Worthington Steel (NYSE:WS) reported second-quarter fiscal 2026 results that management described as solid despite a “mixed” demand environment and compressed galvanized spreads. The company also reiterated that, following a December 6 statement regarding potential M&A activity, it would not provide additional detail or address related questions during the call.
Quarterly results and key drivers
For the quarter, Worthington Steel reported net sales of $871.9 million, adjusted EBITDA of $48.3 million, and adjusted EPS of $0.38. On a GAAP basis, earnings were $18.8 million, or $0.37 per share, compared with $12.8 million, or $0.25 per share, in the prior-year quarter. Excluding non-recurring items in both periods, adjusted EPS was $0.38 versus $0.19 a year earlier.
Shipments mix shifts toward direct sales
Total shipments were approximately 902,000 tons, down modestly year over year as lower toll volumes more than offset growth in direct sales. Adams highlighted a notable mix shift: direct sale volume represented 65% of shipments this quarter, up from 55% in the prior-year period. Direct volumes increased 13% year over year, with most of that growth coming from existing facilities and supplemented by the addition of Sitem.
In end markets, management emphasized automotive strength. Direct shipments to automotive rose 26% year over year, reflecting share gains from new programs reaching expected volumes and a return to more normal production levels at one OEM customer that had curtailed production last year.
Other market trends cited on the call included:
- Energy shipments up 50% year over year, largely driven by project-based solar programs.
- Agriculture volume up 1%, with grain bin strength offsetting weaker OEM equipment demand.
- Construction down 9% and heavy truck down 6%, reflecting continued softness.
- Service center volumes pressured as customers continued to destock.
Toll processing volumes declined year over year, primarily due to the closure of the Cleveland-area Worthington Samuel Coil Processing facility last fiscal year and softer market conditions. Adams said the company views the decline as cyclical rather than structural, excluding the impact of that consolidation.
Steel pricing volatility, spreads, and Serviacero contribution
Adams said direct spreads improved year over year, driven mainly by a $6.2 million favorable swing in estimated pre-tax inventory holding losses. The company estimated inventory holding losses of $7.2 million this quarter versus $13.4 million in the prior-year period.
Management expects steel prices to remain volatile. Adams noted hot-rolled coil stabilized around $800 per ton in September and October before increasing to approximately $900 per ton. Because many contracts use lagging index-based pricing, the company estimated that in the third quarter of fiscal 2026, inventory holding gains and losses could range from a $3 million pre-tax gain to a $3 million pre-tax loss.
Serviacero equity income increased $7.7 million year over year due to higher direct spreads, inventory holding gains, and favorable exchange rate movements, according to Adams.
On galvanized spreads, CEO Geoff Gilmore attributed compression largely to decreased demand, especially in construction, which has heightened competition. He said the company believes conditions have reached a trough and expects margin expansion going forward. Gilmore also pointed to “232s” and reduced galvanized product imports into the U.S., citing an estimate of imports being down about 35%, and said he expected normalization “somewhere around the second quarter” of the calendar year, while noting added U.S. capacity could cap upside.
SG&A increase, strategic projects, and integration efforts
SG&A rose $9.8 million year over year, driven by higher compensation and benefits expense of $5.9 million and increased professional fees of $2.3 million tied to various strategic projects the company is evaluating. In response to an analyst question, Adams characterized the professional fees as the key one-time-like component and said they could be volatile and unpredictable. He also clarified that a transaction bonus related to Sitem occurred in the prior quarter and “is all done,” while the current quarter reflects Sitem being included in results.
Gilmore said the company is seeing market share gains and cited momentum in cold rolled strip, including all-time high shipments in October to a key D3 automotive customer and new business with a large Japanese OEM. He said those programs would take time to ramp, with starts anticipated in the first quarter of calendar year 2026 and reaching fuller potential in the second quarter.
Asked about what is driving share gains, Gilmore said a “pretty significant amount” is tied to customers localizing supply chains that previously sourced from Europe or elsewhere. He added the company has not yet seen share gains due to announced onshoring of manufacturing, which he suggested could be a future opportunity.
On M&A integration, Gilmore said integration of Sitem is progressing well, citing early collaboration and cultural alignment. He said Sitem’s capabilities in stamping electrical steel laminations, die casting, and automation complement Worthington Steel’s core and extend its European reach.
Capital spending, cash flow, and shareholder returns
Worthington Steel generated cash flow from operations of $99 million and free cash flow of $75 million during the quarter, aided by a reduction in working capital. Capital expenditures totaled $25 million, primarily for previously announced electrical steel investments. For fiscal 2026, the company expects CapEx of approximately $110 million.
On a trailing 12-month basis, free cash flow was $73 million. The company ended the quarter with $90 million in cash and $92 million of net debt, down sequentially due mainly to working capital improvements. Management also announced a quarterly dividend of $0.16 per share, payable March 27, 2026.
Looking ahead, Gilmore said the company remains “cautiously optimistic” about the first half of 2026 and believes conditions are setting up for improvement in the back half of 2026 as interest rates ease and some policy uncertainties subside. He also highlighted ongoing electrical steel expansion projects, including preparations for initial production in Mexico in the first quarter of calendar year 2026 and a transformer core manufacturing expansion in Canada, with production transition expected in the first quarter and incremental revenue anticipated in the spring.
About Worthington Steel (NYSE:WS)
Worthington Steel (NYSE: WS) is a leading North American steel processor specializing in the production of flat-rolled, coated and painted sheet and coil products. Operating as a wholly owned subsidiary of Worthington Industries, the company serves a broad range of industries, including construction, automotive, appliance, energy and agricultural equipment. Its core business activities encompass the processing, finishing and distribution of carbon and advanced high-strength steels, aluminum and stainless products to manufacturers across the continent.
The company’s product portfolio includes hot-dip galvanizing, galvannealed, aluminized and pre-painted steel products, as well as cold-rolled and hot-rolled coil.
