Executive Summary / Key Takeaways

• Worthington Enterprises (NYSE: WOR) has fundamentally reshaped its portfolio post-spin, focusing on market-leading Consumer and Building Products segments, anchored by a disciplined business system emphasizing innovation, transformation, and M&A.
• Recent performance, particularly in Q3 FY2025, demonstrates resilience and margin expansion potential, with significant gross margin improvement driven by portfolio mix shifts and operational efficiencies, despite ongoing macroeconomic headwinds and varied segment performance.
• The company is actively leveraging technology and strategic partnerships to enhance its value proposition, launch innovative products (e.g., IoT-enabled propane sensing, new cylinder designs), and expand market reach, positioning for organic growth and competitive advantage.
• A strong balance sheet with low leverage and ample liquidity provides significant financial flexibility to pursue accretive M&A, invest in modernization projects, and return capital to shareholders, supporting ambitious long-term growth and margin targets.
• While facing near-term risks from economic uncertainty, high interest rates, and specific market softness (like repair/remodel and steel price volatility impacting JVs), management is optimistic about market normalization, the impact of strategic initiatives, and the potential for significant earnings and margin expansion in the coming years.

A New Chapter: Forging a Diversified Portfolio

Worthington Enterprises, Inc., emerging from its legacy as Worthington Industries, has embarked on a transformative journey, fundamentally reshaping its business around market-leading Consumer and Building Products segments. This strategic pivot, highlighted by the tax-free spin-off of its steel processing business into Worthington Steel on December 1, 2023, marks a new chapter for the nearly 70-year-old company. The core of Worthington Enterprises' strategy remains rooted in the Worthington Business System, a long-standing framework emphasizing innovation, transformation, and strategic M&A to drive profitable growth and enhance shareholder value.

The company's historical foundation in manufactured metal products now underpins a diversified portfolio. The Consumer Products segment serves end markets through tools, outdoor living, and celebrations categories, featuring brands like Bernzomatic, Balloon Time, and HALO. The Building Products segment provides critical components for residential, non-residential, and repair and remodel markets, including pressurized containment solutions (cylinders, tanks) and, through key joint ventures like WAVE and ClarkDietrich, ceiling suspension systems and light gauge metal framing. This focused structure allows Worthington Enterprises to concentrate resources and expertise on attractive end markets with distinct growth drivers and competitive dynamics.

Central to Worthington Enterprises' competitive positioning is its commitment to innovation and leveraging technology to create differentiated products and enhance operational efficiency. In the Building Products segment, the recent launch of SureSense, an IoT-enabled wireless propane-level sensing technology, exemplifies this. This technology provides accurate digital fill readings directly to customers, aiming to improve efficiency for propane marketers and reduce costly customer runouts. This offers a tangible benefit by enhancing the service provided by distributors to their end-users. Similarly, the PowerCore engineered cylinder, developed in partnership with 3M (MMM), supports a new water-based adhesive application, making commercial adhesive work more efficient and effective. These initiatives demonstrate a focus on developing solutions that provide quantifiable value to customers, going beyond basic product supply.

In the Consumer Products segment, innovation is also a key driver. The new Balloon Time Mini helium tank, designed for convenience and broader distribution, and the recognition for products like the HALO Versa pizza oven and Elite Series Griddle, highlight the segment's focus on product development and brand building. Furthermore, the company's Amtrol-Alfa facility in Portugal is set to produce the first sustainable green propane cylinder using low carbon emission steel, boasting a 73% lower carbon footprint than traditional steel. This initiative aligns with growing sustainability demands and positions Worthington Enterprises as a leader in environmentally conscious product offerings.

Beyond product innovation, transformation efforts include significant investment in automation and facility modernization projects, such as the ongoing work at the Chilton, Wisconsin campus. These projects aim to increase production efficiencies and build competitive advantages. The adoption of AI across operations and back-office functions, and the implementation of disciplines like the 80/20 project in the water business, are geared towards optimizing processes, prioritizing profitable products, and aligning manufacturing capabilities with demand. These technological and operational advancements are foundational to the company's strategy to drive margin expansion and improve overall performance.

