Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to Worthington Steel's Second Quarter 2025 Earnings Conference Call. [Operator Instructions] And I would now like to turn the conference over to Melissa Dykstra, Vice President, Corporate Communications and Investor Relations. Melissa, you may begin.

Thank you, operator. Good morning, and welcome to Worthington Steel's second quarter fiscal year 2025 earnings call. On our call today, we have Geoff Gilmore, Worthington Steel's President and Chief Executive Officer; and Tim Adams, Vice President and Chief Financial Officer. 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 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 the 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 available later today on worthingtonsteel.com.

Thanks, Melissa. Good morning, everyone, and thank you for joining us. As we celebrate our first full year of being a publicly traded standalone company, I am pleased to report we generated solid quarterly earnings despite some sizable headwinds and uncertainty across a number of end markets. In the second quarter, we generated adjusted EBITDA of $30.6 million compared with $23 million in the prior year quarter. Earnings per share came in at $0.25 versus a loss of $0.12 per share in the same period last year. Results were impacted by both lower volumes and lower average selling prices for the quarter. There were several highlights this quarter as Worthington Steel continue to work safely, implement our strategy, reach new milestones and earn accolades as a best place to work. Last month, we named Cliff Larivey, President of Flat-Roll Steel Processing, separating this role from Jeff Klingler's COO position. Cliff's work leading our commercial and purchasing teams has strengthened our partnerships with customers and suppliers. This move recognizes Cliff's leadership strength and the talented team he built and allows Jeff Klingler to sharpen his focus on our growing global business operations. Further, Worthington Steel continues to make strides implementing our strategy. Earlier this month, we made a move toward growing our high value-added business through selective acquisitions when we announced our agreement to acquire a 52% stake in Sitem Group. Sitem strengthens our presence in Europe, which is vital to growing our electrical steel lamination business. Europe remains a high-growth market for electric vehicles. And it is expected that by 2030, 80% of the vehicles produced in Europe will be battery electric or hybrids. Like Tempel, Sitem stamps laminations for both automotive and industrial motors. More importantly, Sitem gives Worthington access to world-class tool and die making and significant expertise…

Thank you, Geoff, and good morning, everyone. Before I provide some color on the quarter, I would like to remind everyone that the current year quarter consolidated results on a standalone basis are compared with a prior year quarter which was prepared on a carve-out basis. For the second quarter, we are reporting earnings of $12.8 million or $0.25 per share as compared with a $6 million loss or $0.12 per share in the prior year quarter. There were several unique items that impacted our quarterly results, including the following. The current quarter results included recognition of a pre-tax non-cash gain of $2.7 million or $0.04 per share associated with the annuitization of a portion of the frozen Tempel pension plan. Additionally, we recognized a pre-tax gain of $1.5 million or $0.02 per share related to the sale of excess land in China. The prior year results included pre-tax separation expense of $14.9 million or $0.23 per share. Excluding these unique items, we generated earnings of $0.19 per share in the current year quarter compared with $0.11 per share in the prior year quarter. In addition, in the second quarter, we had estimated pre-tax inventory holding losses of $13.4 million or $0.20 per share compared to estimated pre-tax inventory holding losses of $34.8 million or $0.53 per share in the prior year quarter, a favorable pre-tax swing of $21.4 million or $0.33 per share. In the second quarter, we reported adjusted EBIT of $14.3 million, which was up $7.7 million from the prior year quarter adjusted EBIT of $6.6 million. This increase is primarily due to higher gross margin, partially offset by higher SG&A expense and lower equity earnings at Serviacero. Gross margin was impacted by higher direct material spreads, including the impact of lower year-over-year pre-tax inventory holding losses,…

[Operator Instructions] Your first question comes from Phil Gibbs with KeyBanc Capital Markets.

Geoff, the EBITDA per ton ex inventory holding gains and losses I think was down about $26 a ton sequentially, certainly not something we were expecting. I know you guys have been managing your profitability within a pretty tight range. What made it drop off so abruptly sequentially in particular? I know you did give some color, but what were some of the biggest, I guess, impacts to that? And when should we expect you guys to get back to some of the levels we're more used to?

Thanks for the question, Phil. I'm actually going to pass that to Tim to answer for you.

Phil, I think it's the 3 drivers. Whether it's sequential or year-over-year, I think the 3 big drivers, #1 is volume. We would have expected volume on a sequential basis to be down 2% to 3% and it was actually down 7%. And what we outlined with the D3 customer, that was unexpected. And if that would occur over a long period of time, you could take a look at your operating expense and everything would be variable. But the way the production cuts came in, they came fast and furious and kept expanding over the course of the quarter. Most of our costs are fixed at that point. The other 2 drivers are SG&A, which we touched on. We had an increase in bad debt as well as the professional fees associated with the Sitem transaction. Now that transaction is not closed yet, but the fees came in. And then finally, performance at Serviacero. So you've got a couple of things happening down there. You've got volume, you've got some spread compression plus the FX gains that occur -- FX losses, I should say, rather than gains.

