Worthington Steel achieves $75.2 million adjusted EBITDA and optimistic outlook despite mixed market conditions and recent acquisitions in Q1 fiscal 2026

OPERATOR - (00:01:25)

Good morning and welcome to Worthington Steel's first quarter fiscal year 2026 earnings call. 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'd like to ask a question during that time, simply press star then the number one on your telephone keypad. I will now turn the call over to Melissa Dykstra, Vice President of Corporate Communications and Investor Relations. Please go ahead.

Melissa Dykstra - Vice President of Corporate Communications and Investor Relations - (00:01:53)

Thank you operator Good morning and welcome to Worthington Steel first quarter fiscal year 2026 earnings call. On our call today we have Jeff Gilmore, Worthington Steel's President and Chief Executive Officer, and Tim Adams, Vice President and Chief Financial Officer. Before we begin, I'd like to remind everyone that certain statements made today are forward looking within the meaning of the 1995 Private Securities Litigation Reform Act. These statements are subject to risks and uncertainties that could cause actual results to differ from those suggested. We issued our earnings release yesterday after the market closed. Please refer to it for more detail on the factors that could have caused 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 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 now I'll turn it over to Jeff Gilmore.

Jeff Gilmore - President and Chief Executive Officer - (00:03:03)

Good morning and thank you for joining Worthington Steel's first quarter fiscal year 2026 earnings call. As always, I'll begin by thanking the people of Worthington Steel. I'm incredibly proud of our team's commitment to safety, quality and our customers throughout the quarter. I want to extend a warm welcome to the Cedam team. We completed our acquisition of 52% of Cedam in June. To our Cedam teammates who may be on the call, we are thrilled to have you join the Worthington family and I'm excited about what we'll accomplish together. We're off to a strong start in fiscal year 2026 driven by disciplined execution and a soft market resulting in year over year volume growth. Adjusted EBITDA came in at $75.2 million, earnings per share were $0.72 and net sales were $872.9 million. This performance reflects the strength of our base business, the advantages of our commercial and operational agility, and the benefits of our ongoing transformation. An important highlight of our quarter was safety. Through training, continuous improvement and the commitment of every Worthington Steel employee, we achieved our safest quarter on record. But there is still work to do to ensure every employee goes home safely and we meet our goal of zero injuries. Congratulations to our environmental health and safety team, our operations team, and all Worthington Steel employees on this vitally important achievement. Looking at our key end markets and business trends, the macro environments remain mixed. Visibility is limited in several sectors and we expect this to persist for the near term. That said, we are cautiously optimistic despite continued uncertainty in the market. At Worthington Steel, we are not waiting for clarity to act. We're focused on what we can control and we are positioning ourselves to win. In any environment, uncertainty can create opportunity and that's where we lean in. When supply chains shift, we collaborate. When customers face complexity, we deliver solutions. This quarter we saw continued growth in automotive with new programs ramping up to drive volume. In fact, during the period, the Detroit 3 saw a 5% year over year production increase while our shipments increased by nearly 13% compared to the prior year. Our commercial teams are doing an outstanding job winning new business. We remain cautiously optimistic about the automotive market for the rest of calendar year 2025. We also offset some of the slowness in the heavy truck market with an increase in market share during our first quarter. Construction in the subsectors we serve remains soft but steady. We are disciplined and efficient in how we serve the space. The ag market continues to experience challenges, but we remain committed to our customers and ready to adapt. I'd like to commend our commercial team for their focus on proactively serving our customers. The strong relationships they build and cultivate help us capitalize on opportunities and gain new customers, new business and new market share. Turning to our long term strategy, our team continued to make progress on electrical steel investments, margin accretive growth and base business transformation. In Canada, we remain on schedule to start production in early calendar year 2026, expanding our ability to support the ever growing need for electricity. And in the United States with transformer cores, transformers remain in short supply and the market is expected to grow by up to 7% per year over the next decade. The expansion of our facility in Mexico will begin production in just a few months and trials are currently underway. This facility will supply electrical steel laminations for traction motors and hybrid and electric vehicles as the electrification of transportation continues. With the close of our Cedam acquisition, we've expanded our reach in the global EV market and are now integrating Cedam'S automation and toolmaking capabilities to strengthen our competitiveness across our electrical steel platform. Transformation at Worthington Steel is a daily discipline. It's how we improve safety, productivity and customer outcomes. We now have the opportunity to fuel and accelerate that work with artificial intelligence. We are using AI to gain insight, assess strategies and automate low value tasks. We are testing use cases like predictive maintenance and intelligent reporting and we are confident about the gains we will see over time. Adding AI to our transformation toolbox, both in operations and the back office will allow our teams to focus on the critical 20% of their job that drives the most value for our business. At the same time, our employees will gain more fulfillment from their careers as the more repetitive tasks are clear from their daily work. This quarter we identified, launched and are advancing four critical AI driven pilots Demand Forecasting to improve capacity planning and inventory management Predictive Inventory Optimization to reduce inbound raw material inventory Predictive maintenance to reduce downtime and forecast and demand planning automation. All four of these are expected to provide cost savings and and or free up cash flow when fully implemented. Additionally, we continue to see progress as we apply the transformation to our back office functions. As examples, we launched a project to automate daily cash posting, reducing effort by more than 10 hours per month and increasing reliability. We streamlined it access provisioning, creating a more efficient process for adding software and system access for employees which saves our IT staff 20 hours per week. And we apply process automation to significantly cut manual work in our back office credit function, saving 80 hours per month. These are just a few samples of ongoing work, but these are real improvements, measurable, repeatable and aligned with our long term goals. I believe our culture of continuous improvement through the transformation, combined with our golden rule of treating people the way we want to be treated, is our secret weapon. Alongside that is our sound strategy and a disciplined approach to capital allocation. Our priorities are clear. Generate strong free cash flow, invest in the high return opportunities and pursue M and A that creates strategic value. With a 70 year heritage, we are building a company that is stronger, more efficient and more valuable year after year. To close, I want to thank our 6,000 employees, our customers and our shareholders. Worthington Steel is operating with a clear strategy, a culture of execution and and continuous improvement and a deep bench of talent. That's a powerful combination and I believe it sets us apart. Thank you for your time today and for your continued interest in Worthington Steel. Now I'll turn it over to Tim Adams to walk through our financials.

