Executive Summary / Key Takeaways

• Strategic Pivot to Electrification: Worthington Steel is aggressively investing in electrical steel processing, with significant expansions in Mexico and Canada and the recent Sitem Group acquisition, positioning the company to capitalize on the surging demand for electrified vehicles and energy infrastructure.
• Technological Differentiation & AI Integration: The company leverages specialized processing capabilities, including tailor-welded blanks and the ablation process, for lightweighting and safety in automotive. It is also integrating AI across operations and back-office functions to enhance productivity and drive cost savings.
• Solid Q1 FY26 Performance Amidst Headwinds: Despite a mixed macroeconomic environment and a 7% decline in total volume tons, Worthington Steel reported a strong Q1 FY26 with net sales up 5% to $872.9 million and adjusted EBIT increasing by $15.5 million, driven by higher direct volumes, favorable inventory holding gains, and strategic acquisitions.
• Cautiously Optimistic Outlook: Management maintains a "cautiously optimistic" stance, anticipating improved clarity in the latter half of calendar year 2025, fueled by potential interest rate cuts and continued market share gains in automotive, alongside the ramp-up of electrical steel investments.
• Disciplined Capital Allocation & Risk Management: With a strong balance sheet and a forecasted $100 million in fiscal 2026 capital expenditures, the company is focused on high-return opportunities and strategic M&A, while actively managing risks such as commodity price volatility and customer concentration.

The Foundation: A Specialized Processor's Enduring Heritage and Strategic Vision

Worthington Steel, Inc. (NYSE:WS) stands as a premier value-added metals processor in North America, boasting a 70-year heritage of delivering high-quality steel processing capabilities across a diverse array of end markets. Formally established as an independent, publicly traded company on December 1, 2023, following its spin-off from Worthington Enterprises, Inc. (WE), the company has swiftly carved out market-leading positions in North American carbon flat-rolled steel, tailor-welded blanks, and as a major global producer of electrical steel laminations. This strategic independence has allowed Worthington Steel to sharpen its focus on core competencies and high-growth opportunities.

The company's overarching strategy is built on three pillars: focused investments in the rapidly expanding electrical steel market, margin-accretive growth driven by a strong commercial focus and strategic capital expenditures and acquisitions, and continuous base business improvements through its "transformation" initiatives. This strategic framework is designed to leverage its operational agility and deep customer relationships, enabling it to deliver highly technical, customer-specific solutions.

The broader industry landscape is characterized by significant trends, including the accelerating electrification of the economy, driven by the proliferation of electric vehicles (EVs) and the escalating demand for energy infrastructure to support artificial intelligence (AI) and data centers. These macro trends present substantial tailwinds for Worthington Steel's specialized offerings. For instance, the transformer market, a key consumer of electrical steel cores, faces a two-year backlog and is projected to grow by up to 7% annually over the next decade, with over half of existing transformers exceeding their useful life. This confluence of factors underscores the strategic importance of Worthington Steel's investments in electrical steel.

Technological Edge: Innovation Driving Value

Worthington Steel's competitive differentiation is deeply rooted in its advanced processing capabilities and a proactive approach to technological innovation. The company excels in processing flat-rolled steel coils into precise specifications, offering customized solutions that go beyond basic material supply. A prime example of this is its leadership in tailor-welded blanks (TWB). This technology enables the creation of single, lighter, and stronger components from what would traditionally be multiple parts, offering significant benefits to customers, particularly in the automotive sector.

The tangible benefits of TWB are substantial and quantifiable for original equipment manufacturers (OEMs). By consolidating parts and lightweighting, TWB solutions reduce material costs, freight expenses, and scrap. Critically, on the assembly line, they significantly cut manufacturing costs by simplifying the assembly process. Furthermore, in electric vehicles, lightweighting directly translates to increased range, while the enhanced strength of press-hardened steel components improves passenger and battery safety in the event of a crash. Worthington Steel has further bolstered its TWB capabilities through a licensing agreement for the ablation process with ArcelorMittal Tailored Blanks (MT), which is crucial for welding ultra-high strength and press-hardened steels. This technology is being integrated with new ablation lines, with equipment currently being installed and tested.

Beyond its core processing technologies, Worthington Steel is aggressively embracing artificial intelligence (AI) as a "force multiplier" across its operations and back-office functions. In the first quarter of fiscal 2026, the company launched four critical AI-driven pilots: demand forecasting to improve capacity planning and inventory management, predictive inventory optimization to reduce inbound raw material inventory, predictive maintenance to reduce downtime, and forecast and demand planning automation. These initiatives are explicitly expected to provide cost savings and/or free up cash flow upon full implementation. In the back office, AI is automating daily cash posting, streamlining IT access provisioning (saving IT staff 20 hours per week), and cutting manual work in credit functions (saving 80 hours per month). This strategic deployment of AI aims to enhance productivity, improve quality, and unlock new value, allowing employees to focus on higher-value tasks.

