Worthington Steel Inc Aktie

Good morning, and welcome to Worthington Steel's Third Quarter Fiscal Year 2026 Earnings Call. [Operator Instructions]

I will now hand the call over to Melissa Dykstra, Vice President of Corporate Communications and Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to Worthington Steel's Third Quarter Fiscal Year 2026 Earnings Call. On our call today, we have Geoff Gilmore, Worthington Steel's President and Chief Executive Officer; and Tim Adams, Vice President and Chief Financial Officer.

Before we begin, I'd like to remind everyone that certain statements made today are forward-looking within the meaning of the 1995 Private Securities Litigation Reform Act. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those suggested. We issued our earnings release yesterday after the market closed. Please refer to it for more detail on factors that could cause actual results to differ materially.

Unless noted as reported, today's discussion will reference non-GAAP financial measures which adjust for certain items included in our GAAP results and are presented on a standalone basis. You can find definitions of each non-GAAP measure and GAAP to non-GAAP reconciliations within our earnings release.

Today's call is being recorded, and a replay will be made available later today on worthingtonsteel.com. Now I'll turn it over to Geoff Gilmore.

Good morning, and thanks for being with us today. It's been a memorable few months for us, to say the least. As most of you know, in January, we announced our proposed acquisition of Kloeckner, which will be the largest in our history and a meaningful strategic step for the company. I appreciate that even with an announcement of this size and the work that goes with it, our team stayed anchored in what matters: safety, serving customers and improving the business every day. Thank you to the entire Worthington Steel team.

This quarter, I'll start with an update on the Kloeckner acquisition. The combination of our two organizations will create a larger, more diversified metals processing platform with meaningful opportunities to generate value and capture synergies through Worthington's proprietary base business improvement program that we call the transformation. This transaction is being executed through a voluntary public tender offer in Germany and remains subject to the tender process and required regulatory approvals.

Since our investor call in January, the voluntary tender offer has been launched. We have submitted requests for regulatory approval in the required jurisdictions, and we are beginning to see approvals come through. Overall, the process is progressing well. Today is the final day of the initial acceptance period of the tender offer process, and we are confident we will secure enough shares to meet the 57.5% minimum threshold.

We continue to expect the transaction to close in the second half of the calendar year. In preparation for closing, we've begun internal planning focused on integration, governance and day 1 readiness. We're doing that responsibly and deliberately with an eye toward maintaining our high-performing cultures, unlocking value and accelerating growth.

Most importantly, this deal is about combining two great companies that share the same values. I've had the opportunity to spend time with several of our future Kloeckner teammates, and it reinforces our view that Worthington and Kloeckner are culturally aligned and fit together very well. Furthermore, since our announcement, the response from customers, suppliers and investors has been overwhelmingly positive. As a reminder, the German public company takeover process is highly structured, and we will continue to provide updates as we reach key milestones.

With that, let's turn to our results for the third quarter. Net sales were $769.8 million. Adjusted EBITDA was $41.6 million, and adjusted earnings per share were $0.27. On a macro level, the third quarter of our fiscal year was volatile and uneven, with galvanized spreads remaining compressed and the effects of the holidays and winter weather dampening and delaying industrial activity. While direct volumes were up over the prior year, overall conditions were stable to soft, keeping customers' inventory disciplined and highly sensitive to interest rates and uncertainty. Even with those headwinds, our execution remains strong where it matters most: safety, customer service and transformation.

Commercially, the team continued to win the right work and capture high-value opportunities, including building on our momentum in the automotive market. Our direct shipments in Q3 to the Detroit 3 increased by approximately 13%, significantly outpacing the reported 3% growth in Detroit 3 production for the quarter. As discussed last quarter, the outlook for the automotive market heading into calendar year 2026 remains cautiously optimistic. Conditions appear to be moving toward a more robust market later in the year. That view is supported by growing confidence that a USMCA agreement will be completed in 2026, removing a significant amount of market uncertainty.

Turning to agriculture. We believe we are nearing the trough of the market cycle and that a slow rebound will begin in late calendar year 2026. On a positive note, our team has been able to secure new business with a key customer in this market, which will continue to ramp up over the next few quarters.

In construction, conditions remained flat in most segments. We expect to see data center growth continue. And as lower interest rates take hold, we believe we will see some expansion in the second half of 2026 due to pent-up demand. And in heavy truck and trailer, as we expected, the market started off slowly in calendar year 2026. We are more confident about the back half of this year, where we expect to see a pickup in both the Class 8 truck sector as well as the trailer market. Looking ahead, we are still cautiously optimistic about the second half of calendar year 2026. Overall, the backdrop looks modestly encouraging as key economic indicators show a return to expansion.

With that market context, let me turn to our strategic priorities. We continue to make progress in the areas that matter most: investments in electrical steel growth, innovation and transformation. In electrical steel, we advanced the projects that underpin our longer-term growth strategy. In Canada, we have shifted some production to our new facility and are shipping from both locations. We will finish moving the existing equipment and production to the new facility over the next few months. We have more than 60% of the increased capacity sold for the facility. We're sequencing the start-up to protect performance and service levels, and we expect to fill the balance relatively quickly as the facility ramps up.

Our traction motor lamination facility expansion in Mexico is also on track and will begin shipping production parts this quarter. Almost all the OEMs tied to the expansion are experiencing some type of OEM delays. Previously, we expected to reach full production levels in fiscal 2028. However, the OEMs have pushed out a number of the programs for a variety of reasons. While timing is shifting on production starts for some of our new programs, when these platforms reach full production volumes in fiscal 2029, we will be at 75% capacity based upon the current contracts. These delays are not surprising, as many automotive OEMs are rethinking their electrification strategy.

With the elimination of the fuel economy mandate and the elimination of the $7,500 federal tax credit, the market is clearly pivoting away from a government-driven BEV mandate to a consumer-led demand for hybrids. The data is quite clear. Year-over-year, hybrid sales in the U.S. increased 18% in 2025, and the same trend is happening in early 2026. Sales and production of hybrids are both up more than 10%, and the shift to hybrids is expected to continue. We are also seeing reports of increased consumer interest in hybrid and full electric vehicles due to rising oil prices and geopolitical tensions. While it is too soon to see if this will translate into sales, we will be watching closely and are well positioned to capitalize on this renewed interest.

From a commercial standpoint, we have seen a slowdown in quotes for pure BEV opportunities, but the quote activity related to hybrids is picking up. We are excited by the growth in hybrids as we have the opportunity to produce the electrical steel laminations for a hybrid traction motor, as well as the specialty cold-rolled steel used in the powertrain for the hybrid internal combustion engine.

We continue to improve our business and find efficiencies using the Worthington Business System and artificial intelligence. In one notable project, we used our transformation process to implement a lean flow operating model at our Delta, Ohio facility that aligns material release, production and purchasing directly to customer demand, replacing a forecast-driven push process with a more disciplined pull approach. This allows us to tighten our purchasing windows and drive down inventory. The work has led to 60% fewer coils held in our work in process day and an overall reduction of 6 days of inventory over the past 26 months.

As the next step in the process, we will be adding predictive AI tools to ensure our flow is not only disciplined, but also predictable. That means spotting problems earlier and moving more quickly to remedy them. Predictive flow helps us stabilize performance as we run leaner, enabling faster, more consistent decisions at lower working capital levels. Further, we will use what we learned at Delta, package what works and build scalable solutions we can use across our footprint.

We also continue to make progress transforming our administrative functions. When we stepped back and looked at where we started about a year ago, a few themes stood out. There was a significant amount of manual, repetitive work, a fair amount of variation on how processes were executed across functions and facilities, and much of the work was being managed through e-mail, spreadsheets and manual follow-ups.

We are addressing that in a couple of ways. First, where we see discrete opportunities to remove manual effort, we move quickly using automation and AI. For example, we are developing an AI agent for daily cash posting in our finance group that is expected to eliminate a significant amount of manual data entry and free up about 30 hours per month of analyst time. We've also deployed automation in accounts payable that is reducing manual invoice interventions and should remove roughly 150 hours of work per month as the models continue to improve. And in our order-to-cash process, robotic automation that reconciles shipping notices with customer portal data has helped accelerate cash collection and reduce past due balances.

Second, for workflows that are more interconnected, we are using AI to assist us in mapping processes, establishing standard work and removing waste. For instance, in the indirect purchasing, we redesigned the sourcing workflow and then layered in analytics and AI tools that allow the team to focus more on strategic sourcing rather than repetitive tasks. We're still early in this part of the transformation journey, but what we are building is a repeatable capability that allows us to apply automation and AI across more processes and functions over time, structurally improving efficiency and scalability across the organization.

To close, while this was a challenging quarter from a macroeconomic standpoint, our team remained focused on executing the business, advancing our electrical steel strategy and moving the Kloeckner process forward in a disciplined way. At the center of that is a culture that puts safety first and reflects the dedication of our people across the organization. To our employees, thank you. The discipline, care and commitment you bring every day are what turn our strategy into action.

I'll now turn the call over to Tim for more detail on the financials for the quarter.

Thank you, Geoff, and good morning, everyone. Our third quarter was a disciplined quarter in a more challenging environment. While we saw softer demand in certain markets and continued pressure in Europe, we executed well, generating strong free cash flow, gaining share in key markets and maintaining a strong balance sheet. That consistency in execution, particularly in more challenging environments, is a hallmark of how we run the business. We also took an important strategic step forward with the proposed Kloeckner transaction, which we believe will strengthen our long-term positioning.

For the third quarter, we reported earnings of $10.4 million or $0.20 per share as compared with earnings of $13.8 million or $0.27 per share in the prior year quarter. There were several nonrecurring items that impacted comparability in the quarter, including a number of Kloeckner-related items which are primarily transactional and timing related and not indicative of our ongoing operating performance.

First, the current quarter results include $15.4 million of pretax SG&A expense or $0.24 per share for advisory, legal and regulatory fees incurred in connection with the previously announced acquisition of Kloeckner. Additionally, we recognized $9.1 million of pretax miscellaneous income or $0.14 per share related to a foreign currency forward contract designed to hedge a portion of the Kloeckner purchase price. Unrelated to the Kloeckner transaction, we recognized a $6 million pretax restructuring gain or $0.06 per share on the sale of real estate and equipment associated with our previously announced Worthington Samuel Coil Processing plant closure in Cleveland, Ohio.

Finally, in the quarter, we recognized a $1.5 million pretax impairment of certain internal-use software, or $0.03 per share. The prior year quarterly results included several nonrecurring items, including a $7.4 million pretax impairment of assets or $0.07 per share, primarily related to the operational consolidation of our Worthington Samuel Coil Processing facility in Cleveland into WSCP's remaining facility in Twinsburg, Ohio. Additionally, we recognized pretax restructuring expenses of $900,000 or $0.01 per share related to a voluntary retirement plan at our tailor-welded blank joint venture. Excluding these items, we generated adjusted earnings of $0.27 per share in the current year quarter compared with $0.35 per share in the prior year quarter.

In the third quarter, we reported adjusted EBIT of $20 million, which was down $5.3 million from the prior year quarter adjusted EBIT of $25.3 million. The year-over-year decrease was driven primarily by lower toll processing volumes, higher SG&A largely related to compensation and unfavorable results in Europe, partially offset by higher direct volumes and higher equity earnings from Serviacero. Total shipments were approximately 818,000 tons, down 64,000 tons or 7% year-over-year as lower toll volumes more than offset volume growth in direct sales. Direct sale volume made up 63% of our mix in the current year quarter compared with 57% in the prior year quarter. Direct volume increased 4% compared with the prior year quarter. The year-over-year increase was split evenly between the legacy business and the addition of Sitem compared to the prior year quarter.

Our increased shipments to the automotive market remained a bright spot. Direct shipments to automotive increased 10% year-over-year. Similar to last quarter, the increase in automotive volume reflects share gains from new programs, plus the impact of a key automotive OEM customer returning to a more normal build schedule after curtailing production last fiscal year. This growth in the automotive market reflects the strength of our long-standing customer relationships and our collaborative, proactive approach to assisting customers to meet their needs.

Outside of automotive, agriculture volume was up 9%, primarily due to improved OEM equipment demand. And container volume was up 11%. As Geoff mentioned earlier, we won additional business with a key OEM customer in the ag sector. These gains were partially offset by lower shipments to a number of other markets, including energy, which was down 22% year-over-year, largely driven by project-based solar programs. Construction was down 7%, and service center, where we saw some increased competition, was down 21%. Heavy truck was down 12% due to ongoing market weakness.

Toll processing volumes declined 22% year-over-year due to a combination of closing our Cleveland area Worthington Samuel Coil Processing facility in fiscal 2025 and near-term demand headwinds. We view the softer market conditions in toll processing as cyclical, not structural, and expect toll volumes to improve as end market demand recovers, excluding the impact of the Cleveland facility consolidation last May.

Direct spreads were relatively flat year-over-year, excluding the impact of the Sitem acquisition, which closed in June. Direct spreads were impacted by a $3.3 million favorable swing in pretax inventory holding gains. In the current year quarter, we had estimated pretax inventory holding gains of $2.1 million compared to estimated pretax inventory holding losses of $1.2 million in the prior year quarter. After stabilizing around $800 per ton in the fall, the price for hot-rolled coil increased $175 per ton in our third quarter to approximately $975 per ton. We expect the market price for steel to remain volatile in the near term with expected mill outages, extending lead times and a tightening market. Given that many of our contracts use lagging index-based pricing mechanisms, we estimate in our fourth quarter of fiscal 2026, pretax inventory holding gains will fall within a range of $15 million to $20 million.

