Q1 2027 Worthington Enterprises Inc Earnings Call

Speaker #1: 27, Q1 earnings call. After today's prepared remarks, we will host a Q&A session. If you would like to ask a question, please press *1 to raise your hand.

Speaker #1: To withdraw your question, press *1 again. I will now hand the conference over to Marcus Rogier. Treasurer and Investor Relations Officer. Marcus, please go ahead.

Speaker #2: Thank you, Paige. Good morning, everyone, and thank you for joining us for Worthington Enterprises' Q1 2027 earnings call. On the call today are Joe Hayek, our President and Chief Executive Officer, and Colin Souza, our Chief Financial Officer.

Speaker #2: Before we begin, I'd like to remind everyone that certain statements made during today's call are forward-looking in nature and subject to risk and uncertainties, that could cause actual results to differ materially from those expressed or implied.

Speaker #2: For more information on these risk and uncertainties, please refer to our earnings release issued yesterday after the market closed, which is available on the Investor Relations section of our website.

Speaker #2: Additionally, our remarks today will include references to non-GAAP financial measures, reconciliations of these measures to the most directly comparable GAAP measures, can also be found in the earnings release.

Speaker #2: Today's call is being recorded, and a replay will be available later on our website at worthingtonenterprises.com. With that, I'll turn the call over to Joe for opening remarks.

Speaker #3: Thank you, Marcus. Good morning, everyone. Welcome to Worthington Enterprises' 2027 Q1 earnings call. We had a strong start to 2027. While we faced some market and operating headwinds, our team continued to execute, serve our customers, and make progress on our strategic initiatives.

Speaker #3: I want to thank my colleagues around the world for the focus, creativity, and grit they bring to Worthington every day. In Q1, we grew sales by 13% year over year, including 7% organically.

Speaker #3: Adjusted EBITDA increased by 10% to $74 million, and we generated $54 million of free cash flow, nearly double the prior year quarter. Adjusted EPS was $82, compared with $78 a year ago.

Speaker #3: We continued to deploy capital thoughtfully in the quarter, including the repurchase of $335,000 shares of our common stock. While we're pleased with our progress, the quarter was not without challenges.

Speaker #3: Building performance solutions, as we anticipated, faced headwinds in our cooling and construction business. As channel inventories were right-sized and new home sales were muted, demand for a newly mandated A2L refrigerant cylinders is lower than it was a year ago, creating a difficult comparison.

Speaker #3: Additionally, steel availability across the industry remains tight, and lead times in the quarter were extended. That dynamic created some disruptions in production and scheduling for both cooling and construction and for our balloon tank business.

Speaker #1: Sales increased by 13% year over year, including 7% organically. Adjusted EBITDA increased by 10% to $74 million, and we generated $54 million of free cash flow, nearly double the prior year quarter.

Speaker #3: Our teams are actively working through these issues every day, prioritizing our customers and ensuring that we are the best partner that we can be.

Speaker #1: Justin, EPS was $82 compared with $78 a year ago. We continued to deploy, including the repurchase of 335,000 shares of our common stock. While we're pleased with our progress, the quarter was not without challenges.

Speaker #3: While we face some headwinds in the quarter, our performance was a reflection of our business's and our people's resilience. Creating specialty solutions delivered strong sales and EBITDA growth as that team continues executing at a high level.

Speaker #1: Building Performance Solutions, as we anticipated, faced headwinds in our Cooling and Construction business. As channel inventories were right-sized and new home sales were muted, demand for newly mandated A2L refrigerant cylinders is lower than it was a year ago, creating a difficult comparison.

Speaker #3: Our water business is performing very well, as our 80/20 work matures and helps us focus on resources on the products and opportunities that create the most value.

Speaker #3: Wave and Clark Detrick also delivered higher equity earnings, and were important contributors in the quarter. When we optimize and grow Worthington, our strategy is not complicated.

Speaker #1: Additionally, steel availability across the industry remains tight, and lead times in the quarter were extended. That dynamic created some disruptions in production and scheduling for both cooling and construction, and for our balloon tank business.

Speaker #3: We're leveraging the Worthington Business System, transformation to improve our businesses, disciplined M&A to add capabilities and strengthen our portfolio, and innovation to grow organically where we have attractive opportunities.

Speaker #1: Our teams are actively working through these issues every day, prioritizing our customers and ensuring that we are the best partner that we can be.

Speaker #3: We continue to use 80/20 to optimize our businesses. As we sharpen our focus, improve working capital, and allocate resources, where they matter most. We've seen meaningful progress in our water business and are now extending that discipline into our portable fuel and torch businesses.

Speaker #1: While we face some headwinds in the quarter, our performance was a reflection of our business's and our people's resilience. Creating specialty solutions delivered strong sales and even thought growth, as that team continues executing at a high level.

Speaker #3: We're also continuing to improve productivity through automation, AI-enabled tools, and other transformation initiatives. We remain disciplined about growth through M&A, and we're focused on opportunities where we believe we can bring unique advantages as an owner and create long-term value.

Speaker #1: Our water business is performing very well, as our 80/20 work matures and helps us focus our resources on the products and opportunities that create the most value.

Speaker #1: Wave and Clark Detrick also delivered higher equity earnings and were important contributors in the quarter. As we optimize and grow Worthington, our strategy is not complicated.

Speaker #3: Our integration of LSI continues to progress well, and there we're focused on reaching more prospective customers and introducing them to LSI's compelling value proposition.

Speaker #1: We're leveraging the Worthington business system, transformation to improve our businesses, disciplined M&A to add capabilities and strengthen our portfolio, and innovation to grow organically where we have attractive opportunities.

Speaker #3: I want to spend a little more time this morning on organic growth, because we're increasingly seeing our innovation capabilities translate into meaningful commercial opportunities.

Speaker #1: We continue to use 80/20 to optimize our businesses as we sharpen our focus, improve working capital, and allocate resources where they matter most. We've seen meaningful progress in our water business and are now extending that discipline into our portable fuel and torch businesses.

Speaker #3: One of the most topical examples of the kind of organic growth opportunities we're trying to create and develop at Worthington is our engineered ASME tanks.

Speaker #3: These engineered tanks have played an important role in commercial buildings across the world for decades. Increasingly, as new chip sets generate significantly more heat, data center designers and operators are embracing liquid cooling.

Speaker #1: We're also continuing to improve productivity through automation, AI-enabled tools, and other transformation initiatives. We remain disciplined about growth through M&A, and we're focused on opportunities where we believe we can bring unique advantages as an owner and create long-term value.

Speaker #3: Engineered tanks like ours help manage the cooling fluid used in liquid cooling systems and, as such, are a critical component of those data centers and the cooling infrastructure.

Speaker #1: Our integration of LSI continues to progress well, and there we're focused on reaching more prospective customers and introducing them to LSI's compelling value proposition.

Speaker #3: We've been a market leader in these engineered ASME tanks for years. A market we believe has consistently been plus or minus 200 million dollars a year for some time.

Speaker #1: I want to spend a little more time this morning on organic growth, because we're increasingly seeing our innovation capabilities translate into meaningful commercial opportunities.

Speaker #3: Given the projected growth in data centers and the increasing adoption of liquid cooling in those data centers, industry sources suggest the market for liquid cooling and thermal management ASME tanks alone could be more than 10 times the size of the legacy market in the next few years.

Speaker #1: One of the most topical examples of the kind of organic growth opportunities we're trying to create and develop at Worthington is our engineered ASME tanks.

Speaker #1: These engineered tanks have played an important role in commercial buildings across the world for decades. Increasingly, as new chipsets generate significantly more heat, data center designers and operators are embracing liquid cooling.

Speaker #3: To grow in and with this important end market, we took capabilities we already had, listened closely to our customers, leveraged our engineering and innovation expertise, and created an emerging suite of liquid cooling and thermal management solutions.

Speaker #1: Engineered tanks like ours help manage the cooling fluid used in liquid cooling systems and, as such, are a critical component of those data centers and their cooling infrastructure.

Speaker #3: As a result, what started as a promising new application for us has quickly developed into an increasingly meaningful growth opportunity. As a reminder, in fiscal 26, we shipped roughly 13 million dollars of ASME tanks for data centers, and the first quarter of fiscal 27, we generated an additional 13 million dollars of revenue from that value stream.

Speaker #1: We've been a market leader in these engineered ASME tanks for years—a market we believe has consistently been plus or minus $200 million a year for some time.

Speaker #1: Given the projected growth in data centers and the increasing adoption of liquid cooling in those data centers, industry sources suggest the market for liquid cooling and thermal management ASME tanks alone could be more than 10 times the size of the legacy market in the next few years.

Speaker #3: Essentially matching what we did in the entire prior fiscal year. Year-term, we believe that our ASME tank revenues will continue to grow sequentially quarter over quarter through the balance of this fiscal year.

