Worthington Enterprises (WOR) Q1 2027 earnings call

Hello everyone, thank you for joining us, and welcome to the Worthington Enterprises Fiscal Year 2027 First Quarter Earnings Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Marcus Raje, Treasurer and Investor Relations Officer. Marcus, please go ahead.

Thank you Paige. Good morning everyone, and thank you for joining us for Worthington Enterprises First Quarter Fiscal 2027 Earnings Call. On the call today, or Joe Hay, our President and Chief Executive Officer and Kalamazooza, our Chief Financial Officer. Before we begin, I'd like to remind everyone that certain statements made during today's call are forward-looking in nature and subject to risk and uncertainties that can cause extra results to differ materially from those expressed or implied.

For more information on these risk and uncertainties, please refer to our earnings release issued yesterday after the market closed, which is available on the Investor Relations section of our website. Additionally, our remarks today will include references to non-gap financial measures. Reconciliation of these measures to the most directly comparable gap measures can also be found in their earnings release. Today's call is being recorded, and a replay will be available later on our website at Worthington Enterprises. com.

With that, I'll turn the call over to Joe for opening remarks.

Thank you Marcus. Good morning everyone. Welcome to Worthington Enterprises Fiscal 2027 First Quarter Earnings Call. We had a strong start fiscal 2027. While we faced some market and operating headwinds, our team continued to execute, serve our customers, and make progress on our strategic initiatives. I want to thank Michael for the focus, creativity, and grit. They bring to Worthington every day. In 2-1, we grew sales by 13% year over year, including 7% organic growth. Trustee was often treated by 10% to $74 million, and we generated $54 million of free cash flow, nearly double the prior year of quarter. Trustee PPS was 82 cents compared with 78 cents a year ago. We continued to deploy capital thoughtfully in the quarter, including the reverses of 335,000 shares of our common stock.

While we were pleased with our progress, the quarter was not without challenge. Facetet wins are cooling and construction visits. As channel inventory arrives and new home sales are muted, demand for a newly mandated A2-el refrigerant cylinders is lower than it was a year ago, creating a difficult comparison.

Additionally, steel availability across the tree remains tight, and lead times in the quarter were extended. Disruptions in production and scheduling for both Q&A construction and for our balloon pilots. Our teams are actively working through these issues every day, prioritizing our customers and ensuring that we are the best partner that we can be. While we face some headwinds in the quarter, our PPS was a reflection of our businesses and our people. Resilient, strong sales and even dog growth, is asking and continues executing at a high level, performing very well. 80-20 work matures and helps us focus on resources, on the products and opportunities that create the most value. Wave and Cartetrick also delivered higher equity earnings and were important contributors in the quarter.

When we optimize and grow Worthington, our strategy is not complicated. Transformation to improve our businesses, discipline that abilities and strengthen our portfolio and innovation to grow organically where we have attractive opportunities. 80-20 to optimize our businesses. On outcake resources for the matter most and are now extending that discipline into our portable fuel and tourist businesses. Continuing to improve productivity through automation, AI-enabled tools and other transformation initiatives. And we're focused on opportunities where we believe we can bring unique advantages as an owner and create long-term value. So I continue to progress well and there we're focused on reaching more perspectives and introducing them to LSI's compelling value proposition. This morning on organic growth, recently seeing our innovation capabilities translate into meaningful commercial opportunities.

Topical examples of the kind of organic growth opportunities we're trying to create and develop at Worthington is our engineering and design. These engineering types have played an important role in commercial buildings across the world for decades and make significantly more heat. Data center designers and operators are cooling fluids used in liquid cooling systems. And as such, our cool component, market leader in these engineering SME tanks for years. Consistently then, plus or minus 200 million dollars a year for some time. Given the projected growth in data centers and increasing adoption of liquid cooling in those data centers, industry sources suggest the market for liquid cooling and thermal management SME tanks alone could be more than 10 times the size of the legacy market in the next few years.

More than that market, engineering and innovation expertise and created an emerging suite of liquid cooling and thermal management solutions. What started as a promising new application for us is quickly developed into an increasingly meaningful growth opportunity.

