Teleconferência de Resultados do 1º Trimestre Fiscal de 2027 da Worthington Enterprises (WOR): Crescimento em Tanques para Data Centers e Forte Fluxo de Caixa

A Worthington Enterprises (NYSE: WOR) relatou maiores vendas, lucro ajustado e fluxo de caixa livre no primeiro trimestre fiscal de 2027. O crescimento em Soluções Comerciais e Especializadas, joint ventures e tanques ASME relacionados a data centers ajudou a compensar os ventos contrários no setor de refrigeração e na construção civil.

Principais Destaques

• As vendas consolidadas aumentaram 13% em relação ao mesmo período do ano anterior, atingindo US$ 344 milhões, incluindo um crescimento orgânico de aproximadamente 7%. As aquisições contribuíram com US$ 19 milhões.
• O EBITDA ajustado subiu 10%, para US$ 74 milhões, com margem de 21,5%. O LPA ajustado aumentou de US$ 0,78 para US$ 0,82.
• O fluxo de caixa livre quase dobrou, passando de US$ 28 milhões para US$ 54 milhões. O fluxo de caixa livre nos últimos 12 meses atingiu o recorde de US$ 196 milhões.
• A receita com tanques ASME para data centers atingiu US$ 13 milhões no primeiro trimestre, igualando o total gerado em todo o ano fiscal de 2026. A administração espera um crescimento sequencial ao longo do restante do ano fiscal de 2027, mais concentrado no segundo semestre.
• O segmento de Soluções Comerciais e Especializadas expandiu o EBITDA ajustado de US$ 16 milhões para US$ 24 milhões, enquanto sua margem melhorou de 13,6% para 18,6%.
• Os segmentos de refrigeração e construção civil continuaram sob pressão devido à normalização da demanda relacionada aos fluidos A2L, vendas fracas de casas novas, oferta restrita de aço e prazos de entrega mais longos.

Principais Dados Financeiros

A Worthington retornou US$ 9 milhões por meio de dividendos e despendeu US$ 18 milhões na recompra de 335.000 ações. Suas joint ventures distribuíram US$ 36 milhões em dividendos, o equivalente a 88% do resultado de equivalência patrimonial. O conselho de administração também declarou um dividendo trimestral de US$ 0,20 por ação, pagável em dezembro de 2026.

Desempenho Operacional e dos Negócios

Soluções de Desempenho Predial

As vendas líquidas aumentaram 16%, passando de US$ 185 milhões para US$ 215 milhões. As aquisições contribuíram com US$ 19 milhões, enquanto as vendas orgânicas subiram 6%, lideradas pelos negócios de água e pela operação europeia.

O EBITDA ajustado ficou praticamente estável em US$ 60 milhões, com margem de 27,8%. A menor receita em refrigeração e construção civil, o mix desfavorável, a oferta restrita de aço e prazos de entrega mais longos anularam o crescimento das vendas.

O segmento de água se beneficiou da demanda por tanques ASME projetados para sistemas de resfriamento líquido de data centers. A receita proveniente dessa aplicação atingiu US$ 13 milhões no primeiro trimestre, igualando o montante gerado em todo o ano fiscal de 2026. A Worthington está investindo em talentos de engenharia, equipamentos e capacidade de produção, além de recorrer a parceiros de fabricação onde apropriado.

A WAVE registrou resultado recorde de equivalência patrimonial de US$ 35 milhões, cerca de US$ 3 milhões a mais na comparação anual. A atividade aquecida nos setores de educação, saúde, transporte e data centers sustentou os resultados, enquanto os mercados de varejo e escritórios mostraram-se mais fracos. O resultado por equivalência patrimonial da ClarkDietrich aumentou mais de US$ 1 milhão, alcançando US$ 7 milhões, apesar da fraqueza na construção comercial fora do segmento de data centers.

Soluções Comerciais e Especializadas

As vendas cresceram 8%, de US$ 119 milhões para US$ 129 milhões, impulsionadas pelo maior volume e preços médios de venda mais altos. Os segmentos de propano portátil e ferramentas apresentaram força especial devido ao crescimento no volume, expansão da distribuição e ações de precificação.