Tim Adams - Vice President and Chief Financial Officer - (00:11:12)

Thank you Jeff and good morning everyone. For the first quarter we are reporting earnings of $36.8 million or $0.72 per share as compared with earnings of $28.4 million or $0.56 per share in the prior year quarter. We closed on the Cedam acquisition on June 3rd. Cedam is reported on a one month lag and as such our first quarter includes two months of Cedam results. The minority interest associated with CEDOM is reported as redeemable non controlling interest in a new mezzanine equity section of our consolidated balance sheet as the CDM Purchase Agreement includes put and call options which are exercisable in euros several years from now. Mezzanine equity is presented at redeemable value in US dollars. Our earnings per share include a $0.01 negative impact shown as a deemed dividend on a redeemable non controlling interest due to a change in the redeemable value primarily associated with the dollar to euro exchange rate. There were several other unique items that impacted our quarterly results. First, the current quarter results include $1,000,000 or $0.01 per share of pre tax restructuring related to a gain on sale of an asset associated with our previously announced closure of the Worthington Samuel Coil Processing toll pickling facility in Cleveland. Additionally, in the current quarter we recognized $4.6 million or $0.04 per share of compensation expense within SGA related to a one time bonus paid to certain key Cedam employees upon closing of the Cedam acquisition. Finally, the current quarter included an $800,000 or $0.01 per share tax expense associated with the disallowance of certain tax assets due to the contribution of Noggled as part of the CEDAM acquisition. The prior year quarter included the recognition of a Tax Court ruling related to a Temple pre acquisition matter for which we were indemnified by the former owners of Temple. The net impact to earnings of the Tax court ruling was zero. However, we recognized $4.4 million of miscellaneous expense related to the indemnity payable offset by $4.4 million of tax income associated with a refund in the prior year quarter. Excluding these unique items and the deemed dividend on redeemable non Controlling interest on CEDOM, we generated earnings of $0.77 per share in the current year quarter compared with $0.56 per share in the prior year quarter. In the first quarter we had estimated pre tax inventory holding gains of $5.6 million or $0.08 per share compared to estimated pre tax inventory holding losses of $16.6 million or $0.25 per share in the prior year quarter. A favorable pre tax swing of $22.2 million or $0.33 per share. In the first quarter we reported adjusted EBIT of $54.9 million which was up $15.5 million from the prior year quarter adjusted EBIT of $39.4 million. The increase in adjusted EBIT is primarily due to higher gross margin and an increase in equity earnings at Serviacero partially offset by higher SGA expense. Gross margin increased $14.8 million as compared with the prior year quarter primarily due to higher direct material spreads combined with higher direct volumes partially offset by lower toll processing Gross margin. Direct spreads were up $23 million primarily due to the year over year improvement in pre tax inventory holding gains in the current year as compared with losses in the prior year. Higher year over year direct volume delivered an additional $4.6 million of gross margin. Offsetting these increases, our toll processing gross margin was down $11 million from the prior year primarily due to lower toll volume and a tolling mix that was lower value added. Equity earnings from Serviacero increased due to higher direct spreads, inventory holding gains as well as the favorable impact of exchange rate movements. The $10.9 million increase in SGA included a one time $4.6 million bonus paid to certain key CEDAM employees upon closing the acquisition I mentioned earlier. Excluding this one time item, SGA was up $6.3 million compared to the prior year quarter with the increase split equally between incremental Cedam expenses and an increase in other SGA primarily due to increased compensation expense. Next I will provide some perspective on our market and our shipments. The market pricing for hot rolled coil peaked at $950 per ton in March and has generally experienced downward pressure due to softer volumes in many markets. Despite an increase in tariffs on imported steel that was implemented in June. Current pricing for hot rolled coil is approximately $800 per ton, again reflecting softer market demand. Given that many of our contracts use lagging index based pricing mechanisms, we expect to generate inventory holding losses in the second quarter of fiscal 2026. We estimate those losses could be approximately 5 to $10 million as compared with the $5.6 million of estimated