Worthington Steel's Q1 2027 Earnings Call - WORTHINGTON STEEL INC

Financial Performance:

• Consolidated net sales reached $2.7 billion, an increase of approximately $1.9 billion year-over-year, primarily driven by the full inclusion of Kloeckner.
• Reported net loss from continuing operations was $7 million ($0.14 diluted EPS), compared to $36.8 million earnings ($0.73 diluted EPS) in the prior year; the decline was largely due to non-cash acquisition-related expenses ($22.6M) and a $15.5M loss from remeasuring previously held Kloeckner shares.
• Adjusted earnings per share were $0.57, down from $0.77 in the prior year, while Adjusted EBITDA was $111 million.
• Adjusted EBIT increased by $23 million to $78.5 million year-over-year; however, higher interest expense ($38.8M reported vs. $2.9M prior year) negatively impacted adjusted earnings.
• Purchase accounting required recording Kloeckner's inventory at fair value, which reduced gross margin and Adjusted EBITDA by an estimated $43 million in Q1; a limited residual impact is expected in Q2.
• Legacy Worthington Steel net sales were $954 million (up 9% to $81 million), driven by higher volumes and selling prices, though total legacy shipments declined 1% to 921,000 tons.
• Legacy direct shipments increased 3% (automotive up 4%, agriculture up 40%), while toll volumes declined 8%.
• Inventory holding gains were estimated at $12.1 million pre-tax for the quarter ($10–$15 million estimated for Q2) due to tight supply and price lagging.
• Operating cash flow was an outflow of $6 million; capital expenditures were $63 million, resulting in negative free cash flow of $69 million.
• Fiscal 2027 capital expenditure guidance is estimated between $160 million and $180 million.
• Balance sheet as of August 31 included $248 million in cash and $1.9 billion in net debt; trailing 12-month leverage ratio is not reported until a full year of Kloeckner results is available.

Guidance and Future Outlook:

• Full-year outlook remains guided by existing synergy targets and deleveraging plans; debt reduction is expected to progress alongside synergy capture and working capital improvements.
• North American automotive production is forecast to be essentially flat for calendar 2026; the company expects to grow via customer wins and localization trends rather than volume inflection.
• Construction demand remains pressured by interest rates but is expected to improve as inflation moderates and uncertainty eases.
• Agriculture is a growth driver, with shipments up 40% year-over-year, and heavy truck/trailer markets are showing signs of stabilization and share gains.
• Management anticipates the purchase accounting inventory step-up impact to be largely resolved by Q2.
• Future market discussions will evolve to include Kloeckner's industrial sectors beyond traditional Worthington end-markets.
• A quarterly dividend of $0.16 per share was declared, payable on December 28, 2026.

Business Segments and Product Lines:

• The acquisition of Kloeckner has expanded the company's product capabilities, geographic footprint (adding a strong Southeast/Southwest presence to Worthington's Midwest base), and market reach.
• Legacy business saw strong performance in agriculture (OEM and grain bin demand) and heavy truck/trailer (share gains and new business wins).
• Legacy energy shipments declined 31% due to a customer shift to a competitor, and construction shipments dropped 9% due to competition and tight steel availability limiting short-term quoting.
• A joint venture, TWB, received two supplier awards from Subaru, highlighting technical expertise in the automotive sector.
• Monroe, Ohio facility unlocked capacity through operational excellence, shifting work from a bottleneck press to underutilized assets to meet demand without new capital.
• Kloeckner utilizes domestic mills for 99% of purchases, aligning with Worthington's strategy of regional sourcing.
• Kloeckner's gross margins are lower than Worthington's due to a product mix with fewer value-added processes (e.g., less galvanizing/pickling initially), but synergies include starting to produce galvanizing for Kloeckner.

Market and Competitive Landscape:

• The steel supply environment remains tight with limited imports and extended lead times, creating a competitive advantage for companies with strong supply chain execution.
• Management anticipates hot-rolled coil prices to remain stable or tick up, supporting the sustainability of direct spreads, particularly as new contract seasons begin on January 1st.
• Market conditions have forced customers to be careful with inventories and commitments, increasing the value of Worthington's problem-solving and communication capabilities.
• Heavy truck and trailer markets are stabilizing but not yet fully recovered; the company is positioned to capture activity as the sector strengthens.
• Interest rates and geopolitical stability remain key macro variables affecting construction and capital-intensive end markets.

Risks and Challenges:

• Significant acquisition-related expenses and non-cash charges related to the Kloeckner transaction (revaluation of shares, deferred tax write-offs) distorted reported earnings.
• Tight steel supply chains prevented the company from fulfilling an estimated 30,000 tons of demand in the quarter due to constraints.
• Construction and energy sectors face headwinds from high interest rates and competitive pricing pressures.
• Integration risks regarding the DPLTA (Domination and Profit and Loss Transfer Agreement) remain until shareholder approval and court declaration in Germany.
• Legacy business margins faced pressure from higher labor, benefits, and freight costs.

Management Commentary and Tone:

• Management tone is confident and disciplined, emphasizing the strategic value of the Kloeckner transaction and the company's enhanced scale and diversification.
• CEO Jeff Gilmore expressed pride in the team's ability to navigate difficult market conditions while preparing for integration.
• The leadership team emphasized "discipline over speed" regarding the integration process to ensure operational control and synergy capture.
• Management highlighted a commitment to long-term value creation through digital transformation, AI-enabled decision-making, and operational excellence.
• The tone regarding the supply environment is realistic, acknowledging constraints but framing them as an opportunity to demonstrate customer service and earn trust.

Analyst Questions and Answers:

• Volume Performance: Samuel McKinney (KeyBank) asked about the volume beat in legacy direct tons; management confirmed market share gains in automotive, heavy truck, and agriculture offset seasonality, noting they missed ~30,000 tons due to supply constraints.
• Spread Sustainability: McKinney queried the sustainability of spreads above $200/ton; management affirmed strong sustainability due to a tight market and limited imports, expecting benefits in Q2/Q3 as new contracts roll out.
• German Minority Shares: John Tumazos (Independent Research) asked about the 38% minority shareholder retention; management explained that after DPLTA approval, shareholders have a put option at €11/share or can retain shares for an annual guaranteed cash compensation of €0.66/share indefinitely.
• Margin Differences: Tumazos inquired about margin gaps between Kloeckner and Worthington; management attributed lower Kloeckner margins to a different product mix (less value-added processing) and cited inventory turnover synergies as a key integration goal.
• Segment Disclosure: Martin Englert (Seaport) asked for Kloeckner's normalized EBITDA; management declined to provide segment-specific data or pro forma figures, stating the company is not yet at a point to disclose such details.
• Sourcing Strategy: Englert asked about Kloeckner's domestic sourcing; management confirmed ~99% of Kloeckner purchases come from domestic mills, aligning with Worthington's regional sourcing strategy.

Other Key Points:

• The transaction with Kloeckner closed on June 3rd; shares were delisted from the Frankfurt Stock Exchange on August 12th; the DPLTA was signed on September 8th and is pending shareholder approval.
• Kloeckner's subsidiary, Becker Stahl, is being marketed for sale, with proceeds expected to be used for debt reduction.
• The company is actively applying AI and digital tools to inventory management and indirect purchasing to drive cost avoidance and efficiency.
• The combined entity is now larger, broader, and more diversified, with a focus on electrification, grid investment, and high-efficiency applications.
• Integration teams are currently collaborating on business processes and culture to prepare for operational control and synergy capture starting Q1 2027.