Q3 2024 Worthington Steel Inc Earnings Call

March 22, 2024

Operator: To the Worthington Steel's Q3 2024 earnings conference call. Today's conference is being recorded, and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during that time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one a second time. Thank you. I will now turn the conference over to Melissa Dykstra, Vice President of Corporate Communications and Investor Relations. You may begin.

Melissa Dykstra: Thank you, Operator. Good morning and welcome to Worthington Steel's Q3, fiscal 2024 earnings call. On our call today, we have Jeff Gilmore, Worthington Steel's President and Chief Executive Officer; Jeff Klingler, Executive Vice President and Chief Operating Officer; and Tim Adams, Vice President and Chief Financial Officer. Before we get started, I'd like to 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 those factors that could cause actual results to differ materially.

Melissa Dykstra: As noted as reported, today's discussion will reference non-GAAP financial measure, which adjusts for certain items included in our GAAP results and which are presented on a standalone basis. You can find definitions of each non-GAAP measure and GAAP to non-GAAP reconciliations within our earnings release. Today's call is being recorded, and a replay will be made available later today on worthingtonsteel.com. At this time, I will turn the call over to Jeff Gilmore.

As noted as reported, today's discussion will reference non-GAAP financial measure, which adjusts for certain items included in our GAAP results and which are presented on a standalone basis. You can find definitions of each non-GAAP measure and GAAP to non-GAAP reconciliations within our earnings release. Today's call is being recorded, and a replay will be made available later today on worthingtonsteel.com. At this time, I will turn the call over to Jeff Gilmore.

Jeff Gilmore: Thanks, Melissa. Good morning, everyone, and welcome. I'd like to start the call today by thanking our 4,600 Worthington Steel employees for the work they do every day to support our customers, shareholders, community, and each other. Their hard work and dedication led to a great Q3 for Worthington Steel. Over the quarter, I had the opportunity to visit several of our facilities, where I experienced our focus on safety and saw transformation in action. Transformation, our system of continuous improvement to increase margins, reduce working capital, and add capacity, is integral to our strategy. Our teams clearly recognize this and incorporate it daily into their work. I've talked with dozens of employees around the company. I am energized by the pride each of them takes in their work and their role in our company. We have a team that is focused and intent on creating value for our shareholders.

Geoff Gilmore: Thanks, Melissa. Good morning, everyone, and welcome. I'd like to start the call today by thanking our 4,600 Worthington Steel employees for the work they do every day to support our customers, shareholders, community, and each other. Their hard work and dedication led to a great Q3 for Worthington Steel. Over the quarter, I had the opportunity to visit several of our facilities, where I experienced our focus on safety and saw transformation in action. Transformation, our system of continuous improvement to increase margins, reduce working capital, and add capacity, is integral to our strategy. Our teams clearly recognize this and incorporate it daily into their work. I've talked with dozens of employees around the company. I am energized by the pride each of them takes in their work and their role in our company. We have a team that is focused and intent on creating value for our shareholders.

Jeff Gilmore: Together, we continue to help our customers ensure the products the world uses every day are stronger, better performing, and more durable. In our first quarter as a standalone company, our teams executed on our strategy and continue to make progress on our safety, quality, productivity, and sales goals. We are off to a great start, but we have much more to accomplish. I am confident in our team and our strategy and look forward to sharing updates in the future on how we perform. Now I'll turn it over to COO Jeff Klingler for a look at some of the highlights of the quarter.

Together, we continue to help our customers ensure the products the world uses every day are stronger, better performing, and more durable. In our first quarter as a standalone company, our teams executed on our strategy and continue to make progress on our safety, quality, productivity, and sales goals. We are off to a great start, but we have much more to accomplish. I am confident in our team and our strategy and look forward to sharing updates in the future on how we perform. Now I'll turn it over to COO Jeff Klingler for a look at some of the highlights of the quarter.

Jeff Klingler: Thanks, Jeff. I'd like to begin my remarks by thanking our employees for their continued commitment to safety. As Jeff said, we continue to see positive trends in our safety metrics supported by our SafeWorks program. We use data analytics, ergonomic measurement tools, best practice sharing, and daily involvement from our entire team to continuously improve our performance. The same kind of commitment and focus on metrics helps us improve our quality as well, ensuring our customers receive the best possible product and service with every interaction. An example of that, in January, Tempel received the Zero PPM Award from MAHLE Electric Drives India, recognizing our commitment to manufacturing excellence and quality assurance. Tempel provides electrical steel laminations to MAHLE for use in the electrical motors they supply to Ather Energy's EV two-wheelers. Congratulations to our Tempel team for this achievement.

Jeff Klingler: Our integration at Nagold, Germany, is going well, and we're making great progress in many areas. Along those lines, we are already seeing commitments from our customers for when our recently announced expansions in Canada and Mexico come online. We kicked off a multi-year ERP implementation at Tempel, moving to a solution that's consistent across all divisions. Similar to what we've seen with the rest of our business, we believe this move will help us reduce risk, improve processes, and better drive decision-making with more real-time, effective operational and financial data. This is another example of our long-term commitment to transformation. On the technology front, TWB has signed a licensing agreement with ArcelorMittal Tailored Blanks for the use of its patented ablation technology in the production of hot form tailored blanks.

Our integration at Nagold, Germany, is going well, and we're making great progress in many areas. Along those lines, we are already seeing commitments from our customers for when our recently announced expansions in Canada and Mexico come online. We kicked off a multi-year ERP implementation at Tempel, moving to a solution that's consistent across all divisions. Similar to what we've seen with the rest of our business, we believe this move will help us reduce risk, improve processes, and better drive decision-making with more real-time, effective operational and financial data. This is another example of our long-term commitment to transformation. On the technology front, TWB has signed a licensing agreement with ArcelorMittal Tailored Blanks for the use of its patented ablation technology in the production of hot form tailored blanks.

Jeff Klingler: We will install a fully automated ablation line at the TWB facility in Monroe, Michigan, making Worthington Steel one of the only two companies in North America to offer this technology to our customers. Congratulations to all our teams on these impressive achievements. Now I'll turn it over to Tim Adams.

We will install a fully automated ablation line at the TWB facility in Monroe, Michigan, making Worthington Steel one of the only two companies in North America to offer this technology to our customers. Congratulations to all our teams on these impressive achievements. Now I'll turn it over to Tim Adams.

Tim Adams: Thanks, Jeff, and good morning, everyone. I would also like to thank our employees for staying focused on safety as well as serving our customers during the Q3, our first as an independent public company. As a reminder, with this being our Q1 reporting results as a standalone company, our consolidated results for the Q3 are compared with the prior year data, which were prepared on a carve-out basis. For our Q3, we reported net earnings of $49 million, or $0.98 per share, as compared with $5.4 million, or $0.11 per share in the prior year quarter. Our Q3 results included pre-tax separation expenses of $1 million, or $0.01 per share, as compared with $4 million, or $0.06 per share in the prior year quarter. I expect this will be the last quarter we recognize expense associated with the separation.

Tim Adams: Excluding these items, we generated earnings of $0.99 per share in the Q3 compared to $0.17 per share in the prior year quarter. In addition, in the Q3, we had estimated pre-tax inventory holding gains of $19.3 million, or $0.29 per share, compared to estimated pre-tax inventory holding losses of $26.6 million, or $0.40 per share in the prior year quarter, a favorable pre-tax swing of $45.9 million, or $0.69 per share. In the Q3, we reported adjusted EBIT of $66.9 million, which was up $56.2 million from the prior year quarter of $10.7 million. This increase is primarily due to higher gross margin, which benefited from increased material spreads, including the impact of estimated pre-tax inventory holding gains. Our SG&A was up $3.1 million from the prior year, primarily due to incremental costs associated with being a standalone company.

