Good morning, and welcome to the Worthington Industries First Quarter Fiscal 2023 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 now like to introduce Marcus Rogier, Treasurer and Investor Relations Officer. Mr. Rogier, you may begin.

Thank you, Rob. Good morning, everyone, and welcome to Worthington Industries first quarter fiscal 2023 earnings call. On our call today, we have Andy Rose, Worthington's President and Chief Executive Officer; Joe Hayek, Worthington's Chief Financial Officer; and Geoff Gilmore, Worthington's Chief Operating Officer. Please note, given the business separation announcement we made earlier this morning, our prepared remarks will be longer than normal. For the Q&A portion of our call, we ask that participants limit their initial questions to our quarterly results in order to allow everyone the opportunity to ask questions. And then to re-queue for questions related to the separation. In addition, we have posted a slide presentation to our Investor Relations website, which provides more information on the planned separation. 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 detail 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 Andy to kick things off.

Thank you, Marcus. Good morning, everyone. In addition to releasing our first quarter results this morning, we announced exciting news that we are pursuing a separation of our Steel Processing Business into a new public company, creating two distinct market-leading companies. It's an exciting day for Worthington. Joe is going to start with our first quarter results and then I'll discuss the separation in more detail. Joe?

Thank you, Andy, and good morning, everybody. We do have a lot to discuss this morning and so we'll get right to it. We started our fiscal year with solid results, reporting Q1 earnings of $1.30 per share versus $2.55 in the prior year quarter. There were several unique items impacting the quarterly results that included the following. We divested our 50% interest in ArtiFlex, which was a non-core joint venture for approximately $42 million, that divestiture resulted in an after-tax loss of $0.25 per share. We took advantage of rising interest rates in annuitized, a portion of our inactive Gerstenslager pension plan, which resulted in a non-cash charge that negatively impacted earnings by $0.07 per share. Recognized incremental expenses of a $0.01 per share related to our recent acquisition of Level5 Tools in the earnout associated with that acquisition. And finally, we benefited by $0.02 per share due to a restructuring gain recognized in the current quarter, compared to gains of $0.09 per share in the prior-year quarter. Restructuring activity in both periods was primarily related to the monetization of non-core real estate. Excluding those unique items, we generated earnings of $1.61 a share in the current quarter compared to $2.46 per share in the prior year. In addition, in Q1, we had inventory holding losses estimated to be $2 million or $0.03 per share compared to inventory holding gains of $47 million or $0.68 per share in the prior year, an unfavorable swing of $49 million, which is $0.71 per share. Consolidated net sales in the quarter $1.4 billion were up 27% compared to $1.1 billion in Q1 of last year. Increase in sales was primarily due to the inclusion of Tempel Steel, combined with higher average selling prices across all of our segments. Gross profit for the…

Thanks, Joe. We're off to a good start in fiscal 2023, with our second best first quarter ever. Adjusted earnings per share of $1.61 and EBITDA of $140 million are solid accomplishments in the face of the declining steel prices and continued challenges throughout our supply chains. We continue to pair our non-strategic assets with the sale of our 50% ownership interest in ArtiFlex during the quarter. We are approaching the end of this multi-year process of repositioning our businesses for growth by exiting non-core and underperforming operations, and beginning to invest in higher returning products and markets. We had almost $60 million of free cash flow during the quarter and our net debt to EBITDA is very modest at 1.2 times. End market demand remained steady across most of our products and markets but recent market volatility could lead to changes in this outlook, as higher rates impact various markets. Our employees continue to go above and beyond to deliver for our customers, despite the many challenges the world has faced over the past few years. Today, we announced an exciting plan to separate our Steel Processing business into its own separately traded public company. The remaining business which we are calling New Worthington for now has market-leading products and services in Consumer Products, Building Products and Sustainable Energy. This side of our business was recently re-segmented to better align with the attractive markets it serves and develop broader growth strategies to leverage our strong market positions. New Worthington is poised to capitalize on key trends in sustainability, technology, remodeling and construction, and outdoor living and will continue levering its robust new product pipeline of sustainable tech enabled solutions to disrupt mature markets. We believe that New Worthington's high margins and lower asset intensity will provide the opportunity for…

[Operator Instructions] Your first question comes from the line of Martin Englert from Seaport Research. Your line is open.

Hi. Good morning, everyone.

Martin, good morning.

So just to clarify, holding losses in steel for the quarter was about $1.5 million for the absolute value, correct?

That is correct. And part of that, Martin, was a bit of a bring forward if you will of losses that we could identify that we knew we were going to have in Q2 and we brought those forward into Q1, up $4 million.

