Worthington Enterprises, Inc. Q3 FY2025 Earnings Call

Good morning, and welcome to the Worthington Enterprises Third Quarter Fiscal 2025 Earnings Conference Call. All participants will be in listen-only until the question-and-answer session of the call. This conference is being recorded at the request of Worthington Enterprises. If anyone objects, you may disconnect at this time. I would now like to introduce Marcus Rogier, Treasurer and Investor Relations Officer. Mr. Rogier, you may begin.

Thank you, Sarah. Good morning, everyone, and thank you for joining us for Worthington Enterprises third quarter fiscal 2025 earnings call. On our call today, we have Joe Hayek, Worthington's President and Chief Executive Officer, and Colin Souza, Worthington's Chief Financial Officer. Before we get started, I'd like to note that certain statements made today are forward-looking within the meaning of the 1995 Private Securities Litigation Reform Act. These statements are subject to risks and uncertainties that could cause actual results to differ from those suggested. We issued our earnings release yesterday after the market closed. Please refer to it for more detail on those factors that could cause actual results to differ materially. In addition, our discussion today will include non-GAAP financial measures. A reconciliation of these measures with the most appropriate comparable GAAP measure is included in the earnings press release, which is available on our Investor Relations website. Today's call is being recorded and a replay will be made available later on our worthingtonenterprises.com website. At this point, I will turn the call over to Joe for opening remarks.