As a reminder, in fiscal 26, we shipped roughly $13 million of eight SME tanks for data centers. For fiscal 27, $13 million a revenue from that value stream, essentially matching what we did in the entire city tank revenues will continue to grow sequentially quarter over quarter to the balance of this fiscal year. This market is in the early stages of development. Our pipeline suggests that one, our solutions can play a meaningful role in this evolving architecture and two is continuing to accelerate. To be clear, pipeline is not revenue. And there was always some uncertainty around the timing and conversion of these opportunities to dive in the quality of the opportunities in front of us is encouraging.

And we are investing in equipment, engineering, talent, and production capacity, servicing today and the opportunities we see at it. The opportunities that have had us are to our people. That people are a modern asset. This is true today. It has ever been.

Recently named one of America's most innovative businesses for 2,025 business insight, number and impact of companies' technological innovations. The reputation among peers for fostering innovation and how a company's investment in R&D compared to other quarter by USA Today and points of life as one of America's most charitable commitments to communities where we live and work, including volunteerism and support from the Worthington companies' foundation. Real political instability, inflation, health and strength, and operational challenges. We continue to prioritize our customers and we continue to see tangible evidence that has reached its work. We're invited to continue driving profitable growth. Importantly, we have a talented team that cares deeply about each other. We'll spend a few more minutes on our financial performance in the quarter.

We would like to remind everyone that we'll be hosting our investor day in New York on November the 10th. Looking forward to discussing our businesses, the opportunities we see for profitable growth and our position in Worthington enterprises to create long-term value. We hope you'll join us.

Thank you, Joe. And good morning, everyone. We delivered a strong start to fiscal 2027% organic sales growth, record trailing 12-month free cash flow of $196 million, continued improvement across our trade and specialty solutions businesses, strong performance from our joint ventures, and meaningful progress in several of our strategic growth platforms. Yap earnings in Q1 were 87 cents per share compared to 70 cents per share in the prior year period. The current quarter included a net benefit of 5 cents per share from non-occurring and restructuring items, primarily related to a gaining realized from a contingent turnout associated with the sale of our former oil and gas business, which was invested in January of 2021. The prior year quarter included 8 cents per share of restructuring and other expenses.

Excluding these items in both periods, adjusted earnings were 82 cents per share, up from 78 cents per share in the prior year quarter. Included in adjusted earnings for Q1 was a net pre-tax benefit of approximately $4 million or 6 cents per share related to IEPA tariff refunds. Consolidated sales increased 13% to $344 million, demonstrating continued momentum across the underlying portfolio in addition to the contribution from our recent acquisitions, which added $19 million in net sales for Q1. Growth profit increased by nearly 11% in the quarter, while growth margin was 26.4% versus 27.1% a year ago, primarily reflecting lower volumes and less favorable mix in building performance solutions, where fully in construction based a particularly difficult prior year comparison.

Adjusted EBITDA was $74 million compared to $67 million in the prior year quarter, while adjusted EBITDA margin was 21.5%. Importantly, even excluding the net tariff refunds, adjusted EBITDA increased year over year, reflecting underlying improvement across several of our businesses. On a trailing 12 month basis, adjusted EBITDA increased to $300 million. Turn to our capital allocation, we remain focused on reinvesting in our businesses and pursuing strategic acquisitions, while returning excess cash to shareholders via dividends and charity purchases. Free cash flow remains one of our most important operating metrics, and Q1 demonstrated the strength of our cash generation. Operating cash flow was $67 million up from $41 million a year ago, while free cash flow increased to $54 million from $28 million, which is our second strongest quarter since becoming wording to net enterprises behind Q4 fiscal 2026.

Our discipline around cash flow generation was evident again in Q1 supported by effective working capital management across the organization.

On a trailing 12 month basis, free cash flow increased to $196 million, representing a 116% conversion rate relative to adjusted net earnings, and our highest mark since becoming more than 10 enterprises. This level of cash flow provides us with the flexibility to reinvest in our businesses, pursue additional growth opportunities, and return capital to shareholders, supporting our ability to create value over time. Capital expenditures sold $13 million in the quarter, and we returned capital to shareholders through $9 million in dividends and spent $18 million to repurchase 335,000 shares of our common stock. Our joint ventures continue to deliver strong cash generation, providing $36 million in dividends during the quarter, representing 88% of equity income.