holding gains in the current quarter. Net sales in the quarter were $873 million, up $39 million or 5% from the prior year quarter primarily due to the addition of CDM and higher direct volume, partially offset by lower selling prices and to a lesser extent lower toll volumes and a toll processing mix that was unfavorable. We shipped approximately 929,000 tons during the quarter, down 7% compared with the prior year quarter due to the decrease in toll volumes. Direct sales volume made up 63% of our mix in the current year quarter AS compared with 56% in the prior year quarter. Direct sale volume increased 6% compared to the prior year quarter with the vast majority of the volume increase coming from our existing facilities complemented by the addition of cetm. We experienced pluses and minuses across various markets as customers continue to navigate uncertainty during the quarter. Automotive was a bright spot during the current quarter, our shipments to the Automotive market were up 17% compared to the prior year quarter. As we noted in prior quarters, we have won share in the automotive market. The new programs continue to ramp up and volumes have increased across the board for our D3 OEM customers. We expect volume from the new programs to continue layering in over the next few quarters. Similar to the past few quarters, our year over year shipments to the D3 OEMS grew more than OEM unit production. We estimate production grew approximately 5% for the Detroit 3 on a year over year basis while our D3 shipments increased nearly 13%. We continue to work closely with our automotive customers to provide solutions that create value for both sides. Our long standing relationships and collaborative approach are driving incremental growth in this market. The volume increase in the automotive market was partially offset by reductions in the construction, ag service center and heavy truck markets. While we saw some modest increases in the energy and container market, Our shipments to the construction market fell a modest 3% while our ag volumes were down nearly 50% compared with the prior year quarter. Primarily due to continued softness in the agricultural equipment market. Our shipments to the heavy truck market were down 7%. However, we were able to offset some of the softness with new business in the heavy truck market. Toll processing volumes were down 22% year over year for several reasons. First, the overall market was softer in the current year resulting in less toll processing from mills and service centers. Second, we closed the Cleveland area Worthington Samuel Coil processing facility in the fourth quarter of the last fiscal year. And finally, as we discussed last quarter, we were impacted by several customer decisions. For example, one customer changed a program from tolling to direct sale while another customer elected to resource a toll processing program to capture freight sales. When end market demand picks back up, we expect our toll processing volumes to increase. However, as we discussed in prior quarters, in normal market conditions we expect to see a decrease of approximately 100,000 annual toll processing tons primarily as a result of the Worthington Samuel Coil Processing consolidation from Cleveland to Twinsburg. Turning to cash flows in the balance sheet, cash flow from operations was a $5 million outflow and free cash flow was a $34 million outflow. Cash flows for the quarter were impacted by increases in working capital. During the quarter, we spent $29 million on capital expenditures related to a variety of projects, including the previously announced electrical steel expansions. Our CapEx forecast for fiscal 2026 remains at $100 million. Our disciplined approach to capital is aligned with long term priorities to support growth and customer needs even in uncertain times. We may revise our CAPEX estimate next quarter once we complete our review of CEDAM's CapEx priorities. On a trailing 12 month basis, we generated $34 million of free cash flow Wednesday. We announced a quarterly dividend of $0.16 per share, payable on December 26, 2025. We ended the quarter with $78 million of cash and our outstanding debt as of August 31 was $233 million, resulting in net debt of $155 million. Net debt increased over the sequential quarter primarily due to increases in working capital. Finally, I would like to thank everyone at Worthington Steel for making safety their highest priority and for driving results in a challenging market. With a strong balance sheet, a clear strategy and an agile team, Worthington Steel is well positioned to create value and move decisively when opportunities arise. I want to express my sincere gratitude to our entire team for their hard work and and for living Worthington's philosophy while delivering value to our shareholders. At this point, we would be happy to take your questions.

