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. All lines have been placed on mute to prevent any background noise and after the speakers' remarks, there will be a question-and-answer session. Thank you. 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 that 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. Now I'll turn it over to Geoff Gilmore.

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 continued to work safely, implement our strategy, reach new milestones, and earn accolades as the 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 strengths 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 in press automation, which we will be able to leverage across our electrical steel plants. Sitem is one of the largest and most respected electrical steel lamination producers in Europe and this partnership provides an expanded footprint required for our long-term success. Bringing together our compatible cultures and best practices allows us to fulfill customer expectations and solidify our global presence in electrical steel laminations. We expect this transaction to close in early 2025 after regulatory approvals and customary closing conditions. I am excited to begin serving our customers with the combined expertise of our Tempel and Sitem Group employees. Rounding out our strategy is transformation, our system of continuous improvement. The transformation mindset drives our employees to always look for ways to improve quality and service, find efficiencies, free up capacity, and eliminate unnecessary costs. This is an ongoing process for Worthington Steel and in the second quarter, we saw teams come together to reduce scrap, streamline purchasing processes, and more efficiently manage our IT contractors. The transformation mindset often carries over to our interactions with customers. Over the quarter, we developed an analytics tool to help both Worthington Steel and a key customer improve inventory control and order lead times, thereby reducing inventory. On the new product front, we continue to receive interest from customers about new capabilities at TWB using our licensed ablation technology and are filling our pipeline of potential opportunities. The equipment is being installed and tested and we remain on schedule. I'd like to thank our teams for all they do each quarter to support the Worthington Steel strategy. We rounded out the period with significant momentum in other areas of our business. In October, we released our first Corporate Citizenship and Sustainability Report, highlighting key achievements such as a safety record nearly two times better than the industry average, a decrease in carbon emissions, and the support of 73 non-profit organizations through the Worthington Companies Foundation. Our ESG approach is based on our philosophy of doing the right thing for our employees, customers, suppliers, shareholders, and communities, and we work hard each day to improve our efforts. We were named a military-friendly employer for the 10th year in a row by the Victory Organization. Workforce development and a commitment to our military members and veterans is incredibly special to me and this was a proud moment for our company. Another accolade for Worthington Steel as an employer was announced just last week when Computerworld included our company in its annual list of Top Places to Work in IT. Our IT team deserves special recognition this year. The team separated infrastructure, end-user business applications, and security systems as we became a standalone public company and kicked off the ERP implementation at Tempel, all while working to improve every day and ensuring our day-to-day IT-dependent operations perform. Yesterday, we added a new member to our Board of Directors. Scott Kelly brings a great background in operations in the energy industry and adds a new and diverse voice to our Board. I'm pleased to welcome him to Worthington Steel and I look forward to working with him. As I mentioned earlier, we saw some sizable headwinds during the quarter in several markets, including automotive, construction, and heavy truck. Some of these headwinds may persist for the next few quarters, especially in the automotive market. Looking ahead, we are cautiously optimistic about this segment as OEMs make moves to adjust their commercial strategy and rebuild market share. The headwinds could be offset by lower interest rates and lower inflation. We saw some positive signs in November when overall US vehicle sales reached their highest levels since May of 2021. Lower interest rates and decreasing inflation also provide positive momentum for the construction market. We continue to expect moderate growth in the construction market areas we supply, such as data centers and manufacturing in calendar year 2025. We expect heavy truck to remain relatively slow in the first half of calendar year 2025, but we believe regulatory requirements will help fuel growth in the second half of the year and into 2026. Overall, we are feeling positive about the tailwinds as we enter our second year as a standalone publicly traded company. We have already accomplished so much in a relatively short period of time. We have strong customer relationships, an experienced leadership team, and a sound strategy. We have an amazing team of employees with a strong commitment to safety and we are consistently recognized as the Best Place to Work. I am grateful and energized every day to work with everyone on the Worthington Steel team. Now, I'll turn things over to Tim Adams to discuss financials.

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, partially offset by lower direct volume. SG&A increased by $7 million over the prior year second quarter, primarily due to incremental costs associated with being a standalone company, as well as an increase in bad debt expense associated with the bankruptcy of a customer and an increase in our reserves associated with a separate customer. Additionally, the company incurred higher than normal professional fees, most of which were associated with the announced pending European acquisition. Equity earnings from Serviacero decreased due to lower direct spreads, which were unfavorably impacted by lower steel prices as well as the impact of exchange rate movements. Next, I will provide some content on the market and our shipments. Since July, the market pricing for Hot-Rolled Coil has fluctuated in a relatively tight band between $650 and $700 per ton. With little movement in market pricing, we expect minimal estimated inventory holding gains in the third quarter of fiscal 2025, as compared with the $13.4 million of estimated holding losses in the second quarter of 2025. Net sales in the quarter were $739 million, down $69 million or 9% from the prior year quarter, primarily due to lower direct volumes and lower direct market pricing. We shipped approximately 936,000 tons during the quarter, which was down 3% compared with the prior year quarter. Direct sales volume made up 55% of our mix in the current year quarter as compared with 56% in the prior year quarter. Direct sales volume was down 5% over the prior year quarter with shipments down in most markets. Our shipments to the automotive market were down 2% compared to the prior-year quarter. As you know, the Detroit Three Automakers represent approximately 30% of our net sales. The decrease in automotive volume was primarily due to deeper-than-expected production cuts at one of those customers as they attempted to right-size their inventory levels and reset their commercial strategy. The OEM production cuts continued to increase as the quarter progressed. On a year-over-year basis, for the second quarter, we experienced a volume decrease of more than 30% with that customer, mirroring the customer's estimated decrease in unit production. We are monitoring the situation very closely as the OEM navigates their challenges and we believe they could return to a more normal build schedule within the next two quarters. As we have done in prior years, we are working closely with our partners throughout the entire automotive supply chain to prepare for increased volume requirements as the OEM ramps back up. The vast majority of the year-over-year decrease in our automotive shipments were offset by increases in volume with the other automotive OEMs. We have noted over the past few quarters that we have won new programs and increased our share in the automotive market. We are beginning to see the volume impact of some of those new programs. Our shipments to the remaining Detroit Three increased by more than 30%. Our strategy continues to be collaborating with our automotive customers to find mutually beneficial solutions that help them meet their strategic goals. We look forward to continuing our partnership with our automotive customers. Turning to the construction market, our volumes decreased 20% on a year-over-year basis. The decrease was a combination of several factors. First, in the prior year, we successfully pivoted to a more construction-heavy mix as we prepared for the potential automotive strike at the Detroit Three. Second, in the current year, we anticipated a more typical mix between automotive and construction. However, as I mentioned, we experienced sudden and deep cuts to our automotive order book. Both the timing and the magnitude of those cuts limited our ability to secure replacement volume in other markets. Toll tons were down 1% year-over-year, primarily due to lower coated volumes, partially offset by an increase in pickling and tailor-welded blanks. Turning to cash flows and the balance sheet. Cash flow from operations was $68 million and free cash flow was $33.2 million. During the quarter, we spent $34.8 million on capital expenditures related to a variety of projects, including the previously announced electrical steel expansions. We now expect capital expenditures for fiscal 2025 to be approximately $125 million versus our previous estimate of $110 million. We are increasing the estimate for fiscal 2025 CapEx for several reasons. First, we now expect a larger portion of the CapEx for our Canada expansion to be spent in fiscal 2025 rather than fiscal 2026. This is simply a change in timing. Second, as we talked about in the past, we expect other projects to come up during the course of any fiscal year. For example, we are adding a new press to our electrical steel facility in China to support new business. In addition, as part of the previously mentioned Tempel ERP system, we have elected to upgrade our shop floor system and data warehouse to maximize the future opportunities for process improvements using the transformation. On a trailing 12-month basis, we generated $79.4 million of free cash flow. Wednesday, we announced a quarterly dividend of $0.16 per share payable on March 28th, 2025. We ended the quarter with $52 million of cash and our ABL debt at November 30 was $115 million, resulting in net debt of $63 million. Finally, I would like to thank our team for making safety the highest priority at every facility and for delivering incredible performance in our first year as a public company. I am proud to be part of Worthington Steel and look forward to working with our entire team to continue driving value for all stakeholders. At this point, we would be happy to take your questions.