Excluding these items, we generated earnings of $0.99 per share in the Q3 compared to $0.17 per share in the prior year quarter. In addition, in the Q3, we had estimated pre-tax inventory holding gains of $19.3 million, or $0.29 per share, compared to estimated pre-tax inventory holding losses of $26.6 million, or $0.40 per share in the prior year quarter, a favorable pre-tax swing of $45.9 million, or $0.69 per share. In the Q3, we reported adjusted EBIT of $66.9 million, which was up $56.2 million from the prior year quarter of $10.7 million. This increase is primarily due to higher gross margin, which benefited from increased material spreads, including the impact of estimated pre-tax inventory holding gains. Our SG&A was up $3.1 million from the prior year, primarily due to incremental costs associated with being a standalone company.

Tim Adams: Next, I'll provide some content on the market and our shipments. Similar to what we experienced over recent history, steel market pricing was volatile over the quarter. Steel prices increased from $700 per ton in October to $1,100 per ton in January, then decreased sharply throughout March. The current price for hot rolled steel is approximately $750 per ton. We expect estimated inventory holding gains in the Q3 will flip to inventory holding losses in the Q4, and we estimate those losses could be approximately $5 to $10 million on a pre-tax basis. Net sales in the Q3 were $806 million, up 3% from the prior year quarter, primarily due to slightly higher direct pricing combined with increased volumes in both direct and toll. We shipped 986,000 tons during the Q4, which was up 4% compared with the prior year quarter.

Next, I'll provide some content on the market and our shipments. Similar to what we experienced over recent history, steel market pricing was volatile over the quarter. Steel prices increased from $700 per ton in October to $1,100 per ton in January, then decreased sharply throughout March. The current price for hot rolled steel is approximately $750 per ton. We expect estimated inventory holding gains in the Q3 will flip to inventory holding losses in the Q4, and we estimate those losses could be approximately $5 to $10 million on a pre-tax basis. Net sales in the Q3 were $806 million, up 3% from the prior year quarter, primarily due to slightly higher direct pricing combined with increased volumes in both direct and toll. We shipped 986,000 tons during the Q4, which was up 4% compared with the prior year quarter.

Tim Adams: Direct sales tons were up 1% over the prior year quarter. Volumes were up in construction and energy, primarily due to spot orders and continued ramp-up of certain business. Direct sale volume to the automotive market was down 4% compared to the prior year quarter. The decrease was primarily due to several programs reaching their end of life, combined with the replacement platforms experiencing launch delays. Our automotive book of business continues to be healthy. Our technical and commercial teams work closely with our customers to help them overcome challenges and provide solutions that meet their needs, resulting in increased collaboration and a strong partnership. We expect to continue growing our leadership position within the automotive industry. Toll tons were up 9% year over year, primarily due to increased tolling with the mills, as well as several new automotive programs.

Direct sales tons were up 1% over the prior year quarter. Volumes were up in construction and energy, primarily due to spot orders and continued ramp-up of certain business. Direct sale volume to the automotive market was down 4% compared to the prior year quarter. The decrease was primarily due to several programs reaching their end of life, combined with the replacement platforms experiencing launch delays. Our automotive book of business continues to be healthy. Our technical and commercial teams work closely with our customers to help them overcome challenges and provide solutions that meet their needs, resulting in increased collaboration and a strong partnership. We expect to continue growing our leadership position within the automotive industry. Toll tons were up 9% year over year, primarily due to increased tolling with the mills, as well as several new automotive programs.

Tim Adams: Direct sale tons made up 55% of our mix in the Q3 compared with 56% in the prior year quarter. Turning to cash flows and the balance sheet, cash flow from operations was $44.7 million, and free cash flow was $22.3 million. During the Q3, we spent $22.4 million on capital expenditures related to a variety of projects, including the previously announced electrical steel expansions in Mexico and Canada. On a trailing 12-month basis, we have generated $175 million of free cash flow. Thursday, we announced a quarterly dividend of $0.16 per share, payable on 28 June 2024. In regard to our balance sheet, operating working capital increased $41.5 million during the Q3, as receivables and inventory increased as a result of higher steel prices, partially offset by an increase in accounts payable.

Direct sale tons made up 55% of our mix in the Q3 compared with 56% in the prior year quarter. Turning to cash flows and the balance sheet, cash flow from operations was $44.7 million, and free cash flow was $22.3 million. During the Q3, we spent $22.4 million on capital expenditures related to a variety of projects, including the previously announced electrical steel expansions in Mexico and Canada. On a trailing 12-month basis, we have generated $175 million of free cash flow. Thursday, we announced a quarterly dividend of $0.16 per share, payable on 28 June 2024. In regard to our balance sheet, operating working capital increased $41.5 million during the Q3, as receivables and inventory increased as a result of higher steel prices, partially offset by an increase in accounts payable.

Tim Adams: We ended the quarter with $60.8 million of cash, which is down from the Q2 due to the $150 million dividend we paid to our former parent in connection with the separation. Our ABL debt at February 29 was $147 million, down $28 million from the Q2. In summary, Worthington Steel had an excellent Q3, and all our teams performed well. Everyone at Worthington Steel continues to be focused on driving stakeholder value on both a near-term and long-term basis. I'm proud of our teams for their dedication and for their continued commitment to safety. At this point, we would be happy to take your questions.

We ended the quarter with $60.8 million of cash, which is down from the Q2 due to the $150 million dividend we paid to our former parent in connection with the separation. Our ABL debt at February 29 was $147 million, down $28 million from the Q2. In summary, Worthington Steel had an excellent Q3, and all our teams performed well. Everyone at Worthington Steel continues to be focused on driving stakeholder value on both a near-term and long-term basis. I'm proud of our teams for their dedication and for their continued commitment to safety. At this point, we would be happy to take your questions.

Operator: Thank you. As a reminder, if you would like to ask a question, press star and then the number one on your telephone keypad, and we will pause for just a moment to compile the Q&A roster. We will take our first question from Phil Gibbs with KeyBanc Capital Markets. Your line is open.

Phil Gibbs: Hey, good morning.

Jeff Klingler: Morning, Phil.

Tim Adams: Morning, Phil.

Phil Gibbs: What's the typical volume seasonality for the May quarter? I know it's usually your strongest from a volume perspective, given the timing of your customer buying patterns.

Jeff Klingler: Yeah, I think you kind of answered your own question. You're right. It tends to be higher. It's usually our strongest quarter from a volume perspective. Q3 tends to be on the lower side because you've got automotive shutdowns in December, and Q4 tends to be on the higher side.

Tim Adams: Yeah, I think you kind of answered your own question. You're right. It tends to be higher. It's usually our strongest quarter from a volume perspective. Q3 tends to be on the lower side because you've got automotive shutdowns in December, and Q4 tends to be on the higher side.

Phil Gibbs: More so, just curious on the historical magnitude, is it ± high single digits, low double digits in terms of what you expect from a volume pickup?

Jeff Klingler: I would say it's low single digits. It's not huge.

Tim Adams: I would say it's low single digits. It's not huge.

Phil Gibbs: Okay. And then from the spin, does your commentary effectively point to the fact that we should use Q3 as a good baseline for the adjustments in your go-forward cost structure?

Jeff Klingler: Yeah, I think what you see in there is SG&A is probably a little light. Q3 tends to be a little light because you've got that December month in there. So travel's down. You have vacations in there. So Q3, from an SG&A perspective, is usually down a little bit. Plus, we had some things that hadn't quite ramped up fully from an SG&A standpoint. So if you look at a go-forward basis, probably on a little bit higher than what it was in Q3.

Tim Adams: Yeah, I think what you see in there is SG&A is probably a little light. Q3 tends to be a little light because you've got that December month in there. So travel's down. You have vacations in there. So Q3, from an SG&A perspective, is usually down a little bit. Plus, we had some things that hadn't quite ramped up fully from an SG&A standpoint. So if you look at a go-forward basis, probably on a little bit higher than what it was in Q3.

Phil Gibbs: As we think about net working capital in the Q4, is that expected to be a use or source of cash? Just update us on the CapEx outlook maybe for the Q4 and next year.

Jeff Klingler: Yeah, typically what happens when you have inventory holding gains, you're going to build working capital, and when you have inventory holding losses, you're going to release. So we would expect to release some working capital in Q4.

Tim Adams: Yeah, typically what happens when you have inventory holding gains, you're going to build working capital, and when you have inventory holding losses, you're going to release. So we would expect to release some working capital in Q4.