Speaker #3: In addition, while this market is in the early stages of development, our pipeline suggests that, one, our solutions can play a meaningful role in this evolving architecture, and two, the market's growth is continuing to accelerate.

Speaker #1: To grow in and with this important end market, we took capabilities we already had, listened closely to our customers, leveraged our engineering and innovation expertise, and created an emerging suite of liquid cooling and thermal management solutions.

Speaker #3: To be clear, a pipeline is not revenue, and there is always some uncertainty around the timing and conversion of these opportunities. But the size and the quality of the opportunities in front of us is encouraging, and we are investing in equipment, engineering talent, and production capacity to support the customers we're sourcing today and the opportunities we see ahead.

Speaker #1: As a result, what started as a promising new application for us has quickly developed into an increasingly meaningful growth opportunity. As a reminder, in fiscal '26, we shipped roughly $13 million of ASME tanks for data centers, and in the first quarter of fiscal '27, we generated an additional $13 million of revenue from that value stream.

Speaker #3: Solid financial results we're generating and the great opportunities ahead of us are a credit to our people. Worthington has always believed that people are our most important asset, and that is as true today as it has ever been.

Speaker #1: Essentially, we are matching what we did in the entire prior fiscal year. Near term, we believe that our ASME tank revenues will continue to grow sequentially, quarter over quarter, through the balance of this fiscal year.

Speaker #3: As an example, we recently named one of America's most innovative businesses for 2027 by Business Insider. Katerina they use included the number and impact of companies' technological innovations, the reputation among peers for fostering innovation, and how the companies' investment in R&D compares to others in their industries.

Speaker #1: In addition, while this market is in the early stages of development, our pipeline suggests that, first, our solutions can play a meaningful role in this evolving architecture; and second, the market's growth is continuing to accelerate.

Speaker #1: To be clear, a pipeline is not revenue, and there is always some uncertainty around the timing and conversion of these opportunities. But the size and quality of the opportunities in front of us is encouraging, and we are investing in equipment, engineering talent, and production capacity to support the customers we're servicing today and the opportunities we see ahead.

Speaker #3: We're also recognized in the quarter by USA Today and Points of Light as one of America's most charitable companies. This honor reflects our deeply rooted commitment to communities where we live and work, including volunteerism and support from the Worthington companies' foundation.

Speaker #3: Much is being asked of our teams. Every day. As we navigate volatile markets, geopolitical instability, inflation, elevated interest rates, supply constraints, and operational challenges, we're very grateful for the way our colleagues continue to prioritize our customers and one another.

Speaker #1: The solid financial results we're generating and the great opportunities ahead of us are a credit to our people. Worthington has always believed that people are our most important asset, and that is as true today as it has ever been.

Speaker #1: As an example, we were recently named one of America's most innovative businesses for 2027 by Business Insider. The criteria they used included the number and impact of companies' technological innovations, the reputation among peers for fostering innovation, and how the companies' investment in R&D compares to others in their industries.

Speaker #3: We're proud of how we started our fiscal year. There's more work to do, but we continue to see tangible evidence that our strategy is working.

Speaker #3: We see it in organic growth driven by innovation. In productivity gains, through transformation. In successful M&A integration, and ultimately, in cash generation. In addition, our end markets, brands, capabilities, and strategy position us exceptionally well to continue driving profitable growth.

Speaker #1: We're also recognized in the quarter by USA Today and Points of Light as one of America's most charitable companies. This honor reflects our deeply rooted commitment to the communities where we live and work, including volunteerism and support from the Worthington Companies' Foundation.

Speaker #3: Most importantly, we have a talented team that cares deeply about each other, our customers, and our company. Before I turn it over to Colin, we'll extend a few more minutes on our financial performance in the quarter, but we'd like to remind everyone that we'll be hosting our investor day in New York on November the 10th.

Speaker #1: Much is being asked of our teams every day as we navigate volatile markets, geopolitical instability, inflation, elevated interest rates, supply constraints, and operational challenges. We're very grateful for the way our colleagues continue to prioritize our customers and one another.

Speaker #3: We're looking forward to discussing our businesses, the opportunities we see for profitable growth, and how we're positioning Worthington Enterprises to create long-term value. We hope you'll join us.

Speaker #1: We're proud of how we started our fiscal year. There's more work to do, but we continue to see tangible evidence that our strategy is working.

Speaker #3: Colin?

Speaker #2: Thank you, Joe. And good morning, everyone. We delivered a strong start to fiscal 2027. Percent organic sales growth, record trailing 12-month free cash flow of 196 million dollars, continued improvement across our trade and specialty solutions businesses, strong performance from our joint ventures, and meaningful progress in several of our strategic growth platforms.

Speaker #1: We see it in organic growth driven by innovation, in productivity gains through transformation, in successful M&A integration, and ultimately in cash generation. In addition, our end markets, brands, capabilities, and strategy position us exceptionally well to continue driving profitable growth.

Speaker #1: Most importantly, we have a talented team that cares deeply about each other, our customers, and our company. Before I turn it over to Colin, we'll spend a few more minutes on our financial performance in the quarter, but we'd like to remind everyone that we'll be hosting our Investor Day in New York on November 10th.

Speaker #2: Yet earnings in Q1 were 87 cents per share compared to 70 cents per share in the prior year period. The current quarter included a net benefit of 5 cents per share from non-recurring and restructuring items, primarily related to a gain realized from a contingent earn-out associated with the sale of our former oil and gas business, which was divested in January of 2021.

Speaker #1: We're looking forward to discussing our businesses, the opportunities we see for profitable growth, and how we're positioning Worthington Enterprises to create long-term value. We hope you'll join us.

Speaker #2: The prior year quarter included 8 cents per share of restructuring and other expenses, excluding these items in both periods, adjusted earnings were 82 cents per share up from 78 cents per share in the prior year quarter.

Speaker #1: Colin?

Speaker #2: Thank you, Joe, and good morning, everyone. We delivered a strong start to fiscal 2027, with 10% organic sales growth, record trailing twelve-month free cash flow of $196 million, continued improvement across our Trade and Specialty Solutions businesses, strong performance from our joint ventures, and meaningful progress in several of our strategic growth platforms.

Speaker #2: Included in adjusted earnings for Q1 was a net pre-tax benefit of approximately 4 million dollars, or 6 cents per share, related to IEPA tariff refunds.

Speaker #2: Consolidated sales increased 13 percent to 344 million dollars, demonstrating continued momentum across the underlying portfolio in addition to the contribution from our recent acquisitions, which added 19 million dollars in net sales for Q1.

Speaker #2: Gap earnings in Q1 were $0.87 per share compared to $0.70 per share in the prior year period. The current quarter included a net benefit of $0.05 per share from non-recurring and restructuring items, primarily related to a gain realized from a contingent earn-out associated with the sale of our former oil and gas business, which was divested in January of 2021.

Speaker #2: Growth profit increased by nearly 11 percent in the quarter, while gross margin was 26.4 percent versus 27.1 percent a year ago. Primarily reflecting lower volumes and less favorable mix in building performance solutions, where cooling and construction faced a particularly difficult prior year comparison.

Speaker #2: The prior year quarter included $0.08 per share of restructuring and other expenses. Excluding these items in both periods, adjusted earnings were $0.82 per share, up from $0.78 per share in the prior year quarter.

Speaker #2: Adjusted EBITDA was 74 million dollars, compared to 67 million dollars in the prior year quarter, while adjusted EBITDA margin was 21.5 percent. Importantly, even excluding the net tariff refunds, adjusted EBITDA increased year over year, reflecting underlying improvement across several of our businesses.

Speaker #2: Included in adjusted earnings for Q1 was a net pre-tax benefit of approximately $4 million, or $0.06 per share, related to IEPA tariff refunds. Consolidated sales increased 13% to $344 million, demonstrating continued momentum across the underlying portfolio, in addition to the contribution from our recent acquisitions, which added $19 million in net sales for Q1.

Speaker #2: On a trailing 12-month basis, adjusted EBITDA increased to 303 million dollars. Turning to our capital allocation, we remain focused on reinvesting in our businesses and pursuing strategic acquisitions, while returning excess cash to shareholders via dividends and share repurchases.

Speaker #2: Gross profit increased by nearly 11% in the quarter, while gross margin was 26.4% versus 27.1% a year ago, primarily reflecting lower volumes and less favorable mix in Building Performance Solutions, where cooling and construction faced a particularly difficult prior year comparison.

Speaker #2: Free cash flow remains one of our most important operating metrics in Q1, demonstrated the strength of our cash generation. Operating cash flow was 67 million dollars, up from 41 million dollars a year ago, while free cash flow increased to 54 million dollars from 28 million dollars, which is our second strongest quarter since becoming Worthington Enterprises, behind Q4 of fiscal 2026.

