Worthington Steel (WS) Q1 2027 earnings review
Worthington Steel's sales tripled, but interest costs cut its profit
Worthington Steel, which processes steel for carmakers and other manufacturers, bought most of German metals group Kloeckner with borrowed money. Without Kloeckner, sales rose 9%, but earnings from the original business fell about 5% by our math. Interest on the new debt took about half of operating profit excluding one-offs, so profit per share fell.
| Sales excluding Kloeckner | $953.9M +9% from a year ago |
|---|---|
| Profit per share, excluding one-offs | $0.57 $0.77 a year ago |
| Net debt | $1.95B $172M three months earlier |
| Outlook | None given quarterly dividend held at $0.16 |
⚖️ Verdict: 🔴 Bearish
The story got worse because the original business earned less on higher sales while the cost of the new debt arrived in full. The good news: Kloeckner added to operating profit even after a one-time charge for marking up the steel it held at purchase.
The question now is whether Kloeckner can earn enough to pay down the debt. Either the savings Worthington targets from combining the two arrive, or thin margins keep borrowing high for years. A control agreement cannot take effect before January 2027, so the quarter ending in February will give the first reading.
🐂 Bull Case
Original Business Sold More Steel at Higher Prices
Worthington Steel earns most of its money from direct sales: it buys steel, processes it and sells it to carmakers and other manufacturers. Without Kloeckner, sales rose 9% from a year ago. The comparison is clean, because last year's quarter already included the Italian unit Sitem.
- Direct tons, original business: up 3% from a year ago
- Direct selling prices: up 6%
- Direct share of tons processed: 66%, up from 63%
Executives have called direct sales the higher-margin part of the business, so a richer mix supports profit. But the release gives no split by customer industry, so readers cannot check last year's gains with carmakers.
What to watch: shipments to carmakers against Detroit's vehicle production. Direct tons growing faster than vehicle output would show Worthington still winning business from rivals.
Kloeckner Added Operating Profit Despite a One-Time Charge
Kloeckner & Co is a German metals company, and Worthington has owned about 62% of it since June 3. Chief executive Geoff Gilmore said the deal makes Worthington "a more diversified metals processing and manufacturing company".
- Sales from Kloeckner: $1.77 billion, 65% of the total
- Operating profit from Kloeckner: $24.2 million
- One-time charge for marking up Kloeckner's steel stock: about $43 million
The charge ends once Kloeckner sells the steel it held at purchase. Without it, Kloeckner earned about $67 million of operating profit, under 4% of sales, by our math. Even with it, group operating profit excluding one-offs rose 41%.
What to watch: Kloeckner's operating profit next quarter, after the inventory charge has run through. A margin near 4% would confirm this quarter's underlying level.
Positives this quarter didn't test
Four positives from earlier quarters got no new figures in the press release. Each item below names the disclosure that would move it, and the call or the quarterly filing may supply some of them.
- Savings from combining with Kloeckner: Worthington targets $150 million a year by year two; any first-year figure would test it.
- Electrical steel for motors and transformers: no update on the Canada and Mexico plants; new orders would show the ramp.
- Share gains with carmakers: no shipment figures; growth faster than Detroit's production would confirm them.
- Margin goal of 10% or more, measured on earnings before interest, tax, depreciation and one-offs: this quarter reached 4.1%.
🐻 Bear Case
Original Business Earned Less on Higher Sales
Chief executive Geoff Gilmore wrote: "At the same time, our core Worthington Steel business delivered solid operating performance, driven by higher direct volumes and improved pricing." The figures for the business before Kloeckner tell a weaker story.
Those operations earned $75.1 million before interest, tax, depreciation and one-offs, about 5% less than a year ago by our math. Manufacturing expenses rose $11.1 million, mostly on "increased wages and benefits". The increase equals about 1.2 percentage points of the original business's sales.
- Gross margin, original business: 12.3%, down 0.9 percentage points
- Toll tons, where Worthington processes customers' own steel for a fee: down 8%
Gilmore credited better prices, but they only matched steel costs and trimmed $0.2 million from profit. A gain on steel bought before prices rose propped up the result. Without it, these earnings fell about 14%, by our math. Overhead did not cause this: excluding deal fees, selling and office costs fell.
What to watch: manufacturing expenses against tonnage next quarter. Falling earnings on rising direct tons would mean higher wages are absorbing the gain from a richer mix.
Interest Now Takes Half of Operating Profit
Worthington paid for its Kloeckner stake mostly with borrowed money. Net debt, what it owes minus its cash, rose to $1.95 billion from $172 million three months earlier. Earlier this year chief executive Geoff Gilmore said he was confident in the plan to pay it down over time.