Turn to our balance sheet in liquidity, we close the quarter with TTM adjusted e-bita of $303 million and net debt of $250 million. We continue to maintain a strong balance sheet with significant financial flexibility to execute our strategy. Yesterday, our Board of Directors declared a quarterly dividend of $0.20 per share payable in December, 2026.

Before I turn to segment performance and as a reminder, we recently renamed our two business segments to better reflect the markets they serve, the solutions they provide to customers, and the continued evolution of our portfolio.

Building products is now building performance solutions, and consumer products is now created in specialty solutions. Our names are changed to composition of the segments, and our historical financial results remain unchanged. In building performance solutions, Q1 net sales grew 16% year over year to $215 million, up from $185 million in the prior year quarter. Recent acquisitions contributed $19 million in net sales in the quarter, while organic sales increased 6% driven by, primarily by strength in our water and European businesses, partially offset by lower revenue in our cooling and construction business. Adjusted e-bita was essentially flat at $60 million compared to the prior year quarter, with an adjusted e-bita margin of 27.8%.

As Joe mentioned, the year over year comparison for building performance solutions was impacted by the normalization of demand in cooling and construction, following the A2L or refrigerant transition, as well as less favorable product mix. Tight steel availability and extended lead times also created production scheduling and shipment timing challenges during the quarter. We continue to view the A2L impact as a timing and comparison issue rather than a structural change in the business.

Importantly, adoption remains strong and continued installation of A2L equipment supports current demand for our product, while also building an install base that we believe will create an attractive long-term service and replacement opportunity. Our teams have worked diligently and prioritized customer needs throughout this period, while positioning the business to benefit as the temporary headwinds normal us. We are particularly encouraged by the accelerating opportunity in our water business, where demand for engineered AF to meet tanks supporting liquid cooling applications for data centers continues to grow. As Joe discussed, this is becoming an increasingly meaningful organic growth platform for Worthington. We delivered another record quarter with equity income increasing approximately $3 million a year over year to $35 million.

Clark Dietrich also improved with equity income increasing more than $1 million a year over year to $7 million despite commercial construction activity outside of data centers remaining relatively soft.

We are pleased with the performance of LSI and continue to see attractive opportunities to expand the scale, profitability, and diversification of our building performance solutions platform.

In trade and specialty solutions, Q1 net sales grew 8% year over year to $129 million, up from $119 million in the prior year quarter, driven by a combination of higher overall volumes than average selling prices. Adjusted even got increased to $24 million from $16 million in the prior year quarter, while adjusted even got margin expanded to 18.6% from 13.6%.

The improvement and profitability reflected higher sales, pricing, and improved manufacturing performance, along with the net benefit from the EPA tariff refunds we discussed earlier. Importantly, underlying profitability improved excluding the tariff benefit, particularly in our tools and portable fuel businesses. We are pleased with the performance of the segment, which continues to demonstrate the resilience of our portfolio of market leading brands.

Looking ahead, we remain focused on driving profitable, organic growth through the Worthington business system, including continued innovation and transformation across the segment, along with opportunities to expand distribution. We've seen good results from 80-20 in our water business, and we're now applying those same principles to portable fuel and torch to simplify the portfolio, improve next and drive sustainable margin improvement. Overall, we are encouraged by our start to fiscal 20-27. We are driving continued organic growth with innovation and solid contributions from our joint ventures and growing in attractive end markets like data centers, all while generating the record cash flows. These results provide further evidence that our strategy is working.

Looking ahead, we see multiple opportunities to strengthen earnings through continued execution, maturing 80-20, normalization and cooling and construction, growth and higher value applications, continue progress integrating recent acquisitions and continued productivity improvements through the Worthington business system. We believe these initiatives are improving the quality, sustainability and trajectory of our earnings and cash flows, strengthening our ability to invest for growth and create long-term value for our shareholders.

With that, we're happy to take your questions.

We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster.

Your first question comes from the line of Brian Buros with Thompson Research. Your line is open. Please go ahead.

