Cathy Lyttle - VP Communications & IR John McConnell - Chairman, CEO Andy Rose - EVP & CFO Mark Russell - President, COO.

Phil Gibbs - KeyBanc Capital Markets John Tumazos - John Tumazos Very Independent Research Martin Engler - Jefferies Charles Bradford - Bradford Research.

Good morning and welcome to the Worthington Industries Third Quarter Fiscal 2017 Earnings Conference Call. All participants will be able to listen only until the question-and-answer session on the call [Operator Instructions] 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..

Good morning. Thanks for joining us on our third quarter earnings call. This is a reminder that certain statements we make today 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.

We released our earnings yesterday after market close. You can review it for more detail on those factors that could cause actual results to differ materially. We are recording this call and it will be made available later on our website.

On the call today are Chairman and CEO John McConnell; President and COO Mark Russell; Executive Vice President and CFO Andy Rose. John will start this off..

Cathy, thank you and thank you all for joining us this morning. Our third quarter was very good. It was not a record like the first and second quarters, but very good. In fact, it was our second best third quarter in our 62 year history and more noteworthy, it achieved our primary goal of improving on a year-over-year basis.

This performance placed us in great position to finish fiscal 2017 in record fashion. So let's begin with the details of the quarter starting with Andy Rose..

Thanks, John and good morning everyone. The company delivered another solid quarter with earnings per share of $0.57, excluding restructuring up $0.09 or 19% from the prior-year. We saw a strong performance from steel processing, modest improvement at cylinders and engineered cabs and a modest decline in joint venture income.

Strength in automotive and construction was offset by continued weakness in oil and gas and agriculture. Several unique items in Q3 were as follows. Inventory holding losses were $3 million or $0.03 per share, as compared to a loss of $9.4 million or $0.09 per share in the prior-year quarter.

Restructuring charges of $1.4 million were primarily related to plant moves in pressure cylinders. Our current annual effective tax rate is 27.2% this quarter, down from 29.6% last year. The decrease is driven by excess tax benefits from stock compensation expense.

Cylinders operating income, excluding restructuring was up $3.2 million or 40% to a $11.1 million. Strength in consumer products margins drove the improvement, while oil and gas equipment - while the oil and gas equipment market continues to be a drag on profitability.

However, we are seeing green shoots as revenue and bookings have increased modestly over the past several months. Steel processing operating income was up $3.9 million excluding restructuring from the prior-year quarter to $26.2 million.

Inventory holding losses for the quarter were 3 million, as steel prices soften modestly in the final months of the calendar year. Recent increases in flat steel pricing will likely flip that to inventory holding gains during the upcoming quarter, assuming the trend holds.

The business continues to benefit from strong toll volumes and expanded margins in the coated business, but higher manufacturing expenses due to production startup issues in our laser welding business and higher health care expense are offsetting these gains.

Revenue in engineered cabs was down 8% to $23.5 million, excluding restructuring, operating losses were $1.8 million, a $1.8 million improvement over the same quarter a year ago. Reductions in operating costs and SG&A drove the improvement. Equity income from our joint ventures during the quarter was down $2.3 million overall.

ClarkDietrich continues to perform well, earning $2.8 million for us during the quarter, an improvement of $1.5 million. Serviacero and ArtiFlex were softer, the former driven by foreign currency fluctuations and taxes. We received dividends from JVs of $21.4 million during the quarter for a 94% cash conversion on equity income.

Cash from operations was $103 million for the quarter, but was held down by seasonal increase in receivables. We spent $21 million on capital projects, distributed $13.4 million in dividends and didn't repurchase any stock during the quarter. Yesterday the Board declared a $0.20 per share dividend for the third quarter payable in June 2017.

That was essentially flat from the prior quarter at $ 577 million and down $32 million year-over-year. Interest expense was essentially flat at $8 million. Trailing 12 month adjusted EBITDA is now $402 million. We have consolidated cash of $227 million, and almost $600 million available under our revolving credit facilities.