- Net interest: $38.8 million, up from $2.9 million a year ago
- Interest as a share of operating profit excluding one-offs: 49%, up from 5%
- Profit per share excluding one-offs: $0.57, down 26%
Worthington aims to bring net debt below 2.5 times a year of earnings before interest, tax, depreciation and one-offs within 24 months. At this quarter's pace, the ratio stands near 4.4 by our math. Without the one-time inventory charge, it falls to about 3.2. Reaching the goal needs earnings growth, because debt would otherwise have to fall by more than 40%.
What to watch: net debt at the end of November, set against that quarter's earnings. A ratio still above 4 would mean the 24-month goal rests almost entirely on savings that have not yet begun.
Free Cash Flow Fell as Plant Spending Doubled
Free cash flow is the cash a business keeps after paying for its operations and its plants. Worthington spent $69.0 million more than it brought in, almost twice last year's first-quarter shortfall.
- Cash from operations: minus $6.0 million, against minus $6.3 million a year ago
- Spending on plants and equipment: $63.0 million, up from $29.4 million
Part of the gap is seasonal, because the first quarter also burned cash last year. But one quarter of plant spending already equals about half of the $100–150 million yearly plan. That leaves less cash for paying down debt.
What to watch: whether the company restates the yearly spending plan on the October 7 call. A plan above $150 million would push back the point when cash starts reducing debt.
Risks this quarter didn't answer
Four concerns from earlier quarters got no new numbers in the press release. Each item below names the disclosure that would settle it, and the call or the quarterly filing may supply some of them.
- Europe: Chinese competition hurt Worthington's European unit last year; a regional split of Kloeckner's results would show whether that pressure spreads.
- Electrical steel delays: carmakers pushed full output at the Mexico plant to fiscal 2029; an updated order book would show any further slip.
- Minority shareholders: the control agreement needs a Kloeckner shareholder vote and creates payment duties to remaining holders; its terms would size the cost.
- Coated steel profits: no galvanized spread figure this quarter; one would show whether the low point has passed.
👓 Other Themes
Worthington Signed a Control Agreement With Kloeckner
After the quarter ended, Worthington signed a domination and profit and loss transfer agreement, a German contract linking Kloeckner's management and profits to its parent. Kloeckner shareholders must approve it, and it cannot take effect before January 1, 2027. Until then, Kloeckner "continues to operate independently", so the two businesses cannot yet run as one.
Rising Steel Prices Added a Gain on Stock
Steel prices rose during the quarter, so steel Worthington had bought earlier sold at an extra profit. The original business booked an estimated $12.1 million gain on that stock, up from $5.6 million a year ago. Unlike on some past calls, the release gives no estimate of next quarter's gain or loss.
💲 Other KPIs
Inventory rose to about 64 days of cost of sales by our math, the highest in five quarters. It ranged from 47 to 58 days over the past year. Kloeckner's stock lifted total inventories to $1.71 billion. Rising inventories also absorbed $42.9 million of cash this quarter.
Worthington's share of profit from Serviacero, a joint venture it half-owns, fell 17% from a year ago to $5.3 million. The venture paid Worthington $22.0 million in cash, by our math. That payout lifted cash flow even as the venture's profit shrank.
The average basic share count rose 0.8% from a year ago to 50.0 million. Worthington bought back no shares this quarter. It funded the Kloeckner purchase with debt rather than new stock, so existing holders kept their stake.
🔮 Guidance
Unchanged. The board will pay $0.16 a share on December 28, the same as in every quarter of the past year. By our math, that equals about 28% of this quarter's profit per share excluding one-offs. The board kept the payout steady even as debt rose.
New. Worthington expects to sell several Kloeckner business units within a year of the purchase. It reports them separately, and they lost $4.9 million this quarter. The release names neither the units nor a price, so readers cannot yet size the effect on debt.
❓ Key Questions
Does the yearly spending plan include Kloeckner's plants?
One quarter of plant spending already reached about half of the yearly plan. If that plan covers only part of the group, total spending could run much higher and delay debt reduction.
Is Worthington still gaining share with carmakers?
The release gives no automotive shipments. Carmaker gains drove the direct business last year, so shipments against Detroit's production would show whether the rise in direct tons reflects new customers.
When will savings from Kloeckner start to show?
The control agreement cannot take effect before January 2027. A schedule for the first year's savings would show how much reaches this fiscal year and how fast debt can fall.
What path does Worthington see for its debt ratio?
The release repeats no figure for the 24-month debt goal. A stated path, with expected proceeds from the units for sale, would show how quickly interest costs can shrink.
How did Kloeckner's European business perform?
The release gives no regional split. Chinese competition hurt Worthington's European unit last year, so Kloeckner's European margins would show whether that pressure now reaches a much larger business.