O EBITDA ajustado aumentou de US$ 16 milhões para US$ 24 milhões. A margem expandiu 500 pontos-base, atingindo 18,6%, refletindo o crescimento das vendas, precificação, melhor desempenho de fabricação e restituições de tarifas da IEPA. A administração afirmou que a lucratividade subjacente também melhorou, excluindo o benefício tarifário.

Os volumes relacionados a balões caíram em comparação com a forte base do ano anterior. A Worthington está estendendo sua abordagem operacional 80-20 aos produtos de combustível portátil e maçaricos para simplificar o portfólio, melhorar o mix e sustentar as margens.

Perspectivas da Administração

A administração espera que a receita com tanques ASME para data centers cresça sequencialmente no 2º, 3º e 4º trimestres fiscais, com maior crescimento concentrado no segundo semestre. A empresa alertou que o cronograma dos projetos pode variar e que as oportunidades podem levar de 18 a 24 meses a partir do anúncio de um novo data center para se concretizarem.

A empresa espera que o segundo trimestre fiscal continue sendo uma comparação anual difícil para o segmento de refrigeração e construção civil, pois o trimestre do ano anterior beneficiou-se da elevada demanda pela transição para o A2L. A administração prevê uma normalização no segundo semestre, quando o 3º e o 4º trimestres são sazonalmente mais fortes.

Espera-se que a WAVE apresente moderação sequencial no 2º trimestre devido à sazonalidade normal, embora a administração tenha classificado o negócio como saudável. O fluxo de caixa livre também enfrentará um pagamento de imposto adicional normal no 2º trimestre.

Riscos e Pontos de Atenção

• Os estoques nos canais de distribuição relacionados aos fluidos A2L estão demorando mais para se normalizar diante de um mercado imobiliário desaquecido. A empresa estimou um impacto negativo de cerca de US$ 7 milhões no EBITDA ajustado do 1º trimestre na comparação anual, valor superior ao previsto anteriormente.
• A restrição na oferta de aço e os prazos de entrega estendidos prejudicaram o agendamento da produção e os prazos de envio. A administração estimou que essas restrições custaram à empresa alguns milhões de dólares durante o trimestre.
• Os custos do aço e de outras matérias-primas estão mais altos do que no ano anterior. A Worthington implementou ações de reajuste de preços onde apropriado, mas possui visibilidade limitada além do final do ano civil de 2026.
• As oportunidades no setor de data centers permanecem sujeitas a prazos e conversões incertos. A administração enfatizou que seu pipeline não se traduz automaticamente em receita.
• Taxas de juros elevadas, inflação, instabilidade geopolítica, restrições na oferta e desafios operacionais continuam fazendo parte do ambiente de negócios.

Destaques da Sessão de Perguntas e Respostas com Analistas

Oferta de aço: A administração afirmou que a Worthington está utilizando seu relacionamento com fornecedores, capacidade de compra e ampla rede de fabricação para contornar a oferta restrita. Espera-se que as condições melhorem até o final do ano civil de 2026, mas a visibilidade além desse período é limitada.

Estratégia para data centers: A empresa considera os tanques ASME componentes críticos em sistemas de resfriamento líquido e gerenciamento térmico. Ela está expandindo a capacidade interna e os recursos de engenharia, além de complementar a produção com parceiros externos. A exposição a data centers também se estende à WAVE, ClarkDietrich, Elgen e LSI, embora a administração tenha ressaltado que descrever a oferta como totalmente integrada seria um exagero.

Demanda de consumidores e empreiteiros: A Worthington não observou fraqueza material no segmento de Soluções Comerciais e Especializadas. A administração informou que as tendências no ponto de venda aos clientes permanecem estáveis, sustentadas por atividades de reforma e manutenção e pelo desemprego relativamente baixo.

Aquisições: A Elgen e a LSI contribuíram para os US$ 19 milhões em vendas adquiridas no trimestre. A Worthington declarou que a integração da Elgen está progredindo, enquanto a LSI apresenta bom desempenho e oferece oportunidades de expansão comercial. A administração descreveu o pipeline de M&A como saudável, com um ligeiro aumento recente na atividade.