Speaker #2: Adjusted EBITDA was $74 million, compared to $670,000 in the prior year quarter, while adjusted EBITDA margin was 21.5%. Importantly, even excluding the net tariff refunds, adjusted EBITDA increased year over year, reflecting underlying improvement across several of our businesses.

Speaker #2: Our discipline around cash flow generation was evident again in Q1, supported by effective working capital management across the organization. On a trailing 12-month basis, free cash flow increased to 196 million dollars, representing a 116 percent conversion rate relative to adjusted net earnings, and our highest mark since becoming Worthington Enterprises, this level of cash flow provides us with the flexibility to reinvest in our businesses, pursue additional growth opportunities, and return capital to shareholders, supporting our ability to create value over time.

Speaker #2: On a trailing 12-month basis, adjusted EBITDA increased to $303 million. Turning to our capital allocation, we remain focused on reinvesting in our businesses and pursuing strategic acquisitions, while returning excess cash to shareholders via dividends and share repurchases.

Speaker #2: Free cash flow remains one of our most important operating metrics. In Q1, it demonstrated the strength of our cash generation. Operating cash flow was $67 million, up from $41 million a year ago, while free cash flow increased to $54 million from $28 million. This is our second strongest quarter since becoming Worthington Enterprises, behind Q4 of fiscal 2026.

Speaker #2: Capital expenditures totaled 13 million dollars in the quarter, and we returned capital to shareholders through 9 million dollars in dividends and spent 18 million dollars to repurchase 335,000 shares of our common stock.

Speaker #2: Our joint ventures continue to deliver strong cash generation, providing 36 million dollars in dividends during the quarter, representing 88 percent of equity income. Turning to our balance sheet and liquidity, we closed the quarter with TTM adjusted EBITDA of 303 million dollars and net debt of 250 million dollars.

Speaker #2: Our discipline around cash flow generation was evident again in Q1, supported by effective working capital management across the organization. On a trailing 12-month basis, free cash flow increased to $196 million, representing a 116% conversion rate relative to adjusted net earnings and our highest mark since becoming Worthington Enterprises. This level of cash flow provides us with the flexibility to reinvest in our businesses, pursue additional growth opportunities, and return capital to shareholders, supporting our ability to create value over time.

Speaker #2: We continue to maintain a strong balance sheet with significant financial flexibility to execute our strategy. Yesterday, our board of directors declared a quarterly dividend of 20 cents per share, payable in December 2026.

Speaker #2: Before I turn to segment performance and as a reminder, we recently renamed our two business segments to better reflect the markets they serve, the solutions they provide to customers, and the continued evolution of our portfolio.

Speaker #2: Capital expenditures: We returned capital to shareholders through $9 million in dividends and spent $18 million to repurchase 335,000 shares of our common stock. Our joint ventures continue to deliver strong cash generation, providing $36 million in dividends during the quarter, representing 88% of equity income.

Speaker #2: Building products is now building performance solutions, and consumer products is now trade and specialty solutions. While the names have changed, the composition of the segments and our historical financial results remain unchanged.

Speaker #2: Turning to our balance sheet and liquidity, we closed the quarter with trailing twelve months adjusted EBITDA of $303 million and net debt of $250 million. We continue to maintain a strong balance sheet with significant financial flexibility to execute our strategy.

Speaker #2: In building performance solutions, Q1 net sales grew 16 percent year over year to 215 million dollars, up from 185 million dollars in the prior year quarter.

Speaker #2: Recent acquisitions contributed 19 million dollars of net sales in the quarter, while organic sales increased 6 percent, driven by primarily by strength in our water and European businesses, partially offset by lower revenue in our cooling and construction business.

Speaker #2: Yesterday, our Board of Directors declared a quarterly dividend of $0.20 per share, payable in December 2026. Before I turn to segment performance, and as a reminder, we recently renamed our two business segments to better reflect the markets they serve, the solutions they provide to customers, and the continued evolution of our portfolio.

Speaker #2: Adjusted EBITDA was essentially flat at 60 million dollars, compared to the prior year quarter, with an adjusted EBITDA margin of 27.8 percent. As Joe mentioned, the year-over-year comparison for building performance solutions was impacted by the normalization of demand in cooling and construction following the A2L refrigerant transition, as well as less favorable product mix.

Speaker #2: Building Products is now Building Performance Solutions, and Consumer Products is now Trade and Specialty Solutions. While the names have changed, the composition of the segments and our historical financial results remain unchanged.

Speaker #2: Tight steel availability and extended lead times also created production scheduling and shipment timing challenges during the quarter. We continue to view the A2L impact as a timing and comparison issue rather than a structural change in the business.

Speaker #2: In building performance solutions, Q1 net sales grew 16% year-over-year to $215 million, up from $185 million in the prior year quarter. Recent acquisitions contributed $19 million of net sales in the quarter, while organic sales increased 6%, driven primarily by strength in our water and European businesses, partially offset by lower revenue in our cooling and construction business.

Speaker #2: Importantly, adoption remains strong and continued installation of A2L equipment supports current demand for our product, while also building and installed base that we believe will create an attractive, long-term service and replacement opportunity.

Speaker #2: Adjusted EBITDA was essentially flat at $60 million compared to the prior-year quarter, with an adjusted EBITDA margin of 27.8%. As Joe mentioned, the year-over-year comparison for Building Performance Solutions was impacted by the normalization of demand in cooling and construction following the A2L refrigerant transition, as well as a less favorable product mix.

Speaker #2: Our teams have worked diligently and prioritized customer needs throughout this period, while positioning the business to benefit as the temporary headwinds normalize. We are particularly encouraged by the accelerating opportunity in our water business, where demand for engineered ASME tanks supporting liquid cooling applications for data centers continues to grow.

Speaker #2: As Joe discussed, this is becoming an increasingly meaningful organic growth platform for Worthington. Wave delivered another record quarter, with equity income increasing approximately 3 million dollars year over year to 35 million dollars.

Speaker #2: Tight steel availability and extended lead times also created production scheduling and shipment timing challenges during the quarter. We continue to view the A2L impact as a timing and comparison issue rather than a structural change in the business.

Speaker #2: Clark Dietrich also improved, with equity income increasing more than 1 million dollars year over year to 7 million dollars, despite commercial construction activity outside of data centers remaining relatively soft.

Speaker #2: Importantly, adoption remains strong, and continued installation of A2L equipment supports current demand for our product, while also building an installed base that we believe will create an attractive, long-term service and replacement opportunity.

Speaker #2: We are pleased with the performance of LSI and continue to see attractive opportunities to expand the scale, profitability, and diversification of our building performance solutions platform.

Speaker #2: Our teams have worked diligently and prioritized customer needs throughout this period, while positioning the business to benefit as the temporary headwinds normalize. We are particularly encouraged by the accelerating opportunity in our water business, where demand for engineered ASME tanks supporting liquid cooling applications for data centers continues to grow.

Speaker #2: In trade and specialty solutions, Q1 net sales grew 8 percent year over year to 129 million dollars, up from 119 million dollars in the prior year quarter, driven by a combination of higher overall volumes and average selling prices.

Speaker #2: As Joe discussed, this is becoming an increasingly meaningful organic growth platform for Worthington. WAVE delivered another record quarter, with equity income increasing approximately $3 million year over year to $35 million.

Speaker #2: Adjusted EBITDA increased to 24 million dollars, from 16 million dollars in the prior year quarter, while adjusted EBITDA margin expanded to 18.6 percent, from 13.6 percent.

Speaker #2: The improvement in profitability reflected higher sales, pricing, and improved manufacturing performance, along with the net benefit from a EBIT tariff refund we discussed earlier.

Speaker #2: Clark Detrick also improved, with equity income increasing by more than $1 million year-over-year to $7 million, despite commercial construction activity outside of data centers remaining relatively soft.

Speaker #2: Importantly, underlying profitability improved excluding the tariff benefit, particularly in our tools and portable fuel businesses. We were pleased with the performance of the segment, which continues to demonstrate the resilience of our portfolio of market-leading brands.

Speaker #2: We are pleased with the performance of LSI and continue to see attractive opportunities to expand the scale, profitability, and diversification of our Building Performance Solutions platform.

Speaker #2: In Trade and Specialty Solutions, Q1 net sales grew 8% year over year to $129 million, up from $119 million in the prior year quarter, driven by a combination of higher overall volumes and average selling prices.

Speaker #2: Looking ahead, we remain focused on driving profitable organic growth through the Worthington business system, including continued innovation and transformation across the segment, along with opportunities to expand distribution.