Turning to the other drivers for adjusted EBIT this quarter. SG&A expense, excluding the $15.4 million impact of the Kloeckner-related acquisition expenses, was up $7.5 million, primarily due to increased compensation expense in the legacy business and $4.8 million of incremental SG&A with the addition of Sitem. It is worth noting that our Q3 results include increased headwinds in Europe.

As expected, Sitem EBIT prior to minority interest decreased $8.4 million during the quarter. This performance reflects challenging economic conditions in Europe, particularly in the electrical steel and automotive end markets, where demand remains weak, and competition, especially from China, has intensified. While expected, we are actively addressing these headwinds through cost actions and operational adjustments, and our team in Europe is moving with urgency to improve performance.

Although near-term conditions remain challenging, we are focused on positioning the business to return to profitability and to capture share as the market recovers. Finally, equity earnings from Serviacero, our Mexico-based joint venture, increased $3.5 million due to higher direct spreads, inventory holding gains, as well as the favorable impact of exchange rate movements.

Turning to cash flows on the balance sheet. For the quarter, cash flow from operations was $63 million and free cash flow was $33 million, with both metrics benefiting from a reduction in working capital. Capital expenditures were $30 million in the quarter related to several projects, including the previously announced electrical steel investments. We expect CapEx for fiscal 2026 to finish in the range of $110 million to $115 million as several of our large capital growth projects transition from the build phase into start-up production. In addition, we are pursuing maintenance projects that keep our key assets market ready. We take a disciplined approach to capital allocation, balancing investment in growth with maintaining balance sheet strength.

On a trailing 12-month basis, we generated $81 million of free cash flow. We increased borrowings during the current quarter on our ABL to purchase approximately 8.3 million or 8% of Kloeckner shares for $101 million. We ended the quarter with $90 million of cash and net debt of $161 million, up sequentially, driven primarily by the purchase of Kloeckner shares. Earlier this week, we announced a quarterly dividend of $0.16 per share, payable on June 26, 2026.

In summary, this was a disciplined quarter in a more challenging environment. We are gaining share in key markets, generating consistent cash flow and maintaining a strong balance sheet. At the same time, we are taking actions to address underperformance in Europe while continuing to advance our strategic priorities, including the proposed Kloeckner transaction. This reflects how we manage the business, staying focused on execution and positioning the company to perform through cycles. We believe these actions position Worthington Steel to navigate the current environment and continue creating value over the long term.

I want to thank our entire Worthington Steel team for their continued focus on safety, customer service and execution this quarter. At this point, we'll be happy to take your questions.

[Operator Instructions] Your first question comes from the line of Samuel McKinney with KeyBanc Capital Markets.

With direct volumes for the third quarter only up 3% year-over-year, I'm surprised to hear you say the direct auto shipments increased by 10%. Assuming much of this was owed to the market share wins you've outlined, can you talk through some of those wins and the impact they're having?

Yes, Sam, this is Geoff. I'll take that. Clearly, positive impact. If you look at automotive as a whole, it was down maybe 1% or 2% actually year-over-year. And -- so I think as we mentioned, if you look specifically at the Detroit 3, their production was up 3%, and ours were up 13%. So if you look at the difference in the gap, that really is that market share gain that we've been speaking about the last several quarters. And fortunately, for us, we've continued to win market share with those customers mentioned as several -- as well as several others. So that's something that you'll continue to see layered in.

The beginning of your question was, hey, being up 13% there, but only 3% as a whole. As you're aware, weather in the Midwest was quite challenging late January, and specifically for a week. And that absolutely disrupted the entire supply chain, whether it was the mills trying to ship out, to us receiving in, and to -- then to us trying to ship to our customers. And probably, the impact there was 10,000 to 15,000 tons. And look, the mills are extremely busy right now. They have extended lead times, their on-time delivery performance has been challenging. And so we just weren't able to make up for that backlog during the month of February. We did some, but again, we probably could have shipped closer to 15,000 additional tons. Fortunately, those aren't orders lost. We'll make up that backlog and are starting to do so already this month.

Okay. That's helpful. And then on to Kloeckner, how should we think about the over $100 million of short-term debt you used to purchase their securities? Just any other color you could give on that equity investment in the context of meeting the threshold would be helpful. Like Tim said, that's about 8% of the Kloeckner shares.

Yes. Sam, this is Tim. So we had the ability through antitrust or we had a look at the regulations of antitrust as far as how much we could buy. And we did buy in the open market, 10%. And we used that opportunity when the tender offer was announced to buy in the open market. So we increased our ABL by $126 million, and we used $101 million of it to buy shares in the open market. As long as the price stays below the tender offer of EUR 11, we can buy shares. So you've seen the price of Kloeckner rise a little bit, that shut us out of the market. So we bought shares early in the quarter, and we haven't bought much since.

Okay. And then last one for me. Steel pricing obviously has remained hot in recent weeks. Can you give us a sense of the net working capital expectation for the fourth quarter in the context of the $15 million to $20 million of inventory holding gains?

Yes. I think there, I mean, we are definitely going to see some upward pressure on working capital. I think you can kind of look at the percentage price increase and kind of translate that into how much working capital should go up. But you will absolutely see some upward pressure on working capital in Q4 for sure.

Your next question comes from the line of John Tumazos with John Tumazos Very Independent Research.

The German stock market is down 8% year-to-date. And their economy is more vulnerable to the energy escalation, as they're almost entirely an energy importer. Does your view of the amount of debt level that you want to hold post acquisition or the degree of exposure to Europe change given our incursion into Iran and the subsequent events in the last 4 weeks?

John, good question. Hi, by the way. Thanks for calling in. Look, we went into this acquisition eyes wide open and a clear understanding on Europe and the current challenges. I think, a few things. First, their economy. I think they are doing their own things to increase, I'll call it, protectionism, which certainly will help their economy, specifically, I think, aimed at China. I think they've increased spend on defense pretty significantly here over the last 6, 12 months, which should benefit the business environment, specifically manufacturing.

But what we did not predict was a war with China and the impact -- or China, I'm sorry, with Iran and the impact on the oil prices. So right now, it's not having a major impact on the business here or Europe. But if this is prolonged, yes, then we certainly are concerned about their economy, but we're equally concerned about the economy here. Obviously, higher energy prices, higher gas prices is certainly not going to be good for either economy. So that's really our position on it right now.

So following up on what you just said, would you then want to have more equity in your financial structure and less debt?

No, John. We're comfortable with the capital structure, where we're moving forward right now. We're quite comfortable with the debt level that we'll be carrying forward. And to be more transparent, it's because we're very confident in our plan and how we'll go about paying that debt down over time. So we haven't had any serious discussions about reducing the debt and increasing equity as part of the capital structure. And I think we're going to be in very good shape.

There are no further questions at this time. I will now turn the call back to Geoff Gilmore, President and CEO, for closing remarks.

From a macroeconomic standpoint, there were some challenges with the business. But just a reminder, during last call, I addressed the overall market as well as some of the challenges in spreads, specifically hot-rolled and coated and hot-rolled and cold-rolled. But at that time, I mentioned I felt like the quarter would be really -- we'd be experiencing the trough. And I feel strongly that that's the case, and that's what we've seen.

I think the tightness in the market in the U.S. and where we're seeing prices headed, along with -- cautiously optimistic now on all markets that we're starting to see recovery. And that's the sentiment across the market. We're no different that we can start to see signs of growth, not just with market share gains in automotive, but other key markets as well. And certainly, those markets will increase demand for galvanized as well as cold-rolled. And hopefully, we start to see some of that spread pressure alleviate gradually over time.

More importantly, we could not be more well positioned to continue to grow as a company, have a great deal of confidence of us achieving the threshold goal for Kloeckner. And that just puts us in a position to accelerate growth moving forward. So the business is in great shape. Look forward to what's to come, and thank you again for listening in today.

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

Good morning, and welcome to Worthington Steel's January 16 Investor Call. [Operator Instructions] Now I'll turn the call over to Melissa Dykstra, Vice President of Corporate Communications and Investor Relations.

Thank you, operator. Good morning, and thank you for joining us for today's call. I'm Melissa Dykstra, Vice President of Corporate Communications and Investor Relations at Worthington Steel. With me today are Geoff Gilmore, our President and CEO; and Tim Adams, our Chief Financial Officer.

On Slide 1, you will find our safe harbor statement. Before we begin, I'd like to remind everyone that certain statements made today are forward-looking within the meaning of the 1995 Private Securities Litigation Reform Act. These statements are subject to risks and uncertainties that could cause actual results to differ from those suggested. Today's call is being recorded, and a replay will be available later today on worthingtonsteel.com. With that, I'll turn the call over to Geoff.

Thanks, Melissa. This is an exciting day for Worthington Steel. We are taking a strategic and transformative step in our growth journey.

Through the acquisition of Kloeckner, we will strengthen our position in high-value metals processing, create meaningful value for our shareholders, deepen our strong relationships with our customers and suppliers, and generate new opportunities for our employees.

Worthington and Kloeckner share a focus on safety, operational excellence, innovation and disciplined execution. By integrating Kloeckner's capabilities, we will build a more resilient business and drive long-term value creation. Our two companies will be stronger together.

On Slide 2, you'll see our strategic logic for why we are pursuing this combination and why we believe it matters. Tim and I will talk about each of these points in more detail. But the key takeaway is we will become a larger and more diversified market leader.

When closed, we expect to become the second largest service center in North America. We'll expand our geographic reach, offer a more diversified set of products and begin to serve new markets. At the same time, we will enhance our existing strengths in carbon flat roll-steel and electrical steel laminations.

We've identified key synergies and growth initiatives and believe the cultural alignment between our two organizations will streamline integration and allow us to maintain our disciplined approach to process improvement.

The key takeaway is that this combination creates a larger, more diversified metals processing platform with meaningful opportunities to apply our transformation playbook.

Turning to Slide 3. I want to explain how this acquisition fits the criteria we have shared in the past. Worthington Steel is very deliberate in how we evaluate acquisitions. We look for well-run businesses with strong management, a culture aligned with our philosophy and a disciplined financial framework. We target deals that will be EPS accretive in a short period of time and improve the quality of our earnings, including overall EBITDA margin.

We also prioritized opportunities where we can create value through a proven transformation process and capture synergies. We place great importance on finding acquisitions that strengthen us in markets we know well or expand us into new and attractive markets.

Kloeckner checks all these boxes. They embarked on the path several years ago to shift toward a higher value-added portfolio and are well down that path. They also bring a long operating history and long-standing partnerships with both customers and suppliers. Just as importantly, we see strong cultural alignment with Worthington's golden rule-based philosophy, which we believe supports disciplined execution once we close.

Financially, we expect the transaction to be accretive within the first full year of operation with margin expansion expected over time, driven by synergies and complemented by a number of strategic growth projects already underway at Kloeckner. Transformation is a mechanism through which we've historically delivered synergies, and it will be the primary driver here as well.

Strategically, Kloeckner strengthens our core in carbon flat-roll and electrical steel, while expanding our portfolio to include aluminum, stainless, long products and downstream fabrication. It also diversifies the markets we serve and expands our footprint, particularly in the Southern U.S., which we believe improves resilience across cycles. Importantly, to reduce leverage following close.

Now let's take a closer look at Kloeckner's business. On Slide 4, you'll see Kloeckner's shipped 4.2 million tonnes on a trailing 12-month basis, which generated sales of $6.3 billion. Kloeckner is listed on the Frankfurt Stock Exchange and has nearly 100 million shares outstanding, approximately 42% of the shares are owned by a single shareholder in the holding company called SWOCTEM. I am pleased to announce SWOCTEM fully supports the transaction and signed an irrevocable agreement to tender their shares in support of our offer.

Kloeckner operations include approximately 110 facilities and approximately 6,000 employees in North America and Europe. It is important to keep in mind that most of their shipments and sales are within the North American market. Slide 5 outlines one of the most important benefits of this transaction. The expansion and diversification of our footprint in terms of geography, product offering and markets served. This diversification gives us more flexibility and better balance across different demand environments. It also enhances our ability to serve customers with more localized coverage, especially in the Southern U.S., where growth, manufacturing activity and reshoring trends continue to shift industrial demand.

Kloeckner's business model is similar to Worthington's from the standpoint of buying local to serve local. Kloeckner has a broad footprint serving customers locally with a wide product offering and extensive processing and fabrication capabilities. That matters because it expands the ways we can support customers, more lanes, more local responsiveness and more capability to solve problems all within close proximity to where customers operate.

From a product standpoint, this combination broadens Worthington's portfolio beyond our carbon flat-roll core into complementary categories such as aluminum, stainless, long products, plate and downstream fabrication. That breadth is strategically important because it helps create a more diversified market portfolio, which we believe can mitigate cyclicality over time.

At the same time, this transaction enhances our existing strengths. We remain firmly anchored in carbon flat-roll steel in the U.S. and Mexico and we continue to build our differentiated position in electrical steel laminations, an area we believe is supported by long-term demand tailwinds tied to electrification and grid investment.

Like Worthington Steel, Kloeckner has made a series of investments and divestitures over the past several years to focus on their core strengths and higher value-add processing.

