Klöckner & Co SE (WS) Earnings Call Transcript & Summary

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

Thank you, operator. Good morning, and thank you for joining us for today's call. I'm Melissa Dykstra, Vice President of Corporate Communications and Investor Relations at Worthington Steel. With me today are Geoff Gilmore, our President and CEO; and Tim Adams, our Chief Financial Officer. On Slide 1, you will find our safe harbor statement. Before we begin, I'd like to remind everyone that certain statements made today are forward-looking within the meaning of the 1995 Private Securities Litigation Reform Act. These statements are subject to risks and uncertainties that could cause actual results to differ from those suggested. Today's call is being recorded, and a replay will be available later today on worthingtonsteel.com. With that, I'll turn the call over to Geoff.

Thanks, Melissa. This is an exciting day for Worthington Steel. We are taking a strategic and transformative step in our growth journey. Through the acquisition of Kloeckner, we will strengthen our position in high-value metals processing, create meaningful value for our shareholders, deepen our strong relationships with our customers and suppliers, and generate new opportunities for our employees. Worthington and Kloeckner share a focus on safety, operational excellence, innovation and disciplined execution. By integrating Kloeckner's capabilities, we will build a more resilient business and drive long-term value creation. Our two companies will be stronger together. On Slide 2, you'll see our strategic logic for why we are pursuing this combination and why we believe it matters. Tim and I will talk about each of these points in more detail. But the key takeaway is we will become a larger and more diversified market leader. When closed, we expect to become the second largest service center in North America. We'll expand our geographic reach, offer a more diversified set of products and begin to serve new markets. At the same time, we will enhance our existing strengths in carbon flat roll-steel and electrical steel laminations. We've identified key synergies and growth initiatives and believe the cultural alignment between our two organizations will streamline integration and allow us to maintain our disciplined approach to process improvement. The key takeaway is that this combination creates a larger, more diversified metals processing platform with meaningful opportunities to apply our transformation playbook. Turning to Slide 3. I want to explain how this acquisition fits the criteria we have shared in the past. Worthington Steel is very deliberate in how we evaluate acquisitions. We look for well-run businesses with strong management, a culture aligned with our philosophy and a disciplined financial framework. We target deals that will be EPS accretive in a short period of time and improve the quality of our earnings, including overall EBITDA margin. We also prioritized opportunities where we can create value through a proven transformation process and capture synergies. We place great importance on finding acquisitions that strengthen us in markets we know well or expand us into new and attractive markets. Kloeckner checks all these boxes. They embarked on the path several years ago to shift toward a higher value-added portfolio and are well down that path. They also bring a long operating history and long-standing partnerships with both customers and suppliers. Just as importantly, we see strong cultural alignment with Worthington's golden rule-based philosophy, which we believe supports disciplined execution once we close. Financially, we expect the transaction to be accretive within the first full year of operation with margin expansion expected over time, driven by synergies and complemented by a number of strategic growth projects already underway at Kloeckner. Transformation is a mechanism through which we've historically delivered synergies, and it will be the primary driver here as well. Strategically, Kloeckner strengthens our core in carbon flat-roll and electrical steel, while expanding our portfolio to include aluminum, stainless, long products and downstream fabrication. It also diversifies the markets we serve and expands our footprint, particularly in the Southern U.S., which we believe improves resilience across cycles. Importantly, to reduce leverage following close. Now let's take a closer look at Kloeckner's business. On Slide 4, you'll see Kloeckner's shipped 4.2 million tonnes on a trailing 12-month basis, which generated sales of $6.3 billion. Kloeckner is listed on the Frankfurt Stock Exchange and has nearly 100 million shares outstanding, approximately 42% of the shares are owned by a single shareholder in the holding company called SWOCTEM. I am pleased to announce SWOCTEM fully supports the transaction and signed an irrevocable agreement to tender their shares in support of our offer. Kloeckner operations include approximately 110 facilities and approximately 6,000 employees in North America and Europe. It is important to keep in mind that most of their shipments and sales are within the North American market. Slide 5 outlines one of the most important benefits of this transaction. The expansion and diversification of our footprint in terms of geography, product offering and markets served. This diversification gives us more flexibility and better balance across different demand environments. It also enhances our ability to serve customers with more localized coverage, especially in the Southern U.S., where growth, manufacturing activity and reshoring trends continue to shift industrial demand. Kloeckner's business model is similar to Worthington's from the standpoint of buying local to serve local. Kloeckner has a broad footprint serving customers locally with a wide product offering and extensive processing and fabrication capabilities. That matters because it expands the ways we can support customers, more lanes, more local responsiveness and more capability to solve problems all within close proximity to where customers operate. From a product standpoint, this combination broadens Worthington's portfolio beyond our carbon flat-roll core into complementary categories such as aluminum, stainless, long products, plate and downstream fabrication. That breadth is strategically important because it helps create a more diversified market portfolio, which we believe can mitigate cyclicality over time. At the same time, this transaction enhances our existing strengths. We remain firmly anchored in carbon flat-roll steel in the U.S. and Mexico and we continue to build our differentiated position in electrical steel laminations, an area we believe is supported by long-term demand tailwinds tied to electrification and grid investment. Like Worthington Steel, Kloeckner has made a series of investments and divestitures over the past several years to focus on their core strengths and higher value-add processing. Slide 6 shows some of the key moves the company has made over the past 4 years to transition their business. By increasing their focus on specialized markets and higher value add, while reducing the reliance on distribution-only businesses, Kloeckner has positioned itself for margin expansion. Turning to Slide 7. One of the things we like about this combination is that it strengthens the near-term platform while also expanding the longer-term growth pipeline. Kloeckner has been investing in value-added projects that complement where we believe the industry is headed. Projects such as adding aluminum processing, increasing plate processing capabilities and expanding their existing presence in the electrical steel market to meet the growing demand for electrification. These are all excellent projects, and they are complementary to our existing strategic priorities. These projects offer an opportunity to bring a variety of new solutions to our customers over time. Slide 8 shows how this combination diversifies the larger portfolio in practical value-creating ways. It broadens our product offering beyond carbon flat-roll into aluminum, stainless, long products and plate, and it expands our value-added processing capabilities, including downstream operations like fabrication. The combination also meaningfully extends our geographic reach, particularly in the Southern U.S. and Mexico, which strengthens local coverage and over time can improve service responsiveness and supply chain efficiency. And finally, it broadens the markets we serve, creating a more balanced end market mix that we believe will make the combined company more resilient across cycles. The chart on Slide 9 puts the increase in scale into context. Post close, the combined company would be positioned as the clear #2 service center in North America by revenue. But let me be clear, this transaction is not about size for the sake of size. Scale means a stronger platform for operational improvement and business resilience, and that's great news for our customers, suppliers, employees and shareholders. We're excited about bringing our two companies together. I want to thank everyone who helped us arrive at this momentous day. Now I'll turn it over to Tim to walk through the transaction details.

