Good afternoon and welcome to the Worthington Industries First Quarter Fiscal 2021 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 would now like to introduce Marcus Rogier, Treasurer and Investor Relations Officer. Mr. Rogier, you may begin.

Thank you, Amy. Good afternoon everyone and welcome to Worthington Industries First Quarter Fiscal 2021 Earnings Call. On our call this afternoon, we have John McConnell, Worthington's Executive Chairman; Andy Rose, Worthington's President and Chief Executive Officer; and Joe Hayek, Worthington's 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 earlier this morning. Please refer to it for more details on those factors that could cause actual results to differ materially. Today's call is being recorded, and a replay will be made available later on our worthingtonindustries.com website. At this point, I will turn the call over to John for some opening comments.

Thank you, Marcus. I'll be brief. I think we should just jump right into the course, so I will turn the call over to Mr. Hayek.

All right. Great. Thank you, John, and good afternoon, everybody. In Q1, we reported earnings of $11.22 per share versus a loss of $0.09 a share in the prior year quarter, there were several unique items that impacted the quarter, including the following: we recognized a net pretax gain of $747 million or $10.74 per share on our investment in Nikola Corporation. During the quarter, we realized gains of $508 million, $488 million in cash from the sale of 11.5 million shares of Nikola and $20 million from the donation of 500,000 shares. We still own just under -- just over 7 million shares, which generated a $288 million unrealized gain based on the quarter end closing stock price of Nikola of $40.81. These remaining shares will be subject to future revaluations for as long as we own the stock. Partially offsetting these gains was the recognition of $49 million of expenses recorded in operating income. $29 million for the gain-related profit sharing and compensation expenses and $21 million for the donation of the Nikola shares to establish a charitable endowment within the Worthington Industries Foundation. We're very pleased to be able to share some of the gains we have realized on this investment with our employees and with our communities. This quarter, we incurred restructuring and impairment charges of $12 million or $0.16 per share, primarily related to the impairment of our North American Cryogenics assets as well as severance expenses. This compares to restructuring and impairment charges of $45 million or $0.65 per share in Q1 last year, most of which related to the write-down of our Engineered Cabs business. The prior year quarter included charges of $0.06 per share related to the early extinguishment of long-term debt, but also benefited by $0.17 per share related to the…

Thank you, Joe, and good afternoon everyone. Our business has, once again, proven to be resilient despite a challenging economic environment. Credit for this goes to our employees, many of whom have been working hard to stay safe and deliver for our customers. Despite a few pockets of weakness, most of our businesses and end markets have rebounded nicely from Q4. Auto manufacturers are restocking dealer lots that were depleted during the COVID-related shutdowns in April and May. Consumers and businesses continue to utilize our retail portfolio of Pressure Cylinders to pursue socially distance activities such as camping, grilling and outdoor dining. We still have a few underperforming units, but have implemented plans to improve performance or redeploy capital, so it generates compelling returns for our shareholders. As Joe mentioned, we elected to monetize roughly two-thirds of our investment in Nikola during the quarter. We have a sizable cash balance that will allow us to reinvest in our company, expand our business through targeted M&A and share a portion with shareholders through dividends and share buybacks as opportunities present themselves. Unfortunately, the economic outlook is still a bit murky despite recent improvements. So while we feel good about our current level of activity, future quarters still may present challenges as stimulus dollars wane and if COVID-related challenges continue. I would like to say thank you, again, to all of our employees for their hard work and dedication to Worthington Industries during these unique times. As a profit sharing company, we are excited to be able to share a portion of the proceeds from our Nikola investment with our employees as recognition for their efforts. We have adapted well to the new normal and are ready for the challenges that may lie ahead. Finally, I would like to thank our Chairman, John P. McConnell for his exceptional leadership over the past 27 years. His legacy contains many great accomplishments. But for me, the most important lesson we will carry forward is to always strive to get better. With the philosophy as our foundation and a talented leadership team and great employees across Worthington, he leaves us well-positioned to deliver strong returns for our shareholders. We'll now take any questions.

[Operator Instructions] Your first question today comes from the line of Michael Leshock of Keybanc Capital Markets.

So first, do you have any NOLs to offset the accrued taxes on the Nikola sale?

Nothing. Nothing Material. The federal income tax is 21%.

Okay. And then in terms of capital allocation regarding the Nikola gains, I mean, it's obviously meaningfully more than what we expected six months ago. I think the IPO was pricing around $10, and you obviously sold for much higher than that. So just wondering what your plans are to use the proceeds, whether it be investing back in the business or returning cash to shareholders.

