Worthington Steel (WS) Q2 2026: Direct Sales Reach 65% of Mix, Driving Margin Expansion
Worthington Steel’s Q2 showcased a decisive shift toward higher-margin direct sales, with direct volumes now 65% of total shipments, up from 55% last year. Automotive, energy, and electrical steel investments are fueling share gains despite a mixed macro backdrop and compressed galvanized spreads. Leadership signals further transformation, automation, and AI integration to underpin cost discipline and margin resilience into 2026.
Summary
- Direct Shipments Expand Share: Direct sales now drive 65% of shipment mix, accelerating margin leverage.
- Automotive and Energy Outperform: Market share gains in automotive and solar offset construction and heavy truck softness.
- Transformation and AI Initiatives Scale: Back office automation and plant-level process improvements anchor cost discipline for 2026.
Performance Analysis
Worthington Steel delivered a quarter marked by operational discipline and strategic share gains, even as end-market demand remained uneven and galvanized spreads compressed. Total shipments were 902,000 tons, a modest year-over-year decline due to lower tolling volume, yet direct sale volumes rose 13%, now comprising 65% of the mix, up from 55% last year. The company’s automotive segment stood out, with direct shipments up 26% year-over-year, reflecting both market share wins and normalized production at key OEM customers.
Outside automotive, energy shipments surged 50% year-over-year, buoyed by project-based solar demand, while agriculture volumes eked out a 1% gain despite broader softness. These bright spots offset a 9% drop in construction and a 6% decline in heavy truck, with service center customers still destocking. Adjusted EBIT rose by $12.3 million year-over-year, driven by improved direct spreads and higher equity earnings from the Servicero joint venture, despite elevated SG&A from compensation and M&A-related professional fees.
- Mix Shift to Direct Sales: Higher direct sales volume supports improved margin capture and customer stickiness.
- Inventory Holding Losses Narrowed: Pre-tax inventory holding losses improved to $7.2 million from $13.4 million last year, supporting EBIT gains.
- Free Cash Flow and Balance Sheet Strength: $75 million in free cash flow and net debt reduction enhance flexibility for growth investments.
Capital expenditures of $25 million focused on electrical steel capacity, with full-year capex guidance at $110 million, underscoring a commitment to long-term growth while maintaining cost vigilance.
Executive Commentary
"We delivered these results in a market that remains mixed, combined with compressed galvanized spreads. Even with those headwinds, our execution remains strong where it matters most: safety, shareholder value, customer service, and transformation."
Jeff Gilmore, President and Chief Executive Officer
"We expanded adjusted EBIT meaningfully year over year, generated strong free cash flow, and continued to gain share in our most important markets while maintaining balance sheet strength and financial flexibility."
Tim, Chief Financial Officer
Strategic Positioning
1. Direct Sales and Market Share Expansion
Worthington Steel’s pivot toward direct sales is reshaping its business model, as direct volumes now constitute 65% of shipments, up from 55% last year. This shift is not only margin-accretive but also deepens customer relationships, particularly in automotive and energy, where share gains are most pronounced. The company’s collaborative approach with OEMs and ability to ramp new programs underpin these advances.
2. Electrical Steel and Capacity Investments
Electrical steel remains a core growth pillar, with expansion projects in Mexico and Canada progressing on schedule. The Mexico facility is preparing for initial production in Q1 2026, targeting traction motor laminations for the EV and hybrid markets. In Canada, the transformer core plant has secured orders for over 60% of new capacity, with incremental revenue expected in the spring. These investments align with the anticipated rebound in electrified vehicle and infrastructure demand.
3. Back Office and AI-Driven Transformation
Transformation at Worthington Steel extends beyond the plant floor, with back office automation and artificial intelligence (AI) now yielding tangible savings. Two AI agents deployed in credit operations are expected to eliminate over 350 hours of manual effort annually. Broader automation initiatives, including advanced shipping notice improvements, are driving accuracy, payment timeliness, and cost containment, enabling operating expenses to remain flat despite growing complexity.
