Worthington Steel, Inc. (NYSE:WS) - A Differentiated Steel Processor Poised for Growth

Published on September 24, 2024 | Ticker: WS

Worthington Steel, Inc. (NYSE:WS) is a leading value-added steel processor in North America, delivering high-quality steel processing capabilities across a diverse range of end markets. With a strong focus on innovation, operational excellence, and customer-centric solutions, Worthington Steel is well-positioned to capitalize on the growing demand for specialized steel products and services.

Business Overview

Worthington Steel operates as one of North America's premier value-added steel processors, maintaining market-leading positions in the carbon flat-rolled steel and tailor welded blank industries, as well as being one of the largest global producers of electrical steel laminations. The company's core business involves processing flat-rolled steel coils, sourced primarily from North American steel mills, into the precise type, thickness, length, width, shape, and surface quality required by customer specifications. Worthington Steel serves a diverse customer base spanning the automotive, construction, agriculture, heavy truck, machinery, and equipment industries, among others.

The company's operations are managed under a single group organizational structure, with a focus on products and services. Worthington Steel owns controlling interests in several joint ventures, including Spartan Steel Coating, TWB Company, and Worthington Samuel Coil Processing, further strengthening its operational capabilities and market presence. The company also holds a noncontrolling interest in the unconsolidated joint venture, Serviacero Worthington, which provides steel processing services to customers in various industries.

Financials

Worthington Steel delivered a strong financial performance in fiscal year 2024, reporting annual net income of $154.7 million, annual revenue of $3.43 billion, annual operating cash flow of $199.5 million, and annual free cash flow of $96.1 million. This performance was driven by the company's ability to navigate the volatile steel market environment and capitalize on its differentiated product and service offerings.

In the fourth quarter of fiscal year 2024, Worthington Steel reported earnings of $53.2 million, or $1.06 per share, compared to $67.3 million, or $1.37 per share, in the prior-year quarter. The decrease in earnings was primarily due to lower gross margins, which were impacted by an unfavorable swing in estimated inventory holding gains/losses of $36 million, or $0.55 per share. Excluding these one-time items, the company generated earnings of $1.06 per share in the current quarter, compared to $1.47 per share in the prior-year quarter.

Quarterly net sales in the fourth quarter of fiscal year 2024 were $911 million, up 3% from the prior-year quarter, driven by slightly higher direct pricing and a favorable mix within the company's toll processing business. Worthington Steel shipped just over 1 million tons during the quarter, a 2% decrease compared to the prior-year period.

Segmental Performance

Worthington Steel's business is diversified across several end markets, with the automotive industry being the largest, accounting for 52% of net sales in the fourth quarter of fiscal year 2024, consistent with the prior-year period. The company's sales to the automotive market were down 1% year-over-year, primarily due to the end of life for certain programs, which was partially offset by the launch of new platforms.

The construction industry remained the second-largest market, representing 14% of fourth-quarter net sales, up from 12% in the prior-year period. Worthington Steel experienced strength in the fencing, metal building, and culvert markets within the construction industry, as the company utilized some open capacity to take on spot and shorter-term business.

Operational Highlights and Growth Initiatives

Worthington Steel continues to make progress on its strategic growth initiatives, particularly in the rapidly growing electrical steel market. The company's large capital projects related to electrical steel expansions in Mexico and Canada remain on track and on budget. In Mexico, three of the five new presses have been installed at the company's electrical steel facility, with the first press now operational and the next two in the process of being installed. Worthington Steel has secured enough orders to fill three of the initial five presses when the OEM programs reach full production, expected in late 2025.

Similarly, the company's electrical steel expansion project in Canada is progressing well, with Worthington Steel having already secured orders to fill 50% of the new capacity as customers look to address the backlog in their transformer order books. The Canadian facility is expected to be operational by the end of calendar year 2025.

In addition to the electrical steel initiatives, Worthington Steel recently licensed an ablation technology for its tailor welded blanks business, which is expected to open up new product opportunities and expand the addressable market by approximately 30%. The company is already receiving customer interest and orders for this new capability.

Worthington Steel's focus on operational excellence and continuous improvement, through its "Transformation" program, has also yielded positive results. The company has implemented various initiatives to streamline material flow, reduce work-in-process inventory, and improve cycle times, leading to a more organized workflow, a safer environment for employees, and the potential for reduced working capital requirements and enhanced customer responsiveness.

Liquidity

Worthington Steel maintains a strong financial position, with $40.2 million in cash and $148 million in outstanding ABL debt as of the end of the fourth quarter of fiscal year 2024, resulting in net debt of $107.8 million. The company generated $96 million in free cash flow on a trailing 12-month basis, providing ample liquidity to fund its strategic growth initiatives and return capital to shareholders.

In April 2024, Worthington Steel's Board of Directors declared a quarterly cash dividend of $0.16 per common share, demonstrating the company's commitment to shareholder returns. The company's capital allocation strategy is focused on funding organic growth opportunities, pursuing strategic acquisitions, and returning excess capital to shareholders through dividends and potential share repurchases.

Outlook

Worthington Steel remains cautiously optimistic about the near-term outlook, as the company expects to see the normal seasonal drop-off in volume during the summer months, particularly in the automotive market. However, the company's long-term growth prospects remain strong, driven by its focus on the rapidly growing electrical steel market, margin-accretive organic investments, and strategic acquisitions.

Conclusion

With a differentiated product and service offering, a strong operational foundation, and a commitment to innovation and continuous improvement, Worthington Steel is well-positioned to capitalize on the evolving needs of its diverse customer base and deliver sustainable value for its shareholders.

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