Thank you for standing by. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Worthington Steel's Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions] Thank you. I will now like to turn the conference over to Melissa Dykstra, Vice President of Communications and Investor Relations. Melissa, you may begin.

Thank you, operator. Good morning, and welcome to Worthington Steel's fourth quarter fiscal year 2024 earnings call. On our call today we have Geoff Gilmore, Worthington Steel's President and Chief Executive Officer; Jeff Klingler, Executive Vice President and Chief Operating Officer; and Tim Adams, Vice President and Chief Financial Officer. Before we get started, I'd like to note 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 yesterday after the market closed. Please refer to it for more detail on those factors that could cause actual results to differ materially. Unless noted, as reported, today's discussion will reference non-GAAP financial measures which adjust for certain items included in our GAAP results and which are presented on a standalone basis. You can find definitions of each non-GAAP measure and GAAP to non-GAAP reconciliations within our earnings release. Today's call is being recorded and a replay will be made available later today on worthingtonsteel.com. Now I'd like to turn the call over to Geoff Gilmore.

Thanks Melissa, and thanks to everyone who is joining today's call. It is a good morning here at Worthington Steel. We saw solid results in Q4, and finished fiscal year 2024 strong. Our performance and our people continue to demonstrate that Worthington Steel is a unique steel processor poised for significant growth. Our ability to deliver value-added solutions to our customers and flat-rolled steel processing, electrical steel laminations and tailor welded products is unique to our industry. Our goal is to continue our distinctive positioning by offering processes that are truly differentiating, positioning us to maintain and gain leadership in the areas we serve. As we enter fiscal year 2025, our first full year as a standalone company, we remain focused on executing our strategy and driving shareholder value through organic growth and strategic M&A. We believe our strategy and differentiation help ensure we are well positioned to grow and deliver strong returns for our shareholders. We have achieved a great deal in just six months as Worthington Steel, but we know we have much to accomplish. With the Worthington business system embedded in everything we do, we will work to execute our strategy of focused investments in the rapidly growing electrical steel market, which is growing faster than GDP, margin accretive growth through disciplined capex and selective acquisitions and transformation our system of continuous improvement to increase margins, reduce working capital and add capacity. Our enhanced leadership focus created by the separation is driving accountability and organizational alignment around our vision and status as one of the most trusted, most innovative and most value-added metals processing partners in North America and beyond. Essential to continuing as a market leader is our strong culture. Earlier this month, we celebrated Founders Day, marking John H. McConnell's first Order of Steel. As…

Thanks, Geoff, and good morning everyone. As Geoff mentioned, we had a good quarter, highlighted by public accolades from multiple groups. Our ability to serve our customers has a direct correlation to our focus on safety. I'd like to start off by congratulating our employees on the improvements we saw in fiscal year 2024. While our ultimate goal is zero incidents, we saw a 25% reduction in recordable injuries in fiscal year 2024, and I'm proud of what the team has accomplished. Our best-in-class safety record and programs that drive that record are a clear reflection of our people-first philosophy. As we look at the operational overview for the quarter, let's start with a look at what we saw in our two largest end markets. Sales to the automotive market made up 52% of fourth quarter fiscal year 2024 sales, the same as the fourth quarter of fiscal year 2023. The automotive market remains solid for us and we believe North American light vehicle production could return to pre COVID levels of more than 16 million units as early as next calendar year. Our OEM customers anticipate more growth in the EV and plug-in hybrid market as adoption continues to grow. Our capital investments in our Mexico electrical steel facility will allow us to capitalize on this opportunity. The construction industry remains the second largest market we serve. In the fourth quarter of fiscal year 2024, the construction market made up 14% of our sales, reflecting a modest increase over the fourth quarter of fiscal year 2023 when construction was only 12% of sales. The construction market is a large and diverse market. In the submarkets where we participate, we experienced strength in the fencing, metal building and culvert markets. Turning to operational highlights for the quarter, our large capital…

