Worthington Steel, Inc. Q1 FY2027 earnings call

• Klockner Integration Milestones: Closed the acquisition on June 3rd; shares delisted August 12th; DPLTA signed September 8th pending shareholder approval. Early integration teams are collaborating to understand processes and cultures, aiming for formal synergy capture starting Q1 calendar 2027.
• Market Conditions: Described as one of the most challenging steel supply environments seen, with tight supply, long lead times, and shifting schedules. Execution focuses on helping customers secure material through communication and problem-solving.
• End Market Performance:
  • Automotive: Resilient North American production expected to remain flat YoY. Won new business via technical solutions; TWB joint venture received two supplier awards from Subaru.
  • Agriculture: A bright spot with a 40% YoY increase in shipments, driven by OEM and grain bin markets.
  • Construction: Demand down due to interest rate sensitivity and consumer confidence issues; data center construction provides some support.
  • Heavy Truck/Trailer: Stabilizing with share gains and new wins, though not yet fully recovered.
• Strategic Priorities & Operational Excellence: Focus on disciplined integration rather than speed. Leveraging AI and technology to improve inventory decisions (MRO network) and simplify workflows (indirect purchasing). Monroe, Ohio facility unlocked capacity through internal engineering and asset optimization without capex.
• Supply Chain Strategy: Both companies prioritize buying locally/regionaly (99% of Klockner’s purchases from domestic mills), complementing Worthington’s Midwest/Southeast footprint.

Total net sales were $2.7 billion, an increase of approximately $1.9 billion year-over-year, primarily driven by the full consolidation of Klockner. Adjusted EBITDA was $111 million. Legacy Worthington Steel net sales were $954 million (up 9% or $81 million YoY). The legacy business accounted for roughly 35% of total reported net sales, while Klockner contributed the remaining ~65%. Specific revenue contribution percentages for Klockner as a standalone segment are not explicitly broken out in the transcript beyond these aggregate figures.

• Inventory Holding Gains: Estimated pre-tax inventory holding gains in the legacy Worthington Steel business of $10–$15 million for Q2 FY2027.
• Capital Expenditures: Combined CapEx guidance for FY2027 is $160–$180 million. First-quarter spending was high ($63 million) but weighted toward earlier projects; spending is expected to moderate later in the year.
• Financial Targets: Previously communicated synergy and deleveraging targets remain unchanged. No trailing 12-month leverage ratio will be reported until a full year of Klockner results is available.
• Dividend: Quarterly dividend maintained at 16 cents per share.

• Integration Risks: Success depends on effective execution of the DPLTA and shareholder approval. Cultural and process alignment between Worthington and Klockner requires careful management.
• Macro Sensitivity: Construction demand remains sensitive to interest rates and geopolitical stability; rates may remain a headwind longer than expected.
• Supply Constraints: Tight steel supply, limited imports, and extended lead times pose operational challenges and limit ability to quote short-term contract business.
• Purchase Accounting Impact: Significant non-cash impact from inventory step-up ($43 million reduction in Q1 gross margin/EBITDA); residual impacts expected in Q2.
• Continuing Operations Loss: Reported net loss from continuing operations (Becker Stahl marketing) of $7 million due to acquisition-related expenses, remeasurement losses, and tax write-offs.

Q: Analyst asked about volume resilience despite seasonality and spread sustainability given rising hot rolled prices. / A: CEO attributed volume beat to market share gains in auto, heavy truck, and agriculture, noting they missed ~30,000 tons due to supply constraints. CFO and CEO confirmed spreads averaged >$200/ton and are sustainable because the market remains tight with limited imports and 90%+ contractual business, reflecting benefits in Jan 1st contract season.

Q: Analyst asked about German law regarding minority shareholders retaining stakes post-DPLTA. / A: CEO explained that if approved, minorities get a put option at €11/share or can stay for a guaranteed 6% annual cash compensation (€0.66/share) indefinitely. CFO added that future gross margins will differ due to Klockner’s lower value-added mix initially, but synergies include Worthington making galvanized for Klockner and working capital improvements targeting $150 million.

Q: Analyst requested normalized Klockner EBITDA excluding the $43M purchase accounting step-up and geographic earnings breakdown. / A: CFO declined to provide segment-level pro forma data or geographic splits, citing early integration stage. He clarified the $43M inventory step-up was non-cash and additive to reported adjusted EBITDA ($111M + $43M = $154M representative EBITDA). CEO noted Klockner sources 99% domestically, aligning with Worthington’s regional strategy.

Q: Analyst asked about the rationale for selling Becker Stahl and use of proceeds. / A: CFO stated Becker Stahl is being marketed for sale as part of ongoing portfolio optimization. Proceeds will primarily be used for debt reduction, supporting the company’s deleveraging targets alongside synergy capture.