Our net debt to EBITDA leverage ratio is now under one time. We continue to be quite pleased with the overall performance of the company, despite a few difficult end markets. The roll out of Transformation 2.0 continues to go well with lean activities driving improvements across all aspects of our business, including the back office functions.

The success that we achieved in improving the performance of our steel company is now beginning to be replicated in pressure cylinders and elsewhere.

While still early in its implementation, we are quite optimistic that the coming quarters and years will result in meaningful improvements in margins, return on capital and growth for our company as Transformation 2.0 becomes part of our daily routine.

We are proud of our employees who seem to be embracing change and working hard to drive improvements. Mark will now discuss operations..

Thanks, Andy. In steel processing direct shipments declined 1% and tolling was down 5% compared to last year. The combined direct and toll overall volume was down 2%. The mix of direct versus toll was 61-39 this year compared to 60-40 last year.

The comparable Metals Service Center Institute data shows very slight increase in direct industry shipments for the comparable period. For accurate comparisons, all these numbers exclude WSP which was unconsolidated in last year’s numbers.

Looking at steel's quarter by market, agriculture was up a 11% this year, which is a very welcome improvement after the multiyear downward trend there and construction was up 5% and remained strong. Detroit 3 automotive shipments were flat. Our weakest market was heavy truck and was down 16%.

Our steel joint ventures are starting to see the benefit of our recent investments in our new Tailor Welded Blank's facilities and in additional capacity at Serviacero. Our partner in Tailor Welded Blank's, which is Wuhan Iron and Steel merger with Baosteel to become Baosteel [ph] during the quarter.

TWB begin full production of lightweight, Hot Formed Tailored Blanks in Puebla, Mexico, while recent investments in Antioch, Tennessee in Glasgow, Kentucky both ramped up to full production in the quarter. At Serviacero direct shipments were up 5% compared to last year.

And finally, our BMW venture in China continues to ramp up with trial orders being produced for targeted customers there. In our Pressure Cylinders business, oil and gas equipment revenue was down 11% compared to last year, but as Andy noted, the volume has increased modestly there in recent months.

In our industrial products group, which now includes our cryogenics business, revenue was down 4%, mostly related to seasonal differences. Alternative fuels revenue was up slightly and then consumer products revenue was up 6% on higher shipments of helium cylinders, and camping cylinders.

The higher helium sales volume continues to be driven by our successful in-store promotions. We continue to add people with outstanding experience and capability to the growing consumer products team.

In engineered cabs low demand for off-highway equipment continues with the exception of construction market, although there are early signs of increased activity in energy and mining markets.

Our non-steel joint ventures generally were flat or slightly lower compared to last year, though WAVE which is our largest JV, saw volume increases across all regions with strength in Europe probably related to buying ahead of recently announced price increases there.

The rollout of the 2.0 version of our Transformation continues on track across the company. We've seen strong results so far in our steel company, where our original Transformation first reached critical mass about 8 years ago as they continue to push back the edge of what's possible there.

And we're enthused to see the beginning of transformational improvements across the rest of the company, including in our cylinders business and our joint ventures and even in our corporate support functions.

There is great energy in the spread of Transformation 2.0 work as we accelerate the deployment of more teams, expand our abilities, move more quickly and reach deeper into the business. John, back to you..

Well, thank you both. At this point, we're happy to take any questions that you might have..

Thank you very much. [Operator Instructions] And first question will come from Phil Gibbs with KeyBanc Capital Markets. Please go ahead..

Hi, good morning..

Morning..

Just have a – had a question on the revenue and bookings in the green shoots you mentioned Andy in cylinders, what was that predominantly related to?.

There is more activity in the eastern part of the country, related to natural gas drilling, so the Marcellus and Utica areas. You know, Phil, we have a couple facilities here in Ohio that service that - those regions. There is also activity out West, where it's more oil plays, but that activity isn't quite as robust..