Slide 6 shows some of the key moves the company has made over the past 4 years to transition their business. By increasing their focus on specialized markets and higher value add, while reducing the reliance on distribution-only businesses, Kloeckner has positioned itself for margin expansion.

Turning to Slide 7. One of the things we like about this combination is that it strengthens the near-term platform while also expanding the longer-term growth pipeline. Kloeckner has been investing in value-added projects that complement where we believe the industry is headed. Projects such as adding aluminum processing, increasing plate processing capabilities and expanding their existing presence in the electrical steel market to meet the growing demand for electrification.

These are all excellent projects, and they are complementary to our existing strategic priorities. These projects offer an opportunity to bring a variety of new solutions to our customers over time.

Slide 8 shows how this combination diversifies the larger portfolio in practical value-creating ways. It broadens our product offering beyond carbon flat-roll into aluminum, stainless, long products and plate, and it expands our value-added processing capabilities, including downstream operations like fabrication.

The combination also meaningfully extends our geographic reach, particularly in the Southern U.S. and Mexico, which strengthens local coverage and over time can improve service responsiveness and supply chain efficiency.

And finally, it broadens the markets we serve, creating a more balanced end market mix that we believe will make the combined company more resilient across cycles.

The chart on Slide 9 puts the increase in scale into context. Post close, the combined company would be positioned as the clear #2 service center in North America by revenue.

But let me be clear, this transaction is not about size for the sake of size. Scale means a stronger platform for operational improvement and business resilience, and that's great news for our customers, suppliers, employees and shareholders.

We're excited about bringing our two companies together. I want to thank everyone who helped us arrive at this momentous day.

Now I'll turn it over to Tim to walk through the transaction details.

Thanks, Geoff. I'll jump right to Slide 10. This transaction is structured as an all-cash acquisition through a voluntary public tender offer in Germany executed via a wholly owned acquisition vehicle. Under the proposed terms, the offer price will be EUR 11 per share in cash, implying an enterprise value of approximately USD 2.4 billion.

We anticipate combined sales of $9.5 billion and an EBITDA margin of 7%, which includes run rate synergies of approximately $150 million by the end of 2028. We expect the transaction to be accretive to Worthington Steel's earnings per share within the first full year of operation, driven by scale benefits, financing structure and early synergy realization.

On an implied basis, the transaction values the business at approximately 8.5x trailing 12-month EBITDA as of September 2025 before synergies. The stand-alone valuation is consistent with service center precedent transactions, synergies, enhance returns, but the deal clears our financial thresholds before considering them.

Including $150 million of expected synergy, the effective multiple improves to approximately 5.5x, reflecting the earnings uplift from integration execution. Importantly, the offer is fully financed with committed facilities and is not subject to any financing conditions.

From a balance sheet standpoint, we expect pro forma net leverage to be approximately 4x at closing. With a clear target and plan to reduce leverage below 2.5x within 24 months. The offer will be subject to a minimum acceptance threshold of 65% and we have signed an irrevocable agreement to accept the offer with Kloeckner's largest shareholder who owns 42% of Kloeckner shares. Based on the process and required approvals, we currently expect the transaction to close in the second half of this calendar year.

Turning to Slide 11. At close, the combined company will have meaningfully greater scale, broadened reach and an expanded end market profile. We will combine the larger scale and broader customer reach with the Worthington business system, which we expect to drive swift synergy realization, margin expansion and prudent working capital management. We expect this will result in the transaction being accretive to Worthington EPS within the first full year of operations, while maintaining margins over 7%.

If you take a look at Slide 12, you'll see that we have identified approximately $150 million of annual run rate cost and operational synergies expected to be achieved by the end of fiscal 2028 with about 50% of that expected to be realizable in year 1. These estimates are preliminary, but they are grounded in specific actions that we have executed in prior integrations. Roughly half of the synergies are tied to procurement, logistics and overhead actions that are within our direct operational control and not dependent on market recovery.

The underlying drivers are practical and familiar. Capturing procurement benefits from increased scale, optimizing logistics of the significantly larger network, improving operational efficiency and productivity and reducing duplicative administrative costs. Our preliminary estimate for the onetime cost to achieve these synergies is approximately $40 million, a relatively modest number compared to the overall synergy target.

Moving to Slide 13. It is worth pointing out that one of the attractive features of this transaction is the asset base underpinning it. More than 70% of enterprise value is backed by net working capital, which materially limits downside risks and provides balance sheet flexibility.

Slide 14 outlines the transaction process. This is a German public tender offer and the process is defined and regulated. The offer document will be submitted to BaFin, German's Financial Regulatory Authority for approval and following approval, the acceptance period typically runs several weeks along with other required approvals. We have committed bridge financing of $1.9 billion from our financing banks. We will begin work on the permanent financing almost immediately. The size of the permanent financing will depend on the number of shares that are tendered in the process and will be adjusted for the existing Kloeckner debt that is rolled over. We expect the transaction to close in the second half of this calendar year.

Turning to Slide 15. After the transaction closes, our near-term financial priorities are clear. Deleveraging, synergy capture and maintaining a disciplined balanced capital allocation approach, including our commitment to maintaining the dividend. We have a clear line of sight on the steps we need to take to meet our goal of reducing leverage below 2.5x within 24 months.

The sources of deleveraging are straightforward. Combined cash flow generation, synergy realization and selective monetization opportunities without losing sight of disciplined reinvestment. And because there are meaningful gating items before closing, regulatory approvals and German takeover process, we will not get ahead of ourselves on integration specifics today. That work becomes appropriate once the transaction closes.

Finally, I'd like to thank our teams from Kloeckner and Worthington, where you work on the transaction. Your dedication, commitment and respect showed in every interaction.

Now I'll turn things back over to Geoff.

Thanks, Tim. I'm sure you can hear our enthusiasm about what this transaction will mean for Worthington Steel's business, our shareholders, employees, customers and suppliers. We are taking that same energy into our integration planning as we work toward closing.

To summarize, this combination works because the assets fit. Kloeckner's footprint and product mix line up directly with Worthington's operating model, particularly in high-value flat-roll and electrical steel. We see clear opportunities to apply Worthington's transformation playbook across Kloeckner to drive improvements in throughput, margins and working capital without disrupting customers. This is a straightforward integration of two businesses with similar operating models where we can apply a proven playbook without disrupting customers. As a result, the synergies are well identified, quantified and achievable within our normal operating cadence. We firmly believe Worthington and Kloeckner will be stronger together.

Now we'd be happy to take your questions.

[Operator Instructions] Your first question comes from the line of Phil Gibbs of KeyBanc Capital Markets.

Congratulations, team. Can you please review the cadence of the synergy capture again? I believe you said $75 million achievable essentially in year 1 right off the bat, very easily achieve vis-a-vis procurement. And then maybe outline the path beyond that for us? And I'm not sure how much Europe becomes of your pro forma revenue at this point as well. So trying to get an idea of that.

No problem, Phil. Tim, you want to grab the synergy question?

Yes, absolutely. Yes, Phil, I think you've identified the right kind of low-hanging fruit out of the gate. Synergies are really focused on procurement savings, SG&A efficiencies, operational best practices. Again, we think how that should be achievable within the first year. And what gives us confidence in that is we've developed over the years a pretty nice playbook with respect to synergy capture. We've created for this project specifically an integration management office and we've staffed it with some of our best people.

We recognize this deal is pretty large. So we're going to bring in some help from the outside. We've got some third-party experts that will help us with synergy capture and integration. Our team understands what the targets are and what the time line is. And the goals are clear and the accountability through the integration management office is in place.

Phil, this is Geoff. The only thing that I would add, Tim hit that perfectly. And again, we'll have some of our best and brightest assigned to that process. And I think something else we're extremely excited about is the leadership team at Kloeckner and their employees as well. So we will certainly have some of their best and brightest working alongside us on that team as well.

And then the question vis-a-vis Europe as well, how much does that become of your pro forma revenue mix versus North America? I know you said over $9.5 billion combined revenue for the company and second largest in North America, but what's the split between North America and Europe?

If I remember correctly [indiscernible]

Phil, I think it's around -- Yes, absolutely. I think it's around 20%, if I did the math correctly.

Your next question comes from the line of John Tumazos of JTVIR.

I'm delighted to be a shareholder. Thank you for doing such a good job. What percent of the $2.4 billion enterprise value do you think the monetization opportunities might be a 10% magnitude?

Tim?

Yes, I think we've got to look at that. I mean, I think what we'll do as part of the integration. I mean our focus right out of the gate is, look, what are the synergies in North America, that's where the low-hanging fruit is, and that's what we're going to focus on. As we go through the synergy process and evaluate the entire portfolio, I mean, it's tough to say we haven't put a number on it yet at this point. John, but there may be some opportunities as we look at the entire network and look at the optimization.

Your next question comes from the line of Martin Englert of Seaport Research.

How do you expect the synergies to be allocated across North America versus the Europe footprint?

Yes. Martin, I'll take that. Just to be clear and transparent here, if you look at Kloeckner's business and you just look at specifically shipments, and I think this will help put synergies in perspective, more than 75% of their shipments are into North America. So that's certainly been a big focus of theirs. So if you start looking at synergies, certainly the largest share of that is going to come from our focus on North America. That's where we will have the absolute best opportunities. That's where this $150 million has been identified. So that's where our focus will be here in year 1 and year 2, heavily weighted towards North America.

Is that close to 100% of the synergies targeted that you're looking towards North America?

Tim, do you want to grab that?

Yes. Yes, I think it's in the upper 90s for sure. I mean you just have to think about where do we have overlapping suppliers, customers, facilities. I mean that happens in North America, right? There's very little to no overlap in Europe. So yes, the vast majority, 95-plus percent will be in North America.

Can you just talk about the margin profile, the euro portion of the business, how it compares to North America?

Tim?

Yes. The margin profile for Europe is a little bit less in North America. That's something that Kloeckner clearly recognizes and it's part of their long-term strategy to drive value add for their customers, which equates into higher margins.

I think one of the slides in the deck shows the path that they've been on to drive higher value add, and they've got strategies to do that, and they've been executing on those strategies.

I think -- couple of weeks ago, I think we talked with you about a, the demand in North America has been solid. It's been okay. That's not been the case in Europe. Europe has been or has seen very soft demand. And as you would guess, when demand is soft, people have open capacity and they become much more aggressive in attempting to win business and margins are compressed even further. So we would expect that margins will increase as Kloeckner executes on their strategic plan and as Europe recovers.

And there was some type of corresponding carve-out of separate sales. What was it Becker Group or something that is excluded from this deal that you announced from Kloeckner that was primarily a Europe footprint. Is that correct?

That is correct. It isn't really a carve-out per se. They've just announced that they plan to pursue a sale of those facilities. So we've excluded it from our numbers because they -- the entity will end up in assets held for sale, and it's on a path to exiting that set of facilities.

And then can you just talk about the types of customers that are usually serviced by Kloeckner's footprint and meaning -- so you all historically have serviced a lot of larger OEM customers and lean towards the automotive space. What I'm getting at, is it a similar type of customer base like larger OEMs and larger industrial companies? Or is it something that differs on that?

Yes. Martin, I'll grab that. This is Geoff. Certainly, a significant amount of the Kloeckner significant amount of the Kloeckner business is flat-roll carbon related, obviously, very similar to ours. And when looking at their flat-roll carbon business, I think you could look at it very similar to ours. They do a lot of large programs selling to large OEM-type customers.

Now certainly, the business can differ a bit when you start looking at long products, plate, stainless and then downstream fabrication, which can be certainly some large program selling, but certainly could be more transactional over the cycle as well in those types of businesses. So very similar on the flat-roll carbon side. Obviously, the products such as stainless, aluminum, downstream fabrication are going to be a bit different.

Okay. Understood. One last one, if I could. How does this impact your long-term target of over 10% group EBITDA margins and fit into that?

Yes, great question. I'll start, and certainly, Tim can add on. Martin, that is a goal we've been very transparent with. We talk about that each quarter and we are still very determined to hit that goal of 10% in a very reasonable time. And we think that this opportunity truly only accelerates that.

I mean we are developing a scaled multi-metal service center, adding more value-added processing capabilities. We're going to have a much richer mix of product offerings, broader geographic reach. So all of these things will contribute to margin expansion over time.

And the other thing I want to highlight, Kloeckner had a pretty significant shift in strategy just a few years ago. And that shift was to focus solely on high value-added metal processing. Just like Worthington Steel is doing today. And so they've announced some really exciting investments to help increase that margin portfolio such as the aluminum processing facility with aluminum dynamics, who's owned by Steel Dynamics.

And then they've also done a fantastic job looking at divestitures and what assets or businesses they have that don't fit that strategy. And recently, you saw the announcement of them selling seven distribution centers, which were lower-margin businesses. So we are still committed to that and think that this will help us accelerate to that goal of 10%.

Tim, anything you want to add to that?

No, I think that was a great answer, and that covers it.

I appreciate that. I apologize I had one last one. Tolling volumes and mix, are you able to comment on that on Kloeckner and if they have meaningful tolling exposure. Is that included in the numbers within the tech reported segment results and in the slide deck that you displayed there.

Tim, do you want to grab that?

Yes. My recollection is there is not a huge portion of their portfolio that is toll processing. In comparison to us, it's relatively de minimis.