Thanks, Geoff. I'll jump right to Slide 10. This transaction is structured as an all-cash acquisition through a voluntary public tender offer in Germany executed via a wholly owned acquisition vehicle. Under the proposed terms, the offer price will be EUR 11 per share in cash, implying an enterprise value of approximately USD 2.4 billion. We anticipate combined sales of $9.5 billion and an EBITDA margin of 7%, which includes run rate synergies of approximately $150 million by the end of 2028. We expect the transaction to be accretive to Worthington Steel's earnings per share within the first full year of operation, driven by scale benefits, financing structure and early synergy realization. On an implied basis, the transaction values the business at approximately 8.5x trailing 12-month EBITDA as of September 2025 before synergies. The stand-alone valuation is consistent with service center precedent transactions, synergies, enhance returns, but the deal clears our financial thresholds before considering them. Including $150 million of expected synergy, the effective multiple improves to approximately 5.5x, reflecting the earnings uplift from integration execution. Importantly, the offer is fully financed with committed facilities and is not subject to any financing conditions. From a balance sheet standpoint, we expect pro forma net leverage to be approximately 4x at closing. With a clear target and plan to reduce leverage below 2.5x within 24 months. The offer will be subject to a minimum acceptance threshold of 65% and we have signed an irrevocable agreement to accept the offer with Kloeckner's largest shareholder who owns 42% of Kloeckner shares. Based on the process and required approvals, we currently expect the transaction to close in the second half of this calendar year. Turning to Slide 11. At close, the combined company will have meaningfully greater scale, broadened reach and an expanded end market profile. We will combine the larger scale and broader customer reach with the Worthington business system, which we expect to drive swift synergy realization, margin expansion and prudent working capital management. We expect this will result in the transaction being accretive to Worthington EPS within the first full year of operations, while maintaining margins over 7%. If you take a look at Slide 12, you'll see that we have identified approximately $150 million of annual run rate cost and operational synergies expected to be achieved by the end of fiscal 2028 with about 50% of that expected to be realizable in year 1. These estimates are preliminary, but they are grounded in specific actions that we have executed in prior integrations. Roughly half of the synergies are tied to procurement, logistics and overhead actions that are within our direct operational control and not dependent on market recovery. The underlying drivers are practical and familiar. Capturing procurement benefits from increased scale, optimizing logistics of the significantly larger network, improving operational efficiency and productivity and reducing duplicative administrative costs. Our preliminary estimate for the onetime cost to achieve these synergies is approximately $40 million, a relatively modest number compared to the overall synergy target. Moving to Slide 13. It is worth pointing out that one of the attractive features of this transaction is the asset base underpinning it. More than 70% of enterprise value is backed by net working capital, which materially limits downside risks and provides balance sheet flexibility. Slide 14 outlines the transaction process. This is a German public tender offer and the process is defined and regulated. The offer document will be submitted to BaFin, German's Financial Regulatory Authority for approval and following approval, the acceptance period typically runs several weeks along with other required approvals. We have committed bridge financing of $1.9 billion from our financing banks. We will begin work on the permanent financing almost immediately. The size of the permanent financing will depend on the number of shares that are tendered in the process and will be adjusted for the existing Kloeckner debt that is rolled over. We expect the transaction to close in the second half of this calendar year. Turning to Slide 15. After the transaction closes, our near-term financial priorities are clear. Deleveraging, synergy capture and maintaining a disciplined balanced capital allocation approach, including our commitment to maintaining the dividend. We have a clear line of sight on the steps we need to take to meet our goal of reducing leverage below 2.5x within 24 months. The sources of deleveraging are straightforward. Combined cash flow generation, synergy realization and selective monetization opportunities without losing sight of disciplined reinvestment. And because there are meaningful gating items before closing, regulatory approvals and German takeover process, we will not get ahead of ourselves on integration specifics today. That work becomes appropriate once the transaction closes. Finally, I'd like to thank our teams from Kloeckner and Worthington, where you work on the transaction. Your dedication, commitment and respect showed in every interaction. Now I'll turn things back over to Geoff.