For investors, these technological differentiators are critical components of Worthington Steel's competitive moat. They enable the company to offer superior, value-added products that command better margins, strengthen customer loyalty through bespoke solutions, and position it favorably in high-growth markets like electrification. The continuous investment in both core processing and emerging AI technologies underpins the company's long-term growth strategy and its ability to maintain a competitive edge.

Competitive Landscape: Forging a Niche in a Fragmented Market

The steel processing industry is fragmented and highly competitive, with competition primarily centered on price, product quality, and delivery capabilities. Worthington Steel operates within this dynamic environment, distinguishing itself through its specialized processing capabilities and customer-centric approach. While larger integrated steel producers like Nucor Corporation (NUE), Steel Dynamics, Inc. (STLD), Cleveland-Cliffs Inc. (CLF), and United States Steel Corporation (X) represent broader market competition, Worthington Steel often competes in more specialized, value-added segments.

Compared to these larger players, Worthington Steel's strengths lie in its adaptability and customized offerings. Its expertise in tailor-welded blanks, for instance, allows it to serve niche automotive demands with precision, potentially offering faster adaptation to specific customer requirements than the scale-focused strategies of Nucor. While Steel Dynamics emphasizes cost efficiency and volume, Worthington Steel's diversification across end-markets, including its growing electrical steel segment, exploits potential weaknesses in competitors' more limited product variety. This specialized focus can lead to more robust growth in emerging sectors like energy infrastructure.

However, Worthington Steel's competitive disadvantages include its relatively smaller scale as a standalone entity compared to the integrated giants. This can lead to potential dependencies on specific supply chains and may make it more vulnerable to commodity price fluctuations or aggressive pricing strategies from larger rivals like Cleveland-Cliffs. The high capital requirements for facilities, stringent regulatory compliance, and established supplier relationships act as significant barriers to entry in the steel processing industry, which generally benefits incumbent players like Worthington Steel by limiting new competition.

Customer and supplier dynamics are crucial. Worthington Steel maintains strong relationships with various North American steel mills for its flat-rolled steel coils, mitigating risks from any single supplier disruption. Its ability to win "Supplier of the Year" awards from major customers like General Motors (GM) and John Deere (DE) underscores its commitment to quality and service, fostering strong customer loyalty. In the tailor-welded blanks market, where only ArcelorMittal Tailored Blanks and Worthington Steel are significant North American players, OEMs actively seek multiple suppliers for critical components, creating opportunities for Worthington Steel to expand its market share, particularly with its newly licensed ablation technology.

Financial Performance: A Quarter of Strategic Gains

Worthington Steel delivered a robust financial performance in the first quarter of fiscal year 2026, demonstrating disciplined execution amidst a mixed macroeconomic backdrop. Net sales for the three months ended August 31, 2025, reached $872.9 million, marking a 5% increase from $834 million in the prior year quarter. This growth was primarily fueled by the inclusion of the Sitem Group acquisition, higher direct volumes, and a slight uptick in average direct selling prices.

Gross margin significantly improved, rising by $14.8 million to $115.2 million, compared to $100.4 million in the prior year. This expansion was largely attributable to higher direct spreads, which saw a favorable swing of $22.2 million from an estimated $16.6 million inventory holding loss in Q1 FY25 to an estimated $5.6 million inventory holding gain in Q1 FY26. Higher direct volumes also contributed $4.6 million to the gross margin increase. However, lower toll processing gross margin, down $11 million due to reduced volumes and an unfavorable mix, partially offset these gains. Direct sales volume constituted 63% of the total mix, up from 56% in the prior year, reflecting a strategic shift towards higher-value direct sales.

Operating income for the quarter stood at $48.3 million, an increase from $43.4 million in the prior year. Selling, general and administrative (SGA) expenses rose by $10.9 million to $67.9 million, primarily due to the Sitem Group acquisition, which accounted for $7.9 million of SGA, including a one-time $4.6 million bonus paid to key Sitem employees. Equity in net income of unconsolidated affiliate, primarily from Serviacero Worthington, surged to $6.4 million from $1.3 million, driven by higher direct spreads, inventory holding gains, and favorable foreign currency exchange impacts. Net earnings attributable to Worthington Steel shareholders increased to $36.3 million, or $0.72 per diluted share, up from $28.4 million, or $0.56 per diluted share, in the prior year. Adjusted EBIT, a key non-GAAP measure, increased by $15.5 million to $54.9 million, underscoring the underlying operational strength.

