Worthington Steel, Inc. (WS) Earnings

Management highlights

### Strategic Acquisition - Completed the Klockner & Company transaction on June 3rd, becoming a 62% majority shareholder. This is the largest acquisition in company history, expanding scale, processing capabilities, geographic footprint, and end market diversification by adding aluminum, stainless, long products, plate, and fabrication to Worthington's existing carbon flat roll and electrical steel portfolio. - Management plans to pursue a Domination and Profit and Loss Transfer Agreement (DPLTA, a German corporate structure) to enable more effective coordination of the combined business, and will pursue delisting of Klockner shares to simplify corporate structure, reduce administrative burden, and increase operational flexibility. - The company targets $150 million in annual EBITDA synergies, with an additional $150 million in working capital improvements, expected to be split 50/50 between year one and year two post-close. Management remains highly confident in hitting these synergy targets and cutting combined debt in half over the same period. ### End Market Conditions - Automotive: North American production is steadier than expected, with mix shifting toward hybrids as EV growth slows. Worthington has outperformed overall market build rates and gained market share, with additional meaningful share gains expected in fiscal 2027 as new programs launch. - Construction: Conditions are mixed, with strength in data center projects but broader weakness driven by high interest rates. Customers remain disciplined, and a broad recovery is not expected until interest rates decline meaningfully. - Agriculture: The sector saw volume improvements from share gains this quarter, but the overall market remains weak, and recovery is expected to be gradual. - Heavy truck and trailer: Shipments declined this quarter, but signs of improvement are emerging in the Class 8 segment, and management expects a rebound in the second half of calendar 2026, with a trailer market rebound pushed to 2027. ### Operational Transformation - Successfully deployed demand-driven lean flow principles at the Bowling Green, Kentucky facility (following prior implementation at Delta Ohio), reducing inventory by 37% while maintaining 100% on-time delivery, and freeing floor space for future growth without additional capital investment. The company is scaling this operating model across its legacy footprint and evaluating deployment across the Klockner network to structurally lower working capital. - Expanded AI automation to customer order management at Spartan Steel Coating, developing an AI agent that processes variable customer work orders automatically with over 90% testing accuracy. The tool adapts to existing customer processes rather than requiring customer changes, reducing manual labor and freeing staff for higher-value work. Management will continue investing in AI and expects to announce new partnerships to accelerate AI adoption, with no specific fixed budget for AI spending in fiscal 2027. - Received third consecutive General Motors Supplier of the Year award (fourth total) and 14th consecutive John Deere partner-level supplier rating, and earned 14th consecutive Top Workplace designation in Central Ohio.

Guidance

- Legacy Worthington Steel fiscal 2027 capital expenditures are expected to be approximately $60 million, covering maintenance projects to keep key assets operational. - Pre-tax inventory holding gains for the first quarter of fiscal 2027 are estimated to be in the range of $10 to $15 million. - Value-added spreads for galvanized and cold rolled strip, a core portion of Worthington's business, have recently improved to near or above $200 per ton from a low of $95 per ton. Management expects this improved spread environment to hold over the next 6-12 months if current conditions continue. - Combined full company earnings releases for fiscal 2027 will be scheduled a couple of weeks later than the company's prior historical timing. Core financial priorities for fiscal 2027 are supporting Klockner integration, executing on synergy plans, completing underway strategic growth projects, improving electrical steel performance, and maintaining disciplined capital allocation. - No material changes to prior long-term growth guidance for electrical steel, which remains a core long-term growth platform supported by electrification and grid investment trends.

Segment performance

Overall net sales for the fourth quarter of fiscal 2026 increased 12% year-over-year to $929.2 million. Adjusted EBITDA was $75.2 million, adjusted earnings per share (EPS) was $0.74, and reported net loss attributable to controlling interest was $48.7 million ($0.98 per share), impacted by one-time non-recurring items. Total shipments were approximately 939,000 tons, down 4% year-over-year. Direct sale volume represented 65% of total shipment mix (up from 60% in the prior year quarter) and increased 3% year-over-year: direct shipments to automotive rose 5% year-over-year, energy volume increased 24%, agriculture volume rose 11%, construction shipments decreased 14%, and heavy truck shipments decreased 14% year-over-year. Toll processing volumes declined 15% year-over-year, with approximately 75% of toll volumes processed for steel mills. Adjusted EBIT was $54 million, down $16.1 million year-over-year, driven by lower direct spreads, lower toll volumes, and higher SG&A, partially offset by higher direct volumes and improved toll mix.

Risks & headwinds

- Near-term macroeconomic risks include ongoing sensitivity to high interest rates, broader geopolitical uncertainty, and volatile steel prices. A sustained high interest rate environment continues to suppress construction demand and delay customer investment decisions. - Near-term weakness in electrical steel markets: Europe has seen softer than expected economic activity, the U.S. has faced increased foreign competition, and there has been a temporary slowdown in industrial motor demand, which led to a $94.5 million pre-tax non-cash impairment of electrical steel goodwill and long-lived assets in the quarter. - Steel market volatility: Mill maintenance outages are expected to keep flat-rolled steel supply tight and prices volatile in the near term, and lagging index-based contract pricing creates variability in gross margins as steel prices change. - The DPLTA approval and full Klockner integration process requires completion of German legal procedures, which adds timing uncertainty to full synergy realization. - Uncertainty around USMCA trade policy creates uncertainty for North American supply chain planning, which can delay customer investment and reshoring decisions.

Analyst Q&A

• Q: Are automotive OEMs shifting away from aluminum back to steel, and will this trend accelerate in 2026/2027? /

  A: Management has not observed any major material shifts to date. While OEMs are evaluating product substitutions, aluminum price trends have not yet made a broad shift back to steel attractive. Most potential substitution would occur on vehicle exterior closures, a segment that Worthington Steel does not currently serve, so any such shift would have little impact on the company's business. Worthington's automotive portfolio focuses on propulsion systems and interior components.\n\nQ: Is there an increase in reshoring of auto supply chain production from Mexico to the U.S.? / A: Management has not observed meaningful reshoring movement to date. OEMs are evaluating potential reshoring opportunities, but no major decisions are expected until there is greater clarity on finalized USMCA terms. Closer, faster USMCA agreement completion would likely increase the likelihood of reshoring announcements.\n\nQ: What is the timeline and expected split for the targeted $150 million in Klockner synergies, and how confident is management in the target? / A: Management reaffirms the $150 million EBITDA synergy target, with an additional $150 million in working capital value, and expects 50% of the synergies to be realized in year one post-close, and 50% in year two. Management remains highly confident in achieving the full synergy target, and also expects to cut combined debt in half over the same two-year period. Full synergy capture will be accelerated once DPLTA approval is obtained.\n\nQ: How will the AI order management tool reach 100% accuracy from the current 90% testing accuracy? / A: The remaining 10% accuracy improvement is expected to come from additional testing and training with more accurate historical transaction data. Like any new process, the AI tool will benefit from trial and error refinement, and management expects to reach full usable accuracy smoothly without major challenges.