Okay. And then your forward-looking comment was losses comparable or potentially exceeding the prior year gains, which were I think was $42.1 million, is that correct?

So the number is right, what we actually said was that they -- it could be as larger, larger than the losses that we had in Q4 of '22, which were $42 million, but your number is exactly right because in Q2 of last year, we had $42 million in gain, so that's the way that we're thinking about it, just given the really steep decline that we've seen in steel prices, as we all know, they were coming down and then the Russian invasion of Ukraine, they popped back up to $1,500, $1,600 and then -- since then, they've resumed their rather steep decline into under $800.

Got it. So that's -- thanks for clarifying, that was relative to the 4Q loss of $42.3 million, something like that or potentially greater. That's helpful. Can you provide a little bit of color commentary across the end markets on both in the Steel business as well as some of the Consumer and Building Products, what you're seeing incrementally on the margin, how order books are looking, is there still -- there was the backlog of activity that was reporting steel demand exiting out of COVID for quite a bit of this year, how that's changing, if it's changing at all?

Sure. So by end market, there are some things that are little unique in each. But one of the things that's inherent to all of the businesses, and really to the entire market is inflation, where you see higher prices but then you also see much higher costs. And so, in Consumer Products and in Building Products specifically, you have higher costs in Building Products, you actually have -- and in Consumer Products, excluding the purchase accounting for the Level5 acquisition, you saw increases in EBIT dollars, but then you saw decreases in EBIT margins and that's a direct reflection of the inflationary trends that we're seeing. Steel is a bit more unique just because of the impact that rapidly rising prices have there and rapidly declining prices have in terms of people's behavior and on the way that sort of things can get priced et cetera. Automotive is starting to show some signs of life. We're not ready to declare that things are back. Everybody seems to have semiconductor solutions, but other supply chain limitations are holding them back. I can call the Detroit Three have mentioned same over the last month or so. Construction markets are reasonable, as is Ag. All that being said, across our markets, we see evidence, right and signs that things are happening that are slowing down and nothing is very steep and nothing is catastrophic. But as Andy mentioned, you're in an environment where the economy has higher prices and some potentially slowing growth. So, we've got our eye on everything, businesses have a really good feel for what's happening. And the other thing that you would see, I think in some of those results with respect to Tempel, and then the markets that they're in, those markets will continue to grow exceptionally well regardless of kind of where GDP is just because it's electrification, decarbonization and infrastructure. So, lots of end markets that we follow, and lots of end markets that we're in, but for the most part, we feel really good about where we are and, but we're certainly aware of the market conditions that we're in and where things may or may not go over the next six months to 12 months.

When you comment about kind of from a high level things are slowing a bit on the margin. Were you seeing this in construction and Ag, I mean auto seems like it might be a little bit better on the margin incrementally here, but what about other key end markets as it pertains to steel, if you think about construction and Ag?

Nothing, really specific that we would say, strong growth or decline, Martin.

Okay. All right. Thank you for that color. I'll get back in queue.

Sure.

Your next question comes from the line of Phil Gibbs from KeyBanc Capital Markets. Your line is open.

Hey. Good morning.

Good morning, Phil.

Question I just had was on the consumer portfolio and I know that the volumes there have over the last 12 months to 18 months have been very resilient. And then just anything that you are may be seeing to the extent, some of the big box guys, could be taking down inventories into the -- out of the year. I mean we're just reading what Walmart and Target are saying and the like, and how are you seeing that flow through to your consumer businesses?

Yeah. I mean, everything you said is true, Phil. Inventory levels at our customers have increased. Sometimes what that causes them to do is to want to kind of pair back on weeks of inventory that they have or how they're thinking about things like that. It has probably a bit of a more outsized impact on our Tools business. Those products and those solutions really have longer supply chains and they end up in those retailers doing a good job and so seen a little bit of that our camping (ph) fuel and our Torch business continues to be very solid. That's, we believe, a bit countercyclical if people decide to travel less and spend more time at home, that's going to -- that's a benefit to those products. And then as we look at helium business there is actually a shortage of helium worldwide. We are fortunate that we have really good relationships with folks and are able to continue producing that domestically and so as things are happening and as kind of retailers and then consumers are -- they're behaving a bit differently. We have pretty good data, and pretty good insights and we're able to respond where we think it's appropriate, but as I said, nothing seems to be alarming at all, but we've got our eye on it and we'll certainly stay vigilant.