Sure, Brian. Good question. And steel market had, you know, we are seeing longer lead times and certainly, you know, the price of steel has come up in certain areas. You know, they probably did start last fall when 232 tariffs on imported raw steel doubled. That really chilled imports. And since then, you've seen the price of steel creep steadily up and the market started to see some lead times good. It now certainly the case in Q1. But as you say, you know, type markets can create challenge, but they're also where we think some of our capabilities really do matter.

We're a pretty sophisticated buyer of steel. We have very strong supplier relationships, and we have a broad manufacturing footprint that gives us additional options to manage through periods of constrained supply. We were actively managing in that environment work to be sure that we're serving customers and maintaining access to materials. When it's been a bit, we have taken pricing actions as well since input costs have increased the way that they did.

So, you know, the bill building was a headwind for us in Q1, particularly as we mentioned in going to construction and building time. We do think that we're positioned going certainly through the end of the calendar year. And beyond that, we have limited visibility. It doesn't mean we don't necessarily think that it'll get worse again beyond that. But as I said, we just don't have a lot of gravity kind of into the new calendar year. You know, we ultimately think about that as it probably costs us, you know, a few million dollars in the quarter.

Okay, thank you. And follow up, I guess it'd be on, maybe on the JV wave, up 8%, great to see on a already pretty strong comp anyway. So, maybe some more clarity on kind of what the driving factor for that was, if that data center demands starting to flow through distribution yet, that pricing just from steel and maybe just strong core end markets, more commentary on kind of the demand for that would be helpful.

Sure, Brian. So, wave, as you mentioned, another really excellent quarter delivering record equity income of 35 million dollars. And we continue to be very pleased with the performance of that business and the team there. The end market, that way, they remain generally stable, although performance varies by sector. So, education, healthcare, transportation, and as you mentioned, data centers continue to remain healthy and drive volume while channels like retail and office are a little more muted. So, wave also does benefit from meaningful exposure to repair and remodel activity, which tends to be more resilient than the new commercial construction space. So, they're a little insulated there, which is good. The team continues to really innovate around solutions that help contractors reduce labor and improve installation efficiency.

And that's always going to be valuable in the market. And they continue to create meaningful value for their customers that way. And that supports the attractive economics of the business. And so, more broadly, wave is just a great example of the types of businesses that we like to own. They're market leader and attractive niche with strong customer relationships, differentiated products, and the ability to perform very well across different market environments. And as we look into Q2, there is normal seasonality to the business. Q1 is a strong quarter for them always during the year.

But we would expect as we look into Q2, some sequential moderation, but overall, they will remain very healthy. And we're very confident in the team there.

Your next question comes from the line of Walt's Liptic. With seaport research, your line is open, please go ahead.

Sure. Well, good morning. You know, we're talking here about, you know, ASME facts that people aren't sure is exactly stands for the American Society of the California Engineers. These are facts that are used in liquid cooling systems that support next gen computing infrastructure.

First, build vessels are used for liquid cooling and thermal management. And we've actually been in this business from, you know, we've been innovating in pressure and I've done this for 80 years, a young back-and-forth invented. The first free press rise, not to get too tight going, is your diaphragm, expansion tank, seven years ago. So, this isn't new to us. But as we listen to customers and understood what they were trying and needed to accomplish, we knew we could be awful. So, we leveraged a core competency expertise, you know, and created this emergency suite of solutions that we think really do. And so, you said it, $13 million last year, $13 million in Q1. We do think that it was sequentially in, you know, Q2, Q3, and Q4, both being weighted on the back half of the year, the back part of the year.

So, mind that these opportunities are sometimes 18 to 24 months removed from a Q1 and Q1 announcement that you might hear about a data center being greenlit. And so, we do think that we have some variability from quarter to quarter, but this is a multi-year opportunity. You know, we think it's accelerating. As I mentioned before, we think that the looking-cooling management market just for data centers, you know, could be 10x what the legacy market was in the next few years. And so, we absolutely have invested in our continuing to invest in engineering talents in new equipment and in production capacity, as we're to be part of the solution. And so, if you think about this market, they talk about hyperscalers, data center builders, and then ultimately put it into a kind of, you know, it's oversimplifying.