Phil Gibbs: And then on the CapEx side for the Q4 and then maybe for 2025, as we think about some of these growth projects that you're working on and lamination?

Jeff Klingler: Yeah, so what we've been signaling is $100 million for 2024, 2025, and 2026. We've run about $60 million to date in 2024. Depending on how the projects come in in Q4, I think we're actually going to get pretty close to that $100 million number. We've got some additional CapEx. We've got the ablation project that we announced last week. We've got an ERP project that we're doing at Tempel. It's probably going to add another $10 million to the $100 million estimate we had in 2025, as well as another $10 million to the $100 million estimate we had for 2026.

Tim Adams: Yeah, so what we've been signaling is $100 million for 2024, 2025, and 2026. We've run about $60 million to date in 2024. Depending on how the projects come in in Q4, I think we're actually going to get pretty close to that $100 million number. We've got some additional CapEx. We've got the ablation project that we announced last week. We've got an ERP project that we're doing at Tempel. It's probably going to add another $10 million to the $100 million estimate we had in 2025, as well as another $10 million to the $100 million estimate we had for 2026.

Phil Gibbs: That's really helpful. And then on the ablation business win and the operational piece in Monroe, what could it mean for you all in terms of the investment and timing? It sounds like it's spliced a bit into this $20 million pickup and CapEx along with the ERP over the next two years following this one. But what does it mean for you financially, and how big of a differentiator is it? Just trying to figure out what this possibly means from a mix or a profitability standpoint as you guys put it in play.

Jeff Klingler: Sure. Good morning, Phil. This is Jeff Klingler. We're obviously very excited about this project. We are only one of two companies now that are able to offer this product in North America. We do believe that this market opens up new products and new opportunities by about 30% to our existing welded blank market. So again, very excited about this technology and this project. It's going to take, from a timing standpoint, by the time you install the equipment and win an award, it's a typical automotive-type award cycle that takes about 24 months to get to full production. So it's a little bit out there, but we're pretty excited about all the activity that's happening right now and pretty confident we'll fill that line. And in years three and four, we expect to feel the full benefit.

Phil Gibbs: Thank you.

Operator: And as a reminder, it is star one if you would like to ask a question. We will take our next question from John Tumazos with John Tumazos Very Independent Research. Your line is open.

John Tumazos: Thank you very much for taking my question, and thank you for your good efforts for the company. Just for explanation, could you explain what is ablation and what ERP stands for?

Jeff Klingler: Good morning, John. Jeff Klingler again. I'll take those very quickly. I'm not going to fully explain ablation, but I will tell you it is a patented process that uses lasers to remove the silicon coating prior to welding the press-hardened steels so that the weld remains intact.

John Tumazos: That's for electrical steel.

Jeff Klingler: No, no. That is for Tailored Welded Blanks for press-hardened steel for automotive parts. ERP simply stands for Enterprise Resource Planning System. So it's our computer system.

John Tumazos: How big of a hit is a computer system?

Jeff Klingler: I think in total, those two projects, I'm just going to lump them both together. They're probably $15 to 20 million in total. I don't have the breakout for each, but we were using, when I was given the CapEx numbers going forward, John, that's basically adding $10 million to the next two years to cover both those projects.

John Tumazos: Is ablation part of what you're licensing from ArcelorMittal, or is it a separate item?

Jeff Klingler: It is exactly what we are licensing from. It's their process. We are licensing the ablation process, the patented process for the removal of the aluminum-silicon coating.

John Tumazos: You made reference to four good projects, hopefully to add revenue and profits: Germany, expansions in Canada and Mexico, and TWB license for ablation, if I'm saying it correctly.

Jeff Klingler: Yes.

John Tumazos: Really roughly, in terms of a range, how much are the revenue impacts of these items? We, as listeners, might not comprehend whether they're $10 million in annual sales, or $50 million in annual sales, or $100 million. I'd love to get excited and think that they're going to double the company, but I probably need a cold shower.

Jeff Klingler: No, I understand. It's a good question. I think at the end of the day, as we ramp these things up, so it's going to take a few years to ramp all of them up. It's going to be more than $100 million a year in revenue for us once they're fully ramped up.

John Tumazos: In terms of each one individually, so we can get an idea of what are the bucks and goals versus the big ones.

Jeff Klingler: Yeah, I'm talking about in terms of overall. I would say that the Tempel projects are the two big ones. The ablation is going to be a little bit smaller. We're going to start small there and ramp up. I mean, the ablation line is going to be under $10 million, whereas you've got those other two projects in Canada and Mexico, are $80 million plus each. So right now, we're comfortable saying more than $100 million a year when they're fully ramped up.

John Tumazos: So the Tempel projects are Canada and Mexico. In Germany, how much is the revenue impact of that expansion?

Jeff Klingler: That's relatively small. That's probably around, do you have that number? 40 million per year. And then what we're going to do with that Nagold facility in Germany is we're also going to put growth plans in place there as well. We don't have those plans done yet, but we didn't buy it just to buy it for what it was. It was also to grow our presence in Europe in electrical steel. I would just add that the customer activity and excitement around our acquisition in Germany has exceeded our expectations after just only a few months. So we're pretty optimistic we're going to do some good things there.

John Tumazos: They're very green there. They love everything. It's fine.

Jeff Klingler: They certainly are.

John Tumazos: Better. They got rid of nuclear and coal faster than anybody and jumped right into Putin's arms. In terms of the specific machinery, could you just give us a flavor of what kind of machines you're putting in place in Germany, Canada, and Mexico to better understand the nuts and bolts?

Jeff Klingler: Yeah, why don't you answer that? Sure. I'll start with Germany. Germany will be lamination presses to stamp electrical steel laminations for traction motors for hybrids and battery electric vehicles. In Mexico, it is more of that same. And then, of course, all the automation equipment that comes along with that, as we're making rotors and stator stacks that require some downstream equipment. But the primary addition in Mexico will be EV presses. These are very high-end, very technical, very specific pieces of equipment. And then in Canada, it's a little more of a range. We've got furnaces. We've got a slitter that is specifically designed for grain-oriented steel to process grain-oriented steel, but slitter furnaces, tranco machines, things that support the production of distributed gap cores, and wide miter cut lines for large miter transformer cores as well.

Jeff Klingler: Yeah, why don't you answer that?

Geoff Gilmore: Sure. I'll start with Germany. Germany will be lamination presses to stamp electrical steel laminations for traction motors for hybrids and battery electric vehicles. In Mexico, it is more of that same. And then, of course, all the automation equipment that comes along with that, as we're making rotors and stator stacks that require some downstream equipment. But the primary addition in Mexico will be EV presses. These are very high-end, very technical, very specific pieces of equipment. And then in Canada, it's a little more of a range. We've got furnaces. We've got a slitter that is specifically designed for grain-oriented steel to process grain-oriented steel, but slitter furnaces, tranco machines, things that support the production of distributed gap cores, and wide miter cut lines for large miter transformer cores as well.

Jeff Klingler: And John, I just want to add, and you're probably already familiar with this. This is machinery and equipment we're already very familiar with. It is part of our core competency, and we are making these expansions just due to increased demand. So we have the know-how.

John Tumazos: Worthington's come a long way from 1955 in buying a slitter machine. Which of the 10 or more processes that Worthington does are most competitive, and which of them are highest value-added, better profits?

Jeff Klingler: Well, in terms of, first of all, I'm glad you recognize we truly are a niche value-add producer. So if we're looking at what's most value-add, I think definitely Tempel and electrical steel laminations, certainly very high value-add, a lot of engineering expertise needed to implement that equipment and run it, hence higher margins. I think Tailored Welded Blanks and lightweighting solutions, that's also a very unique niche-type high-value-add market, very similar to Tempel. Again, hence the higher margins. And then certainly, John, there's galvanizing that you're familiar with. Ours is a bit different, and it's hot-rolled substrate. That's a differentiator. Cold-rolled strip is also very high value-add. And why these are all niche-type markets that we play in and a big part of our strategy. And then, of course, you're very familiar with our pickling operations and slitting operations.