Your next question comes from the line of Timna Tanners of Wells Fargo.

I wanted to just ask if you could elaborate a bit on the genesis of the deal and a little bit on why now, why it makes sense at this time.

Yes, absolutely. So Timna, I mean, this is something that we have been considering for two years, so pretty quickly after the separation into our own publicly shared company. And we've been outspoken, we've had conversations with you. Certainly, acquisitions was a significant pillar of our growth strategy. And so we go through a rigorous process every year, more than once a year on just reviewing all the various acquisition targets that could be available to us. And as we went through that process, it just became clear to us and more and more clear that Kloeckner was the right fit for us.

It's a complementary business from a regional perspective. We're clearly very excited about the adjacent product capabilities that it adds in aluminum, stainless, long products and the fabrication. And then it provides a step change in growth. There can be limited opportunities or I should say, limited opportunities that can truly be transformational to our company and our shareholders and more so the industry. And this is transformational. And so this broader platform opens up multiple pathways for incremental growth.

Certainly, we got a plan to pay down debt, but we will have opportunities to look at other larger acquisitions if we choose to continue to consolidate flat-roll carbon steel. But I also think it opens us up in some of these adjacent markets we talked about to pursue some smaller bolt-on acquisition opportunities.

And when you look at the synergies involved, you don't see a lot of deals where you can feel as confident as we do about capturing $150 million in synergies. And so the timing felt great to us where the market is. We felt like the environment has been ripe for consolidation really for years. And being our own stand-alone company, with our own capital structure, we were finally in a position to start pursuing consolidating and making a better steel company.

Okay. That's helpful. And one other question. I wanted to just clarify when you talk about the 7% EBITDA margin, is that -- just looking at last year's numbers and just applying them with some synergies? Or is that assume like run rate with recent higher prices? And does it assume any CBAM benefits? What's in that number, if you could clarify, please?

Tim, do you want to grab that for Timna?

Yes, absolutely. So Timna, yes, it's really looking at the trailing September EBITDA margins and then adding the full run rate of the synergies to it.

Your next question is a follow-up from Phil Gibbs of KeyBanc Capital Markets.

Geoff, you're very much an industry veteran at this point, and you've been at Worthington for a long time and so you've seen a lot of change. I know coming out of the financial crisis, Worthington Steel operations saw a very meaningful change in strategy based on a lot of hard work that you all put in, in terms of being leaner as an organization and leading the charge on hedging and cash flow predictability.

High level, I'm wondering what you see in terms of the potential at Kloeckner to place those disciplines into that business given that you all have been very successful doing it in your own and you've been through it.

Yes. Still honestly, we think that the opportunity there with -- and you're specifically talking about our continuous improvement program and transformation and what we've been able to do over the last decade or more. And we see significant opportunities to make those types of improvements at Kloeckner. It is a great leadership team and a great team overall.

But we certainly have some best practices and, I think, best-in-class playbooks that we think are quickly implementable at Kloeckner. And I think more importantly, they're open-minded to that. It's a high-performing organization. We're going to have some good candid conversations. But the discipline that we put into managing working capital, specifically inventory, how we approach demand planning and supply chain management, looking for opportunities to increase capabilities within the operations. Those opportunities are going to exist and really be plentiful.

So we will attack the income statement, and we will attack the balance sheet with the same vigor that we have at Worthington over the last decade. And I think when you put two solid companies together, and you have the breadth of purchasing and buying that we have across flat-roll and now these other products, whether we're talking about hedging and price risk management or again, the operational type things that I just discussed. It kind of starts to look like heaven's playground for us with transformation. So we're very excited about that.

But I know they're equally excited about that, and that's probably the most important thing to help us achieve it. And I think that's why we're so confident when Martin or others ask about our journey to 10%. These obviously feed into that greatly, meaning these opportunities. So excited about that, and I think it's going to be a huge opportunity for us.

Thank you. And that concludes our Q&A session. I will now turn the conference back over to President and CEO, Geoff Gilmore, for closing remarks.

Thank you, everybody, for joining and showing interest in Worthington Steel. We certainly feel strongly this is a transformational acquisition. We have more work to do. And once we complete that work, hopefully, we are on to integration. I hope you heard a lot of confidence in our voices today. We are pursuing a very good company with a fantastic leadership team. And I just think the combination of the two is going to be, again, transformational and overall going to be a big win for the overall industry. So thank you very much for joining today.

This concludes today's conference call. You may now disconnect.

Good morning, and welcome to Worthington Steel's Second Quarter Fiscal Year 2026 Earnings Call. [Operator Instructions]

I will now turn the call over to Melissa Dykstra, Vice President of Corporate Communications and Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to Worthington Steel's Second Quarter Fiscal Year 2026 Earnings Call. On our call today, we have Geoff Gilmore, Worthington Steel's President and Chief Executive Officer; and Tim Adams, Vice President and Chief Financial Officer.

Before we begin, I'd like to remind everyone that certain statements made today are forward-looking within the meaning of the 1995 Private Securities Litigation Reform Act. These statements are subject to risks and uncertainties that could cause actual results to differ from those suggested. We issued our earnings release yesterday after the market closed. Please refer to it for more detail on the factors that could cause actual results to differ materially.

Unless noted as reported, today's discussion will reference non-GAAP financial measures, which adjust for certain items included in our GAAP results and which are presented on a stand-alone basis. You can find definitions of each non-GAAP measure and GAAP to non-GAAP reconciliations within our earnings release. Today's call is being recorded, and a replay will be made available later today on worthingtonsteel.com.

Now I'll turn it over to Geoff Gilmore.

Good morning, and thank you for joining Worthington Steel's Second Quarter Fiscal Year 2026 Earnings Call. Before we discuss our second quarter results, I want to thank our more than 6,000 employees across North America and Europe. Your commitment to safety, quality and service every shift, every plant continues to set the standard. I'm proud of the work you're doing and grateful for it. On December 6, we issued a statement regarding potential M&A activity. Consistent with that statement, we will not be providing additional detail or addressing related questions on this call.

With that, let's turn to the second quarter. Net sales were $871.9 million. Adjusted EBITDA was $48.3 million and adjusted earnings per share was $0.38. We delivered these results in a market that remains mixed, combined with compressed galvanized spreads. Even with those headwinds, our execution remains strong where it matters most: safety, shareholder value, customer service and transformation.

On the commercial front, our team continues to win and capture high-margin business, particularly in cold-rolled strip. This quarter, we gained market share with new and existing customers. We saw all-time high shipments during the month of October to a key D3 automotive customer and won new business with a large Japanese OEM. While these programs will take some time to ramp up, this momentum fuels cautious optimism for early 2026 and a positive outlook for the second half of the calendar year.

Looking more closely at our key markets. Our sales to the automotive market were strong this quarter. Looking ahead, North American light vehicle output is expected to hold near 15.2 million units in calendar year 2025, essentially flat with 2024. Consumer demand is also expected to continue to drive growth in the electrified vehicle market, particularly hybrids, which suits our strategy and product mix very well. Construction is stable but subdued. We are seeing pockets of strength in areas related to power and infrastructure.

In agriculture, we have been able to capitalize on our diverse customer base to partially offset continuing soft conditions. We are hopeful that ag starts to rebound later in calendar year 2026, but there are many variables that can impact this market. The heavy truck and trailer market continues to be slow. We expect to see the beginnings of rebound in late calendar year 2026.

Stepping back, while the macro remains uncertain, we believe conditions are setting up for improvement in calendar year 2026 as interest rates ease and some policy uncertainty subsides. We're positioning the business so we're ready as demand grows. We are making good progress on our long-term strategy, executing on our electrical steel growth plans, pursuing new growth opportunities using CapEx and acquisitions, developing new products and optimizing our business through transformation, our proven process of continuous improvement. We moved forward in each of these areas in the second quarter.

Starting with electrical steel, our expansion projects are on track. In Mexico, where we make electrical steel laminations for traction motors, we're preparing for initial production in the first quarter of calendar year 2026. Those products will ship in the first or second quarter of the year, depending on OEM release schedules. Production and shipments will continue to ramp up as additional automotive platforms and supply chains come online. Our transformer core manufacturing expansion in Canada remains on schedule. We will transition production to our new facility in the first quarter of the calendar year. We have secured business to fill more than 60% of the new capacity and expect to begin seeing incremental revenue in the spring. We are well positioned to fill the remaining capacity quickly as we bring the new facility up to full production.

You may recall, we added a new slitter to Serviacero, our joint venture in Mexico a little over a year ago. We are well on our way to filling the capacity for that slitter, which is located in Northern Mexico. And we are moving forward with adding a new slitter to our Serviacero operation in Central Mexico. We believe this will allow us to capture new market share and better serve our existing customers. On the M&A front, with Sitem now part of the Worthington Steel family, integration is progressing well. Their capabilities in stamping electrical steel laminations, die casting and automation complement our core, extend our European reach and improve our competitiveness in advanced mobility and industrial markets. We see good cultural alignment and early collaboration across operations and commercial teams. Thank you to everyone who is involved in this integration.

Shifting to new products. This quarter, we announced an innovative technology related to our electrical steel laminations called Full Surface Bonding. This patent-pending technique creates a stronger bond between the laminations in the motor core, eliminating gaps and resulting in a motor that is more efficient, durable and cost effective. All of this is underpinned by daily transformation.

Transformation at Worthington Steel isn't a project. It's how we run the company. We measure it in safety, quality, delivery, cost and revenue, and we work to make progress every day. This quarter was no exception as a key tool in our transformation toolbox, artificial intelligence is becoming more integrated into our processes. We deployed 2 AI agents in our credit department, which allows us to speed up individual customer updates and cut down on the time it takes to process a new customer's credit application. These agents should eliminate more than 350 hours of manual efforts each year and strengthen our financial discipline and risk monitoring.

Another success was the development of automation to improve advanced shipping notices to one of our key OEM customers. Automating this process increased the accuracy of our advanced shipping notice and resulted in improved payment timeliness. The common thread here is practical impact, saved hours, higher accuracy, faster decisions and better use of our assets. These efforts are key to holding operating expenses flat even as volumes and complexity grow.

For instance, in plants where we streamline changeovers and reduce scrap, service levels improve and cost per ton comes down. In shared services, where we automate manual reviews and postings, we redeploy talent to analysis. And in the supply chain, where we improve visibility, we integrate inventory more tightly with demand. These are small changes, but they are critical to building a stronger company quarter after quarter.

In parallel with these improvements, our culture and customer relationships continue to shine and receive recognition. Last month, we were honored to be named a 2025 Supplier of the Year by Schaeffler Group USA, receiving the Americas Region Supply Chain Award, recognition for performance, collaboration and service. Just as our customers are recognizing how we show up for them, others are recognizing how we show up for our people. We received the Military Friendly Employer Gold designation for the 11th consecutive year. We support those who have served our country through a range of programs, including focused recruitment, onboarding resources and the internal veterans network that fosters belonging and connection across our company.

Additionally, Computerworld has named Worthington Steel to its 2026 Best Places to Work in IT for the eighth year in a row. I'm proud to see this recognition for our team's work this year to update global systems, introduce AI-driven tools, enhance our work and support growth through integration and modernization projects.

Finally, this quarter, we released our 2025 corporate citizenship and sustainability report, highlighting progress in safety, greenhouse gas emissions and waste elimination as well as our commitment to developing people through training and supporting communities. Our report sums up what makes Worthington Steel different, our culture and commitment to safety. In calendar year 2025, we also marked our 70th anniversary. In celebration, our employees set a goal they called 70 For Good to complete access service with 70 nonprofits in our communities, and I'm proud to share that we exceeded that goal. The program embodies who we are at Worthington Steel. It's a tangible expression of being strong for good, and it reflects our belief that investing in our people and communities makes the business stronger.

So let me end where I began with our people. Thank you to every Worthington Steel employee for your commitment to safety, quality and service, to our customers for your trust and partnership and to our shareholders for your continued support. We have a clear strategy, a resilient model and a team that knows how to execute. As I said in my opening remarks, the environment is mixed today. We remain cautiously optimistic about the first half of 2026. We believe conditions are setting up for improvement in the back half of 2026, and we intend to be ready.

I'll now turn the call over to Tim for more detail on the financials for the quarter.

Thank you, Geoff, and good morning, everyone. Before diving into the details, I want to start with the headline. This was a solid quarter operationally and financially, particularly given a mixed demand environment and continued volatility in steel pricing. We expanded adjusted EBIT meaningfully year-over-year, generated strong free cash flow and continued to gain share in our most important markets while maintaining balance sheet strength and financial flexibility.

For the second quarter, we are reporting earnings of $18.8 million or $0.37 per share as compared with earnings of $12.8 million or $0.25 per share in the prior year quarter. There were a handful of nonrecurring items in both periods. Excluding those, adjusted earnings were $0.38 per share this quarter compared with $0.19 per share last year, reflecting improved underlying performance.

In the second quarter, we reported adjusted EBIT of $26.6 million, which was up $12.3 million from the prior year quarter adjusted EBIT of $14.3 million. That improvement was driven primarily by higher direct volumes, including continued share gains, improved direct spreads and higher equity earnings from Serviacero, partially offset by lower toll processing volumes and higher SG&A, largely related to compensation, benefits and professional fees.

