Worthington Steel, Inc. (NYSE:WS) Q3 2026 Earnings Call Transcript

Worthington Steel, Inc. (NYSE:WS) Q3 2026 Earnings Call Transcript March 26, 2026

Operator: Good morning, and welcome to Worthington Steel, Inc.’s third quarter fiscal year 2026 earnings call. After today’s prepared remarks, we will host a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. To withdraw your question, press 1 again. I will now hand the call over to Melissa Dykstra, vice president of corporate communications and investor relations. Please go ahead.

Melissa Dykstra: Thank you, Operator. Good morning, and welcome to Worthington Steel, Inc.’s third quarter fiscal year 2026 earnings call. On our call today, we have Jeff Gilmore, Worthington Steel, Inc.’s president and chief executive officer, and Timothy Adams, vice president and chief financial officer. Before we begin, I would 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 materially from those suggested. We issued our earnings release yesterday after the market closed. Please refer to it for more detail on factors that could cause actual results to differ materially.

Unless noted as reported, today’s discussion will reference non-GAAP financial measures which adjust for certain items included in our GAAP results and 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. I will now turn the call over to Jeff Gilmore.

Jeff Gilmore: Good morning, and thanks for being with us today. It has been a memorable few months for us to say the least. As most of you know, in January, we announced our proposed acquisition of Kloeckner, which will be the largest in our history and a meaningful strategic step for the company. I appreciate that even with an announcement of this size, and the work that goes with it, our team stayed anchored in what matters: safety, serving customers, and improving the business every day. Thank you to the entire Worthington Steel, Inc. team. This quarter, I will start with an update on the Kloeckner acquisition. The combination of our two organizations will create a larger, more diversified metals processing platform with meaningful opportunities to generate value and capture synergies through Worthington Steel, Inc.’s proprietary base business improvement program that we call the transformation.

This transaction is being executed through a voluntary public tender offer in Germany and remains subject to the tender process and required regulatory approvals. Since our investor call in January, the voluntary tender offer has been launched. We have submitted requests for regulatory approval in the required jurisdictions, and we are beginning to see approvals come through. Overall, the process is progressing well. Today is the final day of the initial acceptance period of the tender offer process, and we are confident we will secure enough shares to meet the 57.5% minimum threshold. We continue to expect the transaction to close in the second half of the calendar year. In preparation for closing, we have begun and focused on integration, governance, and day-one readiness.

We are doing that responsibly and deliberately with an eye toward maintaining our high-performing cultures, unlocking value, and accelerating growth. Most importantly, this deal is about combining two great companies that share the same values. I have had the opportunity to spend time with several of our future Kloeckner teammates, and it reinforced our view that Worthington Steel, Inc. and Kloeckner are culturally aligned and fit together very well. Furthermore, since our announcement, the response from customers, suppliers, and investors has been overwhelmingly positive. As a reminder, the German public company takeover process is highly structured, and we will continue to provide updates as we reach key milestones. With that, let us turn to our results for the third quarter.

Net sales were $769.8 million, adjusted EBITDA was $41.6 million, and adjusted earnings per share were $0.27. On a macro level, the third quarter of our fiscal year was volatile and uneven, with galvanized spreads remaining compressed and the effects of the holidays and winter weather dampening and delaying industrial activity. While direct volumes were up over the prior year, overall conditions were stable to soft, keeping customers’ inventory disciplined and highly sensitive to interest rates and uncertainty. Even with those headwinds, our execution remains strong where it matters most: safety, customer service, and transformation. Commercially, the team continued to win the right work and capture high-value opportunities, including building on our momentum in the automotive market.

Our direct shipments in Q3 to the Detroit Three increased by approximately 13%, significantly outpacing the reported 3% growth in Detroit Three production for the quarter. As discussed last quarter, the outlook for the automotive market heading into calendar year 2026 remains cautiously optimistic. Conditions appear to be moving toward a more robust market later in the year. That view is supported by growing confidence that a USMCA agreement will be completed in 2026, removing a significant amount of market uncertainty. Turning to agriculture, we believe we are nearing the trough of the market cycle, and that a slow rebound will begin in late calendar year 2026. On a positive note, our team has been able to secure new business with a key customer in this market, which will continue to ramp up over the next few quarters.