Okay. Appreciate that. And Mark, on the side of the tolling business, relatives to last quarter, I think it was down - the volumes were down 10% to 15% versus last quarter. I know there's some seasonality.

But what was the driver related to?.

The tolling portion of our business that was up most significantly was in galvanizing. Our toll pickling business was actually stronger relatively..

Okay.

And then in terms of terms of the end market, is that essentially – is that essentially automotive are is that automotive, construction and kind of mix markets or what was the biggest end market?.

It is mostly automotive there..

Okay.

And last question Andy on the $3 million of hedging – excuse me, in FIFO losses, was there any mark-to-market hedge offset to that?.

Yeah, I mean, there was a negative mark, there was a little bit of negative mark-to-market, but nothing significant..

Okay. Thanks very much. Operator Thank you. [Operator Instructions] Next in queue is John Tumazos with John Tumazos Very Independent Research. Please go ahead..

Thank you very much for the dividend and I just want to congratulate you that about $3 of earnings disappoints people. I just think that’s a wonderful achievement, that only $3 maybe. Could you explain the three straight down quarters at WAVE if there's anything more than a strong dollar translating the overseas earnings a little less.

And could you explain how you might apply the $227 million of current cash balances provide and for my $0.02 worth there is nothing wrong with paying off debt. I think having leverage is overrated? Thank you..

Yes. I would say there is nothing systemic in WAVE. Their business continues to perform pretty well. They have had a little margin compression a year ago for a period of a couple of quarters they had very high material spreads because of what happened with steel prices over a year ago, getting very low.

A little bit of that is come back, their volume continues to improve. And I would also say the third quarter, as you know, John, for a lot of our businesses just happens to be a seasonal low point and I think WAVE is no different there. So I don't think I would expect that trend to continue that you're referencing there.

And then the second part of your question on – I think it relates to our cash balance, is we have three trenches of long-term debt. The first that matures is in 2020 and then after that its 2024 and 2026. We can prepay that debt, but it has make whole penalties associated with it. So it’s not particularly economic to do so.

And frankly, the way we think about it, we like to have you know, kind of a reasonably good base of long-term debt. We also like to have flexibility with short-term credit facilities and because we have not done any acquisitions recently and we have not been buying back stock, we basically accumulated cash.

I would not expect that or say that our goal is to have a large cash balance, you know, going forward in perpetuity. Ultimately, we want to find good places to invest the cash, whether it be acquisitions, investing capital equipment or buying back stock. So I would say that’s a temporary phenomenon..

Thank you..

Thank you. The next question in queue will come from Martin Engler with Jefferies. Please go ahead..

Hi. Good morning, everyone..

Morning..

Wanted to see if you could speak to the - any losses that are ongoing related to the cylinders energy business and kind of the run rate that you are seeing there quarterly?.

Yeah, I mean, our oil and gas business is still losing money. So it is dragging down margins and earnings and in the Pressure Cylinders segment. I will say that we believe that that business has bottomed.

Our comments - Mark and Andy's comments that we're seeing some uptick in activity more in the gas play than in the oil play, I mean, this is not a rocket ship. So I don't want people to get overly enthusiastic that suddenly the oil and gas business is going to be back to where it was four years ago.

But capital budgets for the big exploration companies and other drillers for 2016 were virtually nil, in 20 - calendar 2017 they are starting to spend money, but they are doing it in a somewhat cautious manner and certain plays where I think the economics make sense.

So our goal is to get that business back to a minimum EBITDA neutral, as activities starts to pick up and then obviously get it back to profitability. We do believe in the long-term viability of that business, but you know right now we're seeing, I would just call it, modest improvement.

But it gives us hope that you know, the trend is in the right direction..

Okay. Thanks of that detail. And then in the rest of your cylinders business, and perhaps this is due to the drag in oil and gas. But profitability per unit was quite a bit lower than it had been on recent run rate.

Is this more due to consumer and industrial seeing incremental gains on volumes or is something else going on there?.