Speaker #2: We've seen good results from 80/20 in our water business, and we're now applying those same principles to portable fuel and torch to simplify the portfolio, improve mix, and drive sustainable margin improvement.

Speaker #2: Adjusted EBITDA increased to $24 million from $16 million in the prior-year quarter, while adjusted EBITDA margin expanded to 18.6% from 13.6%. The improvement in profitability reflected higher sales, pricing, and improved manufacturing performance, along with the net benefit from IEPA tariff refunds we discussed earlier.

Speaker #2: Overall, we are encouraged by our start to fiscal 2027. We are driving continued organic growth through innovation and solid execution, improving performance across several of our wholly owned businesses, strong contributions from our joint ventures, and growing and attractive end markets like data centers, all while generating near record cash flows.

Speaker #2: Importantly, underlying profitability improved, excluding the tariff benefit, particularly in our Tools and Portable Fuel businesses. We were pleased with the performance of the segment, which continues to demonstrate the resilience of our portfolio of market-leading brands.

Speaker #2: These results provide further evidence that our strategy is working. Looking ahead, we see multiple opportunities to strengthen earnings through continued execution, maturing 80/20, normalization in cooling and construction, growth in higher value applications, continued progress integrating recent acquisitions and continued productivity improvements through the Worthington business system.

Speaker #2: Looking ahead, we remain focused on driving profitable organic growth through the Worthington business system, including continued innovation and transformation across the segment, along with opportunities to expand distribution.

Speaker #2: We've seen good results from 80/20 in our Water business, and we're now applying those same principles to Portable Fuel and Torch to simplify the portfolio, improve mix, and drive sustainable margin improvement.

Speaker #2: We believe these initiatives are improving the quality, sustainability, and trajectory of our earnings and cash flows, strengthening our ability to invest for growth, and create long-term value for our shareholders.

Speaker #2: Overall, we are encouraged by our start to fiscal 2027. We are driving continued organic growth through innovation and solid execution, improving performance across several of our wholly owned businesses, strong contributions from our joint ventures, and growing and attractive end markets like data centers—all while generating near-record cash flows.

Speaker #2: With that, we're happy to take your questions.

Speaker #1: We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand.

Speaker #1: To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question, to allow for optimum sound quality.

Speaker #2: These results provide further evidence that our strategy is working. Looking ahead, we see multiple opportunities to strengthen earnings through continued execution, maturing 80/20, normalization in Cooling and Construction, growth in higher-value applications, continued progress integrating recent acquisitions, and continued productivity improvements through the Worthington Business System.

Speaker #1: If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Brian Biros, with Thompson Research Group.

Speaker #1: Your line is open. Please go ahead.

Speaker #2: We believe these initiatives are improving the quality, sustainability, and trajectory of our earnings and cash flows, strengthening our ability to invest for growth and create long-term value for our shareholders.

Speaker #3: Hey, good morning, everyone. Thanks for taking my questions today.

Speaker #4: Morning, Brian. Brian.

Speaker #3: I want to morning. I want to start with a question just about the steel market overall. You mentioned it's tight, lead times extended. Not the ideal supply chain setup, but Worthington should be in a position to, I guess, navigate that better than almost every other competitor you guys have.

Speaker #2: With that, we're happy to take your questions.

Speaker #1: We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand.

Speaker #3: So maybe help us understand kind of where things stand today in the field and kind of what Worthington can do that others can't, to navigate that.

Speaker #1: To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality.

Speaker #1: If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Brian Biros with Thompson Research Group.

Speaker #4: Sure. Right. Brian, it's a very topical, good question, and steel market has absolutely tightened we are seeing longer lead times and certainly price of steel has come up in certain areas.

Speaker #4: You probably well, it did start last fall when the 232 tariffs on imported raw steel doubled. That really chilled imports, and since then, you've seen the price of steel creep steadily up, and the market started to see some lead times get extended.

Speaker #1: Your line is open. Please go ahead.

Speaker #3: Hey, good morning, everyone. Thanks for taking my questions today. I want to say morning. I want to start with a question just about the steel market overall.

Speaker #3: You mentioned it's tight—lead times have been extended. Not the ideal supply chain setup, but Worthington should be in a position to, I guess, navigate that better than almost every other competitor you guys have.

Speaker #4: That was certainly the case in Q1. But as you say, tight markets can create challenges, but they're also environments where we think some of our capabilities really do matter.

Speaker #4: We're a pretty sophisticated buyer of steel. We have very strong supplier relationships, and we have a broad manufacturing footprint. It gives us additional options to manage through periods of constrained supply.

Speaker #3: So maybe help us understand kind of where things stand today in the field, and what Worthington can do that others can't to navigate that.

Speaker #4: So we've been actively managing in that environment, but looking across suppliers, products, and our network to customers and maintaining access to materials, when it's been appropriate.

Speaker #2: Sure. Right. Brian, it's a very topical, good question. And the steel market has absolutely tightened. We are seeing longer lead times, and certainly, the price of steel has come up in certain areas.

Speaker #4: We have taken pricing actions as well since input costs have increased the way that they did. So the availability was a headwind for us in Q1, particularly as we mentioned in going into construction and balloon time.

Speaker #2: You're probably aware, it did start last fall when the 232 tariffs on imported raw steel doubled. That really chilled imports, and since then, you've seen the price of steel creep steadily up.

Speaker #2: And the market started to see some lead times get extended. That was certainly the case in Q1. But, as you say, tight markets can create challenges, but they're also environments where we think some of our capabilities really do matter.

Speaker #4: We do think that we're better positioned going forward, certainly through the end of the calendar year. Beyond that, we have limited visibility. That doesn't mean we don't necessarily think that it'll get worse again beyond that, but as I said, we just don't have a lot of great visibility kind of into the new calendar year.

Speaker #2: We're a pretty sophisticated buyer of steel. We have very strong supplier relationships, and we have a broad manufacturing footprint. It gives us additional options to manage through periods of constrained supply.

Speaker #4: We ultimately think about that as it probably costs us a few million dollars in the quarter.

Speaker #2: So we've been actively managing in that environment by looking across suppliers, products, and our network to be sure that we're serving customers and maintaining access to materials when it's been appropriate.

Speaker #3: I've got a couple. Thank you. And follow-up, I guess, would be on maybe on the JV wave. Up 8 percent. Great to see on a already pretty strong comp anyway.

Speaker #3: So maybe some more clarity on kind of what the driving factor for that was, if that's data center demand starting to flow through distribution yet?

Speaker #2: We have taken pricing actions as well, since input costs have increased the way that they did. So, availability was a headwind for us in Q1, particularly as we mentioned, going into construction and balloon time.

Speaker #3: Is that pricing just from steel? Maybe just strong core end markets? More commentary on kind of the demand for that would be helpful. Thank you.

Speaker #2: We do think that we're better positioned going forward, certainly through the end of the calendar year. Beyond that, we have limited visibility. That doesn't mean we necessarily think that it'll get worse again beyond that.

Speaker #4: Yep. Sure, Brian. So wave, as you mentioned, another really excellent quarter. Delivering record equity income, 35 million dollars in. We continue to be very pleased with the performance of that business and the team there.

Speaker #2: But as I said, we just don't have a lot of great visibility into the new calendar year. We ultimately think about that as it probably costs us a few million dollars in the quarter.

Speaker #4: The end markets at wave, they remain generally stable. Although performance varies by sector. So education, healthcare, transportation, and as you mentioned, data centers continue to remain healthy, and drive volume while channels like retail and office are a little more muted.

Speaker #3: I've got a couple. Thank you. And a follow-up, I guess, would be maybe on the JV wave—up 8%. Great to see on an already pretty strong comp anyway.

Speaker #3: So maybe some more clarity on what the driving factor for that was—if that's data center demand starting to flow through distribution yet?

Speaker #4: So wave also does benefit from meaningful exposure to repair and remodel activity. Which tends to be more resilient than the new commercial construction space.

Speaker #3: Is that pricing just from steel? Maybe just strong core end markets? More commentary on the demand for that would be helpful. Thank you.

Speaker #4: So they're a little insulated there, which is good. The team continues to really innovate around solutions that help contractors reduce labor and improve installation efficiency, and that's always going to be valuable in the market.

Speaker #2: Yes, sure, Brian. So Wave, as you mentioned, had another really excellent quarter, delivering record equity income of $35 million. We continue to be very pleased with the performance of that business and the team there.

Speaker #4: And they continue to create meaningful value for their customers that way, and that supports the attractive economics of the business. And so more broadly, wave is just a great example of the types of businesses that we like to own.

Speaker #2: The end markets at Wave remain generally stable, although performance varies by sector. Education, healthcare, transportation, and, as you mentioned, data centers continue to remain healthy.

Speaker #4: There are market leader and attractive niche, with strong customer relationships. Differentiated products, and the ability to perform very well across different market environments. And as we look into Q2, there is normal seasonality to the business.