Total shipments were approximately 902,000 tons, down modestly year-over-year as lower toll volumes more than offset volume growth in direct sales. Importantly, direct sale volume made up 65% of our mix in the current year quarter compared with 55% in the prior year quarter. Direct volumes increased 13% compared with the prior year quarter, with the vast majority of the volume increase coming from our existing facilities complemented by the addition of Sitem.

Our increased shipments in the automotive market continue to be a standout. Direct shipments to automotive increased 26% year-over-year. This reflects both share gains from new programs reaching expected volumes and a return to more normal production levels at one OEM customer that had curtailed production last year. More broadly, it reflects the strength of our long-standing OEM relationships and our collaborative solutions-oriented approach with customers. Outside of automotive, energy shipments were up 50% year-over-year, largely driven by project-based solar programs.

Agriculture volume was up 1% as grain bin strength offset weaker OEM equipment demand. These gains were partially offset by softness in construction, down 9%, heavy truck, down 6% and service center, where customers continued to destock. Toll processing volumes declined year-over-year primarily due to the closure of our Cleveland area, Worthington Samuel Coil Processing facility last fiscal year and softer market conditions. We view this decline as cyclical, not structural, and expect toll volumes to improve as end market demand normalizes, excluding the impact of that consolidation.

Turning to the other drivers for adjusted EBIT this quarter. First, direct spreads increased year-over-year. Direct spreads were up $6.5 million, primarily due to a $6.2 million favorable swing in pretax inventory holding losses. In the current quarter, we had estimated pretax inventory holding losses of $7.2 million compared to estimated pretax inventory holding losses of $13.4 million in the prior year quarter. We expect the market price for steel to remain volatile in the near term. After stabilizing around $800 per ton in September and October, the price for hot-rolled coil has increased to approximately $900 per ton.

Given that many of our contracts use lagging index-based pricing mechanisms, we estimate in our third quarter of fiscal 2026, inventory holding gains and losses will fall within a range of a pretax gain of $3 million to a pretax loss of up to $3 million. As I mentioned earlier, adjusted EBIT also improved year-over-year due to the increase in equity earnings from Serviacero, our Mexico-based joint venture. Serviacero's equity income increased $7.7 million due to higher direct spreads, inventory holding gains as well as the favorable impact of exchange rate movements. Finally, these improvements in adjusted EBIT were offset somewhat by an increase in SG&A. The $9.8 million increase in SG&A was primarily due to increased compensation and benefits expense, up $5.9 million and higher professional fees related to various strategic projects we are evaluating, up $2.3 million.

Turning to cash flows and the balance sheet. For the quarter, cash flow from operations was $99 million and free cash flow was $75 million, benefiting from a reduction in working capital. Capital expenditures were $25 million in the quarter, primarily related to previously announced electrical steel investments. For fiscal 2026, we expect CapEx of approximately $110 million, reflecting a disciplined approach aligned with long-term growth priorities while maintaining flexibility in uncertain markets. On a trailing 12-month basis, we generated $73 million of free cash flow. We ended the quarter with $90 million of cash and net debt of $92 million, down sequentially, driven primarily by working capital improvements. Earlier this week, we announced a quarterly dividend of $0.16 per share payable on March 27, 2026.

In summary, this was a solid quarter. We're gaining share in key markets, generating consistent cash flow and maintaining a strong balance sheet. That combination positions Worthington Steel well to navigate uncertainty and to act decisively when opportunities arise. I want to thank our entire Worthington Steel team for their continued focus on safety, customer service and execution this quarter.

At this point, we will be happy to take your questions.

[Operator Instructions] Our first question will come from the line of Phil Gibbs with KeyBanc Capital Markets.

You'd mentioned in the SG&A increase in your remarks, Tim, that compensation and benefits up $5.9 million and higher professional fees up $2.3 million. So I'm wondering what out of that larger increase or more -- is more onetime in nature? Because I know you had called out a Sitem fee. I also know that some of this is related to some of the M&A that you're potentially working on. So just trying to think about what may be core because clearly, it was elevated this quarter.

It was. If you look at it from a year-over-year perspective, so we now have Sitem in there. That's one thing we pointed out during my opening remarks. But if you're talking about onetime, it's those professional fees of $2.3 million, I think is how we had it quantified that is related to the strategic products -- projects.

What about the $2.5 million that you had called out from just the Sitem, I believe it was like an earn-out.

Sitem was not in the results. Yes. Sitem was not in the results last year, and now they're in the results this year. That's the...

Okay. So that was -- that wasn't a onetime payment. That was their underlying result.

No. The onetime payment was related last quarter to the bonus, a transaction bonus that happened. I think it was $4.6 million. That's all done. And now what you're seeing is just adding Sitem to the mix, adding them to the financials.

Okay. So the higher professional fees of $2.3 million, that's largely related to the M&A, and that could obviously be somewhat more volatile and unpredictable.

Correct.

And then in the just the automotive momentum that you had on the direct side, pretty impressive, Geoff, was the primary catalyst behind that, the cold-rolled strip piece, I thought I heard you mention that early in the call.

Yes. So Phil, actually not. Most of what you saw this quarter was the market share gains that we had talked about in previous quarters and really those programs working to 100% of the market shares that we gained. We have been fortunate and the market share gains have continued. And a lot of those recent wins are automotive, and they are specifically cold-rolled strip specific. And those are programs that we will look forward to starting really in the first quarter of the calendar year. I would -- probably that third month of the first quarter and then starting to reach full potential in the second quarter of the calendar year.

How do we tease out or think about how much of that, which is on the come that you just mentioned is related to the tariffs from just imported foreign steel, but also how much eventually is related to onshoring of just OE platforms overall. So I'm trying to tease out the short term versus the long term.

Yes, that's a great question. So the recent market share gains, I would tell you a pretty significant amount of that is coming due to the onshoring of supply chains. We definitely had some customers bringing material over from Europe or elsewhere, and they are now localizing that supply chain. So certainly was favorable to us. We have not seen any market share gains due to any announcements of onshoring manufacturing. So to your point, that is something that would be more in the future for us to look forward to.

Our next question comes from the line of John Tumazos with John Tumazos Very Independent Research.

Could you walk us through the deductions for your minority interest partners? They were a little smaller this quarter than last year.

Yes. Compared to year-over-year, I think what you're seeing is there's definitely some slowness in demand, right? And I think we're seeing some of that. So also what you have to keep in mind is last year, at this time, we had the Samuel, the Worthington Samuel Coil Processing joint venture in there, and we've removed that this year. So we've had some differences in profitability year-over-year, really due to demand.

With the disappearance of the Cleveland facility and the Samuel JV, what happens to the machinery? Do you move it to other Worthington plants? Does it get sold for scrap? Just what happens to the equipment?

Sure. So just to be clear, we had several facilities up there. So the business that we could, we moved to Twinsburg. But your question is a good one. We typically sell the real estate, and we've got that underway already. I think it depends on the type of equipment. If we think it's high value-add equipment, we won't sell it or we'll try to sell it offshore. If it's something that's a little more generic like a slitter or cut to length line, we'll find a home for it.

If we can use it -- I mean the first question you asked was, can you use it internally somewhere? And we try to do that first. And then if we don't have a need for it internally, then we'll look to sell it if it's low value-added equipment.

Our next question will come from the line of Martin Englert with Seaport Research Partners.

The compressed galvanized spreads in recent history, what do you think is contributing to that? And what may prompt it to normalize?

Yes. I mean great question. I mean I think the first thing you're going to point to is certainly just decreased demand, Martin, and specifically construction. And so with decreased demand, it just creates certainly a lot more competitive rivalry. And certainly, that's what we have been facing. Martin, we feel like we hit the trough and we'll start to see some margin expansion going forward. We saw a little of that in CRU here on Wednesday. And the reason for the expansion and then potentially normalizing hopefully in the second quarter of the calendar year has much to do with the 232s.

I mean there is obviously limited galvanized product coming into the U.S. at this point. I think it was down, Tim, correct me if I'm wrong, 35% and probably will continue to increase. That has to do with antidumping as well. So I'd expect we continue to see that expand and then normalize somewhere around the second quarter. I think there's a ceiling because there certainly has been added capacity in the U.S. as well, but we're certainly looking forward to that, Martin. Good question.

Have prime scrap spreads relative to obsolete had any negative impact on your business recently?

No, nothing material, nothing meaningful to our margins, Martin.

Okay. And last one that I have is calendar year 2026. What are your top transformation initiatives that you're focused on?

Yes. So we have -- we mentioned in prior quarters, everything in our facilities, we have transformation events ongoing. You're very familiar with that. That's just how we do business. Where we really turned our focus after separation was transformation through our back office. And that's been certainly a big priority of ours. We just had our fourth report out with the back office teams. And the progress has been nothing less than amazing. The team has embraced it. We are seeing certainly savings and the hours saved have been significant as well.

And in addition to that, Martin, that group has fully embraced artificial intelligence, and we have had some great success stories with automation and have launched our first 2 agents. So we've now moved to Agentic AI with much on deck there. And then the second, which a key priority is Tempel. Transformation is not an area where we got too deep into it while we were getting integrated and familiar with their business. We have really started to double down on those efforts as we just think whether it's the income statement or the balance sheet, there's going to be a lot of good meaningful opportunities for the shareholders.

And in addition to that, I say Tempel is Sitem. We have mentioned they are world-class at cool and die making as well as world-class in automation. And so we have been excited to learn their best practices and embrace them because they're all scalable across that footprint. But back office and Tempel would be the priorities.

Do you have an estimate of any type of annualized savings that you've achieved, I guess, since targeting the back office with transformation?

I don't -- yes, good question. I don't have numbers right now, but here is my commitment to you. We are working towards a scorecard. I surely hope to have that available for our next call. We want to do a better job of quantifying the savings that we're seeing through transformation as well as the launch of artificial intelligence. We have seen savings. We're going to continue to see a lot more. We have 5 pretty robust pilots that I think will have certainly a positive impact on the income statement as well as the balance sheet. So we're going to start quantifying those savings for you, specifically transformation and artificial intelligence.

And then in line with that, we want to quantify and share with you the hours saved in the workplace as well. We're seeing significant hours saved now, which is allowing us to redeploy all of our employees to more meaningful work. So we're excited about that as well. But that's certainly a commitment that I'm making to you right now, Martin.

I will now turn the call back over to Geoff Gilmore, President and CEO, for closing remarks.

Just want to thank everybody for joining us this morning and showing interest in Worthington Steel. Clearly, we're quite pleased with the quarter results and excited over our strategy and the opportunities we have to continue to execute on it. Clearly, the story today was gained market share. And we've talked quite a bit about the market share gains in automotive, but even more exciting that we've started to see market share gains in other markets as well, whether it's agriculture, energy or transformers, transformer cores specifically as well. So look forward to start seeing those shipments probably early second quarter of the calendar year. And so a lot for us to look forward along with transformation and artificial intelligence.

So with that, we wish everybody happy holidays, and we very much look forward to talking to you again following the current quarter. Thank you.

This concludes today's call. Thanks for joining. You may now disconnect.

Good morning, and welcome to Worthington Steel's First Quarter Fiscal Year 2026 Earnings Call. [Operator Instructions] I will now turn the call over to Melissa Dykstra, Vice President of Corporate Communications and Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to Worthington Steel's First Quarter Fiscal Year 2026 Earnings Call. On our call today, we have Geoff Gilmore, Worthington Steel's President and Chief Executive Officer; and Tim Adams, Vice President and Chief Financial Officer.

Before we begin, I'd like to remind everyone that certain statements made today are forward-looking within the meaning of the 1995 Private Securities Litigation Reform Act. These statements are subject to risks and uncertainties that could cause actual results to differ from those suggested. We issued our earnings release yesterday after the market closed. Please refer to it for more detail on the factors that could cause actual results to differ materially.

Unless noted as reported, today's discussion will reference non-GAAP financial measures, which adjust for certain items included in our GAAP results and which are presented on a stand-alone basis. You can find definitions of each non-GAAP measure and GAAP to non-GAAP reconciliations within our earnings release. Today's call is being recorded, and a replay will be made available later today on worthingtonsteel.com.

Now I'll turn it over to Geoff Gilmore.

Good morning, and thank you for joining Worthington Steel's First Quarter Fiscal Year 2026 Earnings Call. As always, I'll begin by thanking the people of Worthington Steel. I'm incredibly proud of our team's commitment to safety, quality and our customers throughout the quarter. I want to extend a warm welcome to the Sitem team. We completed our acquisition of 52% of Sitem in June. To our Sitem teammates who may be on the call, we are thrilled to have you join the Worthington family, and I'm excited about what we'll accomplish together.

We're off to a strong start in fiscal year 2026, driven by disciplined execution in a soft market, resulting in year-over-year volume growth. Adjusted EBITDA came in at $75.2 million. Earnings per share were $0.72 and net sales were $872.9 million. This performance reflects the strength of our base business, the advantages of our commercial and operational agility and the benefits of our ongoing transformation. An important highlight of our quarter was safety. Through training, continuous improvement and the commitment of every Worthington Steel employee, we achieved our safest quarter on record, but there is still work to do to ensure every employee goes home safely, and we meet our goal of 0 injuries. Congratulations to our environmental health and safety team, our operations team and all Worthington Steel employees on this vitally important achievement.