Competitive Landscape and Strategic Positioning

Worthington Enterprises operates within diverse and competitive markets, facing a range of rivals from large, integrated players to smaller, niche specialists. In areas overlapping with steel processing and metal products, companies like Nucor Corporation (NUE) and Steel Dynamics, Inc. (STLD) represent significant competition. While WOR's former steel processing business is now separate, its Building Products segment, particularly through its ClarkDietrich JV (light gauge metal framing) and its own manufactured metal products, still interacts with dynamics influenced by these steel giants. NUE and STLD benefit from significant scale, vertical integration, and cost efficiencies in high-volume steel production. For example, STLD's operations are estimated to be 15-20% more cost-efficient per unit due to advanced recycling technology. ClarkDietrich, as the largest player in the metal framing space, counters this with its nationwide presence, breadth of product line, and ability to provide superior service, such as delivering full truckloads of steel to job sites in 24 hours. While ClarkDietrich faces margin compression when steel prices decline due to smaller regional competitors buying spot, its sophistication and proven partner status provide resilience.

In the gas cylinder and sustainable energy space, competitors like Luxfer Holdings PLC (LXFR) are active. LXFR focuses on lightweight cylinders and innovation in materials. While WOR's cylinders may offer advantages in durability, LXFR's focus on lighter materials presents a competitive challenge, particularly as sustainability and ease of handling become more important. WOR's strategic response includes its own development of lightweight composite cylinders through the Ragasco acquisition and its focus on sustainable materials like low carbon emission steel, aiming to compete on both performance and environmental attributes. The formation of the SES JV with Hexagon Composites combines two European market leaders, positioning the venture to better capitalize on the emerging hydrogen and compressed natural gas markets, leveraging Hexagon's expertise in Type 4 composite cylinders.

In the Consumer Products segment, Worthington Enterprises competes with a variety of companies, including larger diversified players like Newell Brands Inc. (NWL) in certain categories. While NWL benefits from scale, Worthington Enterprises focuses on building strong brands (Bernzomatic, HALO, Balloon Time) and leveraging deep retail relationships. The strategy involves expanding the reach of acquired brands through partnerships with major retailers like Walmart and Sherwin-Williams, aiming to gain market share in specific product niches like outdoor cooking and drywall tools. The company's emphasis on product reliability and customer service provides a competitive edge against rivals who may prioritize lower costs through scale.

Overall, Worthington Enterprises positions itself as a provider of value-added solutions within niche markets, leveraging its operational expertise, brand strength, and customer relationships. Its technological advancements, such as IoT integration and sustainable materials, serve as competitive differentiators. While it may not always compete on scale or lowest cost against the largest players, its focus on innovation, quality, and service allows it to capture and maintain market share, particularly in segments where its specialized capabilities and integrated offerings provide a distinct advantage. The company also actively supports efforts to ensure a level playing field against non-compliant imports, advocating for safety standards and domestic manufacturing.

Financial Performance and Health

Worthington Enterprises' recent financial performance reflects the strategic shifts and the prevailing macroeconomic environment. For the three months ended February 28, 2025 (Q3 FY2025), consolidated net sales were $304.5 million, a decrease of 4% year-over-year, primarily attributable to the deconsolidation of the former SES segment. However, excluding the impact of SES in both periods, revenues grew by over 8% in Q3, driven by contributions from the Ragasco acquisition and higher overall volumes in the core businesses.

A notable highlight was the significant improvement in profitability. Gross profit for Q3 FY2025 increased to $89.2 million, up 22% from $73.1 million in the prior year quarter. This resulted in a substantial expansion of the gross margin by approximately 620 basis points to 29.3%. This margin expansion was attributed to the deconsolidation of the lower-margin SES business (contributing roughly 300 basis points), a positive mix shift towards higher-margin products, and the absence of a prior-year lower of cost or net realizable value charge in the Building Products segment.

Adjusted EBITDA from continuing operations for Q3 FY2025 was $73.8 million, an increase of 10.3% from $66.9 million in the prior year quarter. This translated to an adjusted EBITDA margin of 24.2%, up from 21.1%. On a year-to-date basis (nine months ended February 28, 2025), adjusted EBITDA was $178.4 million, down 5% from $187.8 million in the prior year period, primarily reflecting lower equity income contributions from joint ventures despite improved performance in the wholly-owned segments.