In construction, conditions remained flat in most segments. We expect to see data center growth continue, and as lower interest rates take hold, we believe we will see some expansion in 2026 due to pent-up demand. In heavy truck and trailer, as we expected, the market started off slowly in calendar year 2026. We are more confident about the back half of this year, where we expect to see a pickup in both the Class 8 truck sector as well as the trailer market. Looking ahead, we are still cautiously optimistic about the second half of calendar year 2026. Overall, the backdrop looks modestly encouraging as key economic indicators show a return to expansion. With that market context, let me turn to our strategic priorities. We continue to make progress in the areas that matter most: investments in electrical steel growth, innovation, and transformation.

In electrical steel, we advanced the projects that underpin our longer-term growth strategy. In Canada, we have shifted some production to our new facility and are shipping from both locations. We will finish moving the existing equipment and production to the new facility over the next few months. We have more than 60% of the increased capacity sold for the facility. We are sequencing the startup to protect performance and service levels, and we expect to fill the balance relatively quickly as the facility ramps up. Our traction motor lamination facility expansion in Mexico is also on track and will begin shipping production parts this quarter. Almost all the OEMs tied to the expansion are experiencing some type of OEM delays. Previously, we expected to reach full production levels in fiscal 2028.

However, the OEMs have pushed out a number of the programs for a variety of reasons. While timing is shifting on production starts for some of our new programs, when these platforms reach full production volumes in fiscal 2029, we will be at 75% capacity, based upon current contracts. These delays are not surprising as many automotive OEMs are rethinking their electrification strategy. With the elimination of the fuel economy mandate and the elimination of the $7,500 federal tax credit, the market is clearly pivoting away from a government-driven BEV mandate to a consumer-led demand for hybrids. The data is quite clear. Year-over-year, hybrid sales in the U.S. increased 18% in 2025, and the same trend is happening in early 2026. Sales and production of hybrids are both up more than 10%, and the shift to hybrids is expected to continue.

We are also seeing reports of increased consumer interest in hybrid and full electric vehicles due to rising oil prices and geopolitical tensions. While it is too soon to see if this will translate into sales, we will be watching closely and are well positioned to capitalize on this renewed interest. From a commercial standpoint, we have seen a slowdown in quotes for pure BEV opportunities, but the quote activity related to hybrids is picking up. We are excited by the growth in hybrids, as we have the opportunity to produce the electrical steel laminations for a hybrid traction motor as well as the specialty cold-rolled steel used in the powertrain for the hybrid’s internal combustion engine. We continue to improve our business using the Worthington Business System and artificial intelligence.

In one notable project, we used our transformation process to implement a lean flow operating model at our Delta, Ohio, facility that aligns material release, production, purchasing directly to customer demand, replacing a forecast-driven push process with a more disciplined pull approach. This allows us to tighten our purchasing windows and drive down inventory. The work has led to 60% fewer coils held in our work-in-process bay and an overall reduction of six days of inventory over the past 26 months. As the next step in the process, we will be adding predictive AI tools to ensure our flow is not only disciplined, but also predictable. That means spotting problems earlier and moving more quickly to remedy them. Predictive flow helps us stabilize performance as we run leaner, enabling faster, more consistent decisions at lower working capital levels.

Further, we will use what we learn at Delta, package what works, and build scalable solutions we can use across our footprint. We also continue to make progress transforming our administrative functions. When we stepped back and looked at where we started about a year ago, a few themes stood out. There was a significant amount of manual repetitive work, a fair amount of variation in how processes were executed across functions and facilities, and much of the work was being managed through email, spreadsheets, and manual follow-ups. We are addressing that in a couple of ways. First, we see discrete opportunities to remove manual effort; we move quickly using automation and AI. For example, we are developing an AI agent for daily cash posting in our finance group that is expected to eliminate a significant amount of manual data entry and free up about 30 hours per month of analyst time.

We have also deployed automation in accounts payable that is reducing manual invoice interventions and should remove roughly 150 hours of work per month as the models continue to improve. In our order-to-cash process, robotic automation that reconciles shipping notices with customer portal data has helped accelerate cash collection and reduce past-due balances. Second, for workflows that are more interconnected, we are using AI to assist us in mapping processes, establishing standard work, and removing waste. For instance, in indirect purchasing, we redesigned the sourcing workflow and then layered in analytics and AI tools that allow the team to focus more on strategic sourcing rather than repetitive tasks. We are still early in this part of the transformation journey, but what we are building is a repeatable capability that allows us to apply automation and AI across more functions over time, structurally improving efficiency and scalability across the organization.

