Good afternoon, ladies and gentlemen, and welcome to the Worthington Industries' Third Quarter 2016 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 like to introduce Ms. Cathy Lyttle, Vice President of Corporate Communications and Investor Relations. Ms. Lyttle, you may begin.

Thank you. Good afternoon. Thanks for joining us on our third quarter earnings conference call, and a reminder that we're also hosting an Investor Day for members of the investment community in New York on Tuesday, April 5. Senior management will provide an overview of the company's operations, financial performance and strategy. There's more information about it on our website. On today's earnings call, you'll be hearing from John McConnell, Chairman and Chief Executive Officer; Mark Russell, President and Chief Operating Officer; and Andy Rose, Executive Vice President and Chief Financial Officer. A reminder that certain statements made on this call 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 actual results to differ from those suggested. Our earnings release was issued yesterday. Please review it for more detail on those factors that could cause actual results to differ materially. This call is being recorded and will be made available later on our website. John McConnell will start us off.

Thank you very much, Cathy, and thank you all for joining us this afternoon. I am very pleased with the quarter. I believe the businesses are getting the most out of every opportunity that is in front of us. Whether it's strong or weak, we're getting the most out of it. So, let's get on with the detail of it. I'll turn it over to Andy Rose to begin with.

Thank you, John. Good afternoon, everyone. The company delivered another solid performance in the third quarter of fiscal 2016, especially when you consider the impact of inventory holding losses in Steel Processing and continued weakness in the oil and gas and agricultural markets. Lower commodity input costs across many of our businesses, combined with year-over-year improvement in industrial gas and almost all of our joint ventures highlighted the quarter. Quarterly earnings adjusted for restructuring were $0.47 a share, up $0.07 from the prior year quarter. Several unique items were as follows. Inventory holding losses during the quarter were estimated at $9.4 million or $0.09 per share as compared to $9.2 million or $0.08 per share in the prior year quarter. Pressure Cylinders had $3.9 million of one-time expenses that flowed through operating income. $1.6 million in cost related to the repairs on three acquisition products from our Turkey acquisition, $800,000 of transition service fee and purchase accounting related to our acquisition of the Taylor Wharton CryoScience business and $1.5 million of warranty-related expense from product acquired in the d-hybrid acquisition. Cylinders' operating income excluding restructuring was down $13.2 million to $8 million, driven almost exclusively by declining sales in Oil & Gas Equipment, down 71%. Operating margins for the quarter were abnormally low due to the impact of several million dollars in losses in oil and gas and the one-time expenses mentioned above. We continue to reduce cost to match demand in oil and gas, and announced another modest reduction in head count this month. Lower manufacturing cost and improvements in operations in industrial gas and Consumer Products were bright spots. Steel Processing operating income was up $6 million excluding restructuring from the prior-year quarter to $22.4 million. Improved inventory management and some modest mark-to-market gains on several steel hedges…

Steel Processing direct shipment volume was up 1% and total volume was down 10% compared to last year's quarter. The mix of direct versus total is 60%/40% compared to what's 57%/43% last year. Total volume for Steel Processing was down 4%. Metals Service Center Institute data for the same period shows industry shipments down about 7% by comparison. Steel Processing's strongest growth was in construction with shipments there up 32%. We also saw continuing but slowing growth in service center shipments. Shipments to the Detroit Three increased by 3%. Heavy truck was weaker and agriculture down 22% continue to be our weakest market. Our tailor welded blanking joint venture with WISCO commissioned their newest facility in Kentucky, where our new rotary system is producing lightweight rail blanks. TWB also completed final testing in our first Aluminum Tailored Blank friction stir welded part that will provide weight savings for our new models starting in 2017. Our Serviacero joint venture in Mexico continues to grow shipments and market share with shipment there up 21% compared to last year. And finally, our joint venture of cold rolling facility in China with Nisshin and MISI continues on target to start production this summer. In our Pressure Cylinders business, revenue was down 71% – in the Pressure Cylinders business, Oil & Gas Equipment revenue was down 71% compared to last year despite recent rebound in oil prices. The equipment market continues to decline, and capital purchases by the major producers remains limited and short term in nature. In response, we continue to adjust our cost structure and focus on market opportunities that rely less on new drilling activity. In Industrial Products, revenue was up 2%, and the business continues to improve its product mix and operating margins. We also acquired a small brazing rod company that nicely complements our joint technology product offering during the quarter. In Consumer Products, revenue was down 5% on lower volumes for camping and helium cylinders, as well as torches and kits. The lower volume can be partially attributed to mild winter temperatures in North America. Margins were up, however, on lower commodity costs and higher operating efficiencies. Alternative Fuels revenue was down [audio gap].