Thank you, Jeff, and good morning everyone. Before I provide some color on the quarter, I would like to remind everyone that the current year fourth quarter consolidated results on a standalone basis are compared with a prior year quarter which was prepared on a carve out basis. We finished our fiscal year with a strong quarter, reporting fourth quarter earnings of $53.2 million, or $1.06 per share, as compared with the prior year quarter earnings of $67.3 million, or $1.37 per share. The prior year quarter included several unique items including pre-tax separation expense of $5.5 million or $0.07 per share, and a pretax impairment charge of $1.8 million or $0.03 per share related to idled equipment. Excluding these items, we generated earnings of $1.06 per share in the current quarter compared with $1.47 per share in the prior year quarter. In addition, in the fourth quarter, we had estimated pre-tax inventory holding losses of $3.4 million or $0.06 per share compared to estimated pre-tax inventory holding gains of $32.6 million or $0.50 per share in the prior year quarter and unfavorable pretax swing of $36 million or $0.55 per share. In the fourth quarter we reported adjusted EBIT of $70.4 million, which was down $28 million from the adjusted EBIT of $98.4 million in the prior year quarter. This decrease was primarily due to lower gross margin which was impacted by lower direct material spreads, including the impact of the estimated pretax inventory holding losses. Lower direct spreads were partially offset by higher toll spreads due to an improved mix within toll processing. Additionally, SG&A was up $10.6 million from the prior year, primarily due to incremental costs associated with being a standalone company, higher incentive compensation and benefits cost, and a $3.7 million swing in bad debt…

Thank you. [Operator Instructions] Your first question comes from Martin Englert with Seaport Research Partners. Please go ahead.

Hello. Good morning, everyone.

Hey, Martin.

Hey, Martin.

Hey. Wanted to circle back and discuss just the overall profitability within Steel EBITDA per ton, and some of this you alluded to in the discussion. But excluding the holding losses for the quarter which were fairly minimal, I mean the underlying EBITDA seemed like it might have been a high water mark versus history. I understand it's not exact apples to apples, given the separation, and if you called out higher mix of galv and a favorable mix in tolling, as maybe some of the drivers, but what I'm getting at is the sustainability of that type of underlying EBITDA, or is this more of, hey, it was a good quarter, we had a favorable mix, higher galv, good margins on toll processing, and this is maybe a little bit of an anomaly relative to history?

Yes, Martin, I think -- this is Tim. I think you answered your own question. I think it was -- overall we had a very good mix this quarter. Within toll, we had some galvanizing -- additional galvanizing tons, as well as tailor welded blank signs. And then within direct, it was a lot more galv as well. We also picked up some spot business in there. We didn't mention that, but we picked up some spot business there in the construction market, and that was at higher margins as well. So those were the big drivers for the quarter.

Okay, that's helpful. I appreciate that. Can you discuss what you're seeing, and again, you alluded to this when you talked about seasonality, but maybe a little bit more specific, July and overall automotive planned downtime. How is that looking? Maintenance schedules versus last year and versus history and any comment as far as inventories in the auto supply chain that you're seeing?

This is Tim again. Let me start just to talk about seasonality in general for us and then I'll hand it over to Jeff Klingler to talk a little bit about what he's seen in automotive. So we went back and we looked at our seasonality quarter by quarter. So if you take our direct tons and divide by four quarters, what you typically see for us is Q1 is what I would call the average quarter. When you look at Q2 and Q3, those tend to be down from a direct volume standpoint, 3% or 4%. And then when you look at Q4, that tends to be up 6% or 8%. So Q1 perspective, it's an average quarter for us. So overall, what I'm trying to say is Q4 is our strongest and Q1 tends to be the second strongest. Jeff, you want to comment on automotive?

I apologize for interrupting, but just to clarify, you're discussing negative 3% to 4% and up 6% to 8% versus the quarterly average for any given year…

Versus the simple average. Versus the simple average.

Sure. Got it. And then with regard...

Good morning, Martin. This is Jeff Klingler. With regards to the automotive market, we remain very optimistic about the automotive sector here, and for the remainder of 2024 we will see the normal summer slowdown. I don't think anything right now has us believing it's going to be unusual or something out of the ordinary, but we do expect to see the year end modest increase of 1% to 2% over 2023 builds. We're keeping a very close eye on things such as inflation and interest rates, which could cause slow down there, but generally we remain very optimistic.

