call. [Operator Instructions] I'd like to introduce Marcus Rogier. Mr. Rogier, you may begin.

Thank you, Leia. Good afternoon and welcome to our second quarter earnings call. 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, and could cause actual results to differ from those suggested. We issued our earnings release this morning. Please refer to it for more detail on those factors that could cause actual results to differ materially. This call is being recorded and will be made available later on our worthingtonindustries.com website. On our call today are President, Andy Rose; Executive Vice President and COO, Geoff Gilmore; and Vice President and CFO, Joe Hayek. Joe will start us off today with a review of the financials.

Thank you, Marcus, and good afternoon everyone. In the quarter, we generated earnings of $0.58 a share excluding restructuring charges versus $0.61 a share excluding restructuring and impairment charges a year ago. Net sales increased by 10% to $958.2 million in Q2 from $871.3 million in 2018. Our gross margin declined in the quarter by $19.1 million to $120.9 million, as we faced headwinds driven by compressed direct spreads in our Steel Processing business and lower volumes and higher input and conversion costs in our Pressure Cylinders business. Equity income in the quarter was up $4.6 million driven mostly by WAVE, which was impacted in 2018 by $3.6 million in catch up expenses related to increased allocations from Armstrong and Worthington. Our estimated annual tax rate was 23.4% versus 30% in the prior year quarter. Turning to the businesses, Cylinders’ net sales were $294.4 million in the quarter down 2% from last year, primarily due to lower volumes in our consumer products business, which last year saw substantial hurricane-related sales. Cylinders’ operating income before restructuring charges of $15.2 million was $11 million lower than in 2018 due to the lower volumes in consumer products and margin compression across all of our Cylinders businesses. Net sales in our Steel Processing business were $635 million in the quarter up 18% or $96.7 million over last year, due primarily to higher average direct selling prices that corresponded to the higher price of steel. Shipped tons were up 3.1%, due primarily to an increase in tolling, and direct tons were 56% of the mix versus 57% in 2018. Inventory holding gains were insignificant in the current and prior year quarters. Steel Processing operating income excluding restructuring charges was $25 million, down $5.8 million from 2018, driven primarily by wider spreads between hot rolled coil…

Thank you, Joe. Good afternoon everyone. As you've seen, there's a lot of noise in our business right now. Financial results for the quarter were up modestly, but there are number of temporary headwinds that are subsiding and positive moves being made by our leaders to improve results as we turn the page into 2019. The biggest challenge we have been tackling is the steel tariffs which have created artificial pricing mechanics that should have minimal long-term impact on our business but have created short-term margin pressure. In Steel Processing, the scrap to hot-rolled spread has compressed margins. In Pressure Cylinders, higher steel costs have also reduced margins. The good news is that we are successfully recovering margins as we pass-through price increases across our downstream manufacturing businesses. But as expected, there's been a lag in realizing those benefits. We are beginning to see the benefits of price increases and cost reduction measures, and this will continue building in 2019. End market demand remains good across most of our businesses. The economy is strong and showing no signs of extended slow down. As we successfully navigate price volatility and cost pressure, we are confident that our strategy will continue to deliver solid returns for our shareholders. Our core strategy remains centered on improving the profitability of our businesses via transformation and lean, and accelerating our growth via acquisition and innovation. We're also in the early stages of ramping up our investments in data, analytics, and automation. We have a long history, particularly in our Pressure Cylinder business, of driving automation as a competitive advantage. And we believe we can further enhance this combining with advances in data and analytics. Of course, the foundation of our company is our philosophy and we are refocusing our efforts on our people ensuring the way we recruit, train, develop, incentivize, and go about our daily work, unlocks their full potential and allows us all to have fun doing it, optimizing our performance and continuing to be recognized as a preferred employer. We continue to operate near record levels of earnings and cash flow, but our goal continues to be to improve on that every year. We are confident that we have the right team and the right approach to get us there. Thank you for your continued support of Worthington. We will now open it up to questions.

[Operator instructions] Our first question is from the line of Martin Englert with Jefferies. Please go ahead.

For 2Q in Steel Processing, how much would you estimate the other cost headwinds or such as freight in the scrap spreads there for the quarter? Also when would you anticipate these costs to abate based on contractual price resets and other reduction initiatives that you have under way?

So, Martin, it’s Joe, I’d say probably in the quarter, the combination of those things was around $10 million with respect to outlook for Q3 and beyond. They are following the curve, the scrap gap has lessened some in the past several weeks. It’s not going away. And so, that started to impact us kind of a little bit Q4 last year, some in Q1 and more in Q2. It’ll be less in Q3 than it was in Q2, we would estimate right now looking at the curve, but not at all gone. So -- and additionally just following the curve, we are likely to in incur at least some inventory holding losses, FIFO losses in Q3 as well.