Thank you, Marcus, and good morning, everyone. Welcome to Worthington Enterprises fiscal 2025 third quarter earnings call. I'd like to start by thanking our entire team. We had a great quarter and set Q3 records in production and shipments. That does not happen without our teams working safely, something we all commit to every single day. It also reflects the phenomenal work our teams have done in the past 12 months, understanding and working with our customers to ensure that our solutions are the right solutions delivered on time. We delivered year-over-year and sequential growth in both adjusted EBITDA and earnings per share. Adjusted EBITDA margin in the quarter was 24% versus 21% in a very strong Q3 a year ago. Net sales were down $12 million or 4% from the prior year when SES contributed $35 million in sales. But excluding the impact of SES in both periods, our revenues grew by over 8% in Q3. That growth was driven by the inclusion of Ragasco, improved demand as we return to more seasonally normal trends across our value streams, an improved mix, and continued share gains in many end markets. Our results in Q3 are the product of a great job our teams have continued to do as we optimize our current business and grow Worthington. We continue to leverage the Worthington Business System and its three growth drivers, innovation, transformation, and M&A, to maximize both our near- and long-term success. As I've said before, one of the key areas where we excel is our ability to understand and solve our customers' challenges and partner with them to help drive their success through innovation and by opening and expanding new markets. Let me share a few examples. During Q3, our Building Products team launched our latest IoT-enabled product SureSense, a wireless propane-level sensing technology. When it's inserted into a large-format heating tank, it provides extremely accurate and reliable digital readings that are sent directly to our customer. SureSense helps make these propane marketers more efficient and reduces costly customer runouts, ultimately helping them be more successful. Just last week, our Consumer Products team launched the Balloon Time Mini helium tank, which is now available at Target stores nationwide. The innovative design is easy to carry in store, making it convenient for at-home and on-the-go celebrations. Its relatively small size also creates more opportunities for distribution in grocery and convenience stores that haven't been able to carry our traditional tanks because of their size. Our Building and Consumer Products teams are also increasingly working together to bring innovative product offerings and solutions to customers. A great example of this is Tractor Supply, where we leveraged our commercial relationships to gain share and expand the breadth of our products available in the largest rural lifestyle retailer in the US. Now, you can find Worthington products suitable for home, commercial, and agricultural applications in all Tractor Supply locations nationwide. We continue to invest in transformational change as well. Part of thinking like a startup is prioritizing speed and agility in our frontline manufacturing operations. We're investing in automation and have substantially completed one of our facility modernization projects and are on track with the other. We're also embracing AI across our facilities and in our back-office function and we're continuing to adopt new ways of thinking. For example, in early March, we launched an 80/20 project in our water business, which we believe will enable us to better prioritize our products and align our manufacturing to optimize the growth and the margins of that business. Last year, we talked about some of the awards our HALO griddles have won. We're pleased to share that later this year, you'll be able to buy a HALO griddle at select Walmart stores, an example of our strategy of acquiring innovative products with emerging brands and leveraging our capabilities and relationships to broaden the reach of those brands. In another example of adding value to our acquisitions, Level5 just launched Destination Drywall with Sherwin-Williams. Our Level5 drywall tools can now be found by contractors and DIYers in 3,500 Sherwin-Williams locations nationwide. As evidenced by those two examples, M&A, enhanced by the Worthington Business System, is an important growth driver for us. Our strong balance sheet and liquidity give us the financial flexibility to pursue additional growth through acquisitions, and we continue to focus on acquiring market-leading businesses that we can add value to and that will be accretive to our margins, free cash flows, and competitive position. As we head into the spring, our Q4, and ultimately into our fiscal 2026, we're very excited about the platform that we have built and the future that we have in front of us. We're confident that our market-leading brands and outstanding value propositions anchored and supported by our unique and powerful people-first performance-based culture will enable us to accelerate the profitable growth of our business and create more long-term value for shareholders. 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 earnings growth in Q3, reporting GAAP earnings from continuing operations of $0.79 per share versus $0.44 in the prior year quarter. There were a few unique items that impacted our quarterly results including the following: the current quarter was negatively impacted by net pre-tax restructuring and other charges of $5 million or $0.12 per share, primarily due to an earnout associated with the Ragasco acquisition; results in the prior year quarter were negatively impacted by $0.36 per share due to several items, the largest relating to the separation of our former steel processing business, along with the charge to annuitize a legacy defined benefit pension plan. Excluding these items, we generated adjusted earnings from continuing operations of $0.91 per share in the current quarter, marking a strong quarter for us at Worthington Enterprises. This represents an increase from $0.80 per share in Q3 of the prior year. Consolidated net sales for the quarter were $305 million, a 3.9% decrease from $317 million in the prior year quarter. This decline was primarily due to the deconsolidation of our former Sustainable Energy Solutions segment, which contributed $35 million in sales last year. However, this was partially offset by contributions from the Ragasco acquisition and higher overall volumes. Excluding SES in both periods, sales grew over 8%. Gross profit increased significantly to $89 million, up from $73 million in the prior year quarter, reflecting an expansion in gross margin of approximately 620 basis points to 29.3%. Adjusted EBITDA for the quarter was $74 million, up from $67 million in Q3 of last year and up sequentially from $56 million in Q2. Our adjusted EBITDA margin in the quarter was over 24% compared to 21% last year. And on a trailing 12-month basis, adjusted EBITDA now stands at $242 million with a TTM adjusted EBITDA margin of 21%. Turning to our cash flow and balance sheet. We continue to invest in our operations while maintaining a disciplined approach to capital allocation. During the quarter, we invested $13 million in capital projects, including $8 million related to our ongoing facility modernization initiatives. We also returned capital to shareholders, paying $8 million in dividends and repurchasing 150,000 shares of our common stock for $6 million. Our joint ventures remained strong contributors, generating $35 million in dividends during the quarter, a 110% cash conversion rate on that equity income. Cash flow from operations for the quarter was $57 million, and we generated $44 million in free cash flow. On a trailing 12-month basis, free cash flow totaled $144 million, representing a 104% free cash flow conversion rate relative to our adjusted net earnings over the same period. Turning to our balance sheet and liquidity. We closed the quarter with $294 million in long-term funded debt, carrying an average interest rate of 3.6% along with $223 million in cash. Our leverage remains extremely low with ample liquidity supported by a $500 million undrawn bank credit facility, positioning us well for future growth and flexibility. Net debt at quarter-end was $71 million, resulting in a net debt to trailing EBITDA leverage ratio of approximately 0.25 turn. Yesterday, our Board of Directors declared a quarterly dividend of $0.17 per share payable in June 2025. I'll now spend a few minutes on each of the businesses. In Consumer Products, Q3 net sales grew 5% year-over-year to $140 million, driven by higher volumes. Adjusted EBITDA was $29 million with a 20.5% margin compared to $26 million and 19.3% in Q3 last year. The quarter benefited from higher gross profit dollars and improved gross margin percent, though these gains were partially offset by increased SG&A as we continue to invest in the business for future growth. Additionally, within SG&A, we recorded a $1 million charge related to a customer that filed for bankruptcy during the quarter. Our Consumer team continued to execute well in Q3, delivering solid results despite ongoing macroeconomic uncertainty. While we recognize that broader uncertainty could impact consumer sentiment and future demand, we remain optimistic heading into the spring and outdoor season. Our commitment to delivering essential products for outdoor living, celebrations, and tools, combined with our diverse product portfolio, strong brand positioning, and deep retail relationships positions us well to navigate near-term challenges while we continue to focus on long-term growth opportunities. Building Products Q3 net sales grew 11% year-over-year to $165 million, up from $148 million in the prior year quarter. This growth was primarily driven by the Ragasco acquisition along with a more favorable product mix, particularly on our large format heating business, which has returned to seasonally normal levels following last year's destocking cycle. Adjusted EBITDA for the quarter was $53 million with a 32% margin, compared to $53 million and 36% margin in the same quarter last year. Sequentially, the business continued to improve with adjusted EBITDA and margin rising from $47 million and 30% in Q2. The year-over-year increase in adjusted EBITDA was driven by strong performance within our heating, cooling, and water businesses. However, this was largely offset by a lower equity earnings from our joint ventures, particularly ClarkDietrich, which declined $8 million year-over-year but still contributed a solid $9 million in equity earnings for the quarter. ClarkDietrich's results were negatively impacted by the decline in steel prices, which led to margin compression. They also faced a slight headwind from unfavorable weather conditions, which temporarily disrupted some customer job sites during the quarter. WAVE continued to execute exceptionally well in a flat market, contributing $25 million in equity earnings, down slightly from $26 million in the prior year quarter. The Building Products team continues to navigate the current environment well, demonstrating resilience and adaptability in serving our customers. Our products are critical to heating, cooling, construction, and water infrastructure, and we remain well-positioned to meet customer needs and capture market share through new product innovations, reliable service, and a strong commitment to execution. Our joint ventures continue to provide steady contributions and despite some current macroeconomic uncertainty, we are confident in the long-term opportunities in commercial construction and repair and remodel activities. As market conditions improve, we are well positioned to drive long-term growth while supporting our customers and strengthening our competitive position.