Maybe just one other comment, Phil, on the one pound propane cylinder business, for a long time, we were kind of allocating product because we were behind. We are no longer on allocation, but I'm not sure inventory levels at some of the retailers are excessive for that product. That's the highest volume product that we have. And then the other thing, which I never really like talking about, but that business does benefit from natural disasters and so there'll probably be some uptick in this quarter related to the hurricane in Florida.

Thanks, Andy. And then last question just here on the industrial portfolio, what are you all seeing there, because I know it's -- I think it's reasonably diversified, a lot of it is North America, but some of it may be outside the U.S. So maybe talk about what you're seeing in the industrial side of things and then I'll jump out here. Thanks.

Sure. I think you're talking about Building Products, right?

I was thinking about more of your industrial-type cylinders.

Sure. So, Phil, yeah, so those are embedded in Building Products. Those larger propane cylinders continue to benefit from our teams really good work and our -- I'm going to exposure to end markets that are continuing to grow rather nicely, the JVs are little sort of distinct, WAVE and ClarkDietrich behave a bit differently. I think we mentioned in our prepared remarks that ClarkDietrich has been doing exceptionally well. But they are a bit more susceptible to declines relative to steel prices. And so we do expect their results to moderate a bit going forward. Their outlook and their execution remains very strong, as does the execution for WAVE. WAVE had to lap, I think some of the lagging indicators they had relative to demand and some pricing dynamics that they had a year ago and we do expect them to continue doing a good job as well. The other businesses there are refrigerant, foam and adhesive, oriented and a bunch of other things. And while there will always be pockets of issues that could be specific to product lines or anything else, overall, we feel like those businesses are solid GDP growers and we obviously hope to do better than that through taking share and thinking about things that we can enhance relative to our products.

Thanks, guys.

Sure.

Your next question comes from the line of Seth Rosenfeld from BNP Paribas. Your line is open.

Good morning. Thanks for taking my questions. On the demand side, as we can follow up to your earlier comments on what you've seen across Europe. Just a bit of color on the scale of decrease and weakness you've witnessed of late, does that kick in just recently in autumn or much earlier in the year, when energy cost first started to increase, and what your [indiscernible] with regard to activity levels looking ahead through winter? Thank you.

Sure. It's a great question, Seth and obviously, you have a probably a better window to it than most of us. But the economy, there are two economies that we have to really pay a lot of attention to in Europe. One is the general economy and obviously, the other is for hydrogen, CNG and alternative energies. Long-term, what's happening for alternative energy solutions, it's going to accelerate adoption of hydrogen and all fuels for all the reasons that we know about. Short term, there is going to be a fair amount of dislocation and I don't say this lightly, but some economic pain and some real hardship for people and for businesses. When we look at that economy, it was slow six months to nine months ago. We anticipate it, it will be even more challenged moving forward as you mentioned, as you get into colder weather and you have scarcity issues with respect to energy, raw materials, things like that. Our businesses are doing everything they can, to take care of their people, take care of our customers and try and source things where they are available and that's happening, I think everywhere. But I don't think we would have kind of an order of magnitude because our business there is relatively specific, but we don't see it getting terribly worse than it has been, it probably be is kind of an incremental down but not much.

The other thing there is, Seth, it's not a huge revenue component for the overall business of our exposure there.

Great. Thank you. Maybe, just coming back to the other question on orders. Can you give any additional color on the scale of pickup you're witnessing? I think the feedback from many of your peers been continued delay in the pickup we expected much earlier in the year. Any additional color on the scale would anticipate and what your customers are telling you might happen looking forward as well?

Yeah. We think sequentially, it's pretty flat, Seth, the supply chain challenges, it seems as though most OEMs have solved or address their semiconductor shortages and those should get better. At the same time, there are shortages for other products and their ability to produce is founded by lots of different things and so, we actually see automotive sequentially up slightly but from a low base. So I would call it creeping along the bottom searching for some upside, and the first half of 2023 calendar certainly looks better. And I think…

Thank you very much.

Some of the commentary was on Q3, which for a lot of those folks ends tomorrow so.

Your next question comes from the line of Katja Jancic from BMO Capital Markets. Your line is open.

Good morning. Thank you for taking my call. Can you...

Sure. Good morning

Can you please talk a little bit of about the inflationary pressures, specifically, what do you think, how these will develop through the rest of the year, and maybe are you taking any actions that you could mitigate those? Thank you.