From a liquidity and capital resources perspective, Worthington Steel ended the quarter with $78.3 million in cash and cash equivalents. Net cash used in operating activities was $6.3 million, a shift from $54.6 million provided in the prior year, primarily due to a $95.2 million increase in cash consumed by working capital, driven by higher average steel prices. Net cash used in investing activities was $29.6 million, largely for capital expenditures of $29.4 million, predominantly for the strategic expansion of electrical steel operations in Canada. The company's Credit Facility provides ample liquidity, with $279.6 million available as of August 31, 2025, against total outstanding debt of $233.4 million. This robust financial position supports its ongoing strategic investments and operational needs.

Outlook & Guidance: Charting the Future

Worthington Steel's management maintains a "cautiously optimistic" outlook, acknowledging the mixed macroeconomic environment and limited visibility in several sectors for the near term. However, they anticipate improved clarity and momentum in the latter half of calendar year 2025, contingent on factors such as further interest rate cuts and the establishment of a continental trade agreement.

For the second quarter of fiscal 2026, the company expects to incur estimated pretax inventory holding losses of approximately $5 million to $10 million, a reversal from the prior quarter's gains, due to downward pressure on hot-rolled coil pricing. The full fiscal year 2026 capital expenditures are projected to be approximately $100 million, a disciplined investment aimed at supporting growth, particularly in the electrical steel segment. Management also anticipates the direct sale volume mix to settle in the 60% to 65% range, with toll processing at 35% to 40%.

In the automotive market, Worthington Steel remains cautiously optimistic, projecting a calendar year 2025 build rate of around 15 million units. The company expects continued market share gains to layer in over the next few quarters, offsetting some of the challenges faced by a large Detroit 3 OEM customer, which is viewed as a short-term issue. The electrical steel expansions in Mexico and Canada are on track, with Mexico's facility set to begin production in a few months and Canada's transformer core production slated for early calendar year 2026, directly addressing the growing demand for electrification.

The construction market is expected to remain flat in the first half of 2025 but gain momentum in the second half, benefiting from anticipated interest rate cuts. Conversely, the agricultural market is projected to remain soft due to persistent high borrowing costs and uncertainty in farm income. The heavy truck market is expected to be slow in the first half of calendar year 2025 but is anticipated to pick up in the second half and into 2026, driven by regulatory changes. The recent enactment of the One Big Beautiful Bill Act (OBBBA) in July 2025 is expected to provide cash tax savings in fiscal year 2026 through bonus depreciation and domestic research and development expense provisions, with no material impact on tax expense.

Risks & Challenges: Sustaining Momentum

Despite its strategic positioning, Worthington Steel faces several pertinent risks and challenges that warrant investor attention. The cyclical nature of the steel industry and volatility in raw material prices, particularly flat-rolled steel, can significantly impact costs and profitability. While the company utilizes derivative financial instruments to manage commodity price risk, its ability to pass on price increases to customers is subject to competitive conditions, potentially leading to inventory holding gains or losses.

Customer concentration also presents a risk, as net sales to certain large automotive customers can exceed 10% of consolidated net sales. A significant loss or decrease in business from any of these customers could materially affect financial results if replacement business is not secured. Evolving U.S. government tariff policies on steel and aluminum, including the recent increase to 50% under Section 232, create sustained uncertainty in global trade. While management expects little material impact on electrical steel laminations due to customer willingness to pay tariffs and USMCA compliance, abrupt shifts in customer supply chain decisions remain a potential risk.

Furthermore, the acquisition of Sitem Group introduced redeemable noncontrolling interests, classified as mezzanine equity, due to put options held by minority investors. The contingent redemption events associated with these options could require Worthington Steel to utilize available cash or debt capacity in the future, and the determination of redemption probability involves significant judgment. The company's ongoing transformation and AI integration, while promising, also carry execution risks associated with new technology deployment and organizational change.

Conclusion

Worthington Steel, Inc. is strategically positioning itself as a specialized and technologically advanced processor within the dynamic steel industry. Its 70-year legacy, coupled with a focused strategy on high-growth electrical steel markets and a commitment to innovation through AI, underpins a compelling investment thesis. The strong first-quarter fiscal 2026 results, marked by increased net sales and adjusted EBIT, demonstrate the company's ability to execute effectively even in a challenging macroeconomic environment.

The company's leadership in tailor-welded blanks and its aggressive push into electrical steel, supported by expansions in Mexico and Canada and the Sitem acquisition, are critical drivers for future growth, particularly in the burgeoning EV and energy infrastructure sectors. While commodity price volatility, customer concentration, and evolving trade policies present ongoing risks, Worthington Steel's disciplined capital allocation, robust liquidity, and continuous improvement culture provide a solid foundation. Investors looking for exposure to a specialized steel processor with a clear roadmap for capitalizing on electrification and technological advancements should find Worthington Steel's narrative compelling, particularly as market clarity improves and its strategic investments mature.