The planned downtime, just looking at schedules this year for the summer versus last year, you're not seeing any deviations or an extension on what's planned on being down versus last year?

No. We are anticipating roughly two weeks for most automobiles.

Okay, thanks. That's helpful. If I could -- can you just provide an update on the electrical field lamination business? I understand it's embedded in the overall business, but any kind of comment on how margins performed in the quarter some goalposts on share of overall sales, and if there's anything else to add as far as the growth initiatives, I know you did touch on a lot of things in the prepared remarks, however, on that aspect.

Jeff, why don't you go and take that and I can jump in?

Sure. Yes. Overall, in general we're very pleased with the electric field business. We're most excited about the investments that we have that we've been talking quite a bit about in Mexico for our focus factory expansion for electric vehicles. That project is on time and on budget. We've spent about $25 million to date. The building is nearly complete. We've installed the first press and are working on the next three. Commercially, we're very happy with the level of commercial activity and the new orders that we have received. Those orders will not start production very early. Production will be at the end of calendar 2025. So we still have a little time, but we're very pleased with the progress on that project. And then in Canada, that project is also on time and on budget. We've spent also about $25 million to date, and production in that new facility will also begin at an initial scale towards the end of 2025. Same story there. We're very pleased with the level of commercial interest and activity. In fact, we've received orders already for roughly 50% of that future capacity.

And, Martin, this is Geoff Gilmore. Just to add, you had mentioned margins and the embedded in the business which are exactly right. It's embedded in the rest of the business. But certainly we've mentioned this several times. The margins for the electrical steel lamination business will be our highest margin business. So that's certainly exciting to us. And more importantly, we're making these investments because the growth in those markets will be much greater than GDP, we think over the next seven to seven to 10 years. So we remain highly optimistic longer term.

Any goalposts on what the overall sales might have contributed for the quarter there or even the last year?

No, we're not going to disclose that, Martin. It's embedded in the business, and that's how we're going to continue to report it.

Would you have any interest in going farther downstream, potentially partnering with somebody to produce transformers?

Martin right now, no. I think we have a very specific strategy that we're confident in and staying close to our core right now. Think about the growth over the next 10 years. Let us get our arms around this and enjoy the opportunity we have in front of us and be best-in-class before we start getting too far ahead of ourselves. So we're going to stay close to our core.

Okay, excellent. Appreciate that. And nice job on the quarter.

Thank you. Appreciate it, Martin.

Your next question comes from Phil Gibbs with KeyBank Capital Markets. Please go ahead.

Hey, good morning.

Hey, Phil.

Hey, Phil.

Question on some of the color you provided for the new business wins. I think you said three out of the five presses and 50% of the capacity related to Mexico and Canada, respectively, that you already gone out and secured business for. Would it be your goal in the months ahead to try to secure more business on that capacity, or are you purposely leaving some open for spots? So I'm just trying to think about how you view the value of that capacity and leaving some open or wanting firm commitments.

Yes, sure. Good morning, Phil. Jeff Klingler here. Good question. So, two different scenarios. In Mexico, you're right. We've installed two of the first five presses. We have intentions to buy about 10 presses for that building. And yeah we would anticipate in that type of business partially because of the sales cycle time from what programs start up. We are actively pursuing business ahead of the equipment being installed and commitments in advance. So we are actively pursuing and continue to win new programs that will launch 18 to 24 months out from the time they're awarded. In Canada, for the transformer business, we're very happy with the position right now that we have, having 50% of that capacity pre sold, so to speak, with a long term commitment. And we will, from this point on, take that more of a case by case basis. We do need to leave a certain percentage of that capacity open for flexibility and for surge demand and things like that. But we certainly like the comfort of having commitments in advance of installing equipment. So we're going to balance that. It's going to be very situational. There are a handful of places that we would like to go secure some longer term commitments, but we're happy with the pace that we're on right now.

