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WS

Worthington Steel, Inc. (WS)·Q1 2025 Earnings Summary

Executive Summary

  • Q1 FY2025 net sales were $834.0M, down 8% YoY; diluted EPS was $0.56, with adjusted EPS also $0.56. Gross margin fell to $100.4M, and adjusted EBITDA declined to $55.6M as lower direct spreads and volumes weighed on results .
  • A significant driver was an estimated pretax inventory holding loss of $16.6M, a swing vs a $15.5M gain in the prior-year quarter; management also cited lower Serviacero equity income (down to $1.3M) and higher stand-alone company SG&A as headwinds .
  • Cash generation improved: cash from operations was $54.6M and free cash flow $33.1M; net debt decreased to $86.2M. The Board declared a $0.16 dividend payable Dec 27, 2024 .
  • Guidance: inventory holding losses are expected to moderate in Q2 FY2025 to ~$10–$15M pretax; auto volumes are expected to normalize as model changeovers and pricing strategy issues resolve, while trade cases may create upward steel price pressure longer term .
  • Strategic catalysts include electrical steel capacity expansions in Mexico and Canada (production targeted for late 2025), licensed ablation technology at TWB, and a two-year transformer backlog supporting electrical steel growth .

What Went Well and What Went Wrong

What Went Well

  • Improved cash generation and deleveraging: operating cash flow of $54.6M, free cash flow of $33.1M, and net debt reduced to $86.2M .
  • Positive toll mix and value-added processing: higher toll spreads from favorable mix (galvanizing and tailor-welded blanks) offset part of direct spread pressure .
  • Strategic expansion momentum and customer interest: “We remain bullish on the electrified vehicle and transformer markets… there continues to be an 18- to 24-month backlog for transformers” (CEO) ; TWB pricing actions to recover freight/other costs helped spreads (CFO) .

What Went Wrong

  • YoY margin compression and spread headwinds: adjusted EBIT fell to $39.4M and adjusted EBITDA to $55.6M, driven by lower direct spreads and estimated inventory holding losses .
  • Automotive volume softness and program timing: direct sale volumes to auto fell 10% YoY due to model changeover delays and a customer’s commercial/pricing strategy reset; shift from direct to tolling in some TWB programs also impacted mix .
  • Serviacero equity income drop: equity income fell to $1.3M vs $9.0M prior-year, due to lower inventory holding gains and peso volatility (depreciation vs prior-year appreciation) .

Financial Results

MetricQ3 FY2024Q4 FY2024Q1 FY2025
Net Sales ($USD Millions)$805.8 $911.0 $834.0
Gross Margin ($USD Millions)$120.1 $131.0 $100.4
Operating Income ($USD Millions)$66.3 $67.3 $43.4
Diluted EPS (GAAP) ($)$0.98 $1.06 $0.56
Adjusted EPS ($)$0.99 $1.06 $0.56
Adjusted EBIT ($USD Millions)$66.9 $70.4 $39.4
Adjusted EBITDA ($USD Millions)$82.8 $86.5 $55.6
Adjusted EBITDA Margin (%)10.3% 9.5% 6.7%
Volume (tons)985,668 1,029,565 994,093

Segment/End-Market Mix (sales share):

End-Market MixQ4 FY2024Q1 FY2025
Automotive (% of sales)52% 51%
Construction (% of sales)14% 11%

KPIs and Balance Sheet:

KPIQ3 FY2024Q4 FY2024Q1 FY2025
Estimated Inventory Holding Gains/(Losses) ($USD Millions, pretax)+$19.3 -$3.4 -$16.6
Cash from Operations ($USD Millions)$44.7 $35.6 $54.6
Free Cash Flow ($USD Millions)$22.3 -$9.2 $33.1
Net Debt ($USD Millions)—$107.8 $86.2
Equity in Net Income of Unconsolidated Affiliate ($USD Millions)$2.9 $6.7 $1.3
Dividend Declared ($/share)$0.16 $0.16 $0.16

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Inventory Holding Losses (pretax)Q2 FY2025n/a~$10–$15M New quantitative range
Inventory Holding Losses (pretax)Q1 FY2025~$15–$20M (expected from Q4 call) Actual: $16.6M loss Met within range
CapEx (Strategic and Corporate Projects)FY2025~$100M ~$110M (adds ~$10M for ERP/ablation) Raised
CapEx (Strategic and Corporate Projects)FY2026~$100M ~$110M (adds ~$10M) Raised
DividendQ1 FY2025$0.16/share $0.16/share declared for Dec 27, 2024 Maintained
Working Capital OutlookNear-termRelease expected as steel prices fall Continued release over time (qualitative) Maintained view

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 & Q4)Current Period (Q1 FY2025)Trend
Automotive volumes and programsQ3: Auto direct tons down 4% due to end-of-life programs and launch delays ; Q4: auto direct volume down 1%; seasonality noted 10% YoY decline in direct auto volume; model changeover delays; customer retooled pricing strategy; shift of some TWB customers to tolling Stabilizing expected; normalization anticipated
Inventory holding gains/lossesQ3: +$19.3M gains; warned Q4 would flip to losses ; Q4: -$3.4M and expected higher losses in Q1 ($15–$20M) -$16.6M; Q2 expected ~$10–$15M Improving sequentially (smaller losses)
Toll mix/value-added processingQ3/Q4: favorable mix with more galvanized and TWB, boosting margins Favorable toll mix continued, partially offsetting direct spread pressure Sustained positive mix
Electrical steel expansionsQ3: Mexico/Canada expansions on time; 50% Canada capacity pre-sold ; Q4: presses arriving; late-2025 start Mexico presses installed/incoming; customer wins to fill presses; late-2025 production targets reiterated On-track; growing customer commitments
Transformer market & gridTwo-year backlog reiterated; bullish long-term 18–24-month backlog; supportive of expansions; Cliffs’ entry not disruptive Structural demand tailwind
Trade cases/steel pricingQ4: volatile prices; caution on holding losses Fair trade initiatives likely to pressure steel prices upward over longer term Potential price support medium term
Serviacero JV earningsQ3: equity income $2.9M Down to $1.3M; impacted by lower inventory gains and peso depreciation FX sensitivity; potential recovery with pricing

Management Commentary

  • CEO (Geoff Gilmore): “Demand is stable and we continue to deliver unique, custom, value-added solutions for our customers by transforming metals, providing lightweighting solutions and supporting electrification.”
  • CEO: “Electric vehicles, data centers and AI continue to drive the need for electrical infrastructure and there continues to be an 18- to 24-month backlog for transformers.”
  • COO (Jeff Klingler): “We were unexpectedly challenged during the quarter as one of our key customers adjusted their commercial and pricing strategy… [now] largely back on track.”
  • CFO (Tim Adams): “We had estimated pretax inventory holding losses of $16.6 million… compared to estimated pretax inventory holding gains of $15.5 million… an unfavorable pretax swing of $32 million.”
  • CFO: “We estimate inventory holding losses in Q2 could be approximately $10 million to $15 million on a pretax basis.”

Q&A Highlights

  • Auto dynamics: Management expects normalization as model launches progress and a customer’s pricing strategy resets; some TWB customers shifted to tolling (customer-owned material) .
  • Galvanized demand/capacity: Stable demand; open capacity at Spartan and Delta could pursue additional market share; trade case announcements already slowing imports .
  • Serviacero equity income: Drop driven by fewer inventory gains and peso volatility; impacts were roughly equally weighted .
  • Tempel ERP benefits: Early-stage; focus is on timely data and process improvement; savings quantified as initiatives mature .
  • Competitive landscape: Cleveland-Cliffs’ transformer plans viewed as non-disruptive given industry backlog; WS to remain focused on laminations/cores partnering with transformer OEMs .

Estimates Context

  • Wall Street consensus via S&P Global (EPS and revenue) was unavailable at the time of analysis due to request limits. As a result, we cannot quantify beats/misses versus consensus in this recap.

Key Takeaways for Investors

  • Margin headwinds were largely cyclical: lower direct spreads and a sizable inventory holding loss drove YoY compression; sequential holding losses are expected to moderate in Q2 (~$10–$15M pretax), a potential near-term relief .
  • Automotive softness appears transitory: management cited model launch delays and a customer pricing reset; expect normalization with continued market share gains in value-added solutions .
  • Structural growth intact: electrical steel expansions in Mexico/Canada are on time, with customer wins and a two-year transformer backlog supporting late-2025 volume ramp and higher-margin mix .
  • Cash generation and balance sheet strength: improved operating cash flow and free cash flow, plus lower net debt, provide flexibility for strategic capex and selective M&A; dividend maintained .
  • Trade case tailwinds: fair trade initiatives could support steel pricing longer term, aiding spreads and inventory valuation dynamics beyond near-term volatility .
  • Watch JV/FX exposure: Serviacero earnings proved sensitive to Mexican peso swings and inventory holding gains; recovery hinges on pricing and FX stabilization .
  • Execution on transformation: corporate process improvements and value-added pricing actions (e.g., TWB cost recovery) demonstrate levers to expand margins toward long-term targets .