Speaker #2: And drive volume, while channels like retail and office are a little more muted. So WAVE also does benefit from meaningful exposure to repair and remodel activity.

Speaker #4: Q1's a strong quarter for them always. During the year, but we would expect as we look into Q2, some sequential moderation, but overall, they remain very healthy, and we're very confident in the team there.

Speaker #2: Which tends to be more resilient than the new commercial construction space, so they're a little insulated there, which is good. The team continues to really innovate around solutions that help contractors reduce labor and improve installation efficiency.

Speaker #2: And that's always going to be valuable in the market. They continue to create meaningful value for their customers that way, and that supports the attractive economics of the business.

Speaker #3: Great. Thank you.

Speaker #1: Your next question comes from the line of Walt Liptak, with Seaport Research. Your line is open. Please go ahead. Go ahead.

Speaker #2: And so, more broadly, Wave is just a great example of the types of businesses that we like to own. They are a market leader in an attractive niche, with strong customer relationships.

Speaker #5: Hi. Thanks. Good morning, guys. And good quarter. I wanted to ask about the data center product, and it sounds like you hit the targets that you set out to get the 13 million.

Speaker #2: Differentiated products, and the ability to perform very well across different market environments. And as we look into Q2, there is normal seasonality to the business.

Speaker #5: I wonder if you can talk about just the experience during the quarter, any as you're going through any ramp costs or productivity that you're working through, and as you've been able to maintain and come out with a new ASME products, are you able to get more visibility beyond kind of what you've talked about in the past, which is getting to kind of that run rate of 13 million in revenue per quarter?

Speaker #2: Q1 is always a strong quarter for them. During the year, we would expect, as we look into Q2, some sequential moderation. But overall, they remain very healthy, and we're very confident in the team there.

Speaker #3: Great. Thank you.

Speaker #1: Your next question comes from the line of Waltz Liptic with Seaport Research. Your line is open. Please go ahead.

Speaker #4: Sure. Well, good morning. You're we're talking here about ASME tanks that people aren't sure if that's stands for the American Society of Mechanical Engineers.

Speaker #4: Hi, thanks. Good morning, guys, and good quarter. I wanted to ask about the data center product. It sounds like you hit the targets that you set out—to get the $13 million.

Speaker #4: It's a certain code and approval process. But these are tanks that are used in liquid cooling systems that support the next-gen computing infrastructure. Their purpose is built vessels, used for liquid cooling and thermal management.

Speaker #4: I wonder if you can talk about the experience during the quarter, whether you're going through any ramp costs or productivity issues that you're working through.

Speaker #4: And we've actually been in this business for a long time. We've been innovating in pressure and hydraulic systems for 80 years. In fact, Antro invented the first pre-pressurized not to get too technical on you, diaphragm, expansion tank, 70 years ago.

Speaker #4: And as you've been able to maintain and come out with a new ASME products, are you able to get more visibility beyond kind of what you've talked about in the past, which is getting to kind of that run rate of $13 million in revenue per quarter?

Speaker #4: So this isn't new to us, but as we listen to customers and understood what they were trying and needed to accomplish, we knew we could be helpful.

Speaker #2: Sure. Well, good morning. We're talking here about ASME, banks, and people aren't sure it stands for the American Society of Mechanical Engineers. It's a certain code and approval process.

Speaker #4: So we leveraged the core competency, our engineering and innovation expertise, and created this emergent suite of solutions that we think really do help our customers solve problems that they're trying to solve.

Speaker #2: But these are banks that are used in liquid cooling systems that support the next-gen computing infrastructure. They are purpose-built vessels used for liquid cooling and thermal management.

Speaker #4: And so you said it, 13 million last year, 13 million in Q1. We do think that we should grow sequentially, and Q2, Q3, and Q4, more of that growth being weighted on the back half of the year, the back part of the year.

Speaker #2: And we've actually been in this business for a long time. We've been innovating in pressure and hydraulic systems for 80 years. In fact, Amtrol invented the first pre-pressurized—not to get too technical on you—diaphragm expansion tank, 70 years ago.

Speaker #4: But keep in mind that this market is still developing, and these opportunities are sometimes 18 to 24 months removed from a quote-unquote "announcement" that you might hear about a data center being greenlit.

Speaker #2: So this isn't new to us, but as we listened to customers and understood what they were trying to accomplish and needed to achieve, we knew we could be helpful.

Speaker #4: And so we do think that we'll have some variability from quarter to quarter, but this is a multi-year opportunity. We think it's accelerating. And as I mentioned before, we think that the liquid cooling and thermal management market just for data centers could be 10X what the legacy market was in the next few years.

Speaker #2: So we leveraged the core competency—our engineering and innovation expertise—and created this emergent suite of solutions that we think really do help our customers solve problems that they're trying to solve.

Speaker #2: And so you said it, $13 million last year, $13 million in Q1. We do think that we should grow sequentially. And Q2, Q3, and Q4, more of that growth being weighted on the back half of the year, the back part of the year.

Speaker #4: And so we absolutely have invested and are continuing to invest in engineering talent, in new equipment, and in production capacity. As we're really trying to be and believe that we're very well positioned to be part of the solution.

Speaker #2: But keep in mind that this market is still developing, and these opportunities are sometimes 18 to 24 months removed from when you hear about a data center being greenlit.

Speaker #4: And so if you think about the way people describe this market, they talk about hyperscalers, data center builders, and then ultimately when you get into kind of the picks and shovels that make data centers work, it's oversimplifying, but you can think of our solutions as types of picks and shovels.

Speaker #2: And so, we do think that we'll have some variability from quarter to quarter. But this is a multi-year opportunity. We think it's accelerating. And as I mentioned before, we think that the liquid cooling and thermal management market, just for data centers, could be 10x what the legacy market was in the next few years.

Speaker #4: And so we make various kinds of tanks and separators, but what really sets us apart is the services that we can provide around these solutions: our engineering expertise, our design expertise.

Speaker #2: And so we absolutely have invested and are continuing to invest in engineering talent, in new equipment, and in production capacity, as we're really trying to be—and believe that we're very well positioned to be—part of the solution.

Speaker #4: So ultimately helping our customers design or refine their designs for these fluid management solutions and ideally if we're good, we get sort of specced in, thought about, things like the basis of design, but we'd like to get specced in to some of these designs as we go forward.

Speaker #2: And so, if you think about the way people describe this market, they talk about hyperscalers, data center builders, and then ultimately we get into kind of the picks and shovels that make those data centers work.

Speaker #4: And then I think we'll be able to grow in and grow with this market pretty nicely.

Speaker #5: Okay. Thanks for that. I appreciate it. And yeah, good luck with that rapidly expanding market. I wonder if you could talk about the strategy that you guys are going after.

Speaker #2: It's oversimplifying, but you can think of our solutions as types of picks and shovels. And so, we make various kinds of tanks and separators.

Speaker #2: But what really sets us apart is the services that we can provide around these solutions: our engineering expertise, our design expertise, ultimately helping our customers design or refine their designs for these fluid management solutions.

Speaker #5: I think you've talked about some capacity expansions. You just mentioned engineering and production. I wonder if you can talk about what you're doing there.

Speaker #4: Sure. So it is a pretty fulsome approach. Heavy on sort of a design, engineering, and process. A lot of capacity expansion and investments in our own facilities.

Speaker #2: And ideally, if we're good, we get sort of specced in, thought about—thinking about things like the basis of design. But we'd like to get specced into some of these designs as we go forward.

Speaker #2: And then I think we'll be able to grow in and grow with this market pretty nicely.

Speaker #4: But in cases where it makes sense for somebody else to manufacture these, we've got a group of partners that we are relying on and that we are partnering with to help us essentially expand our own capacity and ultimately do the design work, do the commercial work, do all the things that need to happen but ultimately take advantage of some capacity authority in the ground.

Speaker #4: Okay, thanks for that. I appreciate it. And yeah, good luck with that rapidly expanding market. I wonder if you could talk about the strategy that you guys are going after.

Speaker #4: I think you've talked about some capacity expansions. You just mentioned engineering and production. I wonder if you can talk about what you're doing there.

Speaker #5: Okay. Great. Okay. Thanks. I'll get back in Q. Thank you.

Speaker #4: Sure.

Speaker #2: Sure. So it is a pretty fulsome approach—heavy on design, engineering, and process. There is a lot of capacity expansion and investments in our own facilities.

Speaker #2: As a reminder, if you would like to ask a question, please press star one to raise your hand. Your next question comes from the line of Susan McLary, with Goldman Sachs.

Speaker #2: Your line is open. Please go ahead.

Speaker #6: Thank you. Good morning, everyone. My first question is around just the broader state of the good morning. The broader state of the consumer and what you're seeing there.