Looking at our key end markets and business trends. The macro environments remain mixed. Visibility is limited in several sectors, and we expect this to persist for the near term. That said, we are cautiously optimistic despite continued uncertainty in the market. At Worthington Steel, we are not waiting for clarity to act. We are focused on what we can control and we are positioning ourselves to win in any environment.

Uncertainty can create opportunity, and that's where we lean in. When supply chains shift, we collaborate. When customers face complexity, we deliver solutions. This quarter, we saw continued growth in automotive with new programs ramping up to drive volume. In fact, during the period, the Detroit 3 saw a 5% year-over-year production increase, while our shipments increased by nearly 13% compared to the prior year. Our commercial teams are doing an outstanding job winning new business. We remain cautiously optimistic about the automotive market for the rest of calendar year 2025. We also offset some of the slowness in the heavy truck market with an increase in market share during our first quarter. Construction in the subsectors we serve remains soft but steady. We are disciplined and efficient in how we serve this space.

The ag market continues to experience challenges, but we remain committed to our customers and ready to adapt. I'd like to commend our commercial team for their focus on proactively serving our customers. The strong relationships they build and cultivate help us capitalize on opportunities and gain new customers, new business and new market share.

Turning to our long-term strategy. Our team continues to make progress on electrical steel investments, margin accretive growth and base business transformation. In Canada, we remain on schedule to start production in early calendar year 2026, expanding our ability to support the ever-growing need for electricity in the United States with transformer cores. Transformers remain in short supply and the market is expected to grow by up to 7% per year over the next decade. The expansion of our facility in Mexico will begin production in just a few months, and trials are currently underway. This facility will supply electrical steel laminations for traction motors in hybrid and electric vehicles as the electrification of transportation continues. With the close of our Sitem acquisition, we've expanded our reach in the global EV market and are now integrating Sitem's automation and toolmaking capabilities to strengthen our competitiveness across our electrical steel platform.

Transformation at Worthington Steel is a daily discipline. It's how we improve safety, productivity and customer outcomes. We now have the opportunity to fuel and accelerate that work with artificial intelligence. We are using AI to gain insight, assess strategies and automate low-value tasks. We are testing use cases like predictive maintenance and intelligent reporting, and we are confident about the gains we will see over time. Adding AI to our transformation toolbox, both in operations and the back office will allow our teams to focus on the critical 20% of their job that drives the most value for our business. At the same time, our employees will gain more fulfillment from their careers as the more repetitive tasks are clear from their daily work. This quarter, we identified, launched and are advancing 4 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.

All 4 of these are expected to provide cost savings and/or free up cash flow when fully implemented. Additionally, we continue to see progress as we apply the transformation to our back-office functions. As examples, we launched a project to automate daily cash posting, reducing effort by more than 10 hours per month and increasing reliability. We streamlined IT access provisioning, creating a more efficient process for adding software and system access for employees, which saves our IT staff 20 hours per week. And we applied process automation to significantly cut manual work in our back-office credit function, saving 80 hours per month. These are just a few samples of ongoing work, but these are real improvements, measurable, repeatable and aligned with our long-term goals.

I believe our culture of continuous improvement through the transformation, combined with our golden rule of treating people the way we want to be treated is our secret weapon. Alongside that is our sound strategy and the disciplined approach to capital allocation. Our priorities are clear: generate strong free cash flow, invest in the high-return opportunities and pursue M&A that creates strategic value. With a 70-year heritage, we are building a company that is stronger, more efficient and more valuable year after year.

To close, I want to thank our 6,000 employees, our customers and our shareholders. Worthington Steel is operating with a clear strategy, a culture of execution and continuous improvement and a deep bench of talent. That's a powerful combination, and I believe it sets us apart. Thank you for your time today and for your continued interest in Worthington Steel.

Now I'll turn it over to Tim Adams to walk through our financials.

Thank you, Geoff, and good morning, everyone. For the first quarter, we are reporting earnings of $36.8 million or $0.72 per share as compared with earnings of $28.4 million or $0.56 per share in the prior year quarter. We closed on the Sitem acquisition on June 3. Sitem is reported on a 1-month lag, and as such, our first quarter includes 2 months of Sitem results. The minority interest associated with Sitem is reported as redeemable noncontrolling interest in a new mezzanine equity section of our consolidated balance sheet as the Sitem purchase agreement includes put and call options, which are exercisable in euros several years from now.

Mezzanine equity is presented at redeemable value in U.S. dollars. Our earnings per share include a $0.01 negative impact shown as a deemed dividend on the redeemable noncontrolling interest due to a change in the redeemable value primarily associated with the dollar to euro exchange rate. There were several other unique items that impacted our quarterly results. First, -- the current quarter results include $1 million or $0.01 per share of pretax restructuring related to a gain on sale of an asset associated with our previously announced closure of the Worthington Samuel Coil Processing toll pickling facility in Cleveland. Additionally, in the current quarter, we recognized $4.6 million or $0.04 per share of compensation expense within SG&A related to a onetime bonus paid to certain key Sitem employees upon closing of the Sitem acquisition.

Finally, the current quarter included an $800,000 or $0.01 per share tax expense associated with the disallowance of certain tax assets due to the contribution of Nagold as part of the Sitem acquisition. The prior year quarter included the recognition of a tax court ruling related to a Tempel pre-acquisition matter for which we were indemnified by the former owners of Tempel. The net impact to earnings of the tax court ruling was 0. However, we recognized $4.4 million of miscellaneous expense related to the indemnity payable, offset by $4.4 million of tax income associated with a refund in the prior year quarter. Excluding these unique items and the deemed dividend on redeemable noncontrolling interest on Sitem, we generated earnings of $0.77 per share in the current year quarter compared with $0.56 per share in the prior year quarter.

In the first quarter, we had estimated pretax inventory holding gains of $5.6 million or $0.08 per share compared to estimated pretax inventory holding losses of $16.6 million or $0.25 per share in the prior year quarter, a favorable pretax swing of $22.2 million or $0.33 per share. In the first quarter, we reported adjusted EBIT of $54.9 million, which was up $15.5 million from the prior year quarter adjusted EBIT of $39.4 million. The increase in adjusted EBIT is primarily due to higher gross margin and an increase in equity earnings at Serviacero, partially offset by higher SG&A expense. Gross margin increased $14.8 million as compared with the prior year quarter, primarily due to higher direct material spreads combined with higher direct volumes, partially offset by lower toll processing gross margin.

Direct spreads were up $23 million, primarily due to the year-over-year improvement in pretax inventory holding gains in the current year as compared with losses in the prior year. Higher year-over-year direct volume delivered an additional $4.6 million of gross margin. Offsetting these increases, our toll processing gross margin was down $11 million from the prior year, primarily due to lower toll volumes and a tolling mix that was lower value-added. Equity earnings from Serviacero increased due to higher direct spreads, inventory holding gains as well as the favorable impact of exchange rate movements. The $10.9 million increase in SG&A included a onetime $4.6 million bonus paid to certain key Sitem employees upon closing the acquisition I mentioned earlier. Excluding this onetime item, SG&A was up $6.3 million compared to the prior year quarter with the increase split equally between incremental Sitem expense and an increase in other SG&A, primarily due to increased compensation expense.

Next, I will provide some perspective on our market and our shipments. The market pricing for hot-rolled coil peaked at $950 per ton in March and has generally experienced downward pressure due to softer volumes in many markets despite an increase in tariffs on imported steel that was implemented in June. Current pricing for hot-rolled coil is approximately $800 per ton, again, reflecting softer market demand. Given that many of our contracts use lagging index-based pricing mechanisms, we expect to generate inventory holding losses in the second quarter of fiscal 2026. We estimate those losses could be approximately $5 million to $10 million as compared with the $5.6 million of estimated holding gains in the current quarter.

Net sales in the quarter were $873 million, up $39 million or 5% from the prior year quarter, primarily due to the addition of Sitem and higher direct volume, partially offset by lower selling prices and to a lesser extent, lower toll volumes and a toll processing mix that was unfavorable. We shipped approximately 929,000 tons during the quarter, down 7% compared with the prior year quarter due to the decrease in toll volumes. Direct sales volume made up 63% of our mix in the current year quarter as compared with 56% in the prior year quarter. Direct sale volume increased 6% compared to the prior year quarter, with the vast majority of the volume increase coming from our existing facilities complemented by the addition of Sitem. We experienced pluses and minuses across various markets as customers continue to navigate uncertainty during the quarter.

Automotive was a bright spot during the current quarter. Our shipments to the automotive market were up 17% compared to the prior year quarter. As we noted in prior quarters, we have won share in the automotive market. The new programs continue to ramp up and volumes have increased across the board for our D3 OEM customers. We expect volume from the new programs to continue layering in over the next few quarters. Similar to the past few quarters, our year-over-year shipments to the D3 OEMs grew more than OEM unit production. We estimate production grew approximately 5% for the Detroit 3 on a year-over-year basis, while our D3 shipments increased nearly 13%. We continue to work closely with our automotive customers to provide solutions that create value for both sides. Our long-standing relationships and collaborative approach are driving incremental growth in this market. The volume increase in the automotive market was partially offset by reductions in the construction, ag, service center and heavy truck markets, while we saw some modest increases in the energy and container market.

Our shipments to the construction market fell a modest 3%, while our ag volumes were down nearly 50% compared with the prior year quarter, primarily due to continued softness in the agricultural equipment market. Our shipments to the heavy truck market were down 7%. However, we were able to offset some of the softness with new business in the heavy truck market. Toll processing volumes were down 22% year-over-year for several reasons. First, the overall market was softer in the current year, resulting in less toll processing from mills and service centers. Second, we closed the Cleveland area Worthington Samuel Coil Processing facility in the fourth quarter of the last fiscal year.

And finally, as we discussed last quarter, we were impacted by several customer decisions. For example, one customer changed a program from tolling to direct sale, while another customer elected to resource a toll processing program to capture freight savings. When end market demand picks back up, we expect our toll processing volumes to increase. However, as we discussed in prior quarters, in normal market conditions, we expect to see a decrease of approximately 100,000 annual toll processing tons, primarily as a result of the WSCP consolidation from Cleveland to Twinsburg.

Turning to cash flows and the balance sheet. Cash flow from operations was a $5 million outflow and free cash flow was a $34 million outflow. Cash flows for the quarter were impacted by increases in working capital. During the quarter, we spent $29 million on capital expenditures related to a variety of projects, including the previously announced electrical steel expansion. Our CapEx forecast for fiscal 2026 remains at $100 million. Our disciplined approach to capital is aligned with long-term priorities to support growth and customer needs even in uncertain times. We may revise our CapEx estimate next quarter once we complete our review of Sitem's CapEx priorities. On a trailing 12-month basis, we generated $34 million of free cash flow. Wednesday, we announced a quarterly dividend of $0.16 per share payable on December 26, 2025.

We ended the quarter with $78 million of cash, and our outstanding debt as of August 31 was $233 million, resulting in net debt of $155 million. Net debt increased over the sequential quarter, primarily due to increases in working capital.

Finally, I would like to thank everyone at Worthington Steel for making safety their highest priority and for driving results in a challenging market. With a strong balance sheet, a clear strategy and an agile team, Worthington Steel is well positioned to create value and move decisively when opportunities arise. I want to express my sincere gratitude to our entire team for their hard work and for living Worthington's philosophy while delivering value to our shareholders. At this point, we would be happy to take your questions.

[Operator Instructions] Our first question comes from the line of Phil Gibbs with KeyBanc Capital Markets.

Geoff and Tim, can you maybe give us a little bit more color on the Sitem transaction, particularly in terms of the mezzanine financing structure. It's certainly something pretty unique, particularly when foreign currency is involved. So I think we're just trying to get a feel for how much you actually paid for Sitem, the 52% stake this go around and maybe what could be the residual unclear to us how much cash went out the door initially here.

Yes. I understand, Phil, it's Tim. Why don't we start with how we financed the acquisition, and then I'll pivot to this concept of mezzanine equity. So the Sitem purchase price was composed of $60 million in cash, and we disclosed that in the 10-K. So $60 million of cash combined with the contribution of the German facility. That was the Nagold facility we purchased a couple of years ago. So we financed the Sitem acquisition using the ABL. You can see that on last quarter's balance sheet. You may remember that we had a category called restricted cash, and that was the cash that was earmarked for the cash portion of the transaction.

When it comes to the mezzanine equity piece of this, so typically, minority interest of a majority-owned joint venture sits in equity as permanent capital. So in Sitem's case, our partners have a put option that's outside of our control, so we can't classify it as minority interest as part of permanent equity. So according to the accounting guidance, it's not truly really a liability either. So it sits between liabilities and equity in its own category. The minority interest is denominated in euros, so we have to adjust it for changes in exchange rates. The EPS adjustments this quarter reflect the change in FX between the euros and the dollars. So it's not mezzanine debt, it's mezzanine equity.

And regarding automotive, certainly some very strong share gains with the big 3, as you mentioned, Geoff, in your prepared remarks. What do you see moving forward for automotive? And is there more opportunity to layer in more business or share in '26?

Yes. Phil cautiously optimistic. I know you're very used to me saying that at this point. But we project we'll probably finish the year at like 15 million unit build rate, which honestly, we're pleased with. If you recall, just a couple of calls ago, forecasts were all over, they were as low as 13.5 million. So it's been a bit more resilient than we thought, and we would certainly hope into '26, there's an opportunity for a little bit more market recovery there, hopefully, with some tailwinds from a couple more interest rate cuts. However, regardless of the direction of the overall automotive market, yes, we've -- the commercial group has continued to do an excellent job gaining market share. You saw that layered in quite nicely last quarter and again this quarter.