Jeff Klingler: And obviously, those would be markets that would be a bit more competitive. But what we're proud of, your comment on 1955 is we really think we have a great story on innovation. And it's often not recognized, but we've continued to march up the value-add chain over the years, and it's why the company has performed so strongly and why we will well into the future.

And obviously, those would be markets that would be a bit more competitive. But what we're proud of, your comment on 1955 is we really think we have a great story on innovation. And it's often not recognized, but we've continued to march up the value-add chain over the years, and it's why the company has performed so strongly and why we will well into the future.

John Tumazos: I could understand a mill or an auto company with a very large volume tolling utilizing a particular process like a pickler where they might have a bottleneck or need. For something like galvanizing, why would your customers or end customers buy from Worthington rather than buying from Nucor, Steel Dynamics, Cliffs, US Steel, or there's a few small independent galvanizers? I guess you're going right to HVAC companies and other galvanized users for those sales.

Jeff Klingler: So why would they buy from us specifically? Of course, we're going to be cost competitive with the mills, but why would they buy specifically from us? I'm going to tell you what we hear from the customers. And what we would hear from the customers, it's our service. We're very responsive. We're able to be probably a bit more flexible with scheduling and help. Clearly, we have premier quality, or we wouldn't continue to see the orders. But I really do think it's our speed, it's our service, and it's our flexibility. And John, I'm just telling you what I hear from the customers.

John Tumazos: Forgive me if I'm asking too many questions and there's 30 people after me in the queue. I don't want to hog the meeting. But your galvanized customers tend to be in a relatively close radius to your facility, and maybe those big mills would have national customers scattered all over the place. That would better lend itself to service and relationships with their neighbors.

Jeff Klingler: The answer to that is really no. We do tend to sell locally, of course. That makes a lot of sense. But more specifically with our galvanized products, we do ship that product all over the country.

John Tumazos: I should stop and give other people a chance. Thank you very much.

Jeff Klingler: Thank you, John. John, thanks for your support.

Operator: We will take our next question from Martin Englert with Seaport Research Partners. Your line is open.

Martin Englert: Hello. Good morning, everyone.

Jeff Klingler: Hey, Martin.

Martin Englert: A couple of questions on the expansions for electrical steel laminations in Canada and Mexico. If you could just provide an update on any pending equipment deliveries, and whether those are on time, and how the environment is for staffing up headcount once you start to ramp things in the respective locations?

Jeff Klingler: Sure. Good morning. This is Jeff Klingler. I'll be happy to take that. Just maybe from an overall quick general update, in Mexico, that project is on time and on budget. To date, we've spent about $17 million. The building expansion really should be complete here by late spring, early summer. We'll be installing the first presses here in just the next couple of months. We've seen, and this is really true around all of our expansions, we've seen very positive staffing, ability to staff up, and a lot of excitement around these projects internally. So that's a lot. We don't see any problems there. In Canada, this expansion, similar thing, on time, on budget, maybe a little bit delayed due to some land, but we think we're going to be able to catch up. We're talking a month or two.

Jeff Klingler: And then, to date, we've spent about $5 million, but the spending is going to start to ramp up here through the next few quarters. We're not going to see production at that facility till towards the end of next calendar year. But again, there's an awful lot of excitement about the project internally and in the community. So we don't foresee any problems at this point with being able to staff up appropriately.

And then, to date, we've spent about $5 million, but the spending is going to start to ramp up here through the next few quarters. We're not going to see production at that facility till towards the end of next calendar year. But again, there's an awful lot of excitement about the project internally and in the community. So we don't foresee any problems at this point with being able to staff up appropriately.

Martin Englert: Of the remainder of the Cap, sorry, was there more to add there?

Jeff Klingler: No, go ahead, Martin. You're fine.

Martin Englert: Okay. Sorry about that. Of the remainder of the CapEx spend for the respective projects, how much of that is fixed pricing versus is there any component that, whether it would be incremental equipment buys, all within the scope of what's planned that might still have some variability or inflation risk to the price?

Jeff Klingler: This is Tim, Martin. I think most everything is locked in terms of price, right? We negotiated the price, and we lock those things in. So I don't think there's much variability there.

Martin Englert: Okay. Any comments or updates on the backlog for transformers in Canada and how that's looking?

Jeff Klingler: Martin, Jeff Gilmore, it continues to be two years or greater backlog for transformers. So we're still quite bullish on that market. Again, you've heard me say it's a market we feel will grow much faster than GDP out the next 7 to 10 years and a big driver of why we're making that expansion in Canada. So nothing is slowing down on that front.

Martin Englert: Okay. Anything when you think about the pure EVs or the hybrids as far as what you're seeing with activity and demand, just reviewing some of the headlines in recent history, seems like there's a little bit of a pause, but I know you have a diverse mix on legacy platforms as well as hybrid maybe, but still curious what you're seeing?

Jeff Klingler: Yeah. Great question. And you're spot on. I mean, there's a lot of headlines, and certainly these things get a bit politicized, especially in an election year. But we still are bullish that the market is going to move away from ICE to hybrid and BEVs. And Martin, you hit the nail on the head. There's just not a lot of talk about how much momentum hybrids are getting. We didn't enter this business thinking there was going to be a straight line growth curve from ICE to BEV. We figured there'd be a growth slope. It was going to be bumpy at times because it's a significant innovation. It's a supply chain that needs to be built out. But that's going to happen, and costs will come down.

Jeff Klingler: But there is a lot more tension, and a lot of automotive companies that are feeling that hybrid needs to be a bigger piece of that portfolio. And more importantly, if it's internal combustion engine, we produce cold-rolled strip. It's great. If it's hybrid, you need cold-rolled strip for clutch plates. You need electrical steel lamination for electrification. If it's BEV, you need electrical steel laminations. My point in sharing that is I don't know that there's anybody else globally that's better positioned to take advantage of that.

But there is a lot more tension, and a lot of automotive companies that are feeling that hybrid needs to be a bigger piece of that portfolio. And more importantly, if it's internal combustion engine, we produce cold-rolled strip. It's great. If it's hybrid, you need cold-rolled strip for clutch plates. You need electrical steel lamination for electrification. If it's BEV, you need electrical steel laminations. My point in sharing that is I don't know that there's anybody else globally that's better positioned to take advantage of that.

Martin Englert: When you're looking at a hybrid vehicle versus battery EV, how does the electrical steel intensity change from a typical platform? Is it some multiple one versus the other, or is it not markedly different?

Jeff Klingler: Martin, this is Jeff Klingler. That's a tough one to answer. It does get marginally more electrical steel intensive as you go to a full electric vehicle. But we have some data. It definitely varies by program, and it's going to evolve. But any number of traction motors is a good thing for us in the transition.

Martin Englert: Okay. All right. Appreciate the color. Thank you very much.

Jeff Klingler: Thank you, Martin.

Operator: We will take follow-up questions from Phil Gibbs with KeyBanc Capital Markets. Your line is open.

Phil Gibbs: Thanks very much. For the payments to the parent company done following this quarter, is there any residual moving ahead?

Jeff Klingler: We paid the $150 million dividend on 1 December. There's nothing else that we had to do. I mean, we've got some TSAs and some long-term agreements, right? We share a campus, and we've got some of those types of things. But if you're talking about the dividend specifically, that is done. It's paid, and we moved on.

Martin Englert: Following the payments and the quarter, can you just remind us what your current liquidity is?

Jeff Klingler: Yeah. We've got ample liquidity. I think you noted it in your note. Our leverage is pretty low, and we've got ample liquidity to pursue any of these growth projects from the ABL we put in place.

Martin Englert: What's the size of the ABL? Can you just remind us of that?

Jeff Klingler: $550 million ABL.

Martin Englert: What's the rate on that right now, just given all the volatility and interest rates?

Jeff Klingler: Just under 7%. It's a SOFR Plus type arrangement.

Martin Englert: And the last one for me is just kind of a broad question. I know you're just getting your sea legs as a standalone company, but given the historical consistency of free cash flow and operating cash flow, is there any thoughts over the midterm to put in a buyback or remain active in the M&A channel, or are both under consideration?