And then when you guys highlighted the bad debt expense from the customer bankruptcy and the increased reserve and then also the professional fees, any way to square up the magnitude of those 3 items?

Sure. I mean, I think if you look at that, bad debt expense -- let me start with -- our credit group does a fantastic job. I'll just start with that. They work hand-in-hand with our commercial group. So we take that very seriously. We've got an outstanding track record and we rarely have bad debt write-offs. But 2 things that happened in the quarter, the unexpected bankruptcy of one of our customers, that was probably about $1 million, maybe a little bit less. And then we elected to reserve a little over $1 million for a second customer where we think collection of that specific receivable is at risk. So we review -- as you would guess, we review AR on a customer-by-customer basis every quarter. We don't think beyond this quarter we should have any additional issues from a collectability standpoint. But if you add those 2 up, it's about $2 million.

And then the professional fees? I'm sorry.

Professional fees, probably about $2 million, give or take.

Any reason you guys didn't carve those out similar to the other items that you did or is some of that expected to recur as you take on Sitem or should that wind down as the transaction gets closer to close?

Yes, we typically -- I mean, that's kind of normal course of business, right? Those are normal things versus the pension lift out or the gain on the sale of land. These things are kind of normal course. We're looking at acquisitions all the time. And we're going to have transaction expenses whether the transaction goes through or not. So we don't expect those to reoccur.

And then lastly, as you guys look out into the early part of next year, I know typically volumes do lift a little bit into the first part of calendar year and then certainly much stronger in the latter part of the fiscal year for you all. What are you expecting in terms of kind of customer sentiment, particularly as you come out of this period of deep carve-out from one of your key auto customers?

Yes. Phil, I think we're -- overall, I had mentioned in my intro, cautiously optimistic. I specifically said that about automotive, but that's where we feel across the board. I think things will be fairly stable, excluding the one large OEM customer here looking out the next few months. But as we start to get to spring and beyond, I think our optimism gets greater for various reasons. I think that's really the sentiment from our customers. And Phil, that's what you've been reading and hearing from other executives as well. I think specifically with automotive, lower interest rates, the fact that the vehicle is averaging almost 13 years at this point, which is decade highs, people want to replace those vehicles. In addition to that, that's overall market. If I look specifically at Worthington, my optimism also comes from how we've positioned ourselves with automotive. Even with that large OEM down, we were more than able to offset that specifically into the other OEMs. And that was because of market share gains that I have been sharing with you over the last few quarters. Now that's excluding Tier 1s, and that's where we had a bit of a hose. We're feeling good specifically about the market, that's 52% of our business going forward. And that large OEM, this isn't a long-term situation. I think we got another quarter and we're going to have to continue to work with them. And it's a short-term frustration, not a long-term problem. So we'll work through that and I think we're going to be in very good shape.

[Operator Instructions] Your next question comes from Martin Englert with Seaport Research Partners.

A question on the increase in the reserve and the bad debt expense. What type of industry were those customers operating in?

The reserve increase was a scrap dealer. So we sell our scrap to that scrap dealer. That was the reserve. And then the bankruptcy was in the heavy truck industry.

Okay. Are you seeing, I guess, other risks across any -- elsewhere in those industries or those verticals?

No, not in those industries specifically. These were customer-specific situations. So no, we don't -- fundamentally, we think the people we work with from a scrap perspective or the other heavy truck suppliers, we feel pretty good about those things. There's nothing fundamentally wrong with either of those verticals at all.

And Martin, I would add, even the specific customer in that heavy truck market, we feel good about continuing to do business with them going forward.

Okay. Appreciate that. And then a follow-up question on looking forward, change in the U.S. administration and if there are changes on the trade front with tariffs with our trading partners to the north and the south. Could you walk through the puts and takes for your businesses, positives, negatives or neutrals as you think about it? I know you have significant operations to the north and the south and continued investment there in growth.