You should think of our solutions as types of picks and shovels. And so, you know, we may make various kinds of tanks and separators, but what really sets us apart is the services that we can provide around these solutions, our engineering expertise, our design expertise, find their designs for these. You know, we get sort of things like the basis of design, but we'd like to get back in as we go forward at this market pretty nicely.

Thank you. As a reminder, if you would like to ask a question, please press star one to raise your hand. Your next question comes from the line of Susan Maclary with Goldman Sachs. Your line is open. Please go ahead.

Yeah, thanks, Susan. So, I'll take the pipeline question first, and we continue to see a healthy pipeline of opportunities. You know, it's like uptake, if anything, you know, more recently with just activity there, which is good. And as you know, we're focused on businesses where we see strong strategic and cultural fit. These are in attractive niches, and where Worthington has a clear opportunity to create some additional value. And we've got a strong balance sheet. We've got really good free cashflow generation, like we talked about earlier, and low leverage. And that creates significant financial flexibility for us to pursue these opportunities when they make sense.

Our capital allocation framework is balanced, as you know, with a bias towards growth. And we're effectively evaluating opportunities, and we feel good about what we're seeing there. Just on the recent acquisition, so we also, we continue to feel pretty good about our most recent acquisition, both Elgin and LSI in the quarter, you know, the acquisitions contributed approximately 19 million of sales, just in Q1. With Elgin specifically, you know, we've made good progress on that integration. It's been over a year at this point. We're focused heavily on the operations and deploying the Worthington business system to really realize the full potential of the business. The commercial HVAC and markets that they serve remain pretty healthy. And we continue to believe Elgin has significant opportunity over time.

On LSI, that's our most recent acquisition. We closed in January. It's earlier in the integration process, but we are very pleased with performance there. So high quality business really attracted margins of strong position in a very specialized niche. There are critical components of the overall kind of metal roofing system, which isn't attractive markets being. So we're increasingly focused on LSI with how we can deploy Worthington's capabilities to accelerate growth.

We think that's the real unlock for LSI. And most importantly, kind of both of those businesses, Elgin and LSI are great cultural fits. So people are our most important asset. And with the acquisitions, we'd much rather spend our time improving operations, expanding commercial opportunities, then trying to change the culture. In both cases, we feel pretty good about the teams there and the culture at those businesses. Yeah, and Susan, the only thing I would add at columns, right, when you talk about the increase in rates and the rate environment, you know, that's actually a good thing for us. We, as you know, have a pretty good balance sheet and of liquidity in that position, our borrowing base and our borrowing base.

This is probably going to be better than a lot of folks that we might be in competition with. So environment quite this is relatively speaking than when interest rates are very low.

Thank you, Susan.

Your next question comes from the line of Walt's Liptic with seaport research. Your line is open. Please go ahead.

Yeah, so thanks Walt. It's been, this has been an important point for us and we're really pleased with the cash flow generation. As you mentioned, as we talked about earlier, up 26 million year-over-year from operating in free cash flow standpoint, under 96 million in free cash flow on a trailing 12-month basis, that's the highest it's been. The working capital measures we've been very intentional about, which has been helping us drive that free cash flow generation and we believe it is sustainable. We've been working hard with our teams to continue to pull levers to really compound our cash flow. And in particular, it's shown up as we talked about in our working capital. And so just from a cash conversion cycle standpoint, just over the last year, I think we're down about eight or nine days, which we're really pleased with over that period.

And then just from a networking capital as a percent of sales, we're down, I think, almost three percent just over the last couple of years. And so that's a lot of incremental things, working around customer terms, working around our supply base, and then just more efficiently and effectively managing inventory. Things like 80-20 always play a role in that as well. And so we're really pleased with the performance and do view it as sustainable. As we move forward, we're going to continue to drive that free cash flow generation. And there is some normal kind of cyclicality or seasonality to it. We do have extra tax payment in Q2, which is normal course. But outside of that, we feel pretty good from a free cash flow standpoint.