OPERATOR - (00:22:03)

We will now begin the question and answer session. If you would like to ask a question, simply press star followed by the number one on your telephone keypad. Our first question comes from the line of Phil Gibbs with Keybanc Capital Markets. Please go ahead.

Phil Gibbs - Equity Analyst - (00:22:18)

Hey, good morning.

Jeff Gilmore - President and Chief Executive Officer - (00:22:21)

Hey, Phil.

Phil Gibbs - Equity Analyst - (00:22:23)

Hey, Jeff and Tim. Can you maybe give us a little bit more color on the Cedam transaction, particularly in terms of the mezzanine financing structure? It's certainly something pretty unique, particularly when foreign currency is involved. So I think we're just trying to get a feel for how much you actually paid for Cedam, the 52% stake this go round and maybe what could be the residual unclear to us how much cash went out the door initially here.

Tim Adams - Vice President and Chief Financial Officer - (00:23:02)

Yeah, I understand. Phil, this is Tim. Good morning. Why don't we start with how we finance the acquisition and then I'll pivot to this concept of Mezzanine Equity. So the Cedam purchase price was composed of 60 million in cash and we disclosed that in the. In the 10k so 60 million of cash combined with the contribution of the German facility, that was the Noggled facility we purchased a couple of years ago. So we financed the seat of acquisition using the ABL. You can see that on last quarter's balance sheet. You may remember that we had a category called restricted cash and that was the cash that was earmarked for the cash portion of the transaction when it comes to the Mezzanine Equity piece of this. So typically minority interest of a majority owned joint venture sits in equity as permanent capital. So in Cedam's case, our partners have a put option that's outside of our control. So we can't classify it as minority interest on a, as part of permanent equity. So according to the accounting guidance, it's not truly really a liability either. So it sits between liabilities and equity in its own category. The minority interest is denominated in euros, so we have to adjust it for changes in exchange rates. The EPS adjustments this quarter reflect the change in FX between the euros and the dollars. So it's not mezzanine debt, it's Mezzanine Equity.

