Prepared remarks
Good morning, and welcome to the Worthington Enterprises Third Quarter Fiscal 2026 Earnings Conference Call. This conference is being recorded at the request of Worthington Enterprises. If anyone objects, you may disconnect at this time. I'd now like to introduce Marcus Rogier, Treasurer and Investor Relations Officer. Mr. Rogier, you may begin.
Thank you, Regina. Good morning, everyone, and thank you for joining us for Worthington Enterprises Third Quarter Fiscal 2026 Earnings Call. On the call today are Joe Hayek, our President and Chief Executive Officer; and Colin Souza, our Chief Financial Officer. Before we begin, I'd like to remind everyone that certain statements made during today's call are forward-looking in nature and subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied. For more information on these risks and uncertainties, please refer to our earnings release issued yesterday after the market closed, which is available on the Investor Relations section of our website. Additionally, our remarks today will include references to non-GAAP financial measures. Reconciliations of these financial measures to the most directly comparable GAAP measures can also be found in the earnings release. 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.
Thank you, Marcus. Good morning, everybody. Welcome to Worthington Enterprises Fiscal 2026 Third Quarter Earnings Call. We performed very well in Q3 and generated strong earnings growth, which is a reflection of the tremendous effort that our team exhibits every day. Our colleagues all over the world continue putting our customers first and our solutions and approach are resonating, helping us to grow. In Q3, in market conditions that continue to be mixed, we delivered strong year-over-year growth in revenue, adjusted EBITDA and earnings per share. Revenue in Q3 was up over 24% from last year, while our SG&A expenditures declined by 70 basis points as a percentage of sales. Our adjusted EBITDA grew by 15% year-over-year. And in the last 12 months, our adjusted EBITDA is now $297 million, up $54 million from a year ago, and adjusted EBITDA margin was 22.4%. This growth is driven by our teams as they optimize and grow our business by developing and launching new products, expanding production capacity in key value streams, providing excellent customer service and through strategic acquisitions. We believe we are very well positioned to capitalize on our strengths and continue to grow our market share as end markets improve. Q3 is a great example of how we leverage the Worthington Business System and how it shows up in our financial performance. As we grow our top line and profitability, we're leveraging the WBS and its 3 growth drivers: innovation, transformation and M&A to maximize both our near- and long-term success. Innovation is a big part of our growth strategy. Our ASME water tanks used for liquid cooling and data centers are a great example, and our pipeline is rapidly growing as data centers increasingly utilize liquid cooling solutions. In addition, innovation and new products have led to new store placements for Balloon Time, driving growth in our consumer business. Transformation has been a cornerstone of our operating strategy for some time. As new technologies emerge and we conceptualize and implement new tools that help transform our business, we're always focused not on how we did things yesterday, but on how we can do them better or more efficiently tomorrow. Our 80/20 initiative is a good example of that thinking, and we're very happy with our progress to date and excited about how we can continue to leverage that discipline. AI is now embedded across many of our applications, and our focus is shifting from experimentation to operational impact, deploying AI in specific workflows where it can drive measurable efficiencies, not just individual productivity gains. We also continue investing in automation as we gain efficiencies and create elevated opportunities for our colleagues. We're focused on acquiring companies in niche markets with sustainable competitive advantages. And in January, we completed our acquisition of LSI. LSI is a leading U.S. manufacturer of standing seam metal roofing clips, components and retrofit systems that enhances our position in engineered building systems. LSI's products are engineered into OEM certified roof systems, creating meaningful requalification requirements and high switching costs. We're very happy the LSI team is now part of Worthington. Our integration efforts are off to a good start, and we're excited about the growth prospects that we have together. At the core of the WBS and at the core of Worthington is our culture and our philosophy. Our company is founded and grew up embracing the notion that people are our most important asset. Today, as visibly as ever, our people power our success. Part of our opportunity and our obligation as a U.S. manufacturer is to invest in and develop the workforce of the future. This year, we launched our largest career accelerator program to date, where high school seniors spend 10 weeks developing career readiness on the shop floor and in the classroom. When these young men and women complete the program, they'll have a certified manufacturing associate credential and a full-time job offer from us. Our teams do not seek recognition for its own sake, but it is gratifying when we are recognized by others. For instance, Newsweek recently named us one of America's greatest workplaces for culture, belonging and community for 2026. We're also named one of the world's most productive companies by LNS Research. While these awards do not independently drive our success, they reflect a group of talented individuals and teams doing things well and the right way. Teams like that are the kind you build around and that make you proud to come to work every day. Global events seem to be unfolding daily and consequently, economic growth forecasts are cloudy. But we believe our value propositions continue to improve and resonate with our customers that demand in our end markets is steady and will grow as market conditions improve. Our strategies are solid, and we're executing well. As we approach the end of our fiscal year, we believe we're very well positioned to continue growing Worthington Enterprises and creating meaningful value for all of our stakeholders. I will now turn it over to Colin, who will take you through some details related to our financial performance in the quarter.