Sure. We, like others, have seen inflation everywhere, whether it's in our business or at the grocery store, or at the pump. And so, we have taken kind of actions across the board with understanding that our input costs, everything from materials to labor have gone up. We have tried to pass along those costs, so that we're able to execute on our business plan and we pay attention to elasticity of demand and we pay attention to what's happening out there, but suffice it to say, we don't see it sequentially going up by 10%. But we also don't see it going down, I think we feel like we're at a relatively high level, and signs we're seeing is that it will be relatively plateaued for at least the next several months.

Okay. Just maybe one more on the -- so the steel prices are coming down. Shouldn't that benefit the former cylinder businesses a bit or is there a delay that we should be looking at?

That's exactly right, there -- we try very hard to understand and we've got to take care of our customers with fixed price contracts for anywhere from nine months to a year. And so, anytime prices go down like this, there is absolutely a bit of a delay in terms of the potential benefit that we would have there.

Okay. Thank you very much.

Sure.

Your next question comes from the line of John Tumazos from JTI Research. Your line is open.

Hi. Did we buy any…

Good morning, John.

Did we buy any shares back in the current quarter?

We did not.

Are you benefiting from a rebound in vehicle output, either on the programs that Worthington supplies or your competitors getting busier leaving you other business, given that the chip shortage is easing?

Yeah. We definitely feel like we have done well and our ability to manage these complex solutions is increasingly attractive to our customers. When you see it, our direct volumes are actually up a bit, that's, we believe are our market share gain. And so, we don't anticipate automotive recovering to pre- or post-COVID levels just because those supply chain challenges are persisting, John. But we do feel pretty good that there won't be any worse volume rise than they have been the last six months or nine months.

Yeah, I mean, end market demand is still pretty good. I think the SARS rate is in the $14 million, mid-14s. But dealer lots are still very low with respect to inventory. So, even if there is some softness on the sales side, we expect at least for the next several quarters that demand will be good in the steel business.

Will ArtiFlex be gone in the November quarter entirely?

Yes.

Is Serviacero, the only JV, that will be with the steel processing company?

The majority owned JVs that are embedded in Steel today will certainly also remain with Steel, TWB, Spartan, Samuel, WSP.

One irony is been at the other large distribution company, Reliance, seems to have outperformed Worthington a great deal in terms of share price. With this separation, do you think the new Steel Processing will be in a better position to match or exceed Reliance, in terms of...

I mean that's part of -- the thesis here, John, is more focused, leadership teams and more focused capital allocation, that we do expect the business to accelerate its growth and obviously, hopefully, outperform, we don't control the share price, but there is obviously some intent here to unlock value for both businesses.

Thank you.

And your next question comes from the line of Martin Englert from Seaport Research Partners. Your line is open.

Hi. If you're okay with taking some questions on the separation?

Yeah, John. John provided us a great segue, so, absolutely. Go ahead, Martin.

Excellent. Thank you for that. Any anticipated preparation costs or goalposts that we can use?

Yeah. We were -- we don't have a great feel for that. We're not going to disclose that, but we absolutely will keep you posted. And we'll disclose that number, every quarter as we go forward.

Okay. What about thoughts on loss of synergies separating here, whether it be purchasing power or the corporate overhead aspect of it?

Yeah. We absolutely know that those are real. We don't believe that any of those numbers or amounts will be material.

Okay.

Like, they are not (ph) obviously, they're not nothing but we'll -- we're baking that into our assumptions, and we're confident that it will impact either company's ability to reach its goals.

Okay. That's all I had on that. Thank you very much.

[Operator Instructions] Your next question comes from the line of Seth Rosenfeld from BNP Paribas. Your line is open.

Thank you for taking the questions again. First, with regard to the separation. Can you touch on it, if there is any need to refinance any of the debt in order to complete the spin, give that they're two different businesses? I'll stop there, please.

I think you said the need to refinance, Seth, if I understood correctly?

Yes, please.

So we have not finalized capital structures for either company. What we can say is that, we expect both businesses to be conservatively capitalized. We use the phrase modest leverage and ample liquidity, and so, we want both companies to come out of the gate with plenty of capital to meet the needs of growing the business. We obviously are going to be very focused on trying to preserve, most if not all of the attractive financing that we have in place. Some of that will have to be refinanced. Hopefully not all of it.

Okay. Thank you. And a separate question please, would we think about this business over the last two years have been exceptional, but Worthington Steel historically has seen more volatile windfall gains and losses in perhaps industrial business and the guidance for Q2 is a sharp reminder of that, how do you think about, how Worthington Steel operates going forward? Is there an effort to adjust inventory management, try to limit the risk of inventory losses on a standalone basis or do you view it as being adequately stable and that you don't see a change in strategy?