Thanks, Tim. I'm sure you can hear our enthusiasm about what this transaction will mean for Worthington Steel's business, our shareholders, employees, customers and suppliers. We are taking that same energy into our integration planning as we work toward closing. To summarize, this combination works because the assets fit. Kloeckner's footprint and product mix line up directly with Worthington's operating model, particularly in high-value flat-roll and electrical steel. We see clear opportunities to apply Worthington's transformation playbook across Kloeckner to drive improvements in throughput, margins and working capital without disrupting customers. This is a straightforward integration of two businesses with similar operating models where we can apply a proven playbook without disrupting customers. As a result, the synergies are well identified, quantified and achievable within our normal operating cadence. We firmly believe Worthington and Kloeckner will be stronger together. Now we'd be happy to take your questions.

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

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

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

Yes, absolutely. Yes, Phil, I think you've identified the right kind of low-hanging fruit out of the gate. Synergies are really focused on procurement savings, SG&A efficiencies, operational best practices. Again, we think how that should be achievable within the first year. And what gives us confidence in that is we've developed over the years a pretty nice playbook with respect to synergy capture. We've created for this project specifically an integration management office and we've staffed it with some of our best people. We recognize this deal is pretty large. So we're going to bring in some help from the outside. We've got some third-party experts that will help us with synergy capture and integration. Our team understands what the targets are and what the time line is. And the goals are clear and the accountability through the integration management office is in place.

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

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

If I remember correctly [indiscernible]

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

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

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

Tim?

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

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

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

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

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

Tim, do you want to grab that?

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

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

Tim?

Yes. The margin profile for Europe is a little bit less in North America. That's something that Kloeckner clearly recognizes and it's part of their long-term strategy to drive value add for their customers, which equates into higher margins. I think one of the slides in the deck shows the path that they've been on to drive higher value add, and they've got strategies to do that, and they've been executing on those strategies. I think -- couple of weeks ago, I think we talked with you about a, the demand in North America has been solid. It's been okay. That's not been the case in Europe. Europe has been or has seen very soft demand. And as you would guess, when demand is soft, people have open capacity and they become much more aggressive in attempting to win business and margins are compressed even further. So we would expect that margins will increase as Kloeckner executes on their strategic plan and as Europe recovers.

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

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

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

Yes. Martin, I'll grab that. This is Geoff. Certainly, a significant amount of the Kloeckner significant amount of the Kloeckner business is flat-roll carbon related, obviously, very similar to ours. And when looking at their flat-roll carbon business, I think you could look at it very similar to ours. They do a lot of large programs selling to large OEM-type customers. Now certainly, the business can differ a bit when you start looking at long products, plate, stainless and then downstream fabrication, which can be certainly some large program selling, but certainly could be more transactional over the cycle as well in those types of businesses. So very similar on the flat-roll carbon side. Obviously, the products such as stainless, aluminum, downstream fabrication are going to be a bit different.