Jeff Klingler: Buybacks, we talked a little bit about during investor day. It's going to be a way that we return capital to shareholders along with dividends. We have not put anything formal in place. We are still discussing that. So at some point, we would expect to have a buyback program in place. We are continuing to look at M&A opportunities. We haven't really stopped. We've got these big growth CapEx projects. But as we talked about, I mean, we're pretty selective in who we want to buy, right? We're looking for high-value-added companies that we can bolt on and complement what we have or enter new niches. So we're not out of M&A.

Jeff Klingler: We've just paused a little bit to get through the spin, and we'll crank that effort up and continue to look for companies that match us from a culture standpoint and match us from a high-value-add standpoint.

We've just paused a little bit to get through the spin, and we'll crank that effort up and continue to look for companies that match us from a culture standpoint and match us from a high-value-add standpoint.

Martin Englert: I did actually have one more. You'd mentioned in your release that the tolling pricing was up quite nicely year over year. Is that a good baseline to use moving forward, or is that just a mix and timing thing?

Jeff Klingler: It's a mixed thing. I mean, and you got to think about this in two ways. So if you do a straight high-value-added process like galvanizing, it's going to command a higher price per ton than, say, a slit. But then we report ship tons for tolling. So if you do multiple processes to a coil of steel, so you pickle, you galvanize, then you slit it, that's going to show up as a high invoice or a high-priced item, right? So it really is a mixed situation for us.

Martin Englert: Thank you.

Jeff Klingler: And so I want to circle back on your question about Q4 and automotive. Our automotive or our volume typically is up in the high single digits. I said low single digits. It's probably closer to high single digits.

Martin Englert: Thank you for the clarification. Appreciate it.

Jeff Klingler: You bet.

Operator: Ladies and gentlemen, that is all of the time we have for questions today. I will now turn the call back to Mr. Jeff Gilmore for closing remarks.

Jeff Klingler: Thank you, everybody. Appreciate the participation and the interest in Worthington Steel. Again, very proud of our employees, excited about the progress this quarter, and even more excited about what's to come. We'll look forward to our next call and sharing our progress on our strategy. Have a great weekend, everybody. Thank you.

Operator: Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.

<unk> 24 earnings conference call.

Today's conference is being recorded in all lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time simply press. The star key followed by the number one on your telephone keypad.

If you would like to withdraw your question Press Star one a second time.

Speaker Change: Thank you and I will now turn the conference over to Melissa Dykstra, Vice President of corporate Communications and Investor Relations you may begin.

Melissa Dykstra: Thank you operator, good morning, and welcome to Worthington Steel third quarter fiscal 2024 earnings call on our call today, we have Jeff Gilmore Worthington field, President and Chief Executive Officer, Jeff <unk> Executive Vice President and Chief Operating Officer, and Tim Adams, Vice President and Chief Financial Officer.

Melissa Dykstra: Before we get started I would like to remind everyone that certain statements made today are forward looking within the meaning of the $19 95 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 close please refer.

Melissa Dykstra: To it for more detail on those factors that could cause actual results to differ materially.

Unless noted as reported today's discussion will reference non-GAAP financial measure, which adjust for certain items.

Melissa Dykstra: <unk> in our GAAP results, and which are presented on a standalone basis.

Melissa Dykstra: You can find definitions of each non-GAAP measure and GAAP to non-GAAP reconciliations within our earnings release.

Speaker Change: Today's call is being recorded and a replay will be made available later today on Worthington steel dot com at this time I will turn the call over to Jeff Gilmore. Thanks, Melissa Good morning, everyone and welcome I'd like to start the call today by thanking our 4600 Worthington steel employees for the work they do every.

Jeff Gilmore: Day to support our customers shareholders community and each other their hard work and dedication led to a great third quarter for Worthington steel.

Jeff Gilmore: Over the quarter I had the opportunity to visit several of our facilities were experienced our focus on safety and solid transformation in action transformation, our system of continuous improvement to increase margins and reduce working capital and add capacity is integral to our strategy. Our teams clearly recognize this.

Jeff Gilmore: And incorporated daily into their work.

Jeff Gilmore: I've talked with dozens of employees around the company I am energized by the prior to each of them takes and the work and their role in our company. We have a team that is focused and intent on creating value for our shareholders. Together, we continue to help our customers ensure the product stool uses every day are stronger better performing and more durable.

Jeff Gilmore: And our first quarter as a Standalone company our teams executed on our strategy and continue to make progress on our safety quality productivity and sales goals. We are off to a great start, but we have much more to accomplish I am confident in our team and our strategy and look forward to sharing updates in the future on how we.

Speaker Change: Perform now I will turn it over to Cielo, Jeff Klingler for look at some of the highlights of the quarter.

Speaker Change: Thanks, Jeff I'd like to begin my remarks by thanking our employees for their continued commitment to safety as Jeff said, we continue to see positive trends in our safety metrics supported by our Safe works program.

Speaker Change: We use data analytics ergonomic measurement tools best practice sharing and daily involvement from our entire team to continuously improve our performance.

The same kind of commitment and focus on metrics helps us improve our quality as well.

Speaker Change: Ensuring our customers receive the best possible product and service with every interaction.

Speaker Change: An example of that in January temporal received the zero Ppm Award for Maui Electric drives India.

Speaker Change: Recognizing our commitment to manufacturing excellence in quality assurance tempo provides electrical steel laminations to Molly for use in the electrical motors they supply to Eythor energies EV two wheelers, congratulations to our temple team for this achievement or.

Speaker Change: Our integration of <unk>, Germany is going well and we're making great progress in many areas along those lines. We are already seeing commitments from our customers for when our recently announced expansions in Canada and Mexico come online.

Speaker Change: We kicked off a multiyear ERP implementation at temple moving to a solution that is consistent across all divisions.

Speaker Change: To what we've seen with the rest of our business. We believe this move will help us reduce risk improve processes and better drive decision, making with more real time effective operational and financial data.

Speaker Change: This is another example of our long term commitment to transformation.

Speaker Change: On the technology front TWD has signed a licensing agreement with Arcelor Mittal tailored blanks for the use of its patented ablation technology and the production of hot form tailored blanks.

We will install a fully automated abortion line at the TWD facility in Monroe, Michigan, making Worthington steel one of the only two companies in North America to offer this technology to our customers.

Speaker Change: <unk> to all our teams on these impressive achievements now I'll turn it over to Tim Adams.

Tim Adams: Jeff and good morning, everyone. I would also like to thank our employees for staying focused on safety as well as serving our customers during the third quarter. Our first as an independent public company as a reminder, with this being our first quarter reporting results as a Standalone company. Our consolidated results for the third quarter are compared with the prior year.

Tim Adams: Data, which were prepared on a carve out basis for our third quarter, we reported net earnings of $49 million or <unk> 98 per share as compared with $5 4 million or <unk> 11 per share in the prior year quarter.

Tim Adams: Our third quarter results included pre tax separation expenses of $1 million or <unk> <unk> per share as compared with $4 million or <unk> <unk> per share in the prior year quarter.

I expect this will be the last quarter, we recognized an expense associated with the separation.

Tim Adams: Excluding these items, we generated earnings of 99 per share in the third quarter compared to <unk> 17 per share in the prior year quarter.

Tim Adams: In addition in the third quarter, we had estimated pre tax inventory holding gains of $19 3 million or <unk> 29 per share compared to estimated pre tax inventory holding losses of $26 6 million or <unk> 40 per share in the prior year quarter.

Tim Adams: Favorable pretax swing of $45 9 million or 69 per share.

In the third quarter, we reported adjusted EBIT of $66 9 million, which was up $56 2 million from the prior year quarter of $10 $7 million.

Tim Adams: This increase is primarily due to higher gross margin, which benefited from increased materials spreads, including the impact of estimated pre tax inventory holding gains.

Tim Adams: Our SG&A was up $3 1 million from the prior year, primarily due to incremental costs associated with being a standalone company <unk>.

Tim Adams: Next I'll provide some content on the market and our shipments.

