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WS

Worthington Steel, Inc. (WS)·Q4 2024 Earnings Summary

Executive Summary

  • Q4 FY2024 net sales were $911.0M (+3% YoY), with diluted EPS $1.06; adjusted EBIT was $70.4M and adjusted EBITDA $86.5M. Mix skewed toward higher value-added galvanizing and tailor-welded blanks, but direct spreads were pressured by an estimated $3.4M inventory holding loss versus a $32.6M gain last year .
  • Gross margin fell to $131.0M (-$19.2M YoY) and operating income to $67.3M (-$22.5M YoY), reflecting lower direct spreads and +$10.6M higher SG&A due to stand-alone public company costs and a swing in bad debt expense .
  • Management expects larger inventory holding losses of ~$15–$20M pretax in Q1 FY2025 as steel prices declined, but also anticipates working capital release as prices fall; the board declared another $0.16 dividend (payable Sep 27, 2024) .
  • Strategic catalysts: electrical steel expansions in Mexico (EV) and Canada (transformers) are on time/on budget, with commercial wins filling 3 of 5 presses in Mexico and ~50% of Canada capacity; ablation tech licensing should broaden TWB addressable market (~30%) .

What Went Well and What Went Wrong

What Went Well

  • Higher value-added mix: CFO flagged stronger margins from increased galvanizing and tailor‑welded blanks in both direct and toll processing; spot construction business also carried higher margins .
  • Strategic progress and customer validation: Mexico EV press installation underway with orders to fill 3 of 5 presses; Canada transformer expansion pre-sold ~50% capacity; recognized as GM Supplier of the Year and John Deere Partner-level supplier .
  • Culture and safety gains: recordable injuries fell ~25% YoY; transformation (continuous improvement) projects cut cycle times and improved working capital efficiency .

Quote: “Our strategy and differentiation help ensure we are well positioned to grow and deliver strong returns for our shareholders.” — Geoff Gilmore, CEO .

What Went Wrong

  • Inventory holding swing: Q4 saw an estimated $3.4M inventory holding loss vs. $32.6M gain in prior year quarter (unfavorable ~$36M pretax swing), compressing direct spreads and gross margin .
  • Stand-alone cost ramp and credit expense: SG&A rose $10.6M YoY on stand-alone costs, higher incentive comp/benefits, and a $3.7M swing in bad debt (from $2.0M income to $1.7M expense) .
  • Volume softness and tolling decline: shipped just over 1.03M tons (-2% YoY); toll tons down 3% (weaker pickling with mills), and auto volumes down 1% due to program EOL and launch delays .

Financial Results

Consolidated performance vs prior quarters

MetricQ2 2024Q3 2024Q4 2024
Net Sales ($USD Millions)$808.0 $805.8 $911.0
Diluted EPS (GAAP, $)$(0.12) $0.98 $1.06
Adjusted EPS (Non-GAAP, $)$0.11 $0.99 $1.06
Gross Margin ($USD Millions)$60.2 $120.1 $131.0
Operating Income ($USD Millions)$(8.8) $66.3 $67.3
Adjusted EBIT ($USD Millions)$6.6 $66.9 $70.4
Adjusted EBITDA ($USD Millions)$23.0 $82.8 $86.5
Adjusted EBIT Margin (%)0.8% 8.3% 7.7%
Adjusted EBITDA Margin (%)2.8% 10.3% 9.5%

Notes:

  • Q4 YoY margin compression driven by inventory holding loss and lower direct spreads; elevated SG&A impacted operating income .

KPI and mix trends

KPIQ2 2024Q3 2024Q4 2024
Volume (tons)968,595 985,668 1,029,565
Mix: Direct vs Toll (%)56% / 44% 55% / 45% 58% / 42%
Est. Inventory Holding Gain/(Loss) (pretax, $M)$(34.8) +$19.3 $(3.4)
Cash from Operations ($M)$139.9 $44.7 $35.6
Capital Expenditures ($M)$18.9 $22.4 $44.8
Free Cash Flow ($M)$121.0 $22.3 $(9.2)
Net Debt ($M)N/A$86.4 (as of Feb 29, 2024) $107.8 (as of May 31, 2024)

End-market exposure (disclosed items)

MetricQ2 2024Q3 2024Q4 2024
Automotive share of sales (%)N/AN/A52%
Construction share of sales (%)N/AN/A14%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Est. inventory holding losses (pretax, $M)Q1 FY2025N/A~$15–$20M New disclosure
Working capital trajectoryQ1 FY2025N/AExpect release as steel prices decline New disclosure
Capex run-rate ($M)FY2024–FY2026~$100 per year ~$100 per year, plus +$10 in FY2025 and +$10 in FY2026 Maintained, increased add-ons
Dividend per share ($)Q3/Q4 FY2024$0.16 (declared Q3) $0.16 (declared for Q4, payable Sep 27, 2024) Maintained
Volume seasonalityQ4 vs Q1Q4 typically strongest; Q1 second strongest Q4 strongest; Q1 “average” with normal auto downtime (~2 weeks) Maintained qualitative view