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

Yes, great question. I'll start, and certainly, Tim can add on. Martin, that is a goal we've been very transparent with. We talk about that each quarter and we are still very determined to hit that goal of 10% in a very reasonable time. And we think that this opportunity truly only accelerates that. I mean we are developing a scaled multi-metal service center, adding more value-added processing capabilities. We're going to have a much richer mix of product offerings, broader geographic reach. So all of these things will contribute to margin expansion over time. And the other thing I want to highlight, Kloeckner had a pretty significant shift in strategy just a few years ago. And that shift was to focus solely on high value-added metal processing. Just like Worthington Steel is doing today. And so they've announced some really exciting investments to help increase that margin portfolio such as the aluminum processing facility with aluminum dynamics, who's owned by Steel Dynamics. And then they've also done a fantastic job looking at divestitures and what assets or businesses they have that don't fit that strategy. And recently, you saw the announcement of them selling seven distribution centers, which were lower-margin businesses. So we are still committed to that and think that this will help us accelerate to that goal of 10%. Tim, anything you want to add to that?

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

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

Tim, do you want to grab that?

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

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

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

Yes, absolutely. So Timna, I mean, this is something that we have been considering for two years, so pretty quickly after the separation into our own publicly shared company. And we've been outspoken, we've had conversations with you. Certainly, acquisitions was a significant pillar of our growth strategy. And so we go through a rigorous process every year, more than once a year on just reviewing all the various acquisition targets that could be available to us. And as we went through that process, it just became clear to us and more and more clear that Kloeckner was the right fit for us. It's a complementary business from a regional perspective. We're clearly very excited about the adjacent product capabilities that it adds in aluminum, stainless, long products and the fabrication. And then it provides a step change in growth. There can be limited opportunities or I should say, limited opportunities that can truly be transformational to our company and our shareholders and more so the industry. And this is transformational. And so this broader platform opens up multiple pathways for incremental growth. Certainly, we got a plan to pay down debt, but we will have opportunities to look at other larger acquisitions if we choose to continue to consolidate flat-roll carbon steel. But I also think it opens us up in some of these adjacent markets we talked about to pursue some smaller bolt-on acquisition opportunities. And when you look at the synergies involved, you don't see a lot of deals where you can feel as confident as we do about capturing $150 million in synergies. And so the timing felt great to us where the market is. We felt like the environment has been ripe for consolidation really for years. And being our own stand-alone company, with our own capital structure, we were finally in a position to start pursuing consolidating and making a better steel company.

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

Tim, do you want to grab that for Timna?

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

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

Geoff, you're very much an industry veteran at this point, and you've been at Worthington for a long time and so you've seen a lot of change. I know coming out of the financial crisis, Worthington Steel operations saw a very meaningful change in strategy based on a lot of hard work that you all put in, in terms of being leaner as an organization and leading the charge on hedging and cash flow predictability. High level, I'm wondering what you see in terms of the potential at Kloeckner to place those disciplines into that business given that you all have been very successful doing it in your own and you've been through it.

Yes. Still honestly, we think that the opportunity there with -- and you're specifically talking about our continuous improvement program and transformation and what we've been able to do over the last decade or more. And we see significant opportunities to make those types of improvements at Kloeckner. It is a great leadership team and a great team overall. But we certainly have some best practices and, I think, best-in-class playbooks that we think are quickly implementable at Kloeckner. And I think more importantly, they're open-minded to that. It's a high-performing organization. We're going to have some good candid conversations. But the discipline that we put into managing working capital, specifically inventory, how we approach demand planning and supply chain management, looking for opportunities to increase capabilities within the operations. Those opportunities are going to exist and really be plentiful. So we will attack the income statement, and we will attack the balance sheet with the same vigor that we have at Worthington over the last decade. And I think when you put two solid companies together, and you have the breadth of purchasing and buying that we have across flat-roll and now these other products, whether we're talking about hedging and price risk management or again, the operational type things that I just discussed. It kind of starts to look like heaven's playground for us with transformation. So we're very excited about that. But I know they're equally excited about that, and that's probably the most important thing to help us achieve it. And I think that's why we're so confident when Martin or others ask about our journey to 10%. These obviously feed into that greatly, meaning these opportunities. So excited about that, and I think it's going to be a huge opportunity for us.

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

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

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