I mean I do not anticipate a change in strategy. I should probably let Geoff answer this question, but the reality is, we are always focused on trying to minimize the amount of inventory and hence the amount of price swings or volatility in earnings related to that. You know, we've talked about this historically, we run kind of a balanced position, when we sell to a customer, we match it up with a mill contract, where we have inventory in our system and that's where we get this volatility. But we have an amazing price risk management team and a sales team and purchasing team that work tirelessly to minimize that volatility as best we can. But the reality is, at the end of the day, we're always going to have some of it.

Okay. That's very clear. Thank you.

Your next question comes from the line of Phil Gibbs from KeyBanc Capital Markets. Your line is open.

Hey, guys. As we look to this potential separation in early calendar 2024, we've obviously got some time before then, before that occurs, perhaps a year and a half. Will you continue to essentially operate your capital allocation structure as the current enterprise as the way you've done in the past, which is be very opportunistic in terms of the stock buybacks? And then, we also focus on M&A or will some of those things be put to the sidelines as you sort of get your arms around capital structures and how you want to work those businesses moving forward? In other words, business as usual for you all in the next 18 months, where you can almost operate with the mentality that they're already separated?

Yeah. I mean that's a little bit of a difficult question to answer, Phil. What I would say is, both companies, well historically we've had sort of a balanced capital allocation strategy. We've deployed capital in the CapEx, we paid dividends, we bought back stock and we pursued M&A, that's really just part of our strategy in our DNA. And that will likely continue for both companies. I will tell you there is some focus right now on trying to make sure that when we do separate that both businesses are very well capitalized, to go forward. Now that doesn't mean we're not going to deploy capital, it just means that we're going to be cognizant of making sure that both businesses are set up for success. At the same time, I will tell you, we still want to keep the gas pedal on our businesses and our strategies. We don't want to just stop pursuing growth and generating strong returns for shareholders. So there will be a delicate balance to -- trying to find the right mix for that which could be more of the same, but it also could change things up a little bit.

Thanks.

Sure.

And your next question comes from the line of John Tumazos from JTI Research. Your line is open.

I didn't rename my business by the way. For the new companies going forward, how clear will the demarcations be in terms of new acquisitions? For example, a business like your Dietrich industries that was acquired over three decades ago, it became the new JV, subsequent JV, would that be considered an old Worthington business or a new Worthington business?

I'm not sure, how to exactly answer that question, John, other than to say that certainly for the Steel Processing business, Worthington Steel we're referring to it, there are a number of consolidation opportunities. When we bought Dietrich a long time ago, we were pursuing kind of a -- I'll call it a hub-and-spoke strategy, buy downstream steel consuming businesses. The Steel Processing business may do some of that or they may continue to just consolidate and some of the higher growth markets, like, electrical steel and automotive light-weighting, laser welding, where there is a lot more growth and frankly a lot more margin than in the core business, but there is absolutely a consolidation component there. For new Worthington, our M&A focus is on building strong, branded, Consumer and Building Products and then also looking at the high-growth in Sustainable Energy. So our focus is probably a little more. I'll call it asset-light, finding great businesses that are less capital intensive and pursuing growth that way, but for at least the spin, when it happens, ClarkDietrich will stay with New Worthington.

I recall calling on the late Bill Dietrich in '94 to take in public, before Worthington bought the business and he described it as buying non-prime galvanized and running it through a dye that was prime for steel framing but not prime for automotive or metal buildings. So, he conceptualized the business like a secondary Steel business. So, there's a lot of cracks if you would. In terms of the two new companies going forward, will there be a common director and a procedure to make sure the two companies aren't bidding against one another for the same deal because of the overlaps?

That's something we haven't really talked about, as you know this separation is going to take 12 months to 15 months or so. I don't actually expect there to be much, if any, conflict between the M&A strategies of the two different businesses. I think we're part of the thesis behind this separation is that the businesses are very different in terms of their strategic focus and where the growth is going to come from. So, I don't expect that's going to be an issue.

Yeah. But John, with respect to your question on common directors. One of the common things that we will have is our largest shareholder, right, who today owns a third of the company, will own a third of both companies and so that piece of what has always been inherent and appreciated by the company will stay in place.

Exactly. Thank you.

[Operator Instructions] And there are no further questions at this time, I'll turn the call back over to Worthington Industries' management for some closing remarks.

Great. Thank you everyone for joining us today. This is an exciting day for all of us here at Worthington and hope you're sharing that excitement. We will keep you posted as things develop, and look forward to speaking with you soon.

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