Thank you, Joe, and good morning, everyone. We delivered strong financial results in Q3, reporting GAAP earnings of $0.92 per share compared to $0.79 per share in the prior year period. The current quarter included $0.06 per share of restructuring and other nonrecurring items, primarily related to acquisition costs and the noncash amortization of a portion of the inventory step-up associated with our recent acquisition of LSI. The prior year quarter included $0.12 per share of restructuring and other expenses. Excluding these items in both periods, adjusted earnings were $0.98 per share, up from $0.91 in the prior year quarter and marking our sixth consecutive quarter of year-over-year growth in adjusted EPS and adjusted EBITDA. Consolidated net sales for the quarter were $379 million, up 24% compared to $305 million in the prior year quarter. The increase was driven by higher overall volumes in both building and consumer products, combined with the impact of recent acquisitions, which contributed $32 million in net sales for Q3. Excluding the impact of acquisitions, net sales increased $42 million or 14% over the prior year quarter. Gross profit increased to $109 million from $89 million in the prior year quarter. Gross margin was 28.9% compared to 29.3% a year ago, with a modest contraction primarily reflecting the purchase accounting impact of the inventory step-up at LSI. Adjusted EBITDA increased to $85 million from $74 million in the prior year quarter, with an adjusted EBITDA margin of 22.3%. On a trailing 12-month basis, adjusted EBITDA increased $54 million or 22% to $297 million compared to $243 million in the prior year TTM period. This performance reflects the strength of our differentiated portfolio and the positive impact of the Worthington Business System, supporting improved operating discipline and sustainable earnings growth, both organically and through acquisitions. Turning to our cash flow and capital allocation. Our focus remains funding growth through acquisitions and reinvesting in our business while returning excess cash to shareholders via dividends and share repurchases. Capital expenditures totaled $14 million in the quarter, including $4 million related to our facility modernization projects in consumer products. We returned capital to shareholders through $9 million in dividends and the repurchase of 100,000 shares of our common stock. Our joint ventures continue to deliver strong cash generation, providing $35 million in dividends during the quarter, representing 113% of equity income. Operating cash flow was $62 million in the quarter and free cash flow was $48 million. On a trailing 12-month basis, free cash flow is now $164 million, representing a 95% free cash flow conversion rate relative to adjusted net earnings. Our free cash flow reflects elevated capital expenditures associated with our facility modernization projects, which totaled roughly $27 million over the TTM period. We have roughly $25 million of modernization spend remaining. The modernization project is on track and on budget, and we expect to complete it by mid-fiscal year 2027. After this investment is complete, capital expenditures should return to more normalized levels, supporting continued healthy free cash flow conversion over time. Turning to our balance sheet and liquidity. We closed the quarter with net debt of $306 million, resulting in a net debt to trailing adjusted EBITDA ratio of approximately 1x. Our leverage remains conservative, and we maintain ample liquidity with $495 million of availability under our revolving credit facility at quarter end, providing significant financial flexibility. Yesterday, our Board of Directors declared a quarterly dividend of $0.19 per share payable in June of 2026. Let me now turn to our segment performance. Building Products delivered another solid quarter, reflecting the quality of our business and the efforts of our teams. We are pleased to close the LSI acquisition in mid-January, expanding our offering in the building envelope and are excited to welcome LSI's team to Worthington. Q3 net sales grew 36% year-over-year to $224 million, up from $165 million in the prior year quarter. Growth was driven by higher overall volumes and contributions from acquisitions, which contributed $32 million in net sales. Excluding acquisitions, net sales increased 16% year-over-year, reflecting strong organic growth across multiple value streams, in particular, our water and cooling construction businesses. Adjusted EBITDA for the quarter was $59 million compared to $53 million in the prior year quarter, with an adjusted EBITDA margin of 26.3%. The $6 million increase was driven by improved performance in our wholly owned businesses, including approximately $5 million from recent acquisitions, partially offset by lower combined equity earnings from our joint ventures. WAVE continues to perform well, delivering year-over-year growth and contributing $27 million in equity earnings, while ClarkDietrich results were lower year-over-year in a challenging nonresidential construction environment. ClarkDietrich contributed $6 million compared to $9 million last year and improved modestly sequentially from Q2. Our integration plans for Elgen and LSI are on track, and the Building Products team remains well positioned to continue to deliver value as we move forward. Consumer Products achieved strong sales and earnings growth in the quarter, driven by the strength of our brands, disciplined execution and continued demand across key categories. Net sales in Q3 were $155 million, up 11% over the prior year quarter, driven by improved volumes and higher average selling prices. Balloon Time continues to perform well, showing its agility with expanded retail placement paired with innovations like the Balloon Time Mini. Adjusted EBITDA increased to $35 million from $29 million in Q3 a year ago, with margins expanding to 22.9% from 20.5%. The consumer team is poised to continue delivering value-added solutions that strengthen our customer relationships and position the business for sustainable growth moving forward. We delivered strong financial results in Q3. Our differentiated product solutions and disciplined execution, leveraging the Worthington Business System are driving stronger operations, solid cash flow and returns and resilient earnings growth, both organically and through acquisitions. At this point, we're happy to take any questions.