Segment performance showed varied trends. The Consumer Products segment saw net sales increase by 4.9% in Q3 FY2025 to $139.7 million, driven by higher volumes. Adjusted EBITDA for the segment grew by 11.7% to $28.6 million, with margin improving to 20.5%, benefiting from higher gross profit dollars and margin percentage, partially offset by increased SG&A (including a $1.1 million bad debt expense). The Building Products segment reported net sales of $164.8 million in Q3 FY2025, up 11.2%, driven by the Ragasco acquisition and favorable product mix. Segment adjusted EBITDA was relatively flat year-over-year at $53.2 million, as contributions from Ragasco and favorable mix were largely offset by lower equity income from joint ventures.

Equity income from unconsolidated affiliates, primarily WAVE and ClarkDietrich, remains a significant contributor to overall profitability. For Q3 FY2025, total equity income was $32.1 million, down from $43.2 million in the prior year quarter. This decrease was mainly due to lower contributions from ClarkDietrich ($9.5 million vs. $17.8 million), impacted by steel price declines causing margin compression and weather-related disruptions. WAVE continued to deliver strong results, contributing $25.0 million in equity income, slightly down from $26.0 million. Year-to-date equity income was $102.1 million, down from $127.3 million, primarily reflecting lower contributions from ClarkDietrich and Workhorse.

The company maintains a robust financial position with ample liquidity. As of February 28, 2025, cash and cash equivalents totaled $222.8 million. Long-term debt stood at $293.9 million, with an average interest rate of 3.6%. The company has a $500 million undrawn revolving credit facility, providing significant financial flexibility. Net debt was $71 million, resulting in a very low net debt to trailing adjusted EBITDA leverage ratio of approximately 0.25x.

Cash flow generation remains strong. Net cash provided by operating activities was $57.1 million in Q3 FY2025 and $147.3 million year-to-date. Free cash flow was $44.4 million in the quarter and $144 million on a trailing 12-month basis, representing a solid 104% conversion rate relative to adjusted net earnings. The company received $35 million in dividends from JVs in Q3 FY2025, highlighting the cash-generating power of these investments. Capital expenditures were $12.7 million in Q3 FY2025, including investments in facility modernization. The company also returned capital to shareholders, repurchasing $6.2 million of common shares and paying $8.5 million in dividends in the quarter.

Outlook and Path Forward

Management expresses cautious optimism regarding the outlook, balancing ongoing macroeconomic uncertainties with the anticipated benefits of strategic initiatives and expected market normalization. They anticipate that economic uncertainty and tight financial conditions will continue to influence consumer behavior and overall demand in the near term. The residential construction market is expected to remain uncertain, with builders and buyers potentially staying in a holding pattern due to high costs and elevated mortgage rates. While the non-residential market shows a mixed picture with a strong long-term pipeline (indicated by the DMI), near-term activity may be subdued as developers assess economic risks. The repair and remodel market is seen as transitioning to a more normalized, sustainable growth phase after pandemic highs.

Despite these headwinds, Worthington Enterprises is focused on executing its strategy to drive performance. Management believes destocking cycles in key areas like large format heating tanks have largely run their course, expecting a return to more seasonally normal demand levels. They are leveraging their value proposition, including reliable service and innovative products, to capture market share.

Specific targets and expectations shared by management include:

• Sustaining gross margins in the high-20%s over time, with a goal to reach 30% or above in the next couple of years.
• Managing SG&A to 20% or less of sales over the next couple of years.
• Expecting the unconsolidated corporate/other SG&A to be between $25 million and $30 million per quarter.
• Anticipating the Sustainable Energy Solutions JV to be flattish (near breakeven) over the next four to eight quarters.
• Expecting ClarkDietrich and WAVE JVs to perform around current levels sequentially in the near term, with ClarkDietrich's performance subject to steel price volatility.
• Planning significant capital expenditures for facility modernization, with approximately $50 million remaining to be spent over the next six to eight quarters, primarily in fiscal year 2026.
• Targeting free cash flow conversion over 100% and aiming for further improvement over time.
• Continuing share repurchases at least to offset dilution, with potential for opportunistic buybacks.
• Expecting steel prices to be relatively flat year-over-year.
• Anticipating lower interest rates in the future, which should benefit the business, particularly CapEx-sensitive areas.
• Aspiring to exceed the previously stated goal of 6-8% top-line growth per year over the next three to five years, aiming for double-digit growth rates.
• Targeting 24% adjusted EBITDA margins.