Speaker Change: Similar to what we experienced over recent history steel market pricing was volatile over the quarter Steve.

Steel prices increased from $700 per ton in October to $1100 per ton in January then decreased sharply throughout March.

Speaker Change: The current price for hot rolled steel is approximately $750 per ton we.

Speaker Change: We expect estimated inventory holding gains in the third quarter will flip to inventory holding losses in the fourth quarter and we estimate those losses could be approximately $5 million to $10 million on a pretax basis.

Speaker Change: Net sales in the third quarter were $806 million up 3% from the prior year quarter, primarily due to slightly higher direct pricing combined with increased volumes in both direct and toll.

Speaker Change: We shipped 986000 tonnes during the third quarter, which was up 4% compared with the prior year quarter.

Speaker Change: Sales tons were up 1% over the prior year quarter volumes were up in construction and energy primarily due to spot orders and continued ramp up of certain business.

Speaker Change: Direct sale volume to the automotive market was down 4% compared to the prior year quarter.

Speaker Change: The decrease was primarily due to several programs, reaching their end of life combined with the replacement platforms experiencing launch delay.

Speaker Change: Our automotive book of business continues to be healthy our technical and commercial teams work closely with our customers to help them overcome challenges and provide solutions that meet their needs, resulting in increased collaboration and our strong partnerships.

Speaker Change: We expect to continue growing our leadership position within the automotive industry.

Speaker Change: Total tons were up 9% year over year, primarily due to increased tolling with the mill as well as several new automotive programs.

Speaker Change: <unk> sale tons made up 55% of our mix in the third quarter compared with 56% in the prior year quarter.

Speaker Change: Turning to cash flows and the balance sheet cash flow from operations was $44 7 million and free cash flow was $22 3 million during the third quarter. We spent $22 4 million on capital expenditures related to a variety of projects, including the previously announced electrical steel expansions in Mexico and Canada.

Speaker Change: On a trailing 12 month basis, we have generated $175 million of free cash flow.

Speaker Change: Thursday, we announced a quarterly dividend of <unk> 16 per share payable on June 28, 2024.

Speaker Change: In regards to our balance sheet operating working capital increased $41 $5 million during the third quarter as receivables and inventory increased as a result of higher steel prices, partially offset by an increase in accounts payable.

Speaker Change: We ended the quarter with $68 million of cash, which is down from the second quarter due to the $150 million dividend, we paid to our former parent in connection with the separation.

Speaker Change: Our ABL debt at February 29 was $147 million down $28 million from the second quarter.

In summary, Worthington steel had an excellent third quarter and all of our teams performed well everyone. At Worthington steel continues to be focused on driving stakeholder value on both a near term and long term basis I am proud of our teams for their dedication and for their continued commitment to safety.

Speaker Change: At this point, we would be happy to take your questions.

Speaker Change: Okay.

Speaker Change: Thank you.

Speaker Change: As a reminder, if you would like to ask a question Press Star then the number one on your telephone keypad and we will pause for just a moment to compile the Q&A roster.

Speaker Change: And we will take our first question from Phil Gibbs with Keybanc capital markets. Your line is open.

Hey, good morning.

Speaker Change: Good morning, Phil.

Speaker Change: What's the typical volume seasonality for for the May quarter, I know, it's usually youre strongest from a volume perspective, given the timing of your customer buying patterns.

Speaker Change: Yes, I think you've kind of answered your own question Youre right. It tends to be higher it's usually our strongest quarter from a volume perspective.

Speaker Change: Q3 tends to be on the lower side, because you've got automotive shutdowns in December and in Q4 tends to be.

Speaker Change: On the higher side.

Speaker Change: More and more so just curious on the historical magnitude is plus or minus high single digits low double digits in terms of what you expect from a volume pick up I would say, it's low single digits.

Speaker Change: It's not huge.

Speaker Change: Okay.

Speaker Change: And then from.

Speaker Change: From the spin.

Speaker Change: Is your commentary of effectively point to the fact that we should use <unk>.

Speaker Change: As a good baseline for <unk>.

Speaker Change: For the adjustments in your in your go forward cost structure.

Speaker Change: Yes, I think what you see in there is SG&A is probably a little light.

Speaker Change: Q3 tends to be a little light because you've got that December.

Month in there so travels down vacations in there. So Q3 from an SG&A perspective is usually down a little bit.

Plus we had some things that hadn't quite ramped up fully from an SG&A standpoint. So if you look at a go forward basis, probably on a little bit higher than what it was in Q3.

Speaker Change: Yeah.

Speaker Change: And then as we think about networking capital in the fourth quarter is that expected to be a user source of cash and then just update us on the on the Capex outlook, maybe for the fourth quarter and year.

Speaker Change: Yes.

Speaker Change: Yes, typically what happens when you have inventory holding gains youre going to build working capital and when you have inventory holding losses youre going to release. So we would expect to release some working capital in Q4.

Speaker Change: And then on the Capex side for the fourth quarter and then maybe for 2025 as we think about some of these growth projects that youre working on it so.

Speaker Change: So what we've been signaling is $100 million for two.

Speaker Change: <unk> thousand 425, and 26, we've run about $60 million to date in 2024.

Speaker Change: Depending on how the projects come in in Q4, I think we're actually going to get pretty close to that $100 million number.

We've got some additional capex, we've got the ablation project that we announced last week we've got.

Speaker Change: In ERP project that we're doing at temple, it's probably going to add another $10 million to the $100 million estimate we had in 2025 as well as another $10 million to the two the 100 million estimate we had for 2026.

Speaker Change: Okay.

Speaker Change: That's really helpful and then.

Speaker Change: On the ablation.

Speaker Change: Business win.

And the operational piece.

Speaker Change: Eastern Monroe, what what could it mean for you all in terms of the.

Speaker Change: Investment and timing it sounds like it displaced a bit into this $20 million pick up in Capex, along with the ERP over the next two years. Following this one but.

Speaker Change: What does it mean for you.

Speaker Change: Financially.

Speaker Change: And how big of a differentiator is it to just trying to figure out.

Speaker Change: What this possibly means from a mix or a profitability standpoint as you guys.

Speaker Change: Put it in place.

Jeff: Sure. Good morning, Phil This is Jeff <unk>.

Jeff: We're obviously very excited about this project.

Jeff: We are only one of two companies now that are able to offer this.

Jeff: <unk> in North America.

Jeff: We do believe that this market opens up new products and new opportunities by about 30% to our existing.

Jeff: While the blank.

Jeff: Market so.

Jeff: Again very excited about this technology and this project, it's going to take from a timing standpoint.

Jeff: Tom you install the equipment and win an award it's a typical automotive type award cycle that takes about 24 months to get to full production.

Speaker Change: It's a little bit out there but.

Speaker Change: We're pretty excited about all the activity that's happening right now and pretty confident we'll fill that line and in years, three and four we expect to.

Speaker Change: Feel the full benefit.

Speaker Change: Okay.

Speaker Change: Thank you.

And as a reminder, it is star one if you would like to ask a question.

Speaker Change: And we will take our next question from John Tumazos, with John Tumazos very independent.

Speaker Change: Independent research your line is open.

Speaker Change: Thank you very much for taking my question and thank you for your good efforts for the company.

Speaker Change: Just for explanation.

Speaker Change: Could you explain what is oblation, an ERP stands for.

Speaker Change: Good morning, John Jeff <unk> again, I'll take those very quickly I'm.

Speaker Change: I am not going to fully explain ablation, but I will tell you it is a.

Our patented product a patented process that uses lasers to remove the silicon coating.

Speaker Change: Prior to welding the press hardened steels, so that the world remains intact.

Speaker Change: For electrical steel.

Speaker Change: No no that is for tailor welded blanks for press hardened steel for automotive.

Speaker Change: Parts.

Okay.

Speaker Change: Simply stands for enterprise resource planning system. So it's our computer system.

Speaker Change: How big of a hit as a computer system.

Speaker Change: I think in total of those two projects I'm, just going to add lumped them both together.

Speaker Change: They're probably $15 million to $20 million in total I don't have the breakout for each but but we were using when I was given the capex numbers going forward John.