Earnings Call Themes & Trends

TopicQ2 FY2024 (Dec-2023)Q3 FY2024 (Mar-2024)Q4 FY2024 (Jun-2024)Trend
Steel price/macroSwing from lows; expected Q3 holding gains as prices rose HR coil peaked then fell; expected Q4 losses $5–$10M Prices ~675; forecast Q1 losses $15–$20M pretax Volatility rising; near-term inventory loss headwind
Electrical steel expansionsMexico EV focused factory and Canada transformer expansions on time/on budget; Nagold acquisition closed Secured orders; equipment deliveries progressing; backlog remains ≥2 years Mexico: 3 of 5 presses arrived; orders to fill 3 presses; Canada ~50% new capacity awarded Execution progressing; commercial wins building
Technology initiativesERP rollout at Tempel; ablation tech license announced Ablation line to expand TWB market by ~30% Customer interest/orders for ablation tech; continued transformation projects Tech adoption broadening; market expansion
Automotive demandStrike impact offset; 2024 build +5–7% expected Q4 volume seasonality strongest; auto downtime clarifications Auto 52% of Q4 sales; normal summer downtime (~2 weeks) Solid baseline; manageable seasonality
Working capital/liquidity$550M ABL put in place; strong FCF Expect working capital release in Q4 Working capital release as prices fall; net debt $107.8M Liquidity ample; WC set to release
Capital returns/M&ADividend initiated; buybacks contemplated; selective M&A Maintain dividend; selective high value-add M&A Dividend maintained; strategy focused on organic + selective M&A Steady capital return posture

Management Commentary

  • Strategy: “We remain focused on executing our strategy and driving shareholder value through organic growth and strategic M&A…well positioned to grow and deliver strong returns” — Geoff Gilmore, CEO .
  • Operations: “3 of the 5 new presses arrived [Mexico]…enough orders to fill 3…Canada expansion…awarded enough new business to fill 50% of the new capacity” — Jeff Klingler, COO .
  • Margin drivers: “We had a very good mix this quarter…additional galvanizing tons as well as tailor‑welded blanks…spot construction business…higher margins” — Tim Adams, CFO .
  • Near-term headwind: “We expect [Q1 FY2025] inventory holding losses…approximately $15 million to $20 million pretax” — Tim Adams, CFO .

Q&A Highlights

  • Margin sustainability: Analysts probed whether high underlying EBITDA is sustainable; CFO pointed to favorable mix (galvanizing, tailor‑welded blanks) and spot construction margins as drivers .
  • Automotive seasonality/downtime: Q1 typically “average”; expected ~2 weeks auto downtime in summer; overall 2024 auto builds modestly higher vs 2023 .
  • Electrical steel expansions and orders: Mexico EV presses (intent to buy 10 total) and Canada transformer capacity; commercial wins pre-fill capacity with life‑of‑program contracts (Mexico) and long-term commitments (Canada) .
  • Working capital and liquidity: As steel prices decline, company expects working capital release; net debt $107.8M at Q4 end; ABL in place provides ample liquidity .
  • Capex outlook: ~$100M per year with +$10M add-ons in FY2025/FY2026 for ablation and ERP; projects on time/on budget .

Estimates Context

  • Wall Street consensus EPS and revenue estimates for Q4 FY2024 were not available via S&P Global in this session due to data access limits. As a result, explicit beat/miss vs consensus cannot be determined at this time. If needed, we can refresh S&P Global consensus for retrospective comparison in a follow-up.

Key Takeaways for Investors

  • Mix quality matters: Q4 performance benefited from higher value-added galvanizing and tailor‑welded blanks, offsetting volume softness; monitor mix sustainability and the cadence of spot construction opportunities .
  • Near-term inventory headwinds: Expect ~$15–$20M pretax inventory holding losses in Q1 FY2025 as steel prices declined; working capital release should partially offset cash impact .
  • Structural growth in electrical steel: Mexico EV and Canada transformer expansions are commercially de-risking (pre-orders), positioning WS for multi-year growth in higher-margin products; EV/hybrid and grid modernization tailwinds remain intact .
  • Cash discipline and returns: Despite Q4 FCF outflow due to strategic capex, WS maintains ample liquidity (ABL) and continues dividends; buybacks remain a medium-term tool under consideration alongside selective high value-add M&A .
  • Trading lens: Intra-quarter steel price declines and expected Q1 inventory losses could pressure near-term earnings; accumulation may be timed around evidence of working capital release and continued order wins in electrical steel .
  • Year-over-year context: Q4 YoY EPS decline was largely driven by inventory holding swing and stand-alone cost ramp; underlying operations show resilience with improved value-added mix and progress on strategic projects .
  • Watch auto launch cadence: Auto volumes dipped due to program EOL and launch delays; monitor replacement platform timing and EV/hybrid adoption (WS benefits across ICE/hybrid/BEV through strip/laminations) .

Appendix: Additional Data Points

  • Dividend: $0.16 per share declared on June 26, 2024; payable Sep 27, 2024; record date Sep 13, 2024 .
  • Net debt: $107.8M as of May 31, 2024 (Debt $148.0M; Cash $40.2M) .
  • Safety: Recordable injuries reduced ~25% in FY2024 .