Speaker #2: But in cases where it makes sense for somebody else to manufacture these, we've got a group of partners that we are relying on and that we are partnering with to help us essentially expand our own capacity and ultimately do the design work, do the commercial work, do all the things that need to happen, but ultimately take advantage of some capacity authority in the ground.

Speaker #6: It sounds like from what we've been hearing from the home builders, things certainly moderated in the quarter as rates rose and the geopolitical environment.

Speaker #6: Can you just talk a bit about what you're seeing now and what that implies as we think about the growth in the next couple of quarters?

Speaker #4: Sure. So within trade and specialty, one of the reasons, obviously, that we decided to realign and rename those, Susan, as you know, is an awful lot of our products that were sold through what's historically been consumer end up in the hands of contractors.

Speaker #4: Okay, great. Thanks. I'll get back in queue. Thank you.

Speaker #2: Sure.

Speaker #1: As a reminder, if you would like to ask a question, please press star one to raise your hand. Your next question comes from the line of Susan McClary with Goldman Sachs.

Speaker #4: They're working on commercial buildings or in residential buildings. But for us, it's really around that team continuing to execute exceptionally well. They've got good pricing discipline.

Speaker #1: Your line is open. Please go ahead.

Speaker #5: Thank you. Good morning, everyone. My first question is around just the broader state of the good morning. The broader state of the consumer and what you're seeing there?

Speaker #4: They've done a really good job commercially. There's a lot of energy around NPD and new products that we expect kind of to see in the back half of our fiscal year.

Speaker #5: It sounds like, from what we've been hearing from the home builders, things certainly moderated in the quarter as rates rose and given the geopolitical environment.

Speaker #5: Can you just talk a bit about what you're seeing now, and what that implies as we think about growth in the next couple of quarters?

Speaker #4: But I would say generally, yeah, you're right. Interest rates are still high, but people are still repairing, remodeling, unemployment is still pretty low, and we've always used unemployment as a pretty good kind of indicator for us.

Speaker #2: Sure. So within Trade and Specialty, one of the reasons, obviously, that we decided to realign and rename those segments, as you know, is an awful lot of our products that were sold through what's historically been consumer end up in the hands of contractors.

Speaker #4: And so we haven't seen any material weakness in our customers' point of sale is hanging in there. And so we think that our products are awfully resilient and have typically shown that way.

Speaker #2: They’re working on commercial buildings or in residential buildings. But for us, it’s really about that team continuing to execute exceptionally well. They’ve got good pricing discipline.

Speaker #4: And it's not as though the market's worse than it was in the past three years. So it's been relatively steady from that perspective.

Speaker #2: They've done a really good job commercially. There's a lot of energy around NPD and new products that we expect to see in the back half of our fiscal year.

Speaker #6: Okay. That's helpful. And then can you also give us an update on the integration of the recent acquisitions that you've done and any comments on the M&A pipeline in general given the operating conditions and the move-in rates?

Speaker #2: But I would say, generally, yeah, you're right. Interest rates are still high, but people are still repairing, remodeling; unemployment is still pretty low. We've always used unemployment as a pretty good indicator for us.

Speaker #4: Yeah. Thanks, Susan. So I'll take the pipeline question first, and we continue to see a healthy pipeline of opportunities. A slight uptick, if anything, more recently with just activity there, which is good.

Speaker #2: And so we haven't seen any material weakness in our customers' point of sale is hanging in there. And so we think that our products are awfully resilient and have typically shown that way.

Speaker #4: And as you know, we're focused on businesses where we see strong strategic and cultural fit. These are an attractive niche and we're Worthington has a clear opportunity to create some additional value.

Speaker #2: And it's not as though the market's worse than it was in the past three years. So it's been relatively steady from that perspective.

Speaker #4: And we've got a strong balance sheet. We've got really good free cash flow generation. Like we talked about earlier, and low leverage and that creates significant financial flexibility for us to pursue these opportunities when they make sense.

Speaker #5: Okay, that's helpful. And then, can you also give us an update on the integration of the recent acquisitions that you've done? And any comments on the M&A pipeline in general, given the operating conditions and the move-in rates?

Speaker #4: Our capital allocation framework is balanced, as you know, with a bias towards growth. And we're actively evaluating opportunities and we feel good about what we're seeing there.

Speaker #2: Yeah. Thanks, Susan. So I'll take the pipeline question first, and we continue to see a healthy pipeline of opportunities. A slight uptick, if anything, more recently with just activity there, which is good.

Speaker #4: Just on the recent acquisitions, so we continue to feel pretty good about our most recent acquisitions, both Elgin and LSI. In the quarter, the acquisitions contributed approximately $19 million of sales.

Speaker #2: And as you know, we're focused on businesses where we see strong strategic and cultural fit. These are an attractive niche, and where Worthington has a clear opportunity to create some additional value.

Speaker #4: Just in Q1, with Elgin specifically, we've made good progress on that integration. It's been over a year at this point. We're focused heavily on the operations and deploying the Worthington business system to really realize the full potential of the business.

Speaker #2: And we've got a strong balance sheet. We've got really good free cash flow generation, like we talked about earlier, and low leverage. That creates significant financial flexibility for us to pursue these opportunities when they make sense.

Speaker #4: The commercial HVAC and markets that they serve remain pretty healthy and we continue to believe Elgin has significant opportunity over time. On LSI, that's our most recent acquisition.

Speaker #2: Our capital allocation framework is balanced, as you know, with a bias towards growth. We're actively evaluating opportunities, and we feel good about what we're seeing there.

Speaker #4: We closed in January. It's earlier in the integration process, but we are very pleased with performance there. It's a high-quality business, really attractive margins, a strong position in a very specialized niche.

Speaker #2: Just on the recent acquisitions, we continue to feel pretty good about our most recent acquisitions, both Elgin and LSI. In the quarter, the acquisitions contributed approximately $19 million of sales.

Speaker #4: They're a critical component of the overall kind of metal roofing system, which is an attractive market to be in. So we're increasingly focused on LSI with how we can deploy Worthington's capabilities to accelerate growth.

Speaker #2: Just in Q1, with Elgin specifically, we've made good progress on that integration. It's been over a year at this point. We're focused heavily on the operations and deploying the Worthington Business System to really realize the full potential of the business.

Speaker #4: We think that's the real unlock for LSI. And most importantly, kind of both of those businesses, Elgin and LSI, are great cultural fits. So people are our most important asset.

Speaker #2: The commercial HVAC and markets that they serve remain pretty healthy, and we continue to believe Elgin has significant opportunity over time. On LSI, that's our most recent acquisition.

Speaker #4: And with the acquisitions, we'd much rather spend our time improving operations, expanding commercial opportunities, than trying to change the culture. And in both cases, we feel pretty good about the teams there and the culture at those businesses.

Speaker #2: We closed in January. It’s earlier in the integration process, but we are very pleased with performance there. It’s a high-quality business with really attractive margins and a strong position in a very specialized niche.

Speaker #3: And Susan, the only thing I would add, Colin's absolutely right. When you talk about the increase in rates and the rate environment, that's actually a good thing for us.

Speaker #2: They're a critical component of the overall metal roofing system, which is an attractive market to be in. So we're increasingly focused on LSI and how we can deploy Worthington's capabilities to accelerate growth.

Speaker #3: As you know, we have a pretty good balance sheet and have a fair amount of liquidity if competitive situations arise for an acquisition. Our borrowing base and our borrowing basis is probably going to be better than a lot of folks that we might be in competition with.

Speaker #2: We think that's the real unlock for LSI. And most importantly, both of those businesses—Elgin and LSI—are great cultural fits. People are our most important asset.

Speaker #3: So environments like this are actually better for us relatively speaking than when interest rates are very, very low and capital is everywhere.

Speaker #2: And with the acquisitions, we'd much rather spend our time improving operations, expanding commercial opportunities, than trying to change the culture. And in both cases, we feel pretty good about the teams there and the culture at those businesses.

Speaker #6: Yeah. Okay. That's very helpful. Thank you both for the color. And good luck with the quarter.

Speaker #3: Thank you, Susan.

Speaker #1: Your next question comes from the line of Walt Liptak. With Seaport Research. Your line is open. Please go ahead.

Speaker #3: And Susan, the only thing I would add—Colin's absolutely right. When you talk about the increase in rates and the rate environment, that's actually a good thing for us.

Speaker #5: Okay. Thanks. I've got a couple of follow-ups. One on the free cash flow. As you guys pointed out, it was very strong. I wonder if you could talk about some of the programs that you guys are doing to improve working capital.

Speaker #3: As you know, we have a pretty good balance sheet and have a fair amount of liquidity if competitive situations arise for an acquisition. Our borrowing base and our borrowing basis are probably going to be better than a lot of folks that we might be in competition with.