Conversão de caixa: O ciclo de conversão de caixa melhorou cerca de oito a nove dias no último ano, enquanto o capital de giro líquido como percentual das vendas reduziu quase três pontos percentuais nos últimos dois anos. A administração atribuiu o avanço aos prazos concedidos a clientes, à gestão de fornecedores, à eficiência de estoques e às iniciativas 80-20, considerando a melhoria sustentável.

Transcrição Completa da Teleconferência de Resultados

Transcrição completa da teleconferência de resultados

Comentários da administração

Operator

Hello everyone, thank you for joining us and welcome to the Worthington Enterprises Fiscal Year 2027 First Quarter Earnings Call. After today's prepared remarks, we will host a question and answer session. [Operator Instructions] I will now hand the conference over to Marcus Rogier, Treasurer and Investor Relations Officer. Marcus, please go ahead.

Marcus Rogier

Thank you, Paige. Good morning, everyone, and thank you for joining us for Worthington Enterprises' First Quarter Fiscal 2027 Earnings Call. On call today are Joseph 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 risk and uncertainties that can cause actual results to differ materially from those expressed or implied. For more information on these risk and uncertainties, please refer to our earnings release issued yesterday after the market closed, which is available on the investor relations section of our website. Additionally, our remarks today will include references to non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures can also be found in the earnings release. 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.

Joseph Hayek

Thank you, Marcus. Good morning, everyone. Welcome to Worthington Enterprises' Fiscal 2027 First Quarter Earnings Call. We had a strong start to fiscal 2027. While we faced some market and operating headwinds, our team continued to execute, serve our customers, and make progress on our strategic initiatives. I want to thank my colleagues around the world for the focus, creativity, and grit they bring to Worthington every day. In Q1, we grew sales by 13% year-over-year, including 7% organically. Adjusted EBITDA increased by 10% to $74 million.

And we generated $54 million of free cash flow, nearly double the prior year quarter. Adjusted EPS was 82 cents compared with 78 cents a year ago. We continue to deploy capital thoughtfully in the quarter, including the repurchases of 335,000 shares of our common stock. While we were pleased with our progress, the quarter was not without challenges. Informance solutions, as we anticipated, face headwinds in our cooling and construction business. The channel inventories are right-sized and new home sales are muted, demand for newly mandated A2L refrigerant cylinders is lower than it was a year ago, creating a difficult comparison. Additionally, steel availability across the industry remains tight and lead times in the quarter were extended. FEMA had created some disruptions in production and scheduling for both cooling and construction and for our balloon technologies.

Our teams are actively working through these issues every day, prioritizing our customers and ensuring that we are the best partner that we can be. While we face some headwinds in the quarter, our performance was a reflection of our businesses and our people. Resilient. Creating specialty solutions delivers strong sales and even double-digit growth as that team continues executing at a high level. Our water business is performing very well as our 80-20 work matures and helps us focus on resources on the products and opportunities that create the most value. WAVE and ClarkDietrich also delivered higher equity earnings and were important contributors in the quarter. We optimize and grow Worthington. Our strategy is not complicated. Leveraging the Worthington business system, transformation to improve our businesses, disciplined M&A to add capabilities and strengthen our portfolio, and innovation to grow organically where we have attractive opportunities. We continue to use 80-20 to optimize our businesses.

As we sharpen our focus, improve working capital and allocate resources where they matter most. We've seen meaningful progress in our water business and are now extending that discipline into our portable fuel and torch businesses. We're also continuing to improve productivity through automation, AI-enabled tools, and other transformation initiatives. We remain disciplined about growth through M&A and we're focused on opportunities where we believe we can bring unique advantages as an owner and create long-term value. Our integration of LSI continues to progress well, and there we're focused on reaching more prospective customers and introducing them to LSI's compelling value proposition. I want to spend a little more time this morning on organic growth because we're increasingly seeing our innovation capabilities translate into meaningful commercial opportunities. One of the most topical examples of the kind of organic growth opportunities we're trying to create and develop at Worthington is our engineered ASME tanks.