Your first question comes from Kathryn Thompson of Thompson Research Group. Your line is open.

Hi. Thank you for the insights you provided today. I have a couple of points I'd like to focus on. First, regarding tariffs, you mentioned some information, but could you elaborate on how tariffs are being managed in today's market compared to those implemented during the first Trump administration? Additionally, do you see any opportunities related to pricing? Lastly, are there any supply issues that are causing disruptions to the business? Thank you.

Good morning, Kathryn. Thank you for your question. Tariffs and trade-related uncertainty are definitely on a lot of people's minds. We discussed this briefly in December, and we still believe we are well positioned in any scenario. The environment is quite fluid right now, and things may change quickly. As a primarily domestic manufacturer, we view this as a competitive advantage. We have diversified sourcing capabilities that give us flexibility, and we are focused on being good partners for our customers. We recognize the potential impacts of various trade policies on us and our customers. We learned a lot from the supply chain challenges that arose after COVID. Where we foresee cost increases, we have several strategies to address them. We can collaborate with our suppliers to offset those increases, seek efficiencies to mitigate costs, and implement price increases, which we have announced for many of our products. We are confident in our strategy and our ability to manage cost pressures. Although we haven't seen a significant spike in demand linked directly to tariffs, we have received more inquiries in certain areas where we compete with imports. Generally, we believe we would benefit from tariffs, though there are challenges to navigate. The situation is dynamic and can change based on developments in Washington, but we anticipated these changes and believe our approach is solid. We are hopeful that the administration aims to create a more equitable environment for US manufacturers but also acknowledges the need to prevent a resurgence of inflation, a sentiment we share.

Thank you for that. Can you share any insights on the EBITDA margin for the core product and the factors contributing to its performance? Additionally, regarding your joint ventures, could you provide a sequential update without year-over-year comparisons, which may be challenging? Furthermore, what is your outlook for WAVE and ClarkDietrich? Thank you.

Sure. Kathryn, I'll let Colin talk through the Building Products, I think, which is what you were asking about, and then, I'll hit the JVs.