Yes. I would say, Michael, it's probably similar to what we've done historically. Philosophically, we've kind of always said a little bit of everything in moderation, and we tend to lean into those buckets, whether investing in our company through CapEx or M&A or share repurchases and dividends, depending on where we think the most value is. So -- and as you know, with M&A, you can't force it. You have to wait for the right opportunities and get the price right to take advantage of those. So I think it's nice to have to have a little bit of a war chest here, but we're going to be patient and make sure we deploy it the right way.

Okay. And then auto came back strongly in June, July, August. Just given that initial recovery, do you expect better steel volumes in the November quarter?

Yes. I think the -- this build rate is still below where it was last year. As you know, I think as of last week, it was $14 million or so, and that includes no fleet, which would typically be $1.5 million. And so the build rate is still lower than it was last year. And so our volumes will track that. But you're absolutely right, during the period when automakers weren't making cars, they were still selling cars. So restocking dealer lots and continuing to sell those would absolutely suggest that volumes should be stable and still recover.

Okay. And the mix was strong there in the quarter. Do you see that improving further going forward? And secondly, are -- the costs that are tied to any of the pandemic shutdowns, are they set to come back over the remainder of the calendar year?

We shouldn't see a lot of fixed cost back into our own business. Relative to mix, we expect that automotive demand will continue for at least the next several months. We don't have great visibility, and there's a lot of uncertainty out there with respect to what happens economically and with the pandemic over the next several months. But construction was also a very strong market for us and a lot of that is residential construction, which has seeing real strength and has some mega trends associated with it in terms of people deciding they want to live in different places. So in tracking housing starts and things like that, we see reasons to be optimistic, but we're still cautious because it's hard to -- as Andy mentioned earlier, it's hard to see around the corner or to see that far ahead right now.

Got it. And then lastly for me, I'm wondering whether or not you've been benefiting from the wide spread between HRC and galvanized sheet-based prices. And if you are, what are the gains there that you're seeing versus normal? And then what's your outlook for holding gains or losses next quarter?

So your second question first, Michael. Right now, based on where pricing is, we think that will be pretty flat and it wouldn't be a big impact, either gains or losses. Relative to spreads for us, spreads are important, but it's more important that our teams are doing a really good job being able to have what customers need and being able to price it effectively. And so spreads are definitely part of the equation, but that team has done a really nice job gaining some share and executing very, very well.

Your next question comes from the line of Seth Rosenfeld with Exane BNP. Please proceed with your question.

Congrats on a very strong quarter. Moving over to the construction outlook, I was wondering if you can give us a little bit more color on business conditions, both within Steel Processing and also the read across from your construction-oriented JVs, WAVE and ClarkDietrich. Any color with regards to forward-looking demand trends? You did touch on some risk around stimulus going into next year. But are you seeing any challenge, whether it be on the infrastructure side or non-resi commercial real estate, for example, on the JVs?

Yes. I mean the steel side of construction is a little different than the construction JVs, so maybe take that one first. That business is still pretty strong. These projects, when they get started, they tend to move through to completion. And so I think there's a backlog of activity there. The one thing that we are watching is the starts numbers and the Architectural Billings Index, and the starts right now are great. The Billings Index is not so great. So that sort of leads you to be a little bit cautious about, let's call it, calendar '21 activity. Interestingly, for our construction JVs, which are WAVE and ClarkDietrich, they're behaving a little bit different. WAVE's volumes are off. Their profit is off more than their volume just because of some allocation changes at the parents. So I don't see a lot of concern there. But on the ClarkDietrich side, their business actually is holding up very well and is very strong. So it's kind of an interesting dynamic that usually, those businesses are -- trend pretty similarly, but they're behaving a little bit differently right now. And I'm not sure I have a great answer as to why.

Okay. That's very interesting. But so from the steel side, construction is still looking very good for the time being, although you're flagging some of this into 2021. And I guess, for the non-resi side, on the JVs that, for you, flag some divergent performance. Okay. Moving forward, I guess, when we look at the outlook for the Pressure Cylinders business, can you give us a little bit more color on the impairments that impacted the last quarter performance? That's obviously a business that's seen quite a bit of restructuring over time. How do you think about the outlook going forward? Are you at a point today where you feel like you have your ducks in order? Or are there additional businesses within Pressure Cylinders that might require additional work going forward?