Ladies and gentlemen, please stand by while we reestablish connection. Please stand by [audio gap]. And please continue [audio gap]. And ladies and gentlemen, please stand by while we reestablish connection [audio gap].

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And you're back live. Please continue.

Okay. We're going to – we apologize for the interruption. We're going to pick up at the Pressure Cylinders business because we're not sure exactly where that cut off, but we think that's a sufficient place to start. In our Pressure Cylinders business, Oil & Gas Equipment revenue was down 71% compared to last year. Despite a recent rebound in oil prices, the equipment market continues to decline and capital purchases by the major producers remains limited and short term in nature. In response, we continue to adjust our cost structure and focus on market opportunities that rely less on new drilling activity. In Industrial Products, revenue was up 2% and the business continues to improve its product mix and operating margins. We also acquired a small brazing rod company that nicely complements our joint technology product offering during the quarter. In Consumer Products, revenue was down by 5% on lower volumes for camping and helium cylinders, as well as torches and kits. The lower volume can be partially attributed to mild winter temperatures in North America. Margins were up, however, on lower commodity costs and higher operating efficiencies. Alternative Fuels revenue was down 6%, and fuel spread continue to provide a market challenge. Lower CNG cylinder demand was partially offset by Pomona's first shipments of ultra-high pressure hydrogen cylinders for passenger vehicles. Margins overall were negatively impacted by warranty and obsolete inventory costs at our Fuel Systems business in Salt Lake City. Cryogenics revenue was up 74% excluding our recent acquisition of the former Taylor Wharton global CryoScience business. Cryogenics trailer sales were stronger and should continue to improve as we move this business from Boston to our newly acquired Theodore, Alabama operations. Sales from our Turkey operations were also stronger, although temporary costs related to our pending move…

Mark, Andy, thank you both. And at this point, as always, we'll be happy to take any questions you have. And, again, we apologize for the interruption.

Thank you. [Operator Instructions] And we'll go to the line of Aldo Mazzaferro with Macquarie. Your line is open.

Hi. Good afternoon.

Hello?

Yeah. You can hear me, all right? I'm wondering about the Steel Processing business, Mark, the volume comparison year-to-year were up nicely but sequentially down, and that both of those, I think, stood out from the MSCI numbers or the industry data. I'm wondering whether you can talk about what was driving those trends to be essentially more volatile than the industry overall?

Well, our – as I said, we are down overall 4%, and the MSCI number was down about 7%. So we're relatively stronger overall. And I noted construction was our strongest segment. As you know, the trade case have – come through on coated products first and that kind of widened the spread between coated and hot-rolled and cold-rolled. And we have hot-roll-based galv and cold roll-based galv both. And those wide spreads helped us win market share, I think, in the construction market. Is that helpful?

Yeah. And then a separate question, Mark, on the consolidation of your WSP, Worthington Steel Processing coming in. Can you confirm how much volume that would be? Is that all tolling? Number one. And how much roughly should we expect to be consolidated into the numbers?

It is 100% tolling, Aldo. It's – so we've got – the revenue there is only the total portion of the converting – so hang on, we'll look that up for you. We're going to check that Aldo. We'll come back to you before the end of the call.

Okay. Thank you.

Thank you. Our next question comes from the line of Phil Gibbs with KeyBanc Capital. Your line is open.

Hi, good afternoon.

Phil?