To close, while this was a challenging quarter from a macroeconomic standpoint, our team remained focused on executing the business, advancing our electrical steel strategy, and moving the Kloeckner process forward in a disciplined way. At the center of that is a culture that puts safety first and reflects the dedication of our people across the organization. To our employees, thank you. The discipline, care, and commitment you bring every day are what turn our strategy into action. I will now turn the call over to Timothy Adams for more detail on the financials for the quarter.

Timothy Adams: Thank you, Jeff. Good morning, everyone. Our third quarter was a disciplined quarter in a more challenging environment. While we saw softer demand in certain markets and continued pressure in Europe, we executed well, generating strong free cash flow, gaining share in key markets, and maintaining a strong balance sheet. That consistency and execution, particularly in more challenging environments, is a hallmark of how we run the business. We also took an important strategic step forward with the proposed Kloeckner transaction, which we believe will strengthen our long-term positioning. For the third quarter, we reported earnings of $10.4 million, or $0.20 per share, as compared with earnings of $13.8 million, or $0.27 per share, in the prior-year quarter.

There were several nonrecurring items that impacted comparability in the quarter, including a number of Kloeckner-related items which are primarily transactional and timing-related, and not indicative of our ongoing operating performance. First, the current-quarter results include $15.4 million of pretax SG&A expense, or $0.24 per share, for advisory, legal, and regulatory fees incurred in connection with the previously announced acquisition of Kloeckner. Additionally, we recognized $9.1 million of pretax miscellaneous income, or $0.14 per share, related to a foreign currency forward contract designed to hedge a portion of the Kloeckner purchase price. Unrelated to the Kloeckner transaction, we recognized a $6.0 million pretax restructuring gain, or $0.06 per share, on the sale of real estate and equipment associated with our previously announced Worthington Samuel coil processing plant closure in Cleveland, Ohio.

Finally, in the quarter, we recognized a $1.5 million pretax impairment of certain internal-use software, or $0.03 per share. The prior-year quarterly results included several nonrecurring items, including a $7.4 million pretax impairment of assets, or $0.07 per share, primarily related to the operational consolidation of our Worthington Samuel coil processing facility in Cleveland into WSCP’s remaining facility in Twinsburg, Ohio. Additionally, we recognized pretax restructuring expenses of $0.9 million, or $0.01 per share, related to a voluntary retirement plan and our Taylor-Worthington Blanking joint venture. Excluding these items, we generated adjusted earnings of $0.27 per share in the current-year quarter compared with $0.35 per share in the prior-year quarter.

In the third quarter, we reported adjusted EBIT of $20.0 million, which was down $5.3 million from the prior-year quarter adjusted EBIT of $25.3 million. The year-over-year decrease was driven primarily by lower toll processing volumes, higher SG&A largely related to compensation, and unfavorable results in Europe, partially offset by higher direct volumes and higher equity earnings from Serviacero. Total shipments were approximately 818,000 tons, down 64,000 tons, or 7% year over year, as lower toll volumes more than offset volume growth in direct sales. Direct sale volume made up 63% of our mix in the current-year quarter compared with 57% in the prior-year quarter. Direct volume increased 4% compared with the prior-year quarter. The year-over-year increase was split evenly between the legacy business and the addition of CEDIM compared to the prior-year quarter.

Our increased shipments to the automotive market remained a bright spot. Direct shipments to automotive increased 10% year over year. Similar to last quarter, the increase in automotive volume reflects share gains from new programs plus the impact of a key automotive OEM customer returning to a more normal build schedule after curtailing production last fiscal year. This growth in the automotive market reflects the strength of our longstanding customer relationships and our collaborative, proactive approach to assisting customers to meet their needs. Outside of automotive, agriculture volume was up 9%, primarily due to improved OEM equipment demand, and container volume was up 11%. As Jeff mentioned earlier, we won additional business with a key OEM customer in the ag sector.

These gains were partially offset by lower shipments to a number of other markets, including energy, which was down 22% year over year, largely driven by project-based solar programs; construction, which was down 7%; service center, where we saw some increased competition, which was down 21%; and heavy truck, which was down 12% due to ongoing market weakness. Toll processing volumes declined 22% year over year, due to a combination of closing our Cleveland-area Worthington Samuel coil processing facility in fiscal 2025 and near-term demand headwinds. We view the softer market conditions in toll processing as cyclical, not structural, and expect toll volumes to improve as end market demand recovers, excluding the impact of the Cleveland facility consolidation last May.

