Worthington Steel's Q1 2026 Earnings Call: Contradictions in Automotive Outlook, Coke Accident Impact, and Volume Recovery Forecasts

The above is the analysis of the conflicting points in this earnings call

Date of Call: None provided

Financials Results

• Revenue: $872.9M, up 5% YOY
• EPS: $0.72 per diluted share, up vs $0.56 prior year (approx +29% YOY); adjusted EPS $0.77 vs $0.56 prior year

Guidance:

• Q2 FY26 inventory holding losses expected at ~$5–$10M (vs $5.6M gains in Q1).
• Seasonality: Q2 volumes typically 3–4% below Q1; Q3 also ~3–4% below Q1.
• Sales mix outlook: direct 60–65%; toll 35–40%.
• FY26 CapEx forecast ~$100M; potential revision after Sedum CapEx review.
• Canada electrical-steel facility to start production in early calendar 2026; Mexico lamination expansion to begin production in coming months.
• Automotive programs ramping; cautiously optimistic with further share gains possible into 2026.
• Expect demand to remain “okay” with no near-term catalyst for a sharp increase.

Business Commentary:

* Revenue and Volume Growth: - Worthington Steel reported net sales of $872.9 million in Q1 FY2026, up 5% year-on-year. - The growth was driven by increased direct sales volume, the addition of Sedum, and higher direct material spreads.

• Automotive Market Performance:
• Shipments to the automotive market increased by 17% year-on-year.

• This growth was due to the ramp-up of new programs and gaining market share with the Detroit Three OEMs.

• Toll Processing Volume Decline:

• Toll processing volumes were down 22% year-on-year.

• The decrease was attributed to softer market demand, the closure of the Cleveland coil processing facility, and customer decisions to change programs.

• Operational Efficiency and Cost Management:

• Adjusted EBIT increased by $15.5 million compared to the prior year quarter.

• This improvement was due to higher gross margin and increased equity earnings, despite higher SG&A expenses.

• Safety and Environmental Health:

• Worthington Steel achieved its safest quarter on record in terms of safety performance.
• This was a result of continuous improvement efforts and the commitment of employees to safety initiatives.

Sentiment Analysis:

• “Off to a strong start… EPS were $0.72, and net sales were $872.9 million.” “The macro environments remain mixed… visibility is limited… uncertainty… to persist.” “We expect to generate inventory holding losses in the second quarter… approximately $5–$10 million.” “Demand was okay… we don’t see any big event that’s going to trigger a giant increase in demand.”

Q&A:

• Question from Phil Gibbs (KeyBanc Capital Markets): Please clarify the Sedum deal structure, cash paid, and the mezzanine equity/FX effects on EPS.
  Response: $60M cash plus contribution of the NOG Gold German facility; minority interest classified as mezzanine equity due to partner put; EPS impact reflects euro-to-dollar FX adjustments.

• Question from Phil Gibbs (KeyBanc Capital Markets): Outlook for automotive and further share gains into 2026?
  Response: Cautiously optimistic with ~15M unit build; expect continued share gains as new programs ramp and through upcoming contract season.

• Question from Phil Gibbs (KeyBanc Capital Markets): Impact of Section 232 derivative tariffs on electrical steel laminations?
  Response: Minimal impact; customers largely absorb tariffs, many are USMCA-compliant, and demand remains strong, leaving Worthington well positioned.

• Question from John Tumazos (Very Independent Research): Any impact from the U.S. Steel coke accident and implications for market capacity?
  Response: No expected supply disruption for Worthington given diversified mill sources; no view on U.S. Steel’s specific mitigation actions.

• Question from Martin Englert (Seaport Research Partners): What drove the 22% YOY decline in toll volumes versus direct mix shift?
  Response: About half from softer market conditions; most of the rest from the WSCP Cleveland shutdown, plus small program shifts (toll to direct and customer resourcing).

• Question from Martin Englert (Seaport Research Partners): Will direct remain above 60% of mix?
  Response: Yes; expect direct at 60–65% and toll at 35–40% going forward.

• Question from Martin Englert (Seaport Research Partners): How are volumes trending in fiscal Q2 and what seasonality should we expect?
  Response: Normal seasonality: Q2 typically 3–4% below Q1; no catalyst for a meaningful demand uptick near term.

• Question from Martin Englert (Seaport Research Partners): Any changes in upstream mill order books and lead times?
  Response: No notable changes observed.