Just had a question on the Transformation 2.0 and if you could just elaborate a little bit on that and the plans in terms of how you're attacking that, what you're looking to do. Just as far as I know, the steel business that you've run has already been fairly leaned out after the last recession. So if you're looking to do anything there incrementally, what more can you do? And then any color on that side will be help.

Phil, we're re-launching because we want the steel company, first of all, to improve some more. We think there's still more to do there. We did have a lot of improvement in the steel company from the first Transformation, but we're re-launching there like we are every place else because we think there's more to do

Keep going.

And then the second reason that we're re-launching is because we didn't get a lot of traction in parts of the business with the first Transformation, and we're determined to get traction there this time around in Cylinders and the other parts of the business. And, of course, when we first started, that's 19 or 20 acquisitions ago, and those are a lot of companies that we would like to do transformation in and we are going to do transformation in. So we also think that we're more effective in the process now. It used to take us four months to six months to see the – significant improvements that we saw first time around, and we're getting those kinds of improvements in something like half the time this time around. So the process has accelerated. And as we said in the intro, the initial pilot work we're doing here is more impressive in terms of improvements than we saw the first time around in the Transformation. So, we are excited about it. I appreciate the question.

Sure. And in the steel business, is the toll processing business in your mind more profitable than the direct business, or does it depend on [indiscernible] being manufactured on the direct side?

Yeah. No, it does [indiscernible] like both. As we noted in the intro, the toll volume was down a little bit more than direct for us. That's very much concentrated in our one cold rolled galvanizing line with the joint venture with AK Steel, and the volumes there are down significantly. We think that that's a situation that we can address, and we look to do that going forward. So, other than that, our toll volume was pretty much in line with our expectations other than the one cold rolled galv line.

When you say address that, you mean just given the fact that the market on the downstream side right now is tight, or are you taking more of an ownership positioning there as well?

No change in the structure of the JV. However, we are putting more volume in there historically than we have in the past, and we'll continue to do that until we get back to the levels we are looking for.

Okay. Thanks, guys.

Thank you. [Operator Instructions] And we'll go to the line of John Tumazos with John Tumazos Very Independent Research. Your line is open.

Thank you for taking the call and the good results. How much money in terms of planning your balance sheet do you set aside for putting back into inventories and receivables as steel price hikes have been announced in the direction of $100 a ton [indiscernible]? And as you're putting the money back into working capital, should we expect share buybacks to slow down?

Yes there's a few ways, John. One is, right now, we have about $600 million of available capacity on our revolving credit facility. So – and in any circumstance, our goal is to keep kind of a minimum of $300 million. So, we have plenty of capacity to deal with rising steel price environment. Over the past year or so, the steel company has pulled out about $125 million worth of cash from working capital. About half of that is because of the price decline. But half of it is actually because they're getting more efficient with running their business. So $60 million we might have to put back in, I guess, if prices rise, but our hope is that they can sustain the other piece of that.

If I can ask a follow-up, the steel processing margin was close to normal, near 5% for the quarter and year-to-date. In the February quarter, was there any benefit from the initial steel price rebound or penalty from steel inventories when those factors awash?

Well, there were two sort of offsetting things going on. One is our margins were down because of the roughly $9.5 million of FIFO compression during the quarter. There's about a quarter lag. So when prices decline in the second quarter, we feel that in the third quarter. We did have a modest benefit. As you know, we do hedging for customers and we did have some mark-to-market benefit as the value of those hedges went up where we don't have hedge accounting. So we try to hedge accounting on all of those for different reasons. On some, we end up not either pursuing it or getting that. And so, as the steel prices ticked up, we did get a mark-to-market benefit of a few million dollars, not nearly offsetting the $9 million.

You made reference in the prepared remarks about productivity gains or potential productivity gains not flowing as quickly. Could you give us any color as to which businesses those were in and whether the performance programs also are being implemented in JV companies?

John, so far we've been in the Oil & Gas Equipment business, and because of the extremely depressed demand there, those improvements will not show up on the bottom line as much until we recover there. But the efficiency gains that we're after are showing up there like they do any place else, but they just don't show on the bottom line as quickly. So, we've been in five of the sub-business units at this point, and we're going to go on a systematic way across the company with the program.