Direct spreads were relatively flat year over year, excluding the impact of the CEDIM acquisition, which closed in June. Direct spreads were impacted by a $3.3 million favorable swing in pretax inventory holding gains. In the current-year quarter, we had estimated pretax inventory holding gains of $2.1 million compared to estimated pretax inventory holding losses of $1.2 million in the prior-year quarter. After stabilizing around $800 per ton in the fall, the price for hot-rolled coil increased $175 per ton in our third quarter to approximately $975 per ton. We expect the market price for steel to remain volatile in the near term, with expected mill outages, extending lead times, and a tightening market. Given that many of our contracts use lagging index-based pricing mechanisms, we estimate in our 2026 pretax inventory holding gains will fall within a range of $15 million to $20 million.

Turning to the other drivers for adjusted EBIT this quarter, SG&A expense, excluding the $15.4 million impact of the Kloeckner-related acquisition expenses, was up $7.5 million primarily due to increased compensation expense in the legacy business and $4.8 million of incremental SG&A with the addition of CEDIM. It is worth noting that our Q3 results include increased headwinds in Europe. As expected, CEDIM EBIT prior to minority interest decreased $8.4 million during the quarter. This performance reflects challenging economic conditions in Europe, particularly in the electrical steel and automotive end markets, where demand remains weak and competition, especially from China, has intensified. While expected, we are actively addressing these headwinds through cost actions and operational adjustments, and our team in Europe is moving with urgency to improve performance.

Although near-term conditions remain challenging, we are focused on positioning the business to return to profitability and to capture share as the market recovers. Finally, equity earnings from Serviacero, our Mexico-based joint venture, increased $3.5 million due to higher direct spreads, inventory holding gains, as well as the favorable impact of exchange rate movements. Turning to cash flows and the balance sheet, for the quarter, cash flow from operations was $63.0 million and free cash flow was $33.0 million, with both metrics benefiting from a reduction in working capital. Capital expenditures were $30.0 million in the quarter, related to several projects, including the previously announced electrical steel investments. We expect CapEx for fiscal 2026 to finish in the range of $110 million to $115 million as several of our large capital growth projects transition from the build phase into startup production.

In addition, we are pursuing maintenance projects that keep our key assets market ready. We take a disciplined approach to capital allocation, balancing investment in growth with maintaining balance sheet strength. On a trailing twelve-month basis, we generated $81.0 million of free cash flow. We increased borrowings during the current quarter on our ABL to purchase approximately 8.3 million, or 8%, of Kloeckner shares for $101.0 million. We ended the quarter with $90.0 million of cash and net debt of $161.0 million, up sequentially driven primarily by the purchase of Kloeckner shares. Earlier this week, we announced a quarterly dividend of $0.16 per share, payable on June 26, 2026. In summary, this was a disciplined quarter in a more challenging environment.

We are gaining share in key markets, generating consistent cash flow, and maintaining a strong balance sheet. At the same time, we are taking actions to address underperformance in Europe while continuing to advance our strategic priorities, including the proposed Kloeckner transaction. This reflects how we manage the business: staying focused on execution and positioning the company to perform through cycles. We believe these actions position Worthington Steel, Inc. to navigate the current environment and continue creating value over the long term. I want to thank our entire Worthington Steel, Inc. team for their continued focus on safety, customer service, and execution this quarter. We will now be happy to take your questions.

Q&A Session

Operator: We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, press star 1 again. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Please standby while we compile the Q&A roster. Your first question comes from the line of Samuel McKinney with KeyBanc Capital Markets. Your line is open. Please go ahead.

Samuel McKinney: Good morning. With direct volumes for the third quarter only up 3% year over year, surprised to hear you say the direct auto shipments increased by 10%. Assuming much of this was owed to the market share wins you have outlined, can you talk through some of those wins and the impact they are having? Okay. Thanks. That is helpful. And then on to Kloeckner, how should we think about the over $100 million of short-term debt you used to purchase their securities? Just any other color you could give on that equity investment in the context of meeting the threshold would be helpful. Like Tim said, that is about 8% of Kloeckner shares. Okay. Thanks. And then last one for me. Steel pricing has remained hot in recent weeks. Can you give us a sense of the net working capital expectation for the fourth quarter in the context of the $15 million to $20 million of inventory holding gains?