Yes, I think, Andy said it well, Seth, and that's a good question. We do have some pockets of weakness. There are real pockets of strength in Cylinders. The restructuring charge is what it is in terms of the accounting for what that's worth. But all of our businesses have a plan to generate the kinds of returns that we need them to generate. And we've said it and I think you've seen it over the last 1.5 years, we've divested out or restructured several businesses. And rest assured, part of our plan is to realize that when it's not going to generate the kinds of returns that it should, we need to see if there's a better owner for that business, and we're always having those conversations. And maybe just to give you a little bit of color in terms of timelines, if I use the baseball analogy, I think in terms of our cleanup efforts, which have been ongoing for the last couple of years, we're probably in the seventh inning stretch maybe. Part of -- we've got a few remaining businesses that if things stay the way they are, then we're going to have to figure something out. But for the most part, the rest of our businesses are in a better place.

Okay. And last question on working capital. The last quarter saw quite a meaningful working capital release. Can you walk us through some o the drivers of that? And looking forward into Q2, with demand still sequentially improving potentially, what would you expect for that working capital for the release or investment going forward? I'll stop there.

Sure. No, astute observation. In May, our inventory levels were elevated, particularly in Steel Processing, where we bought a fair amount of steel in February and first half of March anticipating a pretty strong quarter and a pretty strong spring that didn't materialize for all the reasons that we know about. We've done a really nice job, both in steel and Cylinders, managing inventory. And so if you look at the balance sheet, obviously, there was a material decline in inventories during the quarter, which generated some cash for us. So $85 million of free cash flow during the quarter. We'd certainly expect to generate additional free cash flow during the year, but probably unlikely to have additional destocking of our own inventories as demand is stable and recovering. So, we'll have -- we don't believe we'll have that dynamic going forward, but we should have reasonable earnings power, and we intend to do a good job looking after the balance sheet as well.

Just to clarify, would you expect there need to be any reversal of that inventory release going forward if volumes continue to gradually recover?

Yes. I mean, possibly, as you know, a big driver of that would be if steel price picked up materially and those things happen. But any -- I don't think it would be a material reversal, Seth.

Yes. I mean, probably maybe another way to answer the question, Seth, is it's probably more price dependent as opposed to volume dependent unless volumes fall off from current levels.

Your next question comes from the line of John Tumazos with John Tumazos Very Independent Research. Please proceed with your question.

[Indiscernible] and that's been over a 5-year period. It started in...

Hey, John, we're having a hard time hearing you. You still there, John? Did we lose you? You want to take somebody else's question? We can come back.

[Operator Instructions]

Seth, you didn't -- you asked us a question. I didn't give you a complete answer relative to the balance sheet. With respect to CapEx in the quarter, we had a couple of long tail projects where we finished those off. And so we do believe that from a CapEx perspective, Q1 will be the high watermark for the year on a quarterly basis, and that should trend back on to more normalized levels starting in Q2.

And you do have a question from the line of Seth Rosenfeld of Exane BNP. Please proceed with your question.

Maybe he was asking about CapEx.

Sorry, I have a follow-up with regard to Steel Processing margins, please. When you commented earlier on spreads and conversion costs aiding margin kind of for Q1, can you just touch on the sustainability of those tailwinds going forward? Obviously, stripping out the inventory holding loss in the period, quite a strong gross margin performance despite obviously challenged market conditions, how should we think about that on a go-forward basis into Q2, please?

So I think what we really believe is one of our sustainable competitive advantage is our ability to hedge and offer a variety of pricing solutions to our customers. And when there is a lot of volatility in pricing, it certainly creates opportunities. And so while it's difficult to predict whether we'll have better conversion costs or not in the future, we feel like we're pretty well-positioned and can offer things that others can't, and along the way, take advantage of different things that we see in the market to benefit both our customers and our shareholders, and we'll certainly continue to do that.

Okay. Fine. But there was nothing in particular with regards to the market environment, given price volatility that would have uniquely boosted that margin in the last quarter?

Nothing that stands out as being kind of unique or onetime in that sense.

[Operator Instructions] And there are no further questions in queue at this time. I turn the call back over to Mr. Rogier.

Once again, this is John McConnell. Thank you all for joining us today. As you know, effective September 1st, I relinquished the CEO title and in way of Mr. Rose. And as such, this will be my last routine attendance at a quarterly conference call. I've enjoyed working with you all over the years, and I wish you a good afternoon.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.