Speaker Change: That's basically adding $10 million.

Speaker Change: Two the next two years to cover both those projects.

Speaker Change: As operation.

Speaker Change: Part of what you are licensing from our solar middle or is it a separate item.

It is exactly what we are licensing from its their process. We are licensing the ablation process the patented process.

For the removal of the aluminum silicon coating.

Speaker Change: You made reference for good projects.

Speaker Change: Uh huh.

Speaker Change: <unk> revenue and profits.

Germany expansions from Canada and Mexico.

Speaker Change: <unk> license for Oblation, I'm, sorry correctly.

Speaker Change: Yes, real roughly in terms of a range.

Speaker Change: How much are the ROE the revenue impacts.

Speaker Change: These items.

Speaker Change: Listeners might not comprehend whether there.

Speaker Change: $10 million in annual sales.

Speaker Change: In annual sales.

Speaker Change: 100.

Speaker Change: I'd love to get excited.

Speaker Change: You're going to double the company.

Speaker Change: I, probably need a cold shower.

Speaker Change: No no I understand.

Speaker Change: It's a good question I think at the end of the day as we ramp these things up that's going to take a few years to ramp all of them up.

Speaker Change: Is going to be more than $100 million a year in revenue for us.

Speaker Change: Once they are fully terms each one individually.

Speaker Change: So we can Joanne idea.

Speaker Change: And it goes versus the big ones.

Speaker Change: Yes, I'm talking about in terms of overall I would say that the the temple project are the two big ones. The ablation is going to be a little bit smaller we're going to start small there and ramp up.

Speaker Change: The ablation lines going to be under $10 million, whereas you've got those other two projects in Canada, Mexico or $80 million plus each so.

Speaker Change: So right now, we're comfortable saying more than $1 million a year.

Speaker Change: When they are fully ramped up.

Speaker Change: So.

Speaker Change: Okay.

Speaker Change: The temple projects to Canada and Mexico.

In Germany, how much is the revenue impact of that expansion.

Speaker Change: That's relatively small that's probably around.

Speaker Change: Yeah.

Speaker Change: Do you have that number.

Speaker Change: $40 million per year.

Speaker Change: And then what we're going to do with that <unk> facility in Germany is we're also going to put growth plans in place there as well.

We don't have those plans down yet, but we didn't buy it just to buy it for what it was it was also to grow our presence in Europe in electrical steel.

Speaker Change: I would just add that the customer activity and excitement around our acquisition in Germany has exceeded our expectations. After just over a few months, so we're pretty optimistic where.

Speaker Change: We're going to do some good things there.

Speaker Change: There are various bringing their own as well as that ratio.

Speaker Change: Certainly our other.

Speaker Change: Got rid of nuclear and coal faster than anybody had jumped right into pollutants arms.

Speaker Change: In terms of the specific machinery.

Speaker Change: Yeah.

Speaker Change: Uh huh.

Speaker Change: Could you just give us a flavor of what's kind of the machines you are putting in place in Germany, Canada and Mexico.

Speaker Change: To better understand the nuts and bolts.

Jeff Why don't you answer that sure I'll start with Germany, Germany will.

We'll be lamination presses.

So to stamp.

Speaker Change: Electrical steel laminations for traction motors for hybrids and battery electric vehicles.

Speaker Change: In <unk> and.

Speaker Change: In Mexico. It is more of that Sam and then of course, all the automation equipment that comes along with that.

Speaker Change: As we are making.

Speaker Change: Routers and stagger stacks.

Speaker Change: That requires some downstream equipment, but the primary addition in Mexico will be EV.

Speaker Change: EV presses. These are very high and very technical very specific pieces of equipment.

Speaker Change: And then in Canada, it's a little more of a range. We've got furnaces, we have got a splitter that is.

Speaker Change: Specifically designed for grain oriented.

Speaker Change: Steel to process green oriented steel, but slid.

Speaker Change: Splitter furnaces.

Speaker Change: <unk> machines things that support the production of distributed GAAP cores.

Speaker Change: And wide Mitre cut lines for large mitre transformer cores as well and John I, just wanted to add and you're probably already familiar with this.

This is machinery and equipment were already very familiar with it as part of our core competency and we are making these expansions just due to increased demand. So we have the knowhow.

Speaker Change: Yeah.

Speaker Change: Worthingtons come a long way from $19 55.

Speaker Change: Following a solid or machine.

Speaker Change: Okay.

Speaker Change: Which of the.

Speaker Change: 10 or more processes Worthington does.

Speaker Change: Our most competitive.

Speaker Change: And which of them are high.

Speaker Change: Highest value a better process.

Speaker Change: In terms of first of all I'm glad you recognize we truly are a niche value add.

Producer so.

Speaker Change: If we're looking at what's most value add I think definitely temple.

Speaker Change: And electrical steel laminations.

Speaker Change: Certainly very high value add.

Speaker Change: A lot of engineering expertise needed to implement that equipment and run it.

Speaker Change: Hence higher margins I think tailor welded blanks in light weighting solutions. That's also a very unique niche type high value add market very similar to temple again, hence the.

Speaker Change: The higher margins and then certainly John Theres galvanizing that youre familiar with ours is a bit different and its hot rolled substrate. That's a differentiator cold rolled strip is also very high value add.

Speaker Change: And why these are all niche type markets that we play in and a big part of our our strategy and then of course, you are very familiar with our lean operations and <unk> operations.

And obviously those would be markets that would be a bit more.

Speaker Change: Competitive, but what we're proud of your comment on $19 55, as we really think we have a great story on innovation and it's often not recognized but we've continued to March up.

Speaker Change: You add chain over the years and it's why the company has performed so strongly and why we will well into the future.

Speaker Change: I could understand a mill or an auto company was.

Speaker Change: Very large volume tolling.

Utilizing a particular process like the pick where where they might have a bottleneck.

Speaker Change: Need Chris.

Speaker Change: Something like galvanizing.

Speaker Change: Your customers or end customers.

Speaker Change: Yeah.

Speaker Change: Why would they buy from Worthington.

Speaker Change: Rather than buying.

Speaker Change: From.

Speaker Change: Nucor steel dynamics clips.

Speaker Change: U S.

Speaker Change: Our independent as a few small independent galvanized series.

Speaker Change: No.

Speaker Change: I guess youre going right to HVAC companies and other galvanize usage.

Speaker Change: Yes.

So why would they buy from US specifically of course, we're going to be cost competitive with the.

Speaker Change: The mills.

Speaker Change: Why would they buy specific specifically from us.

Speaker Change: I'm going to tell you what we hear from the customers and what we would hear from the customers. It's our service we're very responsive.

Speaker Change: We're able to be probably a bit more flexible with scheduling and help.

Speaker Change: We have premier quality or we wouldn't continue to see the orders, but I really do think it's our speed, it's our service and it's our flexibility and John I'm, just telling you what I hear from the customers.

Speaker Change: And forgive me if I am asking too many questions and there's 30 people attribute to I don't want to hog.

Speaker Change: What's your galvanized customers tend to be in a relatively close radius to your.

Speaker Change: Facility.

Maybe those big Mills would have national customers scattered all over the place that would better lend itself to service and relationships with our neighbors.

Speaker Change: Hi.

Speaker Change: The answer to that is really no. We do tend to sell locally of course that makes a lot of sense, but more specifically with our galvanized products, we do ship that.

Speaker Change: Product all over the country.

Speaker Change: I should stop and give other people a chance. Thank you very much.

Speaker Change: Thank you John and John Thanks for your support.

Speaker Change: Okay.

Speaker Change: And we will take our next question from Martin Englert with Seaport Research Partners. Your line is open.

Martin Englert: Hello, Good morning, everyone.

Speaker Change: Hey, Martin.

Speaker Change: Couple of questions on the expansions for electrical steel eliminations in Canada, and Mexico. If you could just provide an update on.

Speaker Change: Any pending equipment deliveries and whether those are on time and how the environment is for staffing up head count once you start to ramp things in their respective locations.

Sure. Good morning, this Jeff <unk> I'll be happy to take that just maybe from an overall quick.