Yes, you got it, Martin. I mean, first, as you know, the devil is in the details and the tariffs could take different directions. Is it on steel? Is it on finished products? So until we're fully aware of what the implications, I can just give you a general answer. I think we're not very concerned. We see little impact on our business. You know this, we source locally. So as far as a raw material perspective, I wouldn't expect any interruptions. I think we'd be able to manage through costs efficiently as well. Where maybe a bit of a difference is in Canada, to your point on the north and Mexico on the South. We are importing. Those countries are less at risk right now of imports. So we don't see an interruption in supply there. The exception may be Canada, who is also looking to put tariffs in place on China. But even if that were to occur -- sorry Martin, not an issue for us to be able to pivot and mitigate any type of issue there. So overall, I think we're in very good shape. And Martin, you know this, we've since 1955 have been dealing with different administrations and different policies and some markets are impacted negatively, some are positively. And we've always been able to navigate that quite well. So from a business perspective, we think we're well positioned. Now my personal opinion, I guess, I'd be a bit surprised if we see that aggressive position on Mexico and Canada, Martin. We've been under a Trump administration and he wants to negotiate. I think that administration has certain things they'd like to see Canada and Mexico tighten up on. And at the end of the day, I think they'll get that cooperation. We're already seeing that. So hopefully, we're able to avoid the tariffs and it's business as usual. Canada, Mexico and U.S. are too critical to one another to have any type of interruptions. But that's how we feel at this point.

Okay, understood. Appreciate the color. If I could, one last one. When you look out across all your end markets, automotive, construction, general manufacturing and elsewhere, I understand you're moving through a lull right now. Maybe volumes were a bit worse than expected and I understand the context with one specific OEM. But what are the customer -- I understand that they're constructive with their outlook. It seems like you are maybe a couple of quarters, some type of recovery. But are you seeing any green shoots on the margin today of improved activity or folks with order books out into early next year speaking to improvements or inflections in the marketplace?

Yes. I mean, I think, Martin, when it comes to our markets, I mean, I think we'll start with automotive. This year, I think we're going to end at about 15.5 million units. Next year, depending on how that OEM plays out, I think the market in automotive is going to be 15.4 to 15.7, somewhere around like that. And we'll see how it all plays out. I think in construction, we're generally positive about construction. Again, I think a lot of people sat on the sidelines here at the end of the year and it was tough for people to understand what the future was going to be like. But overall, in the construction markets that we serve, we feel positive generally about where the market is going. I think ag is going to continue to have some challenges throughout the year, again, with interest rates still being relatively high and commodity prices being relatively low and then whatever happens with trade, right? I mean, that has a big impact on the ag market as well. And then heavy truck, I think heavy truck will probably pick-up towards the end of the year. There's some regulatory changes that are coming. And as you know, in the heavy truck market, when the regulatory changes happen, there's usually -- it's very cyclical and related to those regulatory changes. So we may see some pick-up in heavy truck as we get to the end of the year.

Martin, just to add to that and specifically automotive, I agree with everything Tim said. And the tailwinds there that could speed up that recovery is, hey, if that larger OEM is able to meet their inventory targets sooner. And right now, we're cautiously optimistic. It seems that they are making progress. That certainly is good for us. And then again, I think interest rates continuing to come down is certainly going to fuel buyers to get off the sideline. And the other bit of optimism there, Tim had mentioned 15.5 million, maybe a little bit flat in 2025 with that 2024 calendar year number, but a few data points for you. September and October seasonally adjusted rates were at 16 million. Even more importantly, November was 16.7 million. So that's the highest it's been in three years. So your point, we have a large OEM. We have a little bit of difficulty to overcome in the short-term. But if you start looking out 6 months and beyond, we think automotive is going to start marching back to those pre-COVID levels. And that's a good sign on those data points.

Do you think there may be some demand pull forward in automotive and/or other end markets because of anticipated broad-based tariffs with the incoming administration, so people trying to get ahead of potential inflation. So by now before that might be implemented?

So hard to predict, [ Mike ]. We haven't seen that yet. So we're not seeing anything that's been strange in our order books. And honestly, Martin, I would find that difficult to believe. I think the size of these customers, the OEMs, how we manage our business, they're going to want to manage their working capital smart and with discipline. So I don't know that we're going to see a big pull ahead from the OEMs. The only wildcard I would tell you is the Tier 1s. Certainly, they may try to time things a little bit more and go long. But I think living through those cycles over the last 5 years, all of our customers have gotten a bit more disciplined on that front.

And this concludes our question and answer session. And I will now turn the conference back over to Geoff Gilmore, President and Chief Executive Officer, for closing comments.

First off, thank you for everybody joining today and showing interest in Worthington Steel. Obviously, we explained to you some of the short-term frustrations. But hopefully, what you heard is a lot of optimism about how we start looking going forward. In my opinion, we had a great quarter. The things that we could control, we can control -- we controlled them and controlled them well. I think our team continues to exceed my expectations and couldn't feel better about our future. So thank you again for joining and happy holidays to everybody. Look forward to talking to you next quarter.

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