Martin, that – this is Mark. That per unit number is not meaningful for us at all. Its all mix related. We – our price range for the cylinders that we sell on a per unit basis ranges from under $2 to just shy of a $1 million per unit. So you cannot look at it on a per unit basis, that's misleading.

And I will tell you that we have not reduced prices for any cylinders that I know of..

Has pricing come up for any products when you look at it year-on-year?.

And in every case we have been able to maintain or increase..

Okay. Excellent. And I think that’s all the questions I have. Thank you very much..

Thank you. Next in queue is Charles Bradford with Bradford Research. Please go ahead..

Good morning..

Morning..

With all these talks from the steel industry about their success in the trade cases, it looks like March imports are going to be up pretty dramatic.

Do you have any theory as to what's happening?.

Charles, we don't, as you know, our imports are very limited. We only import what we just cannot buy here basically and it's very limited, very small and not material to our overall purchase. So we do not understand what's going on there and would look to you to explain that..

On a slightly different subject, what are you seeing now as far as pricing? There is been obvious pretty significant volatility in prices, what do you see for April or May?.

Same thing you do, we see cash prices right now about 660 and we see the forward price around 600 as you get to the rest of the year, that’s about what we're looking at, slight backwardation..

Thank you..

Thank you. [Operator Instructions] And next in queue is a follow up from Phil Gibbs with KeyBanc Capital Markets. Please go ahead..

Thanks very much.

I just was curious in terms of some of the commentary on Transformation 2.0 and a lot of runway for improvement for the next several quarters and years, particularly it sounds like in cylinders, anything that you could give us in terms of color there or your goals or targets or just help us frame it up a little butter other than the qualitative commentary or what the big buckets could be?.

I'll tell you that on a more specific basis, each time we look to transform something we're looking for significant non-incremental improvement. The kind of improvements we're after are significant percentage.

We want to dramatically increase the good stuff and dramatically decrease the bad stuff and we are able to do that at pretty consistently and what that translates to on the bottom line is the kind of improvements that you see for us quarter-to-quarter, but especially year-on-year.

That’s why our Chairman continually emphasizes the fact that we want to see year-on-year improvements, given an apples-to-apples comparison in terms of volume. And we're right now being able to do that, we deliver that pretty consistently and we're pretty confident we can do it going forward..

Should we be thinking about the most potential for improvement in that cylinder side, I would imagine?.

Yes, I mean, we believe there's improvement opportunities everywhere, whether its steel processing, which really transformed well in our first run at it, but they are seeing lots of opportunities the second time around with kind of a different approach.

You know, the gains there probably aren’t going to be as substantial, but they are still making some great strides there and I would say with pressure cylinders, you know, they did not succeed as well with the first transformation, partly because of all of the acquisition activity that we were doing.

And so I would say this time around we're really effectively trying to roll out not only the first playbook from Transformation 1.0, but also the lean tools from 2.0.

So I would say that with recovery and a couple of their softer end markets really give them the ability over the next couple of years to really drive you know, what I would think would be pretty substantial, not only just margin improvement, but you know some of the return on capital metrics that steel has achieved as well..

Yes, Phil, for a little bit more color on that, I would steer you towards our capital base in the steel company. The inventories there were running at are - at an all-time low in terms of days, whether you are looking back or forward, the day's inventory that we have on hand is lower than it's ever been.

And our delivery performance, our service levels to our customers it’s higher than it's ever been, and more consistent. So that’s the kind of benefits that you should be looking forward to across the business..

Okay. And then larger question on capital allocation. Your current priorities right now in terms of may be your top two or three and which ones are the strongest maybe in terms of buybacks or acquisitions or organic CapEx is one part.

And then the second part of that question is, do those capital allocation priorities at all change if there is a meaningful – call it a meaningful change in the tax code? Thanks..

Yes. The second question is probably easy, I am not sure our priorities would change much at all with a change in the tax code. If there were corporate tax reduction, we would benefit from that, that would be an increase in free cash flow for us. But I think the way we think about capital allocation is not changed much at all.