Yeah. Kathryn, so, I think we were very pleased with on the Building Product side, in particular, the wholly-owned business margin, so heating, cooling, construction, water. Year-over-year, that business, if you exclude the JVs, is up from an EBITDA margin perspective from 6% to 11%. So, really good performance there. We're seeing a positive mix shift and return to seasonally normal demand levels in a number of our markets and products there. So, that team continues to execute very well and has done a really good job to help offset the big headwind in the quarter, which was ClarkDietrich's year-over-year results down pretty big from last year. They contributed $9 million in the quarter, but that was still $8 million headwind for us, which the heating, cooling, construction, and water business helped overcome. So, very pleased with results there.

And then, with respect to WAVE and ClarkDietrich, WAVE had a pretty tough comp as to how some of the months laid out, but we think kind of a flattish market for them, but very steady. Their strategy is very sound. One of the big growth markets for them going forward is data centers. They've been selling into data centers with their traditional products, but post the acquisition of DCR for them, they've really sort of trained their NPD sites on data center and have some pretty exciting things that they're working about and working on. And so, we're pleased with that. And WAVE ultimately is always there for its customers. They have world-class on-time delivery. They have Six Sigma quality. And so, they're going to be fine, I think, in any kind of a flat market. ClarkDietrich, we talked about a little bit of the headwinds there. They had an amazing Q3 a year ago. We obviously knew that wasn't going to be the same. And so, they're executing really well. And one of the things that we've seen is a little more increase in volatility in steel prices and that is an advantage for ClarkDietrich going forward. It hasn't been massive the way that it was a few years ago. But when there are volatile steel prices and markets out there, that benefits ClarkDietrich because they are nationwide and very sophisticated. They're a proven supplier and partner to a lot of their customers. And so, we see increases in volatility and slight upticks in steel prices as, relatively speaking, a good sign for them.

Okay, great. Thank you so much.

You're welcome.

The next question comes from Daniel Moore of CJS Securities. Your line is open.

Thank you, Joe, Colin, and Marcus. Joe Hayek: Good morning, Dan. Good morning. Thank you for the questions. I wanted to start with margins. Our gross margin, which we don't frequently discuss in terms of consolidated figures, has risen above 29%, indicating some favorable seasonal trends. Could you discuss the factors contributing to this, any notable positives in the quarter? Additionally, how should we approach expectations for Q4 and, more significantly, the annualized range or run rate as we plan for 2026?

Thank you for the question, Dan. Some highlights include a gross margin expansion of 620 basis points year-over-year, which is a positive outcome. Last year, we had our SES business unit contributing to both revenue and margin, but we deconsolidated that business as it moved into a joint venture, which contributed about 300 basis points to the margin expansion. In our Building Products and Consumer Products segments, we experienced a favorable mix shift driven by higher demand in certain categories. Additionally, there was a unique item in the Building Products sector where an LCM adjustment from last year did not occur again due to a specific product sourcing, further assisting margin expansion year-over-year. We consider the 29% gross margins to be strong. Typically, Q3 and Q4 are our strongest quarters. Over time, our goal is to maintain margins in the high-20% range, and we believe we have a solid strategy to achieve that.

Very helpful. Appreciate it. Shifting gears to Consumer segment, clearly, it's tough to know with precision, but any sense for how much of the volume growth in the quarter is restocking or stocking at new customers versus more through end market demand?

Yeah. Hey, Dan. It's Joe. Q3 for Consumer last year was a really strong quarter. It was even stronger this year. One of the things that we worked really hard on was preparing our customers, our retailers for potential surge demands. It obviously happened a little bit in the fall with some of the hurricanes and then in the winter with some of the cold weather and some of the storms that we saw. So, it was really important to us to make sure that we didn't have a situation where people weren't prepared and so bought way ahead because last year what you then saw was that Q4 there was some destocking. And so, we were helpful to our customers in that regard. And so, what we saw towards the tail end of Q3 and into Q4 is that supply is fine, orders are tracking kind of point of sale details, and so, we feel like we were pretty successful there. And I know that our retail partners and customers very much appreciated that. We do think that there was probably a little bit of a positive impact from the storms and from the weather, it helped drive some demands in Consumer, and it helped drive a little bit of demand in our heating business within Building Products. But ultimately it actually was a little bit of a headwind for ClarkDietrich because their customers couldn't be on job sites for several days because of the cold. So, we would try to estimate that as a good factor of about $0.05 a share EPS-wise.