The strategic focus on innovation, transformation, and M&A is expected to be the primary engine for achieving these targets. New product launches, operational efficiencies from modernization and AI adoption, and disciplined cost management are anticipated to drive margin expansion. Accretive M&A, leveraging the strong balance sheet, is seen as a key driver for accelerating top-line growth and enhancing the portfolio. The recent acquisitions (Ragasco, Elgen) and the SES JV formation are examples of this strategy in action, positioning the company in attractive niche markets and enhancing its competitive capabilities.

Risks and Considerations

Investing in Worthington Enterprises is subject to several risks that could impact its ability to achieve its strategic objectives and financial targets. The macroeconomic environment remains a significant factor, with persistent inflation, high interest rates, and potential economic recession posing risks to consumer spending and construction activity, which directly affect demand in both segments. Geopolitical developments and escalating trade tensions could lead to increased tariffs on raw materials like steel, aluminum, and lumber, potentially increasing costs and pressuring margins if not fully offset by price increases or efficiencies.

Fluctuations in raw material prices, particularly steel, can impact profitability, especially for joint ventures like ClarkDietrich, which experienced margin compression due to declining prices. While volatility can sometimes benefit sophisticated players, sharp or sustained price movements introduce uncertainty.

The success of strategic initiatives, including facility modernization projects, AI adoption, and the 80/20 program, depends on effective execution. Delays, cost overruns, or failure to achieve anticipated efficiencies could impact financial performance. Integrating acquired businesses like Ragasco and Elgen also carries risks related to realizing expected synergies and maintaining customer relationships.

While management believes destocking cycles are ending, a prolonged period of soft demand or unexpected shifts in consumer behavior could impact volumes and profitability. Competition remains intense across segments, and the ability to maintain market share and pricing power depends on the continued strength of brands, product innovation, and operational efficiency.

The performance of unconsolidated joint ventures, particularly WAVE and ClarkDietrich, significantly impacts Worthington Enterprises' equity income and overall profitability. Factors affecting these JVs' end markets (commercial construction, steel prices) are largely outside of Worthington's direct control.

Despite a strong balance sheet, continued investment in M&A and modernization projects will require disciplined capital allocation to ensure adequate liquidity is maintained, especially if market conditions deteriorate.

Conclusion

Worthington Enterprises is navigating a period of significant transformation, having successfully spun off its legacy steel processing business to focus on a diversified portfolio of Consumer and Building Products. The company's core investment thesis is centered on leveraging its established Worthington Business System—driven by innovation, transformation, and M&A—to accelerate profitable growth and expand margins in its targeted end markets.

Recent performance, particularly the strong gross margin expansion in Q3 FY2025, underscores the potential of the refocused portfolio and ongoing operational improvements. Strategic initiatives like the Ragasco and Elgen acquisitions, investments in facility modernization and technology (IoT, AI, sustainable materials), and efforts to optimize operations are positioning the company for future success. While macroeconomic headwinds and specific market softness present near-term challenges, management's outlook is underpinned by expectations of market normalization and the tangible benefits of these strategic actions. The company's robust balance sheet provides the financial flexibility to pursue its growth ambitions and continue returning value to shareholders.

The path forward for Worthington Enterprises involves executing on its margin expansion targets, successfully integrating recent acquisitions, and capitalizing on opportunities in its core and emerging markets, including sustainable energy solutions through its joint venture. Investors should monitor the trajectory of demand in key end markets, the realization of benefits from transformation initiatives, and the impact of raw material price volatility on joint venture performance. With a clear strategy, a disciplined approach, and a strong financial foundation, Worthington Enterprises appears well-positioned to build a more profitable and growth-oriented future beyond its steel legacy.