We want to find a nice steady dividend. We like increasing our dividend as the company's performance improves.

We do fund - and in fact, I was explaining to a group of our employees this morning, we fund our capital projects as we find good projects to fund, as it relates to whether new plants, new equipment, we fund those and we've been doing that the last five or six years and we will continue to do that.

And then to the balance, the other two categories that you mentioned, share buybacks, you know, we like our stock and we have continued to say this over the last five or six years, as we bought back a fair number of shares is, the transformation is really driving long-term sustainable improvements in our business.

And if you believe what happened in the first transformation, it’s going to happen with the second one, then there's lots of upside opportunity for the company. And so that's where we get into you know continuing to buy back our stock, even at higher levels than you know, people might – higher trading multiples than people otherwise might say.

And then, is it relates to M&A, we're – you know, we continue to believe that M&A is a good growth pillar for us. We haven't done anything lately and that's just a factor of having not found the right opportunity or getting it at the right price, but we continue to be active and have a pipeline of opportunities..

I think when we talk about transformation currently, its important to reemphasize that these are then driven exercises. And so while the improvement is not incremental and is dramatic weighted against the earnings of the company as we start and move forward, it’s smaller on impact.

But we're getting to the point and this is a point I am trying to make, that we have increased the number of teams that are deployed, at this point pretty dramatically. So instead of doing one of them at a time we can do 10.

So that's the kind of build that we've been looking for and we're starting to get there where we can be more effective across the company, weight against the earnings of the company. So it's really picking up steam, as Mark said, and excited about its future..

Thanks very much..

Thank you. Next question is a follow from John Tumazos. Please go ahead..

In terms of acquisition analysis, is the flow in any - more in any one of your particular existing lines of business or are you looking at new lines of business, we're just trying to guess where the assets are going to be two years from now?.

Yeah, I would say John that you know, we're pretty selective in steel looking for higher value added processing businesses and there are fewer of those out there. You know, we're actively looking, we have active conversations, but they are harder to come by.

In cylinders, there is probably just more raw opportunity globally, new products, new markets consolidating some of our existing businesses. That's where the lion share of the activity has been and likely to be where it will be going forward. Our focus is on our core businesses. Actually WAVE has done a couple of smaller acquisitions.

ClarkDietrich is done an acquisition. So focusing in our core and then we will selectively look outside. But if we do go outside of our core, they are likely to be smaller businesses where we buy them, get to know the business, the industry and really buy it with the intent to build it as we as we get comfortable..

Thank you..

Thank you. And we have time for one more question and that will be a follow up from Martin Engler. Please go ahead..

Hi. Thanks for taking the follow-up.

You had flagged a change in inventory holding from losses to likely gains for the current quarter here any guidance or I guess ballpark where that could come in out for the delta based on steel prices today?.

You know, I'd love to give you guidance, but it’s not an exact science to predict this Martin. So what I would tell you is we're pretty comfortable based on the current trend in steel prices, some of which is already happened and where we are in the quarter that’s going to be a gain in the next quarter.

But the magnitude of that is still to be determined. But you know, I would say at a minimum your moving to a place where there's a meaningful you know, reasonably meaningful gain from where we are today in the loss column..

Okay.

And was there or has there been any impact in the ClarkDietrich for inventory holding gains or losses more recently here?.

Was the question, do they have them or we including them?.

No, have you seen any, in the most recent quarter here ended?.

Yes, I mean, that business tends to follow what our steel company does. We don't calculate their FIFO gain or loss, because we're really just reporting an equity income number. But their pattern would follow what's happening in the steel company..

Okay. Excellent. Thank you for the detail..

Thank you. At this time, I'll turn the conference back over to our presenters for any closing comments..

Again, thank you all for joining us. The company is performing better than it ever has. I am very excited about our future. Have a great team of people and we are all driven to get better. Thank you. We'll talk to you next quarter..

Thank you very much. And ladies and gentlemen, that does conclude your conference call for today. We do thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect..