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WS

Worthington Steel, Inc. (WS)·Q2 2025 Earnings Summary

Executive Summary

  • Q2 FY2025 delivered improved profitability despite lower volumes and pricing: net sales $739.0M (-9% YoY), diluted EPS $0.25 (vs. loss of $0.12 YoY), adjusted EPS $0.19, adjusted EBITDA $30.6M (up from $23.0M YoY) .
  • The quarter was pressured by automotive production cuts at one Detroit OEM (>30% volume decline at that customer), bad-debt charges ($2M), and higher professional fees ($2M) tied to the pending Sitem acquisition; other OEM share gains offset much of the auto impact .
  • Management raised FY2025 capex guidance to $125M (from $110M) and expects inventory holding gains of ~$20–$25M pre-tax in Q4 FY2025; dividend maintained at $0.16 per share .
  • Near-term catalysts: expected Q4 holding gains, normalization at the impacted OEM, progress/closing on Sitem, and electrical steel capacity additions in Mexico (fall 2025) and Canada (late CY2025/early CY2026) .

What Went Well and What Went Wrong

What Went Well

  • EPS swung to positive: diluted EPS $0.25 (vs. $(0.12) YoY); adjusted EPS improved to $0.19 (vs. $0.11 YoY) as spreads and non-GAAP normalization aided results .
  • Adjusted EBITDA rose YoY to $30.6M (vs. $23.0M), with gross margin up $19.8M on higher direct spreads (holding-loss swing favorable vs. prior year) .
  • Strategic progress: definitive agreement for a 52% stake in Sitem to strengthen European electrical steel laminations; continued customer awards and recognition; pipeline building for TWB ablation technology .
    • “Worthington Steel delivered a solid quarter despite headwinds…well-positioned to capitalize on key end market trends with our high value-added solutions” — Geoff Gilmore, CEO .

What Went Wrong

  • Volume and pricing pressure: shipments down 3% YoY to ~936K tons; direct selling prices down ~4%; net sales -9% YoY to $739.0M .
  • Automotive disruption: one Detroit OEM cut builds leading to >30% customer-specific volume decline; auto shipments overall down 2% YoY (offset by +30% with other Detroit OEMs) .
  • Non-recurring charges and fees: bad debt ($2M combined) and professional fees ($2M) tied to acquisitions; lower equity income from Serviacero on spreads and FX .
    • “We had an increase in bad debt…about $2 million…professional fees, probably about $2 million” — Tim Adams, CFO .

Financial Results

Quarterly performance and trends

MetricQ1 FY2025Q2 FY2025Q3 FY2025
Net sales ($USD Millions)$834.0 $739.0 $687.4
Diluted EPS ($USD)$0.56 $0.25 $0.27
Adjusted EPS ($USD)$0.56 $0.19 $0.35
Gross margin ($USD Millions)$100.4 $80.0 $81.2
Adjusted EBIT ($USD Millions)$39.4 $14.3 $25.3
Adjusted EBITDA ($USD Millions)$55.6 $30.6 $41.9
Volume (tons)994,093 936,069 881,410
Net earnings margin (%)3.4% 1.7% 2.0%
Adjusted EBITDA margin (%)6.7% 4.1% 6.1%

Prior-year quarter comparisons

MetricQ1 FY2024Q2 FY2024Q3 FY2024
Net sales ($USD Millions)$905.8 $808.0 $805.8
Diluted EPS ($USD)$1.19 $(0.12) $0.98
Adjusted EPS ($USD)$1.26 $0.11 $0.99
Adjusted EBIT ($USD Millions)$80.5 $6.6 $66.9
Adjusted EBITDA ($USD Millions)$97.4 $23.0 $82.8

KPIs and balance-sheet indicators

KPIQ1 FY2025Q2 FY2025Q3 FY2025
Free cash flow ($USD Millions)$33.1 $33.2 $25.2
Net debt ($USD Millions)$86.2 $63.0 $48.9
Direct/Toll mix (%)56/44 55/45 57/43
Inventory holding gains (losses) ($USD Millions, est.)$(16.6) $(13.4) $(1.2)
Automotive shipments YoY (%)-10% -2% -3%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Capital Expenditures ($USD Millions)FY2025~$110 ~$125 Raised
Inventory Holding Gains/Losses (pre-tax)Q2 FY2025Loss ~$10–$15 Actual loss $13.4 In-line with prior guidance
Inventory Holding Gains (pre-tax)Q3 FY2025Minimal gains expected Minimal gains re-affirmed Maintained
Inventory Holding Gains (pre-tax)Q4 FY2025n/aGains ~$20–$25 New positive guidance
Dividend per share ($USD)Quarterly$0.16 $0.16 (Q2, Q3) Maintained
Mexico electrical steel SOPFall 2025Fall 2025 Fall 2025 (on track) Maintained
Canada transformer core SOPLate CY2025End CY2025 Late CY2025 / Early CY2026 Timing broadened modestly

Earnings Call Themes & Trends

TopicQ4 FY2024 (Q-2)Q1 FY2025 (Q-1)Q2 FY2025 (Current)Trend
Automotive demand/production52% of sales; >16M units possible next year Direct auto volume -10%; model changeover delays; one customer retooled strategy One Detroit OEM >30% volume drop; auto shipments -2% YoY; offset by +30% with other D3 OEMs Stabilizing with share gains; recovery expected over next 1–2 quarters
Construction14% of sales; strength in fencing/buildings/culvert Construction shipments +8% YoY Volumes -20% YoY; prior-year pivot and sudden auto cuts limited replacement Weak near-term; potential improvement with lower rates in 2H CY2025
Inventory holding gains/losses-$3.4M loss -$16.6M loss -$13.4M loss Improving; Q4 FY2025 guidance +$20–$25M gains
Tariffs/macroVolatile prices; seasonality described Fair trade cases could support steel pricing Expect little direct impact; local sourcing strategy; price lift to ~$950/ton; uncertainty remains Managed; pricing supportive
Electrical steel expansionMexico presses arriving; Canada 50% capacity pre-sold Nagold (Germany) gaining commitments; ERP progress; corporate transformation wins On track; adding China press; Mexico/Canada timelines reiterated Advancing to SOP
Serviacero JVStrong partner; slitter coming Equity income down; holding gains and peso volatility Lower spreads and FX; performance pressured Slitter commissioned Q3; gradual improvement expected
TWB ablationNew licensed ablation capability; strong interest Customer interest & orders building Pipeline building; on schedule Execution continues (Q3: non-recurring charges at TWB JV)
AI/data initiativesn/aERP/analytics process wins in corporate functions Analytics tool with customer; improved inventory control; IT contractor management Expanded to AI journey in Q3

Management Commentary

  • Strategy and positioning: “Well-positioned to capitalize on key end market trends with our high value-added solutions” — Geoff Gilmore, CEO .
  • Automotive outlook: “Cautiously optimistic…short-term frustration, not a long-term problem” with the impacted OEM; share gains at other OEMs .
  • Tariffs: “We see little impact on our business…we source locally” — Geoff Gilmore .
  • Q4 inventory outlook: “With the recent increase in market pricing, we expect estimated inventory holding gains in the fourth quarter…~$20 to $25 million” — Tim Adams, CFO .
  • Capital allocation: FY2025 capex increased to ~$125M to accelerate Canada timing and add China press/ERP upgrades .

Q&A Highlights

  • EBITDA/ton decline drivers: Sequential drop explained by volume (-7% vs expected -2% to -3%), higher SG&A (bad debt ~$2M; professional fees ~$2M), and weaker Serviacero on spreads/FX .
  • Bad-debt and fees granularity: Bankruptcy in heavy truck ($1M) and reserve for scrap dealer ($1M); acquisition-related professional fees (~$2M) — normal course, not expected to recur .
  • Normalization timeline: Dependent on demand volumes; cautiously optimistic for more normalized run rates by year-end (calendar) .
  • Tariff impact: Minimal expected due to localized sourcing; pricing lift to ~$950/ton observed; uncertainty remains but strategies in place .
  • Momentum: February strength seen as fundamental, continuing into March; auto demand improving; efforts to win construction business to fill book .

Estimates Context

  • S&P Global consensus (EPS, revenue, EBITDA) for Q2 FY2025 was unavailable due to access limits; therefore, a beat/miss assessment versus Wall Street estimates cannot be provided at this time. We attempted to retrieve SPGI data, but requests exceeded the daily limit, so consensus comparisons are unavailable [SPGI access error via GetEstimates].

Key Takeaways for Investors

  • Operating leverage returns if auto volumes normalize and Q4 holding gains materialize; expect Q4 pre-tax inventory holding gains of ~$20–$25M, a clear upside catalyst if realized .
  • Automotive OEM disruption appears transitory; other OEM share gains are visible and should support sequential recovery into spring/summer; watch cadence of OEM rebuilds and interest-rate trajectory .
  • Electrical steel expansions (Mexico, Canada) remain on schedule; capacity additions should be margin-accretive as SOPs approach (fall 2025 for Mexico; late CY2025/early CY2026 for Canada) .
  • FY2025 capex raised to ~$125M to pull-forward Canada spend and fund China press/ERP—near-term cash outlays, but strategic uplift to capacity and process improvement .
  • Working capital and net debt improved sequentially; net debt declined from $86.2M (Q1) to $63.0M (Q2) to $48.9M (Q3), providing flexibility for M&A and growth .
  • Watch Serviacero JV recovery as demand/FX stabilize and with the new Monterrey slitter online; Q3 saw commissioning and should contribute to volumes .
  • Near-term trading setup: Potential positive revisions if Q4 holding gains and OEM normalization hit; risks include macro uncertainty, tariff policy volatility, and timing shifts in Canada SOP .