Adjusted EBITDA: $30.6 million, up from $23 million in the prior year quarter. Earnings Per Share (EPS): $0.25, compared to a loss of $0.12 per share in the same period last year. Net Sales: $739 million, down 9% from the prior year quarter. Adjusted EBIT: $14.3 million, up from $6.6 million in the prior year quarter. Gross Margin: Improved due to higher direct material spreads, despite lower direct volume. SG&A Expense: Increased by $7 million over the prior year second quarter. Cash Flow from Operations: $68 million. Free Cash Flow: $33.2 million. Capital Expenditures: $34.8 million during the quarter, with a revised estimate of $125 million for fiscal 2025. Net Debt: $63 million at the end of the quarter. Dividend: Quarterly dividend of $0.16 per share announced. Automotive Shipments: Down 2% compared to the prior year quarter. Construction Market Volumes: Decreased by 20% year-over-year. Shipments: Approximately 936,000 tons, down 3% compared with the prior year quarter.

Warning! GuruFocus has detected 2 Warning Sign with WS.

Release Date: December 19, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

Worthington Steel Inc (NYSE:WS) reported a significant increase in adjusted EBITDA, reaching $30.6 million compared to $23 million in the prior year quarter. Earnings per share improved to $0.25 from a loss of $0.12 per share in the same period last year. The company announced a strategic acquisition of a 52% stake in Sitem Group, enhancing its presence in the European market for electrical steel laminations. Worthington Steel Inc (NYSE:WS) released its first corporate citizenship and sustainability report, highlighting achievements such as a safety record nearly two times better than the industry average and a decrease in carbon emissions. The company was recognized as a Military Friendly Employer for the 10th consecutive year and was included in Computerworld's list of Top Places to Work in IT.

Negative Points

The quarter was impacted by lower volumes and lower average selling prices, affecting overall results. SG&A expenses increased by $7 million due to costs associated with being a standalone company and bad debt expenses from a customer bankruptcy. The company faced challenges in the automotive market, with significant production cuts from a major OEM customer. Net sales decreased by 9% compared to the prior year quarter, primarily due to lower direct volumes and market pricing. The company experienced a volume decrease of more than 30% with a major automotive customer, impacting overall automotive shipments.

Story Continues

Q & A Highlights

Q: What caused the EBITDA per ton to drop significantly, and when can we expect it to recover? A: Tim Adams, CFO, explained that the drop was due to three main factors: unexpected volume decreases, increased SG&A expenses, and lower performance at Serviacero. The volume was down 7% instead of the expected 2-3%, largely due to unexpected production cuts from a major customer. SG&A expenses rose due to bad debt and professional fees related to the Sitem transaction. Recovery is expected as these issues are addressed.

Q: Can you provide details on the bad debt expense and professional fees? A: Tim Adams stated that the bad debt expense was about $2 million, stemming from a customer bankruptcy and increased reserves for another customer. Professional fees related to the Sitem transaction were approximately $2 million. These are considered normal business expenses and are not expected to recur.

Q: What is the outlook for customer sentiment and volumes in the coming quarters? A: Geoff Gilmore, CEO, expressed cautious optimism, particularly in the automotive sector. He noted that while there are short-term challenges with a major OEM, the company has gained market share with other OEMs. Lower interest rates and aging vehicles are expected to drive demand, with improvements anticipated by spring.

Q: Are there any risks in the industries related to the increased reserve and bad debt expense? A: Geoff Gilmore clarified that the reserve increase was related to a scrap dealer, and the bankruptcy was in the heavy truck industry. These were specific customer issues, and there are no broader concerns in these industries.

Q: How might changes in US trade policy affect Worthington Steel's operations? A: Tim Adams indicated that potential tariff changes are not a major concern. The company sources locally and expects minimal impact on raw material supply. While there could be some effects in Canada and Mexico, Worthington Steel is well-positioned to manage any challenges.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.

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