Questions and answers
Our first question will come from Dan Moore with CJS Securities.
This is Will on for Dan. 14% organic revenue growth in the quarter, very strong. Can you talk about volume versus price? Was price much of a factor for either building products or consumer products?
Yes. Good question, Will. So we're very pleased with the organic growth rate overall, 14% organic, which you mentioned, Building Products was up 16%. Organically, that's the second quarter in a row. Building Products is up 16% organically. Consumer was up 11%. It was a mix of different factors there across the different value streams. Volume played a key role. Pricing played a role as well there. But overall, we continue to think about where we're heading organically in terms of the margins. We're trying to get to 30%, and we've been in the high 20s over the past couple of quarters. We continue to try to make progress towards that 30% gross margin range. And then just as important is making sure we control our SG&A and getting that below 20% as a percent of sales. So a number of value streams were up from a volume and then some were up from a pricing standpoint. I talked about in consumer products, just volume and higher average selling prices. So the pricing factor was there more than others.
Yes. And Will, it's Joe. The only thing I would add is that volumes are definitely increasing. At the same, as Colin mentioned, there are some pricing dynamics in there as well. What sometimes gets lost is the benefits from the new products and NPD that we're seeing in the organic growth side. We talked about Balloon Time. Their store count is up 64% from a year ago. They're in 55,000 stores. That's driving a lot of growth. And we talked about the ASME tanks in data centers. That's just not us raising the price or having more value of the same thing. That's having new products that are available to either defend our existing businesses to increase the moat around our businesses or, candidly, to appeal to new customers, and we're having success with all three, which makes us pretty happy and pretty optimistic about the future.
That's super helpful. And looking forward, can you add some color on the type of organic growth you're expecting to generate in Q4 and over the next few quarters? And if you could break it out by building products and consumer products in the JVs?
Yes, that sounds suspiciously like giving guidance, Will. So we're not going to be able to do that. But we do believe that a lot of the trends that we have been seeing will continue. We're always mindful in our businesses that there are pockets of strength. One of the things that really makes us feel good about our business is that we do have businesses and end markets that are influenced by different things. We're not over-indexed to a certain vertical or a certain industry. And so yes, we'll continue to drive organic growth as we optimize and grow the business, and we're certainly always looking for opportunities to grow through acquisitions as well.
Our next question will come from the line of Brian Biros with Thompson Research Group.
This is Steven Ramsey on for Brian. The comments on the tank business in data center, certainly an interesting topic and one that our channel checks point to a stunningly bright picture for this segment over the next year or 2 at least. I'm curious on 2 fronts there. Number one, how the pipeline is forming and your visibility into that demand for new data centers? And then secondly, is there much opportunity now or that's coming in the retrofit side of existing data centers?
Steven, it's Joe. Great question. For a lot of our value streams, data centers are an important and a growing end market, WAVE, ClarkDietrich, Elgen, LSI, and Amtrol, which is our water business, to name a few. Specifically, on that water side, on the ASME side of the business, the ASME cooling tanks that we provide are gaining significant traction as data centers increasingly embrace liquid cooling and there are lots of things for chipsets and things like that, that are driving that dynamic. For us, our business this year will probably triple. Importantly, next year, we see additional incremental growth. And we honestly don't think it's a year or 2. We think it's several years. We also don't think it's all coming at once because when you look at the announced data centers and the announced changes, there is a lag between those announcements and then when things get built and certainly when our solutions become part of the overall construction project. And so visibility-wise, we continue investing in people and process and engineering capabilities. And so we feel really good about that business for the foreseeable future. It's not just in the tank side of the business. I mentioned we have lots of other businesses that are benefiting from exposure and solutions to the data center. We also don't want to over-index to data centers either. It's not like this is half of our revenue, but it is growing, and we feel really good about it, and we feel good about the investments that we have made that have led to our success thus far and that we're continuing to make.