Great, Joe, very helpful. And then last is just free cash flow conversion has been really strong on a trailing basis. How should we kind of think about the sustainability of that and looking at free cash flow conversion as we think about maybe fiscal '26 versus what we've seen year-to-date here? And then, bought back 150,000 shares in the quarter, would you expect to maintain similar cadence if shares remain at or near current levels? Thanks again.

Thank you, Dan. I'll start with the last question regarding capital allocation, which will continue to be balanced with a focus on growth. We've discussed this previously. We will monitor our shares and buy back at least enough to offset dilution, and we will also consider more opportunistic buys when appropriate. Our focus on growth includes constantly evaluating M&A opportunities as an essential part of our growth strategy. We are always looking into potential fits and will proceed with those when it makes sense. Regarding capital expenditures, we are currently undertaking some facility modernization projects. We have completed one in the Building Products segment, and the Consumer Products project has been ramping up over the last few quarters. We still have around six to eight quarters left, with approximately $50 million allocated for that project in the coming period, with the majority of spending occurring in fiscal year '26. On the free cash flow front, we are pleased with generating $144 million in free cash flow, reflecting a conversion rate exceeding 100%. We aim to maintain and improve this over time, despite the capital expenditures mentioned earlier.

Very good. Thank you again for the color.

Thank you, Dan.

Your next question comes from Susan Maklari with Goldman Sachs. Your line is open.

Good morning. This is actually Charles Perron in for Susan this morning. Thanks for taking my question.

Sure, Charles. Good morning.

Good morning. First, I want to go back on the revenue and the volume initiatives for Consumer and Building Products. You highlighted several initiatives around product launches in your prepared remarks to drive organic growth over time. Can you maybe unpack how much these initiatives contributed to the growth this quarter and how much they can allow you maybe to outperform the underlying market growth when you think about calendar 2025?

It's a good question. The launches I mentioned didn't make much contribution in the quarter since they're all happening right now. We have initiatives happening constantly, and some of these are indeed contributing to revenue growth and margin improvement. However, when we consider where we stand in many of our businesses, we have a solid market share in various value streams. We're aiming to grow and hopefully outpace our markets. In some of our newer areas, like the tools and grills segments, we have strong brands and products, and as we leverage our relationships and the Worthington Business System, these products have significant growth potential over time by capturing market share. In our more established markets, we already hold that share and are focused on introducing new products and trends rather than entering those markets. So, to sum up, not much contribution from the new products in the current quarter, but they should help with margin and revenue growth moving forward.

That's helpful color, Joe. Next, I want to circle back on the margin performance this quarter, dig a little deeper. Can you talk a little bit more about the drivers between the volume leverage that you got across the core Building Products and Consumer Products and the success of operating initiatives? And how do those inform your ability to expand margins in the coming quarter even if the end market demand were to moderate across those verticals?

So, sure, pretty solid. I think Colin talked to a lot of this, but 29.3%. SG&A was I think a little less than 21%, 20.7% in the quarter. We like where our trends are going. We're not sort of content and satisfied with that. Our goal, right, our algorithm ultimately is to continue to drive gross margin higher. Certainly, volumes and high revenue helps there because utilization goes up and our conversion costs go down. But SG&A as a percentage of sales, our SG&A is kind of flattish in the mid-60%s in a quarter, but we've got lots of things that we're doing to try and make sure we're as tight as we possibly can be on that front. But then, we're in a flat market, and if we take share and we take care of our customers, and we certainly take care of each other by working safely, growth returns and revenue goes up, those things accelerate. We'd love to, over the course of time, certainly our goal over the next couple of years, to get gross margin kind of to 30% or above, and to have SG&A be 20%, not more of SG&A, and then certainly you lap on D&A and then the contribution that we think we'll continue to get from our world-class JVs and that makes us feel pretty good about what's possible.

Okay. No, that's helpful. And maybe last, can you provide an update on the M&A pipeline and your willingness to do deals despite the ongoing macro uncertainty?

Yeah, Charles, thanks for the question. The M&A pipeline, as part of our process, we're constantly looking at opportunities both from a proprietary standpoint and from a market process standpoint. So, we continue to assess opportunities. I think our pipeline is pretty good at this point. The M&A markets are obviously a little slower and there's some uncertainty in the outlook. However, that doesn't really change our perspective. We're long-term holders of businesses. We're assessing opportunities that we think are a good fit and that we can add value to over the long-term. So, as I said, I think our pipeline is pretty healthy and we continue to monitor and assess opportunities on a regular basis.