And to answer your question specifically, are there further opportunities to gain market share? The answer to that question is yes. The group continues to find opportunities. I think you'll continue to see some of that market share layered in, and we'll be coming up on contract season soon and I think we have some very good prospects there. So that would be looking at market share that could be filtering in next calendar year. So we continue to see very good momentum there from our commercial team working with those customers.

And the last question I have is just because I've been getting it from investors is the derivative Section 232 tariffs on electrical steel laminations -- certainly know you've got operations north and south of the border. And I think the crux of the question is how do you manage through that environment and continue to try to achieve your profitability goals and volume aspirations?

Thanks, Bill. Still bullish on electrification and on both of those projects that you referenced in Canada and Mexico. As far as electrical steel laminations and transformer cores being included in the 232 derivatives, Phil, we've seen little impact. We don't think we're going to see any material impact going forward. The customers are paying or are willing to pay the tariffs. And then, Phil, we also have pretty significant chunk of our customer base that is USMCA compliant. So it would not affect them. But we're in a good position. I mean those are -- they're robust markets. The demand is extremely strong. And just sticking to the facts, there's not the capacity or efficient enough supply chains in the U.S. to be able to supply those customers. So we're positioned well even with those being included as derivatives -- part of the derivative products, of 232.

Our next question comes from the line of John Tumazos with John Tumazos Very Independent Research.

The August 11 U.S. Steel coke accident took out 1.7 million tons of coke capacity for them, which I guess equates to 3 million to 4 million tons of slabs. Presumably, my first question is Worthington is a preferred customer and you've had no disruption or interruption.

The second question, should we interpret that as taking 3 million to 4 million tons of crude capacity out of the market until fixed? Or would you expect U.S. Steel to pay extra to buy third-party coke to buy prime scrap $450, $500 a ton or buy slabs, which with tariffs are harder to get by to.

John, the first part of that question, I can easily answer, and it's not going to have any impact on our business. Certainly, we have a great relationship with U.S. Steel, but we have equally good relationships with several other mill sources. So we're not seeing -- would not anticipate any interruptions in our supply chains.

As far as the second question, I just honestly would have to say I don't know. I would rule out buying slabs for the very reason that you referenced. As far as the other 2 options, I'm not sure. I don't have an answer to that question.

Our final question will come from the line of Martin Englert with Seaport Research Partners.

Question on the direct volumes were 63% of the mix, toll volumes down 22% year-on-year. How much of the toll decline was related to the closure of Worthington Samuel versus mill and other customers? Is that just that 100,000 that you cited earlier as far as the Worthington Samuel portion? Or is there something different going on there?

There's a couple of things. So half of that reduction is due to market conditions, right? So the mills and service centers are a little bit slower. And then the vast majority of the other piece of that is related to the Worthington Samuel Coil Processing shutdown. There's some other things going on there. For example, we had a customer ask us to change their program from toll to direct. So that's in that number as well as we had a customer decide to move a program because they could generate some freight savings. But those are relatively small in comparison to the Worthington Samuel Coil Processing shutdown.

Okay. Would you generally expect to remain above that 60% level that we've been at for the past couple of quarters?

Yes. I think going forward, Mark, I think our direct sale volume is probably going to be in that 60% to 65% range and toll will then be 35% to 40%.

Okay. Can you discuss what you're seeing so far with volumes in fiscal 2Q, including seasonal factors that we should be taking into consideration, I guess, kind of what I'm getting at things continue to trend like down overall around mid-single digits year-on-year?

Well, I mean, from a seasonality perspective, Martin, remember that -- so Q1 is typically the average quarter and Q2 is usually 3% or 4% below that, and Q3 is usually 3% or 4% below Q1 as well. I think we would expect normal seasonality because Thanksgiving is not going away, right? You've got the holidays in there that typically don't go away. So we'll see that. And I think we talked a couple of weeks ago where we said demand was okay. And I think we don't see any big motivator or any big event that's going to trigger a giant increase in demand. So I think you're going to see markets kind of -- until there's more clarity and some of this uncertainty goes away on tariffs and other things, I think you're going to see these markets just kind of move along as they have been.

With recent orders, are you seeing any change in upstream mill order books and lead times?

No. We haven't seen any changes there at all at this point.

And I will now turn the call back over to Geoff Gilmore, President and CEO, for closing remarks.

Thanks again for listening in. Again, very good quarter in a tough environment. And I think if you look at what we are able to control, it was a great quarter. The group is managing costs at a very high level. We are gaining market share, and we look forward to more interest rate cuts. We look forward to getting a continental agreement put in place. And I think if we're able to see those with how we've positioned the company, we can start to move our barometer from cautiously optimistic to optimistic. But right now, we're very focused on executing our strategy, and we will look forward to talking to you all next quarter and sharing our success. Thank you.

That concludes our call today. Thank you all for joining. You may now disconnect.

Good morning, and welcome to Worthington Steel's Fourth Quarter 2025 Earnings Call. [Operator Instructions]

I will now turn the call over to Melissa Dykstra, Vice President of Corporate Communications and Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to Worthington Steel's Fourth Quarter Fiscal Year 2025 Earnings Call. On our call today, we have Geoff Gilmore, Worthington Steel's President and Chief Executive Officer; and Tim Adams, Vice President and Chief Financial Officer.

Before we begin, I'd like to remind everyone that certain statements made today are forward-looking within the meaning of the 1995 Private Securities Litigation Reform Act. These statements are subject to risks and uncertainties that could cause actual results to differ from those suggested. We issued our earnings release yesterday after the market closed. Please refer to it for more detail on the factors that could cause actual results to differ materially.

Unless noted as reported, today's discussion will reference non-GAAP financial measures, which adjust for certain items included in our GAAP results and which are presented on a stand-alone basis. You can find definitions of each non-GAAP measure and GAAP to non-GAAP reconciliations within our earnings release.

Today's call is being recorded, and a replay will be available later today on worthingtonsteel.com.

Now I'll turn it over to Geoff Gilmore.

Good morning. Thank you for joining us. First, I want to thank our incredible Worthington Steel team. Once again, they demonstrated resilience, flexibility and an unwavering commitment to safety and serving our customers. In the fourth quarter, we generated adjusted EBITDA of $87 million compared with $86.5 million in the prior year quarter. Earnings per share were $1.10 compared to $1.06 in the same period last year. While the macroeconomic environment remains mixed, Worthington Steel employees stayed focused on execution and we made important strategic progress.

Let me begin with a look at what we saw across our end markets. In automotive, our volume strengthened in the fourth quarter. We continue to gain market share in the overall automotive market, and I commend our commercial teams and everyone involved for their commitment to fulfilling the needs of our automotive customers.

The construction markets we serve, which include fencing, culvert and metal buildings, were down slightly year-over-year. We saw an uptick in heavy truck because we have gained some share in that market. The agricultural market, however, continues to face pressure. Energy demand and the need for transformer cores continue to grow as the world relies more and more on artificial intelligence and electrified vehicles. Transformer core growth is also fueled by the need to replace aging electrical infrastructure as more than half of the transformers and use today reached the end of their useful life.

Now let's talk about the progress we're making on our long-term strategy. We continue to execute against a road map that's built on 3 pillars: focused investments in the rapidly growing electrical steel market; margin-accretive growth using a strong commercial focus, combined with strategic CapEx and acquisitions; and base business improvements to improve margins, reduce working capital, and to add incremental capacity through our transformation.

Starting with our capital investments, we continue to progress on our electrical steel expansions in Mexico and Canada. Testing is underway on the 5 presses in Mexico, and we are preparing for initial production later this calendar year. Electrified vehicle adoption continues to make gains globally with current estimates projecting that hybrids and BEVs will make up more than 2/3s of global market share by 2030.

Our Canada transformer core expansion project remains on track to begin production in early calendar year 2026. The transformer market in the U.S. is expected to double over the next 10 years to meet the growing demand for electrification.

On the acquisition front, I'm pleased to share that we closed on our acquisition of a 52% ownership stake in Sitem on June 3. Sitem is a European electrical steel lamination manufacturer and electric motor die-casting experts. This move marks a significant step in enhancing our position in the European electric motor lamination market and strengthening our ability to support global automotive and industrial motor customers.

Sitem brings strong technical capabilities and expertise in tooling and automation systems for electric motor laminations that will benefit our electrical steel operations globally. Beyond those capabilities, what truly excites us is the cultural fit. Their people-first values mirror our own Worthington philosophy. We are thrilled to welcome the Sitem team into the Worthington family.

From a commercial perspective, we continue pursuing growth opportunities in select markets, and our team continues to gain market share fill open capacity and exceed customer expectations. Our team deserves high praise for their ability to collaborate with our suppliers and customers this quarter as they manage through potential supply chain disruptions due to the idling of several mill locations. They worked hard to ensure an uninterrupted supply for our customers.

This quarter, Worthington Steel was named in 2024 Supplier of the Year by General Motors, marking our fourth time in the past 5 years achieving this distinction. And we were recognized as a Partner-level Supplier in the John Deere Achieving Excellence Program for the 13th consecutive year, Deere & Company's highest supplier ratings. These awards validate our commitment to quality, innovation and service for our customers.

Now looking at continuous improvement to our base business, which we call transformation. Looking for ways to get better is part of our DNA. Across the company, teams are reducing change over time optimizing working capital, improving safety and streamlining operations. We have added another tool to our transformation tool belt, artificial intelligence. We kicked off our AI journey in earnest this quarter, and we see AI as a force multiplier that will elevate our work. AI will become an expectation at Worthington Steel. And we believe it will help us be more productive, improve quality and unlock new value for our customers.

Together, these actions strengthen our competitive advantage and give us a clear path to margin expansion, high returns on capital and long-term value creation. I'm pleased with how well our team is executing on our strategy despite some headwinds. We are focused on what we can control, what we can improve, and what we can do to serve our customers, all with an eye toward safety.

On the governance front, we announced yesterday the addition of Mark Davis to our Board of Directors. Mark brings an extensive background in finance, mergers and acquisitions and corporate governance. He will be a tremendous asset to Worthington Steel as we continue to grow.

As I conclude my remarks, I want to reiterate the cautious optimism we mentioned last quarter. We still sense a bit of uncertainty around policy and the overall macro economy, but our team continues to find ways to win. We are improving our processes and gaining market share, we are embracing AI to unlock even more potential in our business, and I firmly believe we have the right strategy, strong customer relationships and most importantly, the right people.

Although we have only been a stand-alone company for 18 months, we are celebrating 70 years of heritage this year. And for me, that means celebrating the people who fuel our momentum. Our employees are the true strength behind Worthington Steel. Together, we are building the most innovative, customer-focused and efficient steel processor in North America and beyond, one that's purpose-built for the next 70 years.

Now I'll turn it over to Tim Adams to walk through the financials.

Thank you, Geoff, and good morning, everyone. For the fourth quarter, we are reporting earnings of $55.7 million or $1.10 per share as compared with earnings of $53.2 million or $1.06 per share in the prior year quarter. There were several unique items that impacted our quarterly results.

First, the current quarter results include $1.7 million or $0.01 per share of pretax restructuring charges related to 2 discrete items. The first was $800,000 of severance expense associated with our previously announced closure of Worthington Samuel Coil Processing toll pickling facility in Cleveland. Production at the Cleveland pickling facility effectively ended in May.

The second discrete item was a restructuring expense of $900,000 associated with the previously announced early retirement program at our tailor-welded blanks joint venture. Additionally, in the current quarter, we recognized a $4 million gain in miscellaneous income associated with a currency hedge on the Sitem purchase price.

Finally, the prior year quarter results included recognition of the final unfavorable tax court ruling related to a Tempel pre-acquisition matter for which we were indemnified by the former owners of Temple.

The net impact to earnings is 0. However, we recognized $2.8 million of miscellaneous income related to the indemnity receivable and an additional $2.8 million of tax expense. Excluding these unique items, we generated earnings of $1.05 per share in the current quarter, compared with $1.06 per share in the prior year quarter.

In the fourth quarter, we had estimated pretax inventory holding gains of $20.8 million or $0.31 per share, compared to estimated pretax inventory holding losses of $3.4 million or $0.05 per share in the prior year quarter, a favorable pretax swing of $24.2 million or $0.36 per share.

In the fourth quarter, we reported adjusted EBIT of $70.1 million, which was down $300,000 from the prior year quarter adjusted EBIT of $70.4 million. This decrease in adjusted EBIT is primarily due to lower gross margin and lower equity earnings at Serviacero, partially offset by a year-over-year decrease in SG&A expense.

Gross margin was $4 million lower than the prior year quarter, primarily due to unfavorable tolling margins, offset by increased direct spreads. Toll processing margins were down $8.1 million, impacted by lower toll volumes and an unfavorable toll processing mix.

Direct volume was flat year-over-year, while direct spreads were up $3.4 million, primarily due to the impact of year-over-year pretax inventory holding gains. Direct spreads, excluding the impact of estimated holding gains were down primarily due to a shift in direct product mix to lower value-added products and market compression in the spread between hot-rolled products and higher value-added products.