Jeff Gilmore: Yes, Sam, this is Jeff. I will take that. Clearly, positive impact. If you look at automotive as a whole, it was down maybe 1% or 2% year over year. If you look specifically at the Detroit Three, their production was up 3%, and ours were up 13%. If you look at the difference in the gap, that really is that market share gain that we have been speaking about the last several quarters. Fortunately for us, we have continued to win market share with those customers mentioned as well as several others, so that is something that you will continue to see layered in. The beginning of your question was being up 13% there, but only 3% as a whole. As you are aware, weather in the Midwest was quite challenging in late January, specifically for a week, and that disrupted the entire supply chain, whether it was the mills trying to ship out to us, receiving in, and then us trying to ship to our customers.

The impact there was probably 10,000 to 15,000 tons. The mills are extremely busy right now. They have extended lead times. Their on-time delivery performance has been challenging. We just were not able to make up for that backlog during the month of February. We did some, but probably could have shipped closer to 15,000 additional tons. Fortunately, those are not orders lost. We will make up that backlog and are starting to do so already this month.

Timothy Adams: Yes, Sam, this is Tim. We had the ability through antitrust—right, we had to look at the regulations of antitrust as far as how much we could buy. We could buy in the open market 10%, and we used that opportunity when the tender offer was announced to buy in the open market. So we increased our ABL by $126.0 million, and we used $101.0 million of it to buy shares in the open market. As long as the price stays below the tender offer of $11, we can buy shares. You have seen the price of Kloeckner rise a little bit. That shut us out of the market. We bought shares early in the quarter, and we have not bought much since. On working capital, we are definitely going to see some upward pressure. You can look at the percentage price increase and translate that into how much working capital should go up, but you will see some upward pressure on working capital in Q4 for sure.

Operator: Your next question comes from the line of John Tumazos with John Tumazos Very Independent Research. Your line is open. Please go ahead.

John Tumazos: Thank you. The German stock market is down 8% year to date, and their economy is more vulnerable to the energy escalation, as they are almost entirely an energy importer. Is your view of the amount of debt level that you want to hold post-acquisition or the degree of exposure to Europe changed given our incursion into Iran and the subsequent events in the last four weeks? Following up on what you just said, would you then want to have more equity in your financial structure and less debt?

Jeff Gilmore: John, good question. Thanks for calling in. We went into this acquisition with eyes wide open and a clear understanding on Europe and the current challenges. A few things: first, their economy—I think they are doing their own things to increase, I will call it, protectionism, which certainly will help their economy. Specifically, I think aimed at China. I think they have increased spend on defense pretty significantly over the last six to twelve months, which should benefit the business environment, specifically manufacturing. What we did not predict was a war with Iran and the impact on oil prices. Right now, it is not having a major impact on the business here or in Europe. But if this is prolonged, then we certainly are concerned about their economy, and we are equally concerned about the economy here.

Obviously, higher energy prices, higher gas prices are not going to be good for either economy. So that is really our position on it right now. No, we are comfortable with the capital structure where we are moving forward right now. We are quite comfortable with the debt level that we will be carrying forward. To be more transparent, it is because we are very confident in our plan and how we will go about paying that debt down over time. We have not had any serious discussions about reducing the debt and increasing equity as part of capital structure, and I think we are going to be in very good shape.

Operator: There are no further questions at this time. I will now turn the call back to Jeff Gilmore, president and CEO, for closing remarks.

Jeff Gilmore: From a macroeconomic standpoint, there were some challenges with the business. During last call, I addressed the overall market as well as some of the challenges in spreads, specifically hot rolled and coated, and hot rolled and cold rolled, but at that time, I mentioned I felt like the quarter would be the trough, and I feel strongly that is the case, and that is what we have seen. I think the tightness in the market in the U.S. and where we are seeing prices headed, along with being cautiously optimistic now on all markets, that we are starting to see recovery, and that is the sentiment across the market. We are no different. We can start to see signs of growth, not just with market share gains in automotive, but other key markets as well.

Certainly, those markets will increase demand for galvanized as well as cold rolled, and we start to see some of that spread pressure alleviate gradually over time. More importantly, we could not be more well positioned to continue to grow as a company. We have a great deal of confidence in us achieving the threshold goal for Kloeckner, and that puts us in a position to accelerate growth moving forward. The business is in great shape. I look forward to what is to come. Thank you again for listening in today.

Operator: This concludes today’s call. Thank you for attending. You may now disconnect.