Good morning and welcome to the Worthington Industries Third Quarter Fiscal 2019 Earnings Conference Call. All participants will be able to listen only until the question-and-answer secession of the call. This conference is being recorded at the request of Worthington Industries. Anyone objects, you may disconnect at this time. I'd like to introduce Marcus Rogier. Mr. Rogier, you may begin.

Thank you, Paul. Good morning and welcome to our third quarter earnings call. 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, and could cause the 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 the actual results to differ materially. This call is being recorded and will be made available later today on our worthingtonindustries.com website. On our call today are President, Andy Rose; and Vice President and CFO, Joe Hayek. Joe will start us off today.

Thank you, Marcus, and good morning everyone. In Q3, we reported earnings of $0.46 per share versus $1.27 last year. Last year's EPS included a $0.62 per share benefit from the implementation of the Tax Cuts and Jobs Act. There were several unique items in Q3, as follows. We estimated inventory holding losses were $11 million or $0.14 per share in the current quarter, compared to a gain of $800,000 or $0.01 per share in Q3 last year. Pressure Cylinders reported a charge of $13 million or $0.17 per share related to a replacement program for certain composite hydrogen fuel tanks, and Cylinders also recorded a net gain in the quarter of $11 million of $0.14 per share related to the sale of our solder business and certain brazing assets, which we sold during the quarter for approximately $28 million. We acquired the primary piece of the divested business as part of our acquisition of BernzOmatic in 2011, and the sale was prompted by our conclusion that it was no longer a part of our core growth strategy. Consolidated net sales increased by 4% to $874 million in Q3, however, our gross profit declined in the quarter by $37 million to $90 million as we continued to face headwinds driven by a compressed direct spread in steel processing which were negatively impacted by inventory holding losses, wider spreads between steel and scrap prices, and the tank replacement program charge I mentioned before in Pressure Cylinders. Our estimated annual tax rate was 23.3% versus 10.3% in the prior year quarter. Turning to the businesses, while reported revenues were down 2% in Pressure Cylinders, excluding the impact of divestitures, Cylinder net sales were up just over 2% from Q3 last year driven by increases in our consumer product and oil and gas…

Thanks, Joe. Good morning everyone. There continues to be a lot of noise in our third quarter results. As we stated last quarter, the biggest challenge we've been facing 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. Steel price fluctuations impacted all of our businesses in Q3. Cylinders have been impacted by higher raw material input cost for steel and helium over the past few quarters. But we are finally beginning to see the benefit of price increases to cover these costs. Recent declines in steel prices hindered margins and volumes in steel processing. The good news is that demand remains good in almost all of our end markets. So as our mitigation strategies take effect to offset these cost pressures, we expect to see margins improve. We have a lot to be excited about at Worthington. Our annual strategic planning process is underway, and this year is the best it's ever been. We have energized leaders. Many of whom are new, who are finding ways to accelerate the growth and profitability of our businesses using our strategic pillars of transformation, innovation, and M&A. With our strong balance sheet and cash flow, we continue to follow a balanced approach to capital allocation pivoting to where we see the most value. Recently, we have found our stock to be an attractive investment, and our Board agreed by expanding our share repurchases authorization up to 10 million shares. The M&A market is expensive right now, but our team continues to search for value creating investments in and around our core where we have strengths that give us an advantage. In the meantime, we are divesting business that are either non-core or do not meet our return expectations. Sometimes your best work does not always manifest itself in record setting quarterly earnings or cash flow. I believe that our employees are doing some of their best work right now to mitigate cost, build growth strategies, and enable us to bring value to our customers in ways that will ultimately reward our shareholders. Thanks for your continued support of Worthington.

At this point we will open it up for the operator to take questions.

[Operator instructions] The first question is from John Tumazos with John Tumazos Very Independent Research. Please go ahead.

Thank you for taking my question. Could you explain the 50,000 ton fall in steel processing volume, it was a lot bigger drop than the rate of change in auto sales?

Sure, John. It's Joe. A lot of it was due to some of the automotive weakness we saw. I think our numbers are down to the 3.7% during the quarter for the domestic three. We had a very slow December as you might have imagined as people waited for the January reset in pricing, and honestly, we couldn't catch up in January and February though those months were much better, and we saw a little bit of weakness across the board, bit more in our coated business than in other two.

Andy, we love you that you are a financial guy. Do you think that you need to spend more days in the quarter going out selling steel?

I don't know if finance people are allowed to go out and sell, John, but you might be right, maybe I should look into that.