Speaker #5: And is that sort of is this sort of a one-time inflow of cash from working capital accounts? Or is this going to be a can you continue to generate high levels of free cash flow?

Speaker #3: So environments like this are actually better for us, relatively speaking, than when interest rates are very, very low and capital is everywhere.

Speaker #4: Yeah. So thanks, Walt. It's been this has been an important point for us in we're really pleased with the cash flow generation as you mentioned, as we talked about earlier up 26 million year over year from an operating and free cash flow standpoint, 196 million in free cash flow on a trailing 12-month basis.

Speaker #5: Yeah, okay. That's very helpful. Thank you both for the color, and good luck with the quarter.

Speaker #3: Thank you, Susan.

Speaker #1: Your next question comes from the line of Walt Liptick. With Seaport Research. Your line is open. Please go ahead.

Speaker #4: Okay, thanks. I've got a couple of follow-ups. One on the free cash flow, as you guys pointed out, was very strong. I wonder if you could talk about some of the programs that you are doing to improve working capital.

Speaker #4: That's the highest it's been. The working capital measures we've been very intentional about, which has been helping us drive that free cash flow generation.

Speaker #4: And we believe it is sustainable. We've been working hard with our teams to continue to pull levers to really compound our cash flow. And in particular, it's showing up as we talked about in our working capital and so just from a cash conversion cycle standpoint, just over the last year, I think we're down about 8 or 9 days, which we're really pleased with.

Speaker #4: And is that sort of is this sort of a one-time inflow of cash from working capital accounts? Or is this going to be a can you continue to generate high levels of free cash flow?

Speaker #2: Yeah, so thanks, Walt. This has been an important point for us, and we're really pleased with the cash flow generation. As you mentioned, as we talked about earlier, up $26 million year over year from an operating and free cash flow standpoint—$196 million in free cash flow on a trailing 12-month basis.

Speaker #4: Over that period. And then just from a networking capital, as a percent of sales, we're down, I think, almost 3% just over the last couple of years.

Speaker #4: And so that's a lot of incremental things, working around customer terms, working around our supply base, and then just more efficiently and effectively managing inventory, things like 80/20 always play a role in that as well.

Speaker #2: That's the highest it's been. The working capital measures we've been very intentional about, which has been helping us drive that free cash flow generation.

Speaker #2: And we believe it is sustainable. We've been working hard with our teams to continue to pull levers to really compound our cash flow. And in particular, it's showing up, as we talked about, in our working capital. So just from a cash conversion cycle standpoint, over the last year, I think we're down about eight or nine days, which we're really pleased with.

Speaker #4: And so we're really pleased with the performance and do view it as sustainable. As we move forward, we're going to continue to drive that free cash flow generation.

Speaker #4: And there is some normal kind of cyclicality or seasonality to it. We do have an extra tax payment in Q2, which is normal, of course.

Speaker #2: Over that period. And then, just from a networking capital, as a percent of sales, we're down, I think, almost 3% just over the last couple of years.

Speaker #4: But outside of that, we feel pretty good from a free cash flow standpoint.

Speaker #5: Okay. All right. Thanks for that insight. And then just the last one for me, the A2L tough comparison we saw that last quarter. It's here again.

Speaker #2: And so, that's a lot of incremental things—working around customer terms, working around our supply base, and then just more efficiently and effectively managing inventory. Things like 80/20 always play a role in that as well.

Speaker #5: That inventory correction that's going on, how long do you think it'll take to clear? Do you expect more, especially in the second quarter going into the end of the calendar year?

Speaker #2: And so we're really pleased with the performance and do view it as sustainable. As we move forward, we're going to continue to drive that free cash flow generation.

Speaker #5: And at what point do you think we start getting onto a positive comp?

Speaker #4: Yeah. So Walt, so it is that transition. It did have an impact in the quarter, the unfavorable mix, was primarily driven by the cooling construction business and the difficult comparison there related to A2L.

Speaker #2: And there is some normal kind of cyclicality or seasonality to it. We do have an extra tax payment in Q2, which is normal, of course.

Speaker #4: Just a little more background there, the prior year benefited from this unusually strong demand as manufacturers distributors contractors simultaneously established inventory ahead of this regulated transition.

Speaker #2: But outside of that, we feel pretty good from a free cash flow standpoint.

Speaker #4: Okay. All right. Thanks for that insight. And then just the last one for me, the A2L tough comparison we saw that last quarter. It's here again.

Speaker #4: And that included kind of heavy demand on our products, obviously. And we estimate the year-over-year impact to adjusted EBITDA this quarter was approximately $7 7 million.

Speaker #4: That inventory correction that's going on—how long do you think it'll take to clear? Do you expect more, especially in the second quarter going into the end of the calendar year?

Speaker #4: Which is more than we anticipated a quarter ago. And Joe mentioned this earlier, channel inventories are taking a little longer to normalize. And particularly, against the backdrop of the muted housing environment.

Speaker #4: And at what point do you think we start getting onto a positive comp?

Speaker #2: Yeah, so Walt, it is that transition. It did have an impact in the quarter. The unfavorable mix was primarily driven by the cooling construction business and the difficult comparison there related to A2L.

Speaker #4: We expect Q2 to remain a difficult comparison. Because of that prior year quarter benefited from the A2L-related volumes. But as we move to the second half of the year, Q3 and Q4 are seasonally stronger.

Speaker #2: Just a little more background there, the prior year benefited from this unusually strong demand as manufacturers distributors contractors simultaneously established inventory ahead of this regulated transition.

Speaker #4: In this market, including in construction. And so we do expect normalization there. And importantly, we continue to view this primarily as more of a timing and comparison issue rather than a change in the long-term fundamentals of the business.

Speaker #2: And that included kind of heavy demand on our products, obviously. We estimate the year-over-year impact to adjusted EBITDA this quarter was approximately $7 million.

Speaker #4: Nearly all the new residential equipment now utilizes A2L refrigerants. And so every new installation expands the installed base for our products. And over time, that should create a growing service and repair opportunity for the products that we sell into the space.

Speaker #2: Which is more than we anticipated a quarter ago. And Joe mentioned this earlier, channel inventories are taking a little longer to normalize than particularly, again, the backdrop of the muted housing environment.

Speaker #5: Okay. All right. Thanks very much.

Speaker #2: We expect Q2 to remain a difficult comparison. Because of that prior year quarter benefited from the A2L-related volumes. But as we move to the second half of the year, Q3 and Q4 are seasonally stronger.

Speaker #3: Thanks, Walt.

Speaker #1: Your next question comes from the line of Brian McNamara with Canaccord Genuity. Your line is open. Please go ahead.

Speaker #2: Hey, good morning, guys. Thanks for taking the question. Just one for me as all my other questions have been addressed. Can you characterize or quantify the growth you're seeing in data centers outside of ASME tanks, whether it be Wave, Elgin, or LSI?

Speaker #2: In this market, including in construction, we do expect normalization there. Importantly, we continue to view this primarily as more of a timing and comparison issue rather than a change in the long-term fundamentals of the business.

Speaker #2: And specifically, are you bundling your solutions there to win business? Or has that largely been kind of à la carte to this point?

Speaker #2: Nearly all the new residential equipment now utilizes A2L refrigerants. And so every new installation expands the installed base for our products. And over time, that should create a growing service and repair opportunity for the products that we sell into the space.

Speaker #3: It's a great question. Brian, good morning. It's Joe. The way that we think about data centers, we talked a lot about the ASME tanks.

Speaker #3: But yeah, absolutely. Every data center is a commercial building. And a number of our value streams provide building performance solutions that are integral to the way those buildings function.

Speaker #4: Okay. All right. Thanks very much.

Speaker #3: Thanks, Walt.

Speaker #3: And setting them up to do what they're supposed to do. That certainly includes Wave and Clark's Clark Detrick. Elgin, LSI, and across centers are very important parts of the growth that we're seeing.

Speaker #1: Your next question comes from the line of Brian McNamara with Canaccord Dinuity. Your line is open, please go ahead.

Speaker #5: Hey. Good morning, guys. Thanks for taking the question. Just one for me as all my other questions have been addressed. Can you characterize or quantify the growth you're seeing in data centers outside of ASME tanks, whether it be Wave, Elgin, or LSI?

Speaker #3: And I would say our revenues are growing commensurate maybe a bit better or a bit worse depending on the application with the proliferation of data centers.

Speaker #5: And specifically, are you bundling your solutions there to win business, or has that largely been kind of à la carte to this point?

Speaker #3: Because of the market and data centers operate the way that they do, it's relatively decentralized from a construction and from a guts perspective. And so the bundling would be an overstatement.