Speaker Change: Quick general update in.

Speaker Change: In Mexico that project is on time and on budget to date, we've spent about $17 million.

Speaker Change: The building expansion really should be complete complete here by late spring early summer.

Speaker Change: And we will be installing the first presses here in just the next couple of months, we've seen and this is really true.

Speaker Change: We're.

Speaker Change: Throughout all of our expansions we've seen very positive.

Speaker Change: Staffing ability to staff up and a lot of excitement around these projects internally. So that's that's a lot we don't see any any problems there.

Speaker Change: In Canada, we this.

Speaker Change: <unk> similar thing on time on budget, maybe a little bit delayed due to some land, but we think we're going to be able to catch up we're talking a month or two and then.

To date, we've spent about $5 million.

Speaker Change: But the ramping is going to start to spend.

Spending is going to start to ramp up here.

Speaker Change: The next few quarters, we're not going to we're not going to see production at that facility.

Speaker Change: Towards the end of next calendar year.

Speaker Change: But again there is an awful lot of excitement about the project internally and in the community. So we're.

Speaker Change: We don't foresee any problems at this point with being able to staff up appropriately.

Speaker Change: Okay.

Speaker Change: Remainder of the cap sorry was there more to add there.

Martin Englert: No go ahead Martin.

Martin Englert: Sorry about the remainder of the Capex spend for the respective projects how much of that is <unk>.

Martin Englert: Fixed pricing versus is there any component.

Martin Englert: Whether it would be incremental equipment buys.

Martin Englert: All within the scope of Blitz plan that might still have some variability or inflation risks to the price.

Speaker Change: I think this is Tim Martin I think most everything is locked in terms of price right. We negotiated the price and we lock those things and so I don't think theres much variability there.

Speaker Change: Okay.

Speaker Change: Any comments or updates on the backlog for Transformers in Canada and other token.

Speaker Change: Martin Jeff Gilmore.

Speaker Change: It continues to be two years or greater backlog for Transformers. So we're still quite bullish on that market again, you've heard me say, it's a market we feel will grow much faster than GDP out. The next seven to 10 years and a big driver of why we're making that expansion in Canada. So nothing is slowing down.

Speaker Change: On that front.

Speaker Change: Okay.

Speaker Change: When you think about.

Speaker Change: Pure evs or hybrids as far as what youre seeing with activity and demand.

Speaker Change: Just reviewing some of the headlines in recent history. It seems like there's a little bit of a pause, but I know you have.

<unk> diverse mix on legacy platforms as well as hybrid Navy, but still curious what youre seeing.

Speaker Change: Yes, great Great question, and you're spot on I mean, theres a lot of a lot of headlines and certainly these things get a bit politicize, especially in AR.

Speaker Change: And then election year, but.

Martin Englert: We still are bullish that the market is going to move away from from ice to hybrid and Evs and Martin you hit the nail on the head there's just not a lot of <unk>.

Speaker Change: Talk about how much momentum hybrids are getting we didn't enter.

Speaker Change: This business thinking there was going to be a straight line growth curve.

Speaker Change: I used to be EV, we figured there'd be a growth slope it was going to be bumpy at times, because it's <unk>.

Speaker Change: Significant innovation, it's a supply chain that needs to be built out but.

Speaker Change: But thats going to happen and costs will come down, but there is a lot more attention and a lot of automotive companies that are feeling that hybrid needs a bit of a bigger piece of that portfolio and more importantly.

Speaker Change: If its internal combustion engine, we produced cold rolled strip, it's great if it's hybrid.

Speaker Change: You need cold rolled strip strip the clutch plates, you need electrical steel lamination for electrification if its <unk> you need electrical steel laminations My point in sharing that is I don't know that there is anybody else globally, that's better positioned to take advantage of that.

Speaker Change: How when you are looking at.

Speaker Change: A hybrid vehicle versus battery EV.

Speaker Change: Does the electrical steel intensity change from a typical platform.

Speaker Change: Sure.

Speaker Change: Is it some multiple one versus the other or is that not markedly different.

Speaker Change: Okay.

Jeff: Martin This Jeff.

Jeff: That's a tough one that it does.

Jeff: Get.

Jeff: Marginally more electrical steel intensive as you go to a full electric vehicles.

Jeff: But.

Jeff: We have some data it definitely varies by program, it's going to evolve.

Jeff: But.

Jeff: Any number of traction motors is a good thing for us in the transition.

Speaker Change: Okay, Alright, I appreciate the color. Thank you very much.

Speaker Change: Martin.

Speaker Change: Yes.

Speaker Change: And we will take follow up question from Phil Gibbs with Keybanc capital markets. Your line is open.

Speaker Change: Thanks very much.

For the payments.

The parent company Don following this quarter or is there any residual moving ahead.

Speaker Change: We paid the $150 million dividend on December one there is there is nothing else.

Speaker Change: But we have to do I mean, we've got some TSA.

Speaker Change: And some long term agreements right, we sure campus and we've got some of those types of things, but if youre talking about the dividend specifically that as that is done its paid and we moved on.

Speaker Change: And following all the.

Speaker Change: Following the payments in the quarter can you just remind us what your current liquidity is.

Speaker Change: Yes, we've got ample liquidity.

Speaker Change: I think you noted in your note our leverage is pretty low and we've got ample liquidity to pursue any of these growth projects from the ABL, we put in place.

And what's the size of the ABL is remind us of that five.

Speaker Change: $550 million ABL.

And what's the rate on that right now just given all the volatility in interest rates.

Speaker Change: Just under 7%.

Speaker Change: It's an ASC so for plus type of arrangement.

Speaker Change: And last one for me is just kind of a broad question I know Youre, just getting your sea legs as a standalone company, but.

Speaker Change: Given the historical consistency of.

Speaker Change: Free cash flow and operating cash flow is there any thoughts over the midterm.

To put in a buyback will remain active in the M&A channel are both under consideration.

Speaker Change: Okay.

Speaker Change: Buybacks, we talked a little bit about during investor day, and it's going to be.

Speaker Change: Hum.

Speaker Change: A way that we return capital to shareholders along with dividends.

Speaker Change: We have not put anything formal in place we are still discussing that so at some point, we would expect to have a buyback program in place.

Speaker Change: And we are continuing to look at M&A opportunities, we havent really stopped.

Speaker Change: Got these big growth Capex projects, but as we talked about I mean, we're pretty selective in who we want to buy right. We're looking for high value added companies that we can bolt on in and complement what we have or enter new niches. So we're not out of out of M&A, we've just pause a little bit to get through the spin and we will crank that effort up and continue to look for companies that match.

Speaker Change: US from a cultural standpoint and match us from the high value add standpoint.

Speaker Change: I did I did actually have one more you've mentioned in your release that the tolling.

Speaker Change: Pricing was up quite nicely year over year is that a good baseline to use moving forward or was that just that just a mix and timing.

Speaker Change: It's a mixed thing I mean, it's and you've got to think about this in two ways. So if you. If you do a straight high value added process like galvanizing, it's going to command a higher price per ton than say a split but then we report shipped tons for tolling. So if you do multiple processes to a coil of steel so you.

Speaker Change: You pick all you Gal venue slid it that's going to show up as.

Speaker Change: Hi, invoice or a high priced item right. So it really is a mix.

Speaker Change: A mixed situation for us.

Speaker Change: Thank you.

And so I want to circle back on your question about Q4 and in automotive our automotive.

Our volume typically is up in the high single digits, I said low single digits.

Speaker Change: Are we closer to high single digits.

Speaker Change: Thank you for the clarification appreciate it.

Speaker Change: You bet.

Speaker Change: And ladies and gentlemen that is all the time, we have for questions. Today. So I will now turn the call back to Mr. Jeff Gilmore for closing remarks.

Thank you everybody appreciate the participation and the interest in and Worthington steel again very proud of our employees are excited about the progress this quarter and even more excited about what's to come and we will look forward to our next call and sharing our progress on our strategy and have a great weekend everybody.

Speaker Change: Thank you.

Speaker Change: And ladies and gentlemen, this concludes today's call and we thank you for your participation you may now disconnect.

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