Excuse me, I am a shareholder, and I am happy to be a shareholder if I can.

Thank you, John. We appreciate you.

[Operator instructions] We will go to line of Michael Leschuk with KeyBanc Capital Markets. Please go ahead.

Hey, so I am just -- first question just looking at more color around the replacement program related to hydrogen fuel tanks, is that something that you see will continue into 4Q?

Was your question, will it continue into the fourth quarter?

Yes, maybe just explain a bit on what happened there and then if it will continue?

Got you, okay. So, essentially what happened here, this dates back to 2012 to 2015, we sold hydrogen tanks to a customer that were built to ISO standards, but we didn't complete a few of the additional tests for full ISO certification. And for a number of factors related to that, we have decided to replace those cylinders for the customer, and the charge that we took in this quarter is, I will call it our best estimate of the total cost of that replacement program. So, while the program will take about six months to complete, we're hopeful that the charge has been accurately estimated. Obviously there could be some puts and takes there, so the charge could go up or down a modest amount, but we're hopeful that we've got it kind of sized properly.

Okay. And then looking at end markets how is the business performance in oil and gas, and what do you expect there for the full-year '19 going forward?

Sure. We expect continued quarter-over-quarter improvement there. There, they're continuing to make strides there. But with respect to end markets, that's a reasonably small end market of ours, and so I would also go back to what Andy articulated earlier, which was most of our end markets at the moment seem to be showing a lot of resilience and some growth. And that's certainly the case in the oil and gas business as well.

Okay. And then lastly on the WAVE joint venture, how should we think about equity earning there? Do you expect to be -- in full-year '19, do you expect that to be better than full-year '18?

Well, as you know, we don't give guidance on that. But WAVE's business, I will tell you, they're performing well right now. They've done a nice job of recovering the still price increases, and so their margins have held up well, and even expanded a little bit as a result of that. So, as long as the construction markets continue to be strong then we expect they'll have another good year.

Okay, thank you.

[Operator Instructions] At this time, there are no further questions in queue. We do have a follow-up from John Tumazos. Please go ahead.

The cylinder business had a little better than a 6% margin. Is that attributable to the improvement in energy or were some other markets stronger or were the price hikes catching up from the steel escalation quarters ago?

Yes, there's a couple of things going on there, John. One is, as you know in that business, when steel prices rise their margins get compressed, and so it takes us a few quarters for that recovery to start to take affect. And in this quarter, we did start to see cost recovery in Pressure Cylinders. That will continue and even accelerate hopefully in the fourth quarter. We also saw a pretty significant improvement in oil and gas. Some of that is driven by revenue increases. Some of it is also driven by profitability increases in that business. So, both of those things contributed to the -- to Pressure Cylinders.

SG&A fell $9 million. Was that related to fall in steel tons or were there other cost savings?

SG&A, as you know, it was related to our overall profitability, but the way that our compensation structure is set up the SG&A is going to come down some from a bonus and profit sharing perspective as well.

Sorry to hear that you guys got hurt too.

Well, that's the way capitalism works sometimes, John.

You said the M&A business is a little expensive to look at. Maybe that stroked a little bit of fear in the listeners. Your share is at $35 buyback price were very attractive. Is it worth the time and money to spend looking at M&A opportunities?

Well, what I would tell you on that front is we're always looking and having conversations as it relates to acquisitions. The majority of those conversations today are in and around our core businesses. And I mentioned pricing just because we also occasionally look at businesses that are outside of our core, they tend to be smaller, but things that we would consider venturing into. And the market is just -- there's a lot of competition. The purchase multiples tend to be very high. One of the reasons that we have been staying closer to our core is that there are number of different reasons we can be a better buyer. We obviously bring a lot of synergies, we know the businesses, and the markets very well, we know the players very well. So, most of our effort is there, but I will tell you those resources if we didn't have them out looking at opportunities and having conversations, they're not going to impact what we do on a share purchase standpoint. We, as you mentioned, we like our stock a lot. We are going through kind of a noisy period with respect to earnings in the last couple of quarters, which we think we're rapidly moving through that, and as I mentioned in my comments we feel really good about the way our businesses are positioned, and some of the growth initiatives that we have. So, it's a good time to invest in Worthington. That's sort of the view of that we have as the management team, and I think that's the view that our Board shares as well with their increase in repurchase authorization.

Thank you.

And at this time, there are no further questions in queue. Gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference Services. You may now disconnect.