That's great color and all makes sense. Maybe a follow-on question on the same topic. How do you feel about your capacity producing all the various products that go into data centers? And how do you think about managing that capacity given the outlook for multiple years is so bright?
Yes, that's a great question. And certainly, we're not the only company that needs to sort that out. The entire supply chain and ecosystem around data centers continue to be pretty dynamic. From our perspective, we continue to feel like we have capacity and we can grow, and we have the ability to continue to think about the best ways to make sure that we are engineering these products and getting them into the hands of our customers on an efficient basis.
Okay. That's helpful. And then last quick one for me. One of the topics from the recent war issues is helium shortages. I'm curious if this is any impact for you guys?
Yes, it's a great question. In the near term, as a domestic sort of supplier of what we do, our sources of helium are also domestic. And so never say never, but for right now, I think we're in good shape.
Our next question will come from the line of Walt Liptak with Seaport Research Partners.
Great quarter everyone. I wanted to follow up on the data center question that was just asked. You mentioned a few businesses, including WAVE, LSI, and Amtrol, and I believe there might be another one that has exposure to data centers. Could you discuss them collectively, including their current revenue and growth rates? Also, what do you see as the best opportunities among those areas for pursuing data center projects?
Walt, so as Joe mentioned, we play in a number of different verticals, different businesses to support the growth there. With WAVE, it's more of the structural grid and then containment, and they have really solid teams in place and capabilities to capture the demand that they're seeing there, which is fast and growing and feel really good about that. ClarkDietrich, more on the structural side, the products that they provide, they're seeing increased volume there, and they're able to capture that and feel really good there. On Elgen, we've talked about it with HVAC components and then strut products. They've seen big increases in their demand over the past couple of years related to data centers. And then on LSI, the metal roofing clip. So they're all growing quickly within each of these businesses. I mentioned last quarter, it's less than 10% of each of these businesses individually. But in all cases, it's the fastest-growing area of these businesses. So I would expect that to continue moving forward based on what we can see. Each of these businesses, in different ways, they're either making small investments in just resources to help capture the demand and in some cases, small investments in equipment to make sure we can capitalize on the solutions that these data centers need. So Joe talked about our water business with Amtrol, and we're excited about that opportunity. And our teams are just setting up their strategies to make sure we can capitalize on this moving forward. So we feel really good about that and touches a number of businesses, and the teams are focused there for sure.
Okay, I'll change topics and discuss the recent changes in the Middle East regarding the U.S. and Iran. It appears that these events didn't have any significant negative impact, as our results, particularly in organic growth, were strong. Did you notice any changes in customer behavior in February and March? How are things looking as we approach the end of March?
Sure. So Middle East specifically, well, things are pretty fluid at the end of last week, things looked a certain way. And this week, they look a bit more optimistic from the standpoint of getting the straight formulas open and getting goods and oil flowing to the world. It's a little difficult to forecast any tangible impacts that a prolonged closure would have beyond the obvious, which is that interruptions of global shipping are inflationary. That is what it is. And specifically, energy costs are up, including oil, diesel, natural gas, and other derivatives. That's true globally. This will have an impact on everybody, whether it's trucking, ocean freight, or anything else. There are other inputs that come out of the Middle East, but those will be impacted. And then specifically to us, our European LPG business has some customers in the Middle East. And right now, we're unable to ship to those customers. So we're certainly hopeful that the situation gets resolved sometime in the near future. But I would say, first of all, we're not at all over-indexed to the Gulf for oil prices generally since we're predominantly a U.S. manufacturer, but we will take steps to mitigate potential headwinds or price increases with fuel if or as they present themselves to us.
Our next question will come from Dan Moore with CJS Securities.
This is Will on again. Just one more follow-up that I don't think was asked yet. Can you provide maybe more color and update on the LSI acquisition? How is performance and synergy realization tracking relative to expectations?
Yes, Will, thanks for the follow-up. So really excited about LSI. We closed it midway through the quarter. So there's really just about 6 weeks of results in the quarter, but meeting expectations so far. We're in early days of integration, but really, really excited about that business. And the more we spend time with that team, the more it's validating and our conviction increases for what we can do together. As a reminder, they're a leading player in commercial metal roofing clips. This was an attractive niche driven by the reroofing cycle. And really strong margin profile and opportunities for us to really capitalize on coming together and making this business better under our ownership. So really excited about that. And lastly, the team there is such a good cultural fit with ours. So we enjoy spending time with them and look forward to the things we can do together.