Thank you.

Thank you. We'll go to the line of Charles Bradford with Bradford Research, and your line is open.

Thank you and good afternoon.

Good afternoon.

We've been hearing stories about some of the foreign steel suppliers either withdrawing from the market or making offers with pretty hefty price increases but good for one day only. Are you hearing or seeing that kind of thing?

Charles, no, we have not.

I guess some people seem to think that the trade cases with a relatively small margins are having a big effect. Are you seeing that also?

Yeah, we definitely are seeing that, Charles. We definitely see that the trade cases have an immediate effect on market sentiment. So, we've seen that, but we haven't seen any other specifics you were talking about. But then again, we are a very limited importer. We don't do much importing.

On the domestic side, are any of your suppliers more stressed than others as far as being able to supply your needs? [Indiscernible] has gone out to buy substrate.

Yeah, we couldn't help you on that, Charles. We obviously track the performance of all of our suppliers very closely, and some of them are better than others. That's about all I can say in that front.

Thank you.

Thank you.

In response to – I think it was Aldo's question on the WSP volumes, it's roughly 700,000 tons to 800,000 tons. Keep in mind this is primarily a tolling business. There is a little bit of direct. So, right now, it's $80-million-ish of revenue run rate. So, it's not a huge bump in terms of revenue. More tons than revenue, I guess, is my point.

Thank you. We'll go back to the line of Phil Gibbs with KeyBanc Capital. Your line is open.

Thanks. Just curious what you're seeing in WAVE and how much of that business right now is new-build versus retro?

For which part of the business, Phil?

WAVE.

Yeah. I would say it hasn't – I don't think it's changed dramatically. I think it's been sort of historically – at least in the last few years, 70%/30% kind of retro versus new-build. I think that makes us move around quarter to quarter, but I'm not sure it's dramatically different right now.

Okay. And then as far as what you just outlined on the revenue impact for WSP, do we think – should we be modeling that the 49% comes up below the line that you guys don't own and we're thinking about the profitability of the business.

Yeah. Exactly.

Perfect. Thanks so much, guys.

Thank you. We'll go to the line of Aldo Mazzaferro with Macquarie. Your line is open.

Hi, gentlemen. I just want to confirm that I heard the revenue number right on the WSP was 8-0, $80 million?

Yes.

Yeah. Correct. Ballpark.

That's ballpark. So is that on a fee-per-ton basis? Would that be higher than your average for the remaining tolling that you do?

Remember we do several different types of tolling, Aldo. So a pale toll is very different from – this isn't Class 1 business generally.

Right.

So cleaning and inspection and blanking, so it varies significantly.

So this is pickling and cold rolling and cleaning Viking?

No. No, pickling here. We are inspected – we're cleaning – we clean some of it and we inspect all of it, and we blank some of it.

I get it. Okay. And then the final question I had was, since the beginning of the year, we've seen pricing start to move up, we've seen scrap move up, we've seen a lot of stuff that suggest the market is improving. Can you classify what you think about the state of final demand going on right now based since the beginning of the year? Is it improving or are we in a kind of supply squeeze do you think?

That varies significantly by market, Aldo, that [indiscernible] automotive remains strong and construction is picking up a bit, and most of the other markets are pretty weak and oil and gas is really struggling. So...

Yeah. But it hasn't changed much since the beginning of the year, though, has it?

No.

Yeah.

No. We have no – no change in the general trend that we can see.

Right. Yeah. Okay. Thanks – thanks a lot. It sounds like you guys are working while you're on the call. Maybe next [indiscernible] something it sounds like.

I think we've got some connection issues.

Yeah. I think we have an issue [indiscernible] for next time.

Thank you. And I'm showing no further questions at this time. Please continue.

Thank you again for joining us. And once again, we apologize. I think that we're having problems really with our service provider. It's very windy here today. That could have something to do with it. But we appreciate you taking the time to spend with us and we look forward to seeing you or talking to you at the fourth quarter. Thank you.

Thank you. And ladies and gentlemen, that does conclude your confidence call for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.