Thank you. We will now begin the question-and-answer session. Your first question comes from Phil Gibbs with KeyBanc Capital Markets. Please go ahead.

Hey, good morning.

Hey, Phil.

Geoff, the EBITDA per ton excluding 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 the biggest 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.

Hey, Phil. I think it's the three drivers, whether it's sequential or year-over-year, I think the three big drivers. Number one 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 two 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 losses. So those are really the drivers.

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 three 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 two things that happened in the quarter. The unexpected bankruptcy of one of our customers 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 there is a risk of not collecting that receivable. So 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 two 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?

Yeah, 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 recur.

Thanks. 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 the calendar year and then certainly much stronger in the latter part of the fiscal year for you all. And what are you expecting in terms of your customer sentiment, particularly as you come out of this period of deep carve-out from one of your key auto customers? Thanks.

Yeah, Phil. I think, 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 a decade high, 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. You know, 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 hole. So 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.

Thank you.

Thank you. We have seen improvement over the last few quarters, particularly in the market that constitutes 52% of our business. While we have faced some challenges with a large OEM, this is a temporary issue that we expect to resolve in the next quarter. We view this as a short-term frustration rather than a long-term problem, and we believe we will be in a strong position going forward.

You got it, Phil.

Your next question comes from Martin Englert with Seaport Research Partners. Please go ahead.

Hello. Good morning, everyone.

Hey, Martin.

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 elsewhere in those industries of 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 this 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 US 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.

Yeah, you got it, Martin. I mean, first, as you know, the devil's 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. Think we'd be able to manage through costs efficiently as well. Where, you know, maybe a bit of a difference is in Canada to your point on the North and Mexico in 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, that's 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, we've been dealing with different administrations and different policies since 1955, 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 have 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 the US are too critical to one another to have any type of interruptions. But that's how we feel at this point.

I understand. Thank you for the insights. One final question: when you assess all your end markets, including automotive, construction, and general manufacturing, I realize you're currently experiencing a slowdown, with volumes potentially lower than anticipated, and I understand the situation regarding a specific OEM. However, what is the sentiment among customers? I gather they have a positive outlook. It appears you might be looking at a recovery in the coming quarters, but are you noticing any signs of improved activity or conversations about order volumes extending into early next year that indicate potential improvements in the market?

I think we'll start with the automotive market. This year, we expect to finish with about 15.5 million units. Next year, depending on how the OEM situation develops, the automotive market might range from 15.4 to 15.7 million units. We'll see how things unfold. Regarding construction, we generally have a positive outlook. Many people have been hesitant at the end of this year, making it difficult to predict the future. However, we feel optimistic about the construction markets we serve. Agriculture may face challenges this year due to relatively high interest rates and low commodity prices, along with the impacts of trade. In the heavy truck sector, we anticipate some improvement towards the end of the year, especially with upcoming regulatory changes, which typically have a cyclical effect on the market. So, we might see an uptick in heavy truck activity as we approach year-end.

Hey, Martin, and 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 target 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 six 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 buy now before that might be implemented.

So hard to predict. Martin, 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 wild card 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 five years, all of our customers have gotten a bit more disciplined on that front.

Okay. Appreciate all the color and context and congratulations on your first year post-separation.

We appreciate that, Martin. Thanks for following us. Thanks, Martin.

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

First of all, thank you for everybody for 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 forward. In my opinion, we had a great quarter. The things that we could control, we controlled them well. I think our team continues to exceed my expectations, and I couldn't feel better about our future. So thank you again for joining and Happy Holidays to everybody. I look forward to talking to you next quarter.

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