Our next question will come from the line of Brian McNamara with Canaccord Genuity.
I'm going to ask about tariffs and tariff advantages. So I'm curious where you guys stand in your tariff advantage product relative to peers on a market share basis or however kind of way you want to posit it. I remember last quarter, you guys said you needed to hire 40 more people at your plants to kind of meet increased demand for those products. And I think that partly drove part of the gross margin degradation last quarter. So where are we as it relates to kind of tariffs and kind of your perceived advantage there?
Sure, Brian, a lot has changed, but there hasn’t been much resolution regarding tariffs in the last couple of months. However, we still believe that we are benefiting from the tariffs that are in place. In many of our value streams, we are the only domestic manufacturer of certain products, meaning foreign competitors must navigate the Section 232 tariffs, which were not an issue with the Supreme Court. A level playing field is advantageous for us. We feel we have gained market share in several value streams and added manufacturing staff in December to meet demand in those businesses. Our solutions are resonating well, and we see the competitive dynamic providing us the opportunity to compete based on the value we deliver to our customers, which is encouraging. We do experience some negative tariff impacts, particularly with commodity costs and overseas manufactured products in the consumer business. Our three strategies to address this are collaborating with suppliers to offset some additional costs, optimizing our supply chains to reduce expenses, and considering pricing actions when necessary. We believe we’re effectively managing all three aspects. Regarding aluminum and brass, there has been speculation about potential refunds, but I doubt the government will readily offer substantial refunds. Some states and companies have filed lawsuits, so we’ll wait to see how that unfolds. We’re focusing on what we can control, and our teams are performing exceptionally well. If we look at our strategy, there are some numbers worth noting. In the nine months ending Q3, we've increased our top line by $175 million, with improvements in gross margin and a decrease in SG&A as a percentage of sales. Our adjusted EBITDA margin is up 220 basis points in wholly owned businesses, with a slight decline from JVs. This reflects our strategy of optimizing and growing while keeping SG&A flat, as Colin mentioned. Regarding the tariff situation, we believe the current environment is stable and will likely remain so unless unforeseen events occur. There is much happening in the world, but based on our current observations, demand appears steady, with some positive indicators in certain areas, which makes us quite optimistic.
Great. That's really helpful. I appreciate the color on the data centers. It's becoming a bigger topic for you guys and obviously, the market in general. I think when you guys split, it was a pretty small part of your business. I was hoping you guys could contextualize kind of where you are. I understand if you don't want to quantify per se. I think Colin mentioned it's less than 10% of some of your business lines. But like how big is it today on a qualitative or quantitative basis? How big do you think you can get over the next couple of years?
Yes, Brian. So I'll start there and appreciate the question. I mean, it's I think all we can say there is it's helping grow a number of our businesses and offsetting some softness in other markets. And then we're doing our best to develop strategies to support this demand. It's unique in each of these value streams. And so I mentioned earlier, whether it's people or equipment or capabilities or partners, we are leveraging all of those tools to develop the best solutions to capture this demand. It is a focus of ours because we see the growth opportunity. But to Joe's point, we're not over-indexed to it by any means. So we're trying to be smart about how we spend our time and resources, but it is an opportunity to capture more incremental growth for us. And if things play out as we expect, the percentage share across these businesses will increase to data centers as we move forward. And that's the best way we could characterize it on top of what Joe shared specifically about our water business.
Yes, Brian, Colin did a great job outlining the significance of this for us. I believe it will be larger in a year than it is now. We have made investments, and our solutions are connecting with clients. In some cases, these involve buildings that have specific requirements, while in other environments, we are dealing with very specialized buildings that need particular features. Therefore, our solutions have been tailored in many instances. People often concentrate on data centers, but they actually represent a considerable portion of commercial construction. As commercial construction improves overall, the volumes in many of these areas will increase because conditions in the commercial sector normalize, alongside continued growth in data centers, which we anticipate will persist for over five years. I expect this to generate significant activity related to construction and retrofitting.
This concludes our question-and-answer session. I will now turn the call back over to Joe Hayek for closing comments.
Thanks, everybody, for joining us this morning. We appreciate your time. Have a great week. We look forward to speaking with everybody again soon.
This concludes today's conference call. Thank you all for joining. You may now disconnect.