Okay. Any ballpark estimate on the FIFO inventory holding losses for fiscal Q3, would this be 2 million to 3 million, 4 million to 6 million or something greater than that?

Yes. It’s tough right now to speculate.

Okay. And when is the WAVE business unit sales completed?

That’s a complicated question, but the short answer is probably by the middle of 2019. The transaction actually is effectively complete. It’s just not closed and I know that’s a hard thing to understand, but they have agreement with the Trade Commission in Europe and now it’s just about executing on the agreement which involves the sale of a few assets. It’s not going to materially change the economics for us. There could be some modest change, but nothing substantial.

Okay, but it will continue to flow through that JV P&L through -- until it’s completed. Correct?

I think the maximum period of time, it could flow through the JV P&L is through June of 2019.

Okay. And if I could one last one, within the cylinders business there. Can you provide an update on the energy business, what you’re seeing with demand and how profitability was for the past quarter here?

Hi. This is Geoff Gilmore. Yes, demand has been very good and we’ve continued to see that grow . Some of the concerns or issues we faced this last quarter, which we’re finally working through is we were operating two facilities. We had a facility we were operating in Skiatook, Oklahoma and decided that we needed to move that move for various reasons, and we’re moving to a facility in the Port of Catoosa. So, I think you can understand from a cost perspective when you have specific amount of volume and you’re trying to balance that out over two facilities, certainly a difficult situation to navigate. Again, the group has done a wonderful job with that move and executing on it, and now we will be operating out of one facility going forward. So, we’re very excited about that.

Okay. And how was the operating income for the energy business there for the quarter?

It was a few million dollars loss, Martin.

Next, we have a question from John Tumazos with John Tumazos Very Independent Research. Please go ahead.

Thank you very much. Hot rolled NYMEX prices peaked in early June, 924 spot, 894 for the fourth month future. And how many months does that take to work through your income statement? For example, does it take two months from the time of quotation through the lead times of the mill to get delivered, a month to go through your work in process maybe longer in cabs and cylinders and less in steel processing? Is there then a further delay in some product lines until it's shipped to customer? Does that take three or four months to wash through? And was this past quarter when you were delivering your highest cost substrate input?

Yes, John, the short answer as you might expect is, it depends. It's a very complicated question. What I usually tell people is that whatever steel price movement happens today, it's going to be somewhere between three months and sometimes as long as six months before that flows through our income statement. I mean we're carrying 60 to 65 days of inventory in our steel company, but it's also complicated by the fact that we have spot business, we have monthly reset contracts and we have quarterly reset contracts. So if a price changes today but a contract doesn't reset for two or two and a half months, it's going to be another two or two and a half before it flows through. So, it's probably 90 to 150 days is kind of the range.

So, 150 will be five months.

Yes. I mean and that's on the long side certainly, but it’s going to be 90 days.

So if you have some price hikes being passed maybe in cylinders or cabs or even in some steel products and the substrate costs are going down, the February margins in some or most of your product lines could be improving partly offset by all the holidays in the next 90-day period?

Are you talking about steel or cylinders or just general?

Each of them.

Yes, I mean each business is going to be a little bit different. But certainly in the cylinder business, we're raising prices to capture higher input costs, and if steel prices do continue to trend down, you could see somewhat of a double benefit there. In the steel company, it's a little bit different, because as you know FIFO sort of follows what steel prices do for 90 or 120 days as we were just talking about.

So -- and this will be the last question, I'll bother you with Andy. In the ceilings business WAVE and in the Serviacero JV in Mexico, you didn't seem to get hurt with the higher cost inventory as the spot was falling off in the quarter. Why do you think those businesses did better? Is it the accounting comparison on the WAVE last year?

No. WAVE, WAVE really both WAVE and ClarkDietrich behaved the same way, which is when steel prices move they move price very quickly. And so, they tend to be able to get ahead of the cost inflation more so than for example, in our cylinder business, where a lot of the business is contractual, and so it takes us 60 to 90 days to get a price increase through. And then, so for -- that’s kind of the WAVE business and some of the others. Serviacero is going to behave much like the steel company, but there’s a couple of other factors going on there. One is, they are on a one month lag from a financial reporting standpoint just because of logistics. And then, they're obviously going to experience some FIFO impact as well.

Thank you. I'm very happy to be a shareholder.

Thank you. We're trying to make you proud. Thank you.

And there are no other questions. You may continue.

All right, well, thanks for joining us today. I'd like to thank all of our employees for their hard work and dedication in this past year. We wish everybody a terrific holiday season and a safe and happy New Year. And we'll look forward to seeing everybody in 2019.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.