Okay. Thanks, Colin, and good luck for everything, guys.

Thanks, Charles.

Thanks.

Your next question comes from Brian McNamara of Canaccord Genuity. Your line is open.

Good morning, guys. Thanks for taking the questions.

Good morning.

I was hoping you guys could quantify organic sales growth in Q3. I think you mentioned ex SES, but I don't think you quantified the Ragasco contribution?

Excluding Ragasco and SES, it was 4%.

Okay. And then, any color on kind of what we're seeing quarter-to-date here just given the, we'll call it, uncertain consumer macro?

Yeah, we're three weeks into our Q4, Brian. We would say without any kind of visibility, things haven't dropped off a cliff or anything.

Okay. And I know Dan touched on this point, but gross margin is a pretty difficult line item to model for you guys. And I guess, the point of my question is, are they kind of structurally higher here now? I know last year you had large heating tanks that are typically higher margin, they weren't doing great, assuming they're doing better. Anything else we should be considering there? I think Ragasco has also been additive to margin there. Consumer Products doing better. I think they're higher margin. Anything else investors should be thinking about on that line item?

I feel optimistic about our performance this quarter. We've seen a favorable mix shift and several initiatives are unfolding as planned, particularly in our process improvements and cost-saving efforts. Our goal is to maintain levels in the high 20s over time, as Joe mentioned. It's important to remember that Q3 and Q4 are usually our stronger quarters, which should be taken into account from our viewpoint.

Yeah. And Brian, your question is well taken. I think we were at 27% in Q2, we were at 29%. And so, structurally obviously with the deconsolidation of SES, our margin profile has improved, that is certainly sustainable and mix is important. You called it exactly right when those larger heating tanks were really in their destocking phase. It was penalizing for us from a margin perspective. We're through that. And then, as Colin said, we've got a number of initiatives, 80/20 comes to mind, right, in our water business. That's an initiative or a discipline that's going to let us sort of refocus kind of our offerings and the way that we manufacture. And so, there are a number of things that we continue to do. I mean, we wish our gross margins were 100%, right? That's obviously not very possible or likely, but we've got a lot of things going on that we think will continue to help us offset any softness and hopefully grow those margins.

Got it. On the SG&A front, you have recently separated from a $5 billion company, so there may be a period of adjustment as you become accustomed to being a public company. I'm curious about your efficiency in managing expenses. Can you provide an update on your progress in this area?

So, yeah, Brian, just from an SG&A perspective, I mean, Joe touched on it a little bit earlier, we were 20.7% of sales over the past quarter, this quarter, and in Q2, I would point out SG&A was a little elevated due to the bad debts and bankruptcies that we had in both those quarters. But we're going to be in the mid-60%s, and as consistent with the prior question, we're constantly working on initiatives to improve and become more efficient and look for opportunities to save costs along the way as well, so that we can really drive our gross margins higher without increasing our SG&A.

We believe that the unconsolidated segment, which is not part of Consumer Products or Building Products, should be between $25 million and $30 million. This quarter includes about $1 million in equity income losses from the SES business and another $1 million from our Engineered Cabs joint venture, which are combined in that figure. However, the main SG&A component is still expected to be within the $25 million to $30 million range.

Great. And then, finally, I'm just curious, what are you seeing on the M&A front? I'm assuming a good number of targets in Consumer, for example, have some decent production in China and things like that. Is that helping deals get to the finish line or more likely hurting them?

You asked a really good question. Right now, anyone importing a significant amount of their product and exploring strategic alternatives is facing uncertainty. It's tough to determine whether this helps or hinders those specific companies. Generally, uncertainty is not favorable for M&A, but if you maintain a long-term perspective and focus on historically successful ventures, potential acquirers might feel more confident. However, it's still necessary to reach an agreement with the seller on valuation and terms. While uncertainty is a challenge, I don't believe it has completely frozen the market.

Great. Thanks a lot for the color, guys. Appreciate it. Best of luck.

Sure. Thanks.

The next question comes from Walt Liptak with Seaport. Your line is open.