Phil Gibbs - Equity Analyst - (00:24:35)

Thank you. And regarding automotive, certainly some, some very strong share gains with the big three, as you mentioned. Jeff, in, in your prepared remarks, what do you see, what do you see moving forward for, for automotive and is there, is there more opportunity to, to, to layer in more business or share in, in 26?

Jeff Gilmore - President and Chief Executive Officer - (00:24:59)

Yeah, still cautiously optimistic. I know you're, you're very used to me saying that at this point, but you know, we project we'll probably finish the year at like 15 million unit build rate, which honestly we're pleased with. If you recall just a couple calls ago, forecasts were all over, they were as low as 13.5. So it's been a bit more resilient than we thought and we would certainly hope into 26, you know, there's an opportunity for a little bit more market recovery there, hopefully, you know, with some tailwinds from a couple more interest rate cuts. However, regardless of the direction of the overall automotive market, yes, we've, the commercial group has continued to do an excellent job gaining market share. You saw that layered in quite nicely last quarter and, and again this quarter. And you know, to answer your question specifically, are there, are there further opportunities to gain market share? The answer to that question is yes, the group continues to find opportunities. I think you'll continue to see some of that market share layered in and you know, we'll be coming up on contract season soon and I think we have some very good prospects there. So you know, that would be looking at market share that could be filtering in next calendar year. So we continue to see very good momentum there from our commercial team working with those customers.

Phil Gibbs - Equity Analyst - (00:26:41)

Thanks. And the last question I have is, just because I've been getting it from investors, is the derivative section 232 tariffs on electrical steel laminations certainly know you've got operations north and south of the border. And I think the crux of the question is how do you manage through that environment and continue to try to achieve your profitability goals and volume aspirations. Thanks.

Jeff Gilmore - President and Chief Executive Officer - (00:27:16)

Thanks, Bill. Still bullish on electrification and on both of those projects that you referenced in Canada and Mexico. As far as electrical steel laminations and transformer cores being included in the 232 derivatives, Bill, we've seen little impact. We don't think we're going to see any material impact going forward. You know, the customers are paying or willing to pay the tariffs. And then Phil, we also have pretty significant chunk of our customer base that is USMCA compliant. So it would not affect them. But we're in a good position. I mean those are the robust markets. The demand is extremely strong. And just sticking to the facts, there's not the capacity or efficient enough supply chains in the US to be able to supply those customers. So we're positioned well even with those being included as derivatives. Part of the derivative products at 232.

Phil Gibbs - Equity Analyst - (00:28:32)

Thank you.

Jeff Gilmore - President and Chief Executive Officer - (00:28:35)

Thank you.

OPERATOR - (00:28:35)

Comes from the line of John Tomazos with John Tomasos Ferry Independent Research. Please, please go ahead.

John Tomazos - Independent Research Analyst - (00:28:44)

Thank you for taking my question. The August 11th US Steel Coke accident took out 1.7 million tons of coke capacity for them, which I guess equates to 3 to 4 million tons of slabs, presumably. My first question is Worthington's a preferred customer and you've had no disruption or interruption. The second question, should we interpret that as taking 3 to 4 million tons of crude capacity out of the market until fixed, or would you expect US steel to pay extra to buy third party coke, to buy prime scrap for 5,500 a ton or buy slabs, which with tariffs are harder to get by too?

