Worthington Steel, Inc. Q3 FY2026 earnings call

• Announcement and progress of the Klockner acquisition: Proposed acquisition is the largest in history, voluntary tender offer launched, regulatory approvals being obtained, and expecting to close in second half of calendar year. Integration planning underway.
• Third quarter financials: Net sales $769.8M, adjusted EBITDA $41.6M, adjusted EPS 27 cents. Non-recurring items impacted comparability.
• Electrical steel business: Canada new facility production shifting, over 60% of increased capacity sold; Mexico traction motor lamination facility expansion on track but with OEM delays affecting production start timing.
• Transformation efforts: Implemented lean flow operating model at Delta Ohio facility reducing inventory; working on adding predictive AI tools; transforming administrative functions using automation and AI to address manual and repetitive work issues.
• Market outlooks: Automotive market cautiously optimistic with USMCA agreement expected to remove uncertainty; agriculture nearing market cycle trough with slow rebound expected; construction data center growth to continue with expansion in second half of 2026 due to pent-up demand; heavy truck and trailer market expected to pick up in back half of 2026.

Net sales were $769.8 million. Adjusted EBITDA was $41.6 million. Adjusted earnings per share were 27 cents. Direct sales volume increased 4% year over year, making up 63% of the mix. Direct shipments to the automotive market increased by approximately 13%, outpacing Detroit tree production growth of 3% for the quarter. Agriculture volume was up 9%, container volume up 11%, energy down 22%, construction down 7%, service center down 21%, heavy truck down 12%. Toll processing volumes declined 22% year over year due to closing of the Cleveland area Worthington Samuel Coil processing facility and near-term demand headwinds.

• Market backdrop: Modestly encouraging for second half of 2026 with key economic indicators showing return to expansion. Automotive market expected to be more robust due to USMCA and other factors; agriculture slow rebound in late 2026; construction data center growth in second half with lower interest rates and pent-up demand; heavy truck and trailer market pickup in back half.
• Electrical steel: Canada new facility 75% capacity sold, sequencing startup; Mexico traction motor lamination facility production start timing adjusted due to OEM delays but expecting full production volumes in fiscal 2029 at 75% capacity based on current contracts.
• Financial: Estimates for fourth quarter of fiscal 2026 pre-tax inventory holding gains within $15 - $20 million; net working capital expected to have upward pressure in Q4 due to steel price increase.

• Automotive market uncertainty: Shift from government-driven BEV mandate to consumer-led hybrid demand with OEMs rethinking electrification strategy causing delays in production starts for some electrical steel programs.
• European challenges: Challenging economic conditions in Europe, especially in electrical steel and automotive end markets with weak demand and intense competition from China.
• Energy and geopolitical risks: Energy price fluctuations and geopolitical events may impact economic conditions and business operations.
• Acquisition risks: Klockner acquisition subject to tender process and required regulatory approvals, with potential for non-approval or delays affecting the transaction.

Q: Hey, with direct volumes for the third quarter only up 3% year over year, I'm surprised to hear you say the direct auto shipments increased by 10%. Assuming much of this was owed to the market share wins you've outlined, can you talk through some of those wins and the impact they're having?

A: Sam, this is Jeff. Clearly positive impact. If you look at automotive as a whole, it was down maybe 1 or 2% actually year over year. And so I think as we mentioned, if you look specifically at the Detroit three, their production was up 3% and ours were up 13. So, if you look at the difference in the gap, that really is that market share gain that we've been speaking about the last several quarters. And, you know, fortunately for us, we've continued to win market share with those customers mentioned as well as several others. So that's something that you'll continue to see layered in. The beginning of your question was, hey, being up 13% there, but only 3% as a whole. As you're aware, weather in the Midwest was quite challenging late January and specifically for a week. And that absolutely disrupted the entire supply chain, whether it was the mills trying to ship out to us receiving in and then to us trying to ship to our customers. And probably, you know, the impact there was 10 to 15,000 tons. And look, the mills are extremely busy right now. They have extended lead times. Their on-time delivery performance has been challenging. And so we just weren't able to make up for that backlog during the month of February. We did some. BUT AGAIN, PROBABLY COULD HAVE SHIFT CLOSER TO 15,000 ADDITIONAL TONS. FORTUNATELY, THOSE AREN'T ORDERS LOST. WE'LL MAKE UP THAT BACKLOG AND ARE STARTING TO DO SO ALREADY THIS MONTH.

Q: And then on to Klockner, how should we think about the over $100 million of short-term debt you use 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.

A: Yeah, Sam, this is Tim. So we had the ability through antitrust, right? We had to look at the regulations of antitrust as far as how much we could buy. And we could buy in the open market 10%. And we use that opportunity when the tender offer was announced to buy in the open market. So we increased our ABL by 126 million and we used 101 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. So you've seen the price clock rise a little bit. That shut us out of the market. So we bought shares early in the quarter and we haven't bought much since.

Q: And then last one for me, steel pricing obviously 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 to $20 million of inventory holding gains?

A: Yeah, I think there, I mean, we are definitely going to see some upward pressure on working capital. I think you can kind of look at the percentage price increase and kind of translate that into how much working capital should go up. But but you will absolutely see some upward pressure on working capital in Q4 for sure.

Q: The German stock market is down 8% year-to-date and their economy is more vulnerable to the energy escalation as they're almost entirely an energy importer. Does your view of the amount of debt level that you want to hold post-acquisition or the degree of exposure to Europe change our incursion into Iran and the subsequent events in the last four weeks?

A: John, good question. Hi, by the way. Thanks for calling in. Look, we went into this acquisition eyes wide open and a clear understanding on Europe and the current challenges. I think a few things. First, their economy, I think they are doing their own things to increase, I'll call it protectionism, which certainly will help their economy specifically, you know, I think aimed at China. I think they've increased spend on defense pretty significantly here over the last, you which should benefit the business environment, specifically manufacturing. But, you know, what we did not predict was a war with China and the impact or China, I'm sorry, with with Iran and the impact on on the oil prices. So, you know, right now, it's not having a major impact on on the business here or or Europe. But if this is prolonged, yeah, then we certainly are concerned about their economy, but we're equally concerned about the economy here. Obviously, higher energy prices, higher gas prices is certainly not going to be good for either economy. So that's really our position on it right now.

Q: Following up on what you just said, Would you then want to have more equity in your financial structure and less debt?

A: No, John, we're comfortable with the capital structure where we're moving forward right now. We're quite comfortable with the debt level that we'll be carrying forward. And, you know, to be more transparent, it's because we're very confident in our plan and how we'll go about paying that debt down over time. So we haven't, had any serious discussions about reducing the debt and increasing equity as part of the capital structure. And I think we're going to be in very good shape.