Okay. All right. Thanks for that insight. And then just the last one for me, the A2L tough comparison, we saw that last quarter, it's here again. That inventory correction that's going on, how long do you think it'll take to clear? Do you expect more, especially in the second quarter, going into the end of the calendar year? And at what point do you think we start getting onto a positive comp? Yeah. So it is, that transition did have an impact in making the quarter unfavorable mix. It was primarily driven by the cooling construction business and the difficult comparison there related to A2L. Just a little more background there, the prior year benefited from this unusually strong demand as manufacturers, distributors, contractors, simultaneously established inventory ahead of this regulated transition.

And that included kind of heavy demand on our products, obviously. And we estimate the year over year impact to adjusted EBITDA this quarter was approximately $7 million, which is more than we anticipated a quarter ago. And Joe mentioned this earlier, channel inventories are taking a little longer than normalized, and particularly against the backdrop of the muted housing environment.

We expect Q2 to remain a difficult comparison, because of that prior year quarter benefited from the A2L related volumes. But as we move to the second half of the year, Q3 and Q4 are seasonally stronger in this market and cooling and construction. So we do expect normalization there and importantly, we continue to view this primarily as more of a timing and comparison issue rather than a change in the long term fundamentals of the business. Nearly all the new residential equipment now utilizes A2L refrigerants. And so every new installation expands the installed base for our products. And over time that should create a growing service and repair opportunity for the products that we sell in this space.

Okay. All right. Thanks very much.

Excellent. Your next question comes from the line of Brian McNamara with Canacord Genuity. Your line is open. Please go ahead.

It's a great question. Brian, good morning. So the way that we think about data centers, we talk a lot about the ASME tanks, but yeah, absolutely. It is a commercial building. I have a number of our right building performance solutions that are integral to the build function and setting them up to do what they're going to include, Wave, and Clark's Park Dietrich, Elgin, Elgin, Elgin across those value streams. Data centers are important parts of the growth that I would say our revenues are growing, commensurate, maybe a bit better or a bit worse, depending on the application with the proliferation of data centers. Because of the market, data centers, decentralized instruction, and from a gut perspective, are increasingly collaborating across value streams and talking about opportunities and prioritizing and ultimately kind of making the case that we can make more introductions for other pieces of our business that we probably couldn't a couple years ago.

Maybe just a quick follow up on that. I think in Q3 last year, you said that your data center business was expected to triple in fiscal 26. Sounds like the ASME tanks are about to quadruple at least if they sequentially grow each quarter this year. How would we, can we at least characterize the other businesses exposed to data centers that you guys own kind of multiplying this year? Is that a fair way to characterize the growth you're seeing there?

Yes, right. So, yes, we have $13 million was effectively 3x what it had been the year before. We did that in Q1, which is on a run rate, so it would have it being 4x, but we think that and we said it as much that we're going to grow sequentially. So, yeah, we do absolutely believe that this market is accelerating. I apologize for the confusion there.

Thank you.

Your next question comes from the line of Will Gildia with CJS securities. Your line is open. Please go ahead.

Yeah, so thanks Will. So, the trading specialty solution segment really good performance in the quarter sales increase, approximately 8% driven by the combination of higher overall volumes and selling prices. We saw some good, broad based growth across most of the portfolio, particularly portable propane and tools. Those were driven by higher volumes, expanded distribution, and then both those segments had some pricing actions as well, which was helpful. The balloon time business was the primary exception. Volumes were down, but that was more a function of a really strong prior year comparison, which impacted in the current quarter. So, more broadly, really pleased with the performance of the segment and they had good margin expansion, even excluding the tariff and the positive in the quarter as well.

So, just make sure I clear, if I will, you know, my comment on, you know, a few million dollars was was around steel being late and ultimately I was needing to practice and think about shipments and manufacturing and things like that. We do think that in your term will be an in better shape there. Steel is more expensive than it was a year ago, but also as we mentioned, but we have taken price actions where we thought we needed to, but in these are environments where we ultimately can separate ourselves from others. You know, and so with our relationships and our capabilities and our actionality, it will continue to address, you know, things more expensive than they were a year ago from a raw material perspective.

And that's true.

There are no further questions at the time. I will now turn the call back to Joe for any closing remarks.

Hey, thank you. And thank you all for joining this morning. Looking forward to Saturday in November. Hope you have a great day.

This concludes today's call. Thank you for attending. You may now disconnect.