Jeff Gilmore - President and Chief Executive Officer - (00:29:43)

John, the first part of that question I can easily answer and it's not going to have any impact on our business. Certainly we have a great relationship with U.S. steel, but we have equally good relationships with several other mill sources. So we're not seeing would not anticipate any interruptions in our supply chains. As far as the second question, I just honestly would have to say I don't know. I would rule out buying slabs for the very reason that you referenced. As far as the other two options, I'm not sure I don't have an answer to that question.

OPERATOR - (00:30:32)

Our final question will come from the line of Martin Englert with Seaport Research Partners. Please go ahead.

Martin Englert - Research Analyst - (00:30:39)

Hello. Good morning everyone. Question on the direct volumes were 63% of the mix. Toll volumes down 22% year on year. How much of the toll decline was related to the closure of Worthington Samuel versus Mill and other customers? Is that just that 100,000 that you cited earlier as far as the Worthington Samuel portion, or is there something different going on there?

Tim Adams - Vice President and Chief Financial Officer - (00:31:09)

There's a couple things. So half, half of that reduction is due to market conditions. Right. So the mills and service centers are a little bit slower. And then the vast majority of the other piece of that is related to the Worthington Samuel coal processing shutdown. There's some other things going on there. For example, we had a customer ask us to change their program from toll to direct. So that's in that number as well as, you know, we. We had a customer decide to. To move a program because they could generate some freight savings. But those are relatively small in, in comparison to the. The Worthington Samuel Co processing shutdown. Okay.

Martin Englert - Research Analyst - (00:31:49)

Would you generally expect to remain above that 60% level that we've been at. For the past couple.

Tim Adams - Vice President and Chief Financial Officer - (00:31:56)

Yeah, I think going forward. Yeah, I think, I think going forward, Martin, I think our direct sale volume is probably going to be in that 60 to 65% range and total then be 35 to 40%.

Martin Englert - Research Analyst - (00:32:10)

Okay, thank you for that. Can you discuss what you're seeing so. Far with volumes in fiscal 2Q including seasonal factors that we should be taking into consideration? I guess, you know, kind of what I'm getting at. Things continue to trend like down overall, you know, around mid single digits year on year.

Tim Adams - Vice President and Chief Financial Officer - (00:32:35)

Well, I mean, from a seasonality perspective, Martin, remember that. So Q1 is typically the average quarter and Q2 is usually 3 or 4% below that. And Q3 is usually 3 or 4% below Q1 as well. I think we would expect normal seasonality because Thanksgiving is not going away. Right. You've got the holidays in there that typically don't go away. So we'll see that. And I think we talked a couple of weeks ago where we said demand was okay. And I think we don't see any big motivator or any big event that's going to trigger a giant increase in demand. So I think you're going to see markets kind of until there's more clarity and some of this uncertainty goes away on tariffs and other things. I think you're going to see these markets just kind of move along as they have been.

Martin Englert - Research Analyst - (00:33:27)

With recent orders. Are you seeing any change in upstream they'll order books and lead times?

Tim Adams - Vice President and Chief Financial Officer - (00:33:37)

No, we haven't. Haven't seen any changes there at all at this point.

Martin Englert - Research Analyst - (00:33:44)

Okay, appreciate it. Thank you very much.

Tim Adams - Vice President and Chief Financial Officer - (00:33:47)

Thank you.

OPERATOR - (00:33:49)

And I will now turn the call back over to Jeff Gilmore, president and CEO, for closing remarks.

Jeff Gilmore - President and Chief Executive Officer - (00:33:57)

Thanks again for listening in. Again, very good quarter in a, in a tough environment. And I think if you look at what we're able to, what we are able to control, it was a great quarter. The group is managing costs at a very high level. We are gaining market share and we look forward to more interest rate cuts. We look forward to getting a continental agreement put in place. And I think if we're able to see those with how we position the company, we can start to move our barometer from cautiously optimistic to optimistic. But right now we're very focused on executing our strategy and we will look forward to talking to you all next quarter and sharing our success. Thank you.

OPERATOR - (00:34:54)

That concludes our call today. Thank you all for joining. You may now disconnect.