Speaker #3: It's a great question. Brian, good morning. It's Joe. The way that we think about data centers—we talked a lot about the ASME tanks.

Speaker #3: But we are increasingly collaborating across value streams and talking about opportunities and prioritizing and ultimately kind of making the case that we can refer or otherwise make more introductions for other pieces of our business that we probably couldn't a couple of years ago.

Speaker #3: But yeah, absolutely. Every data center is a commercial building. And a number of our value streams provide building performance solutions that are integral to the way those buildings function.

Speaker #3: And setting them up to do what they're supposed to do, that certainly includes Wave and Carcitrix. Elgin, LSI, and across those value streams, data centers are very important parts of the growth that we're seeing.

Speaker #2: Maybe just a quick follow-up on that. I think in Q3 last year, you said that your data business data center business was expected to triple in fiscal 26.

Speaker #3: And I would say our revenues are growing, commensurate—maybe a bit better or a bit worse, depending on the application—with the proliferation of data centers.

Speaker #2: What sounds like the ASME tanks are about to quadruple at least if they sequentially grow each quarter this year. How would we can we at least characterize the other businesses exposed to data centers that you guys own kind of multiplying this year?

Speaker #3: Because of the market and data centers operate the way that they do, it's relatively decentralized from a construction and from a guts perspective. And so the bundling would be an overstatement.

Speaker #2: Is that a fair way to characterize the growth you're seeing there?

Speaker #3: So the non your question, Brian, the non-ASME tanks?

Speaker #3: But we are increasingly collaborating across value streams and talking about opportunities and prioritizing, and ultimately kind of making the case that we can refer or otherwise make more introductions for other pieces of our business that we probably couldn't a couple of years ago.

Speaker #2: Yeah.

Speaker #3: Ask that again. I misunderstood it maybe.

Speaker #2: Say that again?

Speaker #3: I think I misunderstood your question. Can you ask it again?

Speaker #2: Yeah. So I think in Q3, I think you said your data center business overall last year was expected to triple. I don't know where that landed.

Speaker #2: Are we expecting that kind of same maybe doubling, tripling kind of this year? It sounds like the ASME tanks are going to at least quadruple if you grow sequentially quarter after quarter this year.

Speaker #5: Maybe just a quick follow-up on that. I think in Q3 last year, you said that your data business, data center business, was expected to triple in fiscal '26.

Speaker #5: It sounds like the ASME tanks are about to quadruple, at least if they sequentially grow each quarter this year. How can we at least characterize the other businesses exposed to data centers that you guys own, kind of multiplying this year?

Speaker #3: Yes. Yeah. Right. So yes. We have 13 million dollars was effectively 3X what it had been the year before. We did that in Q1, which on a run rate so would have it being 4X.

Speaker #5: Is that a fair way to characterize the growth you're seeing there?

Speaker #3: But we think that and we said this much that we're going to grow sequentially. So yeah, it's that we do absolutely believe that this market is accelerating.

Speaker #3: So your question, Brian, the non-ASME tanks?

Speaker #5: Yeah.

Speaker #2: All right. Apologize for the confusion there. Thanks for taking the question.

Speaker #3: Could you repeat that? I think I may have misunderstood.

Speaker #3: Oh, no. My fault. Thank you.

Speaker #5: Say that again?

Speaker #3: I think I misunderstood your question. Could you please ask it again?

Speaker #1: Your next question comes from the line of Will Gildea. With CJS Securities. Your line is open. Please go ahead.

Speaker #5: Yeah, so I think in Q3, I think you said your data center business overall last year was expected to triple. I don't know where that landed.

Speaker #5: Are we expecting that same kind of doubling or tripling this year? It sounds like the ASME tanks are going to at least quadruple if you grow sequentially, quarter after quarter, this year.

Speaker #6: Hey, good morning. Thanks for taking our questions. Can you add some more color on the good morning. Can you add some more color on the really solid growth in trade, especially solutions?

Speaker #3: Yes. Yeah. Right. So, yes. Yeah. $13 million was effectively 3x what it had been the year before. We did that in Q1, which on a run rate would have it being 4x.

Speaker #6: I think you described as volume and price-driven. Just wondering, are there any product lines or end customers where you saw more strength in the quarter?

Speaker #3: But we think that, and we said this much, that we're going to grow sequentially. So yeah, we do absolutely believe that this market is accelerating.

Speaker #4: Yeah. So thanks, Will. So the trade and specialty solution segment really good performance in the quarter. Sales increased approximately 8%. Driven by a combination of higher overall volumes and selling prices, we saw some good broad-based growth across most of the portfolio, particularly portable propane and tools.

Speaker #5: All right. Apologies for the confusion there. Thanks for taking the question.

Speaker #3: No. My fault. Thank you.

Speaker #1: Your next question comes from the line of Will Gildia with CJS Securities. Your line is open. Please go ahead.

Speaker #4: Those were driven by higher volumes, expanded distribution, and then both those segments had some pricing actions as well, which was helpful. The balloon time business was the primary exception.

Speaker #6: Hey. Good morning. Thanks for taking our questions. Can you add some more color on the good morning. Can you add some more color on the really solid growth in trade, especially solutions?

Speaker #4: Volumes were down, but that was more a function of a really strong prior year comparison. Which impacted in the current quarter. So more broadly, really pleased with the performance of the segment and they had good margin expansion even excluding the tariff kind of positive in the quarter as well.

Speaker #6: I think you described it as volume and price-driven. Just wondering, are there any product lines or end customers where you saw more strength in the quarter?

Speaker #2: Yeah, so thanks, Will. The Trade and Specialty Solutions segment delivered really good performance in the quarter. Sales increased approximately 8%, driven by a combination of higher overall volumes and selling prices.

Speaker #6: That is very helpful. Thank you. And then just one more. I think you described increasing raw material prices ahead of one of a few million dollars.

Speaker #2: We saw some good broad-based growth across most of the portfolio, particularly portable propane and tools. Those were driven by higher volumes, expanded distribution, and then both those segments had some pricing actions as well, which was helpful.

Speaker #6: How quickly can you mitigate that? And how are you thinking about mitigating that? And does that headwind get worse throughout to the end of the calendar year?

Speaker #6: Does it improve?

Speaker #3: Yeah. So just make sure I clarify, Will. My comment on a few million dollars was around steel being late and ultimately us needing to prioritize and think about shipments and manufacturing and things like that.

Speaker #2: The Balloon Time business was the primary exception. Volumes were down, but that was more a function of a really strong prior year comparison, which impacted the current quarter.

Speaker #2: So, more broadly, I'm really pleased with the performance of the segments, and they had good margin expansion even excluding the tariff. Kind of positive in the quarter as well.

Speaker #3: We do think that near term, we'll be in better shape there. Steel is more expensive. Then it was a year ago. But also as we mentioned, that's not ideal.

Speaker #6: That is very helpful. Thank you. And then just one more question. I think you described increasing raw material prices as a headwind of a few million dollars.

Speaker #3: But we have taken price actions where we thought we needed to. But these are environments where we ultimately can separate ourselves from others. And so with our relationships and our capabilities, and our optionality, it's something that will continue to address.

Speaker #6: How quickly can you mitigate that? And how are you thinking about mitigating that? And does that headwind get worse throughout to the end of the calendar year?

Speaker #6: Does it improve?

Speaker #3: Yeah, so just to make sure I clarify, Will, my comment on a few million dollars was around steel being late and ultimately us needing to prioritize and think about shipments and manufacturing, and things like that.

Speaker #3: And I think we'll address it successfully with the caveat, obviously, that things are certainly more expensive than they were a year ago from a raw material perspective.

Speaker #3: And that's true across the board.

Speaker #6: All right. Thank you very much.

Speaker #3: We do think that, near term, we'll be in better shape there. Steel is more expensive than it was a year ago. But also, as we mentioned, that's not ideal.

Speaker #1: There are no further questions at this time. I will now send the call back to Joe for any closing remarks.

Speaker #3: Hey, thank you. And thank you all for joining us this morning. Look forward to potentially seeing some of you at our investor day in November.

Speaker #3: But we have taken price actions where we thought we needed to. But these are environments where we ultimately can separate ourselves from others, and so with our relationships, our capabilities, and our optionality, it's something that we will continue to address.

Speaker #3: Hope you have a great day.

Speaker #3: And I think we'll address it successfully, with the caveat obviously that things are certainly more expensive than they were a year ago, from a raw material perspective.

Speaker #3: And that's true across the board.

Speaker #6: All right. Thank you very much.

Speaker #1: There are no further questions at this time. I will now send the call back to Joe for any closing remarks.

Speaker #3: Hey, thank you. And thank you all for joining us this morning. I look forward to potentially seeing some of you at our Investor Day in November.

Speaker #3: Hope you have a great day.

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