SG&A decreased $4.8 million over the prior year fourth quarter, primarily due to a $3.3 million decrease in compensation and benefit costs as well as lower bad debt expense. In the prior year, we recognized $1.7 million of bad debt expense due to an isolated matter as compared with $100,000 of income in the current year quarter.

Equity earnings from Serviacero decreased due to lower direct volumes and spreads as well as the impact of exchange rate movements.

Next, I will provide some perspective on our market and our shipments. The market pricing for hot-rolled coil began the calendar year at just under $700 per ton. Once steel tariffs of 25% were implemented, the price of hot-rolled jumped to $950 per ton in March and April, but dropped back to approximately $850 per ton in June. With the recent announcement of 50% tariffs on imported steel, we may see additional upward pressure on steel prices.

Given that many of our contracts use lagging index-based pricing mechanisms, we expect to generate inventory holding gains in the first quarter of fiscal 2026. We estimate those gains could be approximately $5 million to $10 million as compared with the $20.8 million of estimated holding gains in the fourth quarter of 2025.

Net sales in the quarter were $833 million, down $78 million or 9% from the prior year quarter, primarily due to lower direct selling prices and, to a lesser extent, lower toll volumes and an unfavorable toll processing mix. We shipped approximately 982,000 tons during the quarter, which was down 5% compared with the prior year quarter.

Direct sales volume made up 60% of our mix in the current year quarter as compared with 58% in the prior year quarter. Direct sales volume was flat compared with the prior year quarter, and we experienced pluses and minuses across various markets as customers continue to navigate uncertainty during the quarter.

Automotive was a bright spot during the current quarter. Our shipments to the automotive market were up 5% compared to the prior year quarter. As we noted in prior quarters, we have won share in the automotive market. The new programs have begun to ship, and we expect to show incremental volume from the new programs over the next few quarters. This additional automotive volume more than offset the continued year-over-year challenges faced by one of our Detroit 3 OEM customers. We continue to be optimistic the OEM is making progress towards optimizing their commercial strategy, leading to a more normal build schedule later in calendar 2025.

Similar to last quarter, our year-over-year shipments to the remaining D3 grew despite a small drop in OEM unit production. Our teams continue to work collaboratively with our automotive customers to deliver mutually beneficial solutions. We look forward to expanding our long-term relationships with our automotive customers.

We also saw volume increases in the heavy truck market due to market share gains despite an apparent slowdown in the truck and trailer market. These results reflect our successful execution in targeted markets, particularly where we pursue a strategy to support key customers.

Volume increases in the automotive and heavy truck markets were offset by reductions in the construction and ag markets. Construction volume was down 5% year-over-year, but consistent with historic fourth quarter levels. Our ag volumes were down 40% compared with the prior year quarter, primarily due to the expected softness in the agricultural equipment market as well as increased competition in the grain bin sector, resulting in spread compression. While tariffs have introduced additional uncertainty and competition has intensified in the ag market, we responded with strategic pricing discipline and remain well positioned to adapt quickly as conditions evolve.

Toll processing tons were down 11% year-over-year for several reasons. First, we saw slowness in some automotive tolling programs that are platform-specific. Second, we began to show a reduction in volume associated with the wind down of Worthington Samuel Coil Processing toll pickling facility in Cleveland, which we idled in Q4.

Finally, we were impacted by several customer decisions. For example, one customer changed the program from toll processing to direct sale, while another customer elected to resource a toll processing program to capture freight savings. When end market demand picks up, we expect our toll processing volumes to increase. However, as we discussed last quarter, we expect to see a decrease of approximately 100,000 annual toll processing tons primarily as a result of the WSCP consolidation from Cleveland to Twinsburg.

Turning to cash flows and the balance sheet. Cash flow from operations was $54 million and free cash flow was $8 million. During the quarter, we spent $46 million on capital expenditures related to a variety of projects, including the previously announced electrical steel expansions. In addition, we purchased a building for our Columbus, Ohio headquarters and expect to move into the building next summer when renovations are complete.

Capital expenditures for fiscal 2025 totaled $130.4 million and we expect CapEx for fiscal 2026 to be approximately $100 million. Our disciplined capital investments are aligned with long-term priorities, particularly in electrical steel and maintaining our key equipment in market-ready condition to support growth and customer needs even in uncertain markets. On a trailing 12-month basis, we generated $100 million of free cash flow.

Wednesday, we announced a quarterly dividend of $0.16 per share payable on September 26, 2025. We ended the quarter with $38 million of cash and our outstanding debt as of May 31 was $152 million, resulting in net debt of $114 million. The increase in net debt over the third quarter of fiscal 2025 is primarily the result of our funding of the Sitem acquisition with the funds held in restricted cash as of May 31. We closed on the Sitem acquisition on June 3, acquiring a 52% controlling ownership interest. With this addition, we broadened our electrical steel capabilities and customer base in Europe. Sitem will be consolidated in our results going forward.

Integration is already underway with joint teams identifying commercial and operational synergies. We are confident the integration is progressing as planned and view Sitem as a natural extension of our electrification growth strategy. Thank you to both the Sitem and Worthington teams for their hard work to finalize the transaction.

Finally, I would like to say thank you to everyone at Worthington Steel for making safety the highest priority at every facility and for driving results in a dynamic market. With a strong balance sheet, a focused strategy and an agile team, Worthington Steel is well equipped to create value and act decisively as opportunities arise. I want to thank our entire team for their hard work during our first full year as an independent company, and for their dedication to our philosophy and our shareholders.

At this point, we will be happy to take your questions.

[Operator Instructions] Our first question comes from the line of Samuel McKinney with KeyBanc Capital Markets.

Congrats on the great quarter. Starting on fourth quarter gross margin, up nearly 350 basis points quarter-on-quarter, and it was the best figure you guys have posted in 2 years. Talk us through how you achieved the richer mix of direct tons and stronger metal spreads despite the macro headwinds that you're still facing in some key end markets.

Well, Sam, this is Tim. Let's parse that a little bit. So fourth quarter in terms of volume is typically our strongest quarter, right? So when you look year-over-year, we were fairly flat on volume, but quarter-over-quarter, we were up quite a bit, right? And I think that's an indication of the market is solid across a lot, right? It's not hugely up or hugely down, but solid across a lot of industries.

I think when it comes to the spreads or the gross margin, I think you have to back out inventory holding gains and losses. So once you do that, I think what we saw was spread compression in both quarters, Q3 and Q4 because of product mix. We had a richer product mix in Q3 versus Q4. And year-over-year, we had a richer product mix in the prior year.

I think the other same thing you're seeing there is you're seeing compression on market spreads from a -- just a high value-add versus hot-rolled, so hot dip to hot-rolled spread or cold rolled to hot-rolled spreads. So you're seeing some compression there.

And that leads into my next question, which is that galvanized spreads, like you said, still relatively compressed with demand still cautious on tariff uncertainty, interest rates? And how do you view that market as we move into fiscal year '26?

Yes, cautiously optimistic. You'll hear that a lot, unfortunately, Sam. But look, we're in a period where there's not a lot of clarity with the tariffs. Because of the tariffs and not having a lot of clarity, you're not seeing much movement on interest rates either. So demand has been a bit muted across several markets that use a lot of galvanized. At the same time, there's been 4.5 million tons of galvanized capacity that's been added over the last several years, and you had quite a bit of imports coming in.

So that's certainly compressed that spread you're referring to between hot rolled and galvanized, and it just creates a more competitive environment. I think we're working through that and why I'm cautiously optimistic, we'll begin to see improvements there.

And it's really a couple of things. I think when we put the 25% tariffs in place, that didn't have a very significant impact on market pricing or on imports, raising that to 50%, certainly will. At the same time, a lot of antidumping cases that have been pushed through, and that's going to limit the amount of galvanized coming in as well. So just those things alone, you'll start to see that spread recover.

And then as we work through the tariffs, and I believe firmly, we will, but we're not going to see any significant movement on interest rate cuts until that's done. But as we move through that, we certainly are going to start to see demand pick up. You got the big beautiful bill coming behind it. And so there's money to be spent, things will pick up, and that certainly will help drive that spread as well.

Okay. And then last one for me. I know throughout the course of fiscal year '25, you guys dealt with some destocking from the automotive OEMs. With the understanding that they're probably not going to build up a huge amount of inventory anytime soon. I mean how can you guys continue to be successful in that end market? I know you noted the new market share wins.

Yes. Good question, Sam. Fortunately, and not a surprise, we clearly are watching forecasts closely, historical forecasts. We get great information on build rates. We had sales and operation planning meetings. And so to your point, we didn't see or feel any type of significant pull ahead this quarter. And the reality is if you look at the Detroit 3 is the easy example I can get, whether it be Ford or GM or Stellantis, this is all published publicly, build rates were down quite a bit. And we were down less than half.

And why we performed well this quarter as far as volume goes, specifically in that market, which was up 5% automotive, is market share gains. Our team, again, I gave them high praise in my comments. We've been talking about this over the last few quarters. We picked up significant market share in automotive. And we will continue over the next few quarters to see that additional market share trickle in. And we had also mentioned one of our larger customers was struggling a little bit. They were late on several launches, and they were not nearly as aggressive as others on pricing and incentives and it cost market share. We saw a bit of a rebound here last month from that customer. And so far into this month, I think, again, cautiously optimistic there. It's going to continue to progress, but it's going to take a few quarters. But that's why our volume was very strong, specifically to automotive.

And in addition, again, not necessarily this quarter, but as you look out in the future, that specific OEM buys the most of our value-added products. And the Tier 1s we support that by a significant amount of value-added products support that specific customer. So Tim talks about mix. We're cautiously optimistic as we start moving into second and third quarter, along with the volume, we can start seeing a more favorable product mix. I don't anticipate a great deal that right now. Again, that will trickle in over the quarters to come, Sam.

Our next question comes from the line of John Tumazos with John Tumazos Very Independent Research.

Could you describe the competitive dynamics in the tailor-welded blanks business? Who else makes them besides ArcelorMittal? Are there trading companies in that business? I'm surprised that you have to take early retirements there.

Yes, John, so interesting market. There are several players globally, not several players in North America. Obviously, there's ArcelorMittal Tailored Blanks, and then there's Worthington Steel with tailor-welded blanks. And it's not an area where the trading partners would play. You're familiar with this business, it is highly technical. So the barriers of entry are high, which is why I don't think you've seen a significant amount of players in North America.

That business is truly specific to part consolidation and lightweighting. And we've seen significant growth at tailor-welded blanks really specifically over the last 5 years, I would tell you, AMTB has seen the same with significant focus on lightweighting over the last 10 years, you're just continuing to see more and more of those specialized parts going into the body in white.

And the future is bright for both AMTB and I think -- well, not think, I know for TWB as well with ultra-high strength steels and specifically press hardened steels, those parts are becoming more sought after. And AMTB was able to work with their research and development team on a process to adjoin high-strength parts. You recall, we mentioned 3 months ago that we reached a licensing agreement with them for what's called the ablation process. That's what's used to weld press hardened steel together. So the OEMs certainly want more than one player. We knew that AMTB knew that. So it's a wonderful opportunity for us both to pursue competitively.

Why that's growing? If you look at the nature of that product, John, and again, I talk about it being highly technical. This press hardened steel is heated up to temperatures that make it much more formidable. And then when it goes through the actual hot stamping, it retains its strength. And why that's important, you're able to take what several parts today and now create one, and one that's lighter. And so there are savings on the weight that the customer is buying, freight that they're paying and scrap.

And then when it gets to the assembly line, it takes out significant cost for the automotive company because you're assembling one part versus what was several parts. And it's a critical component, and this is probably the most important. There's huge safety concerns. It's a critical part of the body in white.

And what it will do is it protects the passenger and the battery if there is to be any type of crash. And then further, because of the lightweighting, you're taking out significant miles per gallon in the vehicle. So a lot less emissions, if it's an internal combustion engine. If it's hybrid or battery electric, obviously, range is important and lighter weight will increase range. But that's why those products are becoming so popular.

So if the products are growing, why are you thinning out your people?

I didn't understand that, John. Could you repeat that for me, please?

You described how the products are growing. So then why were you taking early retirements?

TWB?

Yes.

TWB took early retirements simply because we've made a couple of significant acquisitions in there. And John, part of the part -- part of your assumptions making any acquisitions is SG&A. You know our philosophy, and we tried to stick to our philosophy. That's never something that we want to cut too deep into. We like to embrace the companies that we buy. It takes time, John, to identify top talent. And rather than going in and with an impulsive RIF or putting a family in stress, this is a way to go about doing that, that much more aligns with our philosophy.

And as this grows, again, we just got the license, John. We've just put our first ablation line in. So certainly, there will be that opportunity for the business to grow. And as it grows, and we need to scale up, we won't have a problem doing so.

I will now turn the call back over to Geoff Gilmore, President and CEO, for any closing remarks.

First, again, I want to thank our team for an exceptional job. I could not be more proud of all of them. We are exceeding my expectations, which are high for myself and the team and truly appreciate everybody that's been listening in today and asking questions and showing interest in Worthington Steel. We had an exceptional quarter. Again, I want to continue to use cautiously optimistic, but our base business has never been stronger. And as we work through some of the headwinds that we faced, we are well positioned to take advantage of any opportunity in the growth that's coming. Thank you.

And that concludes our call today. Thank you all for joining. You may now disconnect.