4. M&A Integration and Capability Extension
Integration of Seatham and Temple is advancing, with both acquisitions bringing expertise in electrical steel stamping, die casting, and automation. Early collaboration and cultural alignment are evident, and management expects best practices from these platforms to be scalable across the broader footprint, enhancing competitiveness in advanced mobility and industrial markets.
5. Sustainability and Culture as Differentiators
Worthington Steel’s focus on sustainability and workforce engagement is reflected in recent supplier and employer awards, as well as the launch of its 2025 Corporate Citizenship and Sustainability Report. These initiatives reinforce the company’s brand and stakeholder trust, supporting long-term resilience.
Key Considerations
This quarter’s results spotlight Worthington Steel’s ability to execute and adapt in a volatile market, while laying the groundwork for future growth in electrification and infrastructure. Investors should weigh the following:
- Direct Sales Mix Drives Margins: Sustained mix shift to direct sales supports higher margins but increases exposure to OEM demand cycles.
- Automotive and Solar Strength: Share gains in automotive and energy are offsetting cyclical softness in construction and heavy truck segments.
- Transformation and AI Adoption: Back office automation and AI pilots are yielding cost savings, with further quantification and scaling expected in 2026.
- M&A Integration Progress: Seatham and Temple integration is on track, with best practices being adopted across operations and commercial teams.
- Capex and Balance Sheet Flexibility: Disciplined capital allocation is preserving flexibility for opportunistic growth as end-market conditions improve.
Risks
Exposure to cyclical end markets, particularly construction and heavy truck, remains a risk if macro recovery lags. Steel price volatility and inventory holding swings could pressure near-term margins, especially with lagged contract pricing. Integration execution risk from recent M&A and the pace of transformation savings realization also warrant close monitoring. Management’s cautious optimism for 2026 improvement is contingent on interest rate and policy stabilization.
Forward Outlook
For Q3 2026, Worthington Steel expects:
- Inventory holding gains or losses in a range of a pre-tax gain of $3 million to a pre-tax loss of $3 million, reflecting ongoing steel price volatility.
- Continued ramp in new automotive programs and incremental revenue from transformer core expansion in Canada beginning in the spring.
For full-year 2026, management maintained guidance for:
- Capex of approximately $110 million, focused on electrical steel and automation projects.
Management highlighted that market conditions are setting up for improvement in the back half of 2026, with easing interest rates and policy clarity expected to support demand recovery. Ongoing transformation and AI initiatives are expected to further contain costs and drive margin leverage.
Takeaways
Worthington Steel’s Q2 results affirm its strategic pivot toward higher-margin direct sales and electrification, while transformation and disciplined capital allocation underpin resilience in a mixed market.
- Direct Sales and Market Share: The continued rise in direct shipment mix is driving margin expansion and deepening customer relationships, particularly in automotive and energy.
- Transformation and AI Impact: Early wins in back office automation and AI are setting the stage for broader cost savings and operational agility in 2026.
- Watch for End-Market Recovery: The timing and strength of a rebound in construction, heavy truck, and agriculture will be critical for sustaining top-line growth and maximizing returns on recent investments.
Conclusion
Worthington Steel is leveraging a mix shift to direct sales, strategic investments in electrification, and aggressive transformation to outpace cyclical headwinds. The company’s balance sheet and operational discipline position it to capitalize on demand recovery and continued margin improvement into 2026.
Industry Read-Through
Worthington Steel’s experience this quarter signals a broader industry pivot toward direct sales, electrification, and digital transformation in the metals and manufacturing sectors. Share gains in automotive and solar reflect a shift in OEM sourcing strategies and the growing importance of supply chain localization. The integration of AI and automation in back office and plant processes is likely to become table stakes for margin defense across the steel and industrial supply chain. Other industry players should monitor the pace of end-market recovery and the competitive advantage of operational transformation, as these factors will increasingly differentiate winners from laggards in the next cycle.