And, Phil, this is Geoff Gilmore. This will make sense to you, I believe, is Mexico. That's highly automotive. So that will be contractual business. So if we're able to fill up as those presses are on order, that's an ideal situation. So we're pleased with where we're at. As you know, you're awarded those programs, and it's generally life of program, so they're longer term contracts. And Jeff hit the nail on the head. Canada is a bit of a different situation. Jeff and his team obviously were excited to go out, and you fill up 50% of that business out of the gate. So you're -- you got a great baseload business, you're covering your fixed costs. And now Jeff and team have a great opportunity to continue to sell out that capacity, which we're highly optimistic he'll do.

Thanks very much. And then I also had a question. Yeah. Can you hear me?

Yep.

Okay. I also had a question on networking capital and just how we should think about the evolution over the next couple of quarters. It did come in a bit above our expectations this quarter, and so trying to think about what that could look like the next couple of quarters with, particularly with some of the substrate costs coming down.

Yes, I don't have specific numbers to give you, but your intuition is absolutely correct. As the price of steels come down, we will release working capital over time. So you should see an improvement in capital quarter over quarter.

And then lastly for me, you all mentioned at our conference a few weeks ago that I think you're in the early innings of some structural things you're doing into the business in terms of either cost or efficiency relief, and I think that was also outlined in your investor day a few quarters ago in terms of embedding that 10% EBITDA margin goal. And so long winded question, but way of asking, where should we see some of those initiatives flow through? What are some of those initiatives? And can you just basically talk about that process and if we're on the right track here with the way that we're thinking about it in terms of what you're communicating? Thanks.

Yes, Phil, this is Jeff Klingler again. I'll kick it off and let Tim or Geoff add in if you'd like. I'll talk to you about where we're at and what we're targeting. So we spend a lot of time talking about our transformation process, which is our continuous improvement program. It's really just a systematic way of identifying and eliminating waste across all our organization. What's new in the new structure you mentioned is we are taking that expertise and we are focusing on some of the corporate functions, IT, in resources, finance and indirect purchasing. So we're taking the same process. We're mapping out all the processes and value stream, and then we are identifying areas that we want to, I say attack, but we want to take our improvement, various ways of improvement, the techniques we've developed over the years to problem solve. And yes, we think we're going to be able to streamline, make things more efficient, reduce cost, and generally make it much easier to serve the businesses from the corporate functions. So, Tim, I don't know -- where we're at right now is we just kicked it off last month and the program and we're in the stage of mapping all those processes out.

And then, Phil, this is Geoff Gilmore. Just to add. As you think about timing of this, really about a 12-month process. I mean, it's a methodical approach. We'll do a deep dive diagnostic into each one of those departments. And so you're truly trying to identify what's working, maybe what's not working, what you need to add, what do you need to eliminate. And once you go through that diagnostic process, then you're putting in plans to implement. And really a good way to look at this is, worst case scenario for the corporate functions, our biggest customer is the business. And so we become a better supplier to the business and then the business becomes a better supplier to our customers. Best case is we find those efficiencies and there's cost savings and improvement to the bottom line. And we're confident that we'll see both. And we're excited about the initiatives, and I know Jeff Klingler is very excited about the opportunities.

Thanks gentlemen.

You got it.

Your next question comes from John Tumazos with John Tumazos Very Independent Research. Please go ahead.

Thank you for the $1.06 of earnings. Steel business is a tough place. Should we expect Worthington to generate cash in the August quarter from working capital given that steel prices fell?

Yes, absolutely. As prices fall, this came up a little bit earlier, but we expect to release some working capital. I haven't quantified it yet, but that -- typically that's what we see.

And ladies and gentlemen, that does conclude our question-and-answer session. I will now turn the conference back over to Geoff Gilmore for closing remarks.

Thank you, everybody, for listening in and showing interest in Worthington Steel. Appreciate all the great questions. Again, we're very pleased and want to thank all of our employees, the 4,600 again. And we will look forward to getting back with you at the end of this quarter for another update. Thank you and have a great day.

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