Hi, good morning, guys. Thanks for the great quarter.

Good morning, Walt.

Hey. I was really impressed with Joe's comments about solving customers' problems, especially the various initiatives he mentioned, such as the party time tanks. Can you provide some quantifiable insights on these projects, like their potential impact on growth rates or the total addressable market, as well as potential profit improvements? Some of them sound very impressive.

I'll give it a shot, Walt. There wasn't anything particularly significant in this quarter, but we focus on excelling in niche markets where we hold a reasonable market share. This is beneficial for our Worthington Business System, which is specifically designed for such markets, particularly in transformation and continuous improvement efforts to streamline operations. On the innovation front, having a good market share really advantages us as we maintain ongoing dialogues with our customers who are eager to collaborate. For example, the SureSense was developed in partnership with our customers, and the Balloon Time Mini was completely a joint effort with our partners, many of whom have always wanted to carry that product but lacked the shelf space. Over the years, we have instilled significant discipline through the WBS at Worthington. We believe these initiatives will incrementally benefit us. However, we acknowledge that we face challenges. The initiatives I mentioned today are not going to drastically increase the company's revenues; they are incremental and often in markets where our share is lower than in others, but they will definitely assist us in penetrating those markets further. Ultimately, this reflects the dedication of our teams in innovation, transformation, and our mergers and acquisitions, as we have examples of companies we've acquired that we've helped to expand and broaden the reach of their brands. Everything ties together nicely around the Worthington Business System, which is integral to our philosophy. While it doesn't always function as perfectly as we hope, it is rewarding when it does.

Okay. That sounds great. I think everyone is eager for growth in the US, and it seems like you have some promising initiatives, such as the Balloon Time Mini, which could support your growth and help counteract those challenges. I wanted to ask about the Consumer which appears better than I anticipated. You mentioned this already, but what is the next positive development we might see with the large chains? Will you be focusing on sell-through as a key metric, or in light of the current challenges, what can we expect next? Also, being a US-based manufacturer sets you apart. What are the discussions like with the large chains?

It's a great question. We are continually in touch with our retail partners regarding inventory levels and proactively managing our supply chain to ensure they receive the right products in the right stores at the appropriate times, especially in areas of increased or decreased demand. The consumer sentiment is certainly uncertain, and we will have to navigate that as we progress. However, demand remains strong for us. Year-over-year, we have observed positive growth in consumer volumes, and our retail partners have a healthy inventory, with no signs of destocking as we experienced last year. We feel confident about our control over the situation, and our teams are performing well in executing our strategies.

I would like to add a couple of quick points. Colin is absolutely correct. Seasonally, in our Consumer segment and somewhat in our Building Products segment, our products are essential for emergency heating. When there are power outages during cold storms, people rely on these products. That's why, for the Consumer business, this is the strongest season. Colin mentioned that point of sale is performing as expected compared to shipments. Additionally, Party City was a customer, and their bankruptcy created a $1 million challenge for us. Party City often filled balloons at the front of their stores, which did not utilize our products. Now, customers seeking those services are shifting to retailers that don’t offer front-store filling but do carry our products. We believe this shift represents a more sustainable change in the market.

That's great. Yeah, thanks for that insight. Okay, the last one for me is, it sounds like your early days with your 80/20 work. And so, I just wanted to ask how are you feeling about the work that you're doing there and, yeah, I guess just how are you feeling about it?

So, we're excited on 80/20. As you know, it's an important tool in our toolkit from a transformation perspective. And we just kicked it off in Q3. We're excited about progress and updates along the way. Like Joe mentioned, it started in our water business and we're anticipating some good improvement there and that we would like to roll out over time and replicate in other areas. But early days as you said, excited to see what comes.

Yeah. We just started the initiative a couple of weeks ago, so it actually began in the fourth quarter. Some of our businesses and value streams don't fit well with the 80/20 model because we only produce one or two products and have a limited number of customers. However, for the businesses that are likely to benefit from this approach, we are very enthusiastic about it.

Okay, sounds great. Okay, thanks guys.

Thank you.

This concludes the question-and-answer session. I'll turn the call to Joe Hayek for closing remarks.

Sarah, thank you very much and thanks everybody for joining us this morning. We look forward to speaking to everybody again soon. Have a wonderful rest of your week.

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