These engineered tanks have played an important role in commercial buildings across the world for decades. Increasingly, as new chip sets generate significantly more heat, data center designers and operators are embracing liquid cooling. Engineered tanks like ours help manage the cooling fluids used in liquid cooling systems and as such are a critical component of those data centers and the cooling infrastructure. We've been a market leader in these engineered ASME tanks for years. The market we believe has consistently been plus or minus $200 million a year for some time. Given the projected growth in data centers and the increasing adoption of liquid cooling in those data centers, industry sources suggest the market for liquid cooling and thermal management ASME tanks alone could be more than 10 times the size of the legacy market in the next few years. To grow in and with this important end market, we took capabilities we already had, listened closely to our customers, leveraged our engineering and innovation expertise, and created an emerging suite of liquid cooling and thermal management solutions.

As a result, what started as a promising new application for us has quickly developed into an increasingly meaningful growth opportunity. As a reminder, in fiscal '26, we shipped roughly $13 million of ASME tanks for data centers. In the first quarter of fiscal '27, we generated an additional $13 million of revenue from that value stream, essentially matching what we did in the entire prior fiscal year. Near term, we believe that our ASME tank revenues will continue to grow sequentially quarter over quarter through the balance of this fiscal year. In addition, while this market is in the early stages of development, our pipeline suggests that one, our solutions can play a meaningful role in this evolving architecture, and two, the market's growth is continuing to accelerate. To be clear, a pipeline is not revenue, and there was always some uncertainty around the timing and conversion of these opportunities. But the size and the quality of the opportunities in front of us is encouraging.

And we are investing in equipment, engineering talent, and production capacity to support the customers we're sourcing today and the opportunities we see ahead. Solid financial results we're generating and the great opportunities ahead of us are a credit to our people. Hamilton has always believed that people are our most important asset, and that is as true today as it has ever been. As an example, we recently named one of America's most innovative businesses for 2027 by Business Insider. The criteria they used included the number and impact of companies' technological innovations, their reputation among peers for fostering innovation, and how a company's investment in R&D compares to others in their industries. We're also recognized in the quarter by USA Today and Points of Light as well as of America's most charitable companies. This honor reflects our deeply rooted commitment to communities where we live and work, including volunteerism and support from the Worthington Companies Foundation.

Much is being asked of our teams every day as we navigate volatile markets, geopolitical instability, inflation, elevated interest rates, supply constraints, and operational challenges. We're very grateful for the way our colleagues continue to prioritize our customers and one another. We're proud of how we started our fiscal year. There's more work to do, but we continue to see tangible evidence that our strategy is working. We see it in organic growth driven by innovation and productivity gains through transformation, successful M&A integration and ultimately in cash generation. In addition, our end markets, brands, capabilities, and strategy position us exceptionally well to continue driving profitable growth. Most importantly, we have a talented team that cares deeply about each other, our customers, and our company.

Before I turn it over to Colin, who will spend a few more minutes on our financial performance in the quarter, we would like to remind everyone that we will be hosting our Investor Day in New York on November 10th. We're looking forward to discussing our businesses, the opportunities we see for profitable growth, and how we're positioning Worthington Enterprises to create long-term value.

Colin Souza

We hope you'll join us. Thank you, Joe, and good morning, everyone. We delivered a strong start to fiscal 2027, 1% organic sales growth, record trailing 12-month free cash flow of $196 million, continued improvement across our trade and specialty solutions businesses, strong performance from our joint ventures, and meaningful progress in several of our strategic growth platforms. GAAP earnings in Q1 were 87 cents per share compared to 70 cents per share in the prior year period. The current quarter included a net benefit of $0.05 per share from non-recurring and restructuring items, primarily related to a gain realized from a contingent earn-out associated with the sale of our former oil and gas business, which was divested in January of 2021. The prior year quarter included $0.08 per share of restructuring and other expenses. Excluding these items in both periods, adjusted earnings were 82 cents per share, up from 78 cents per share in the prior year quarter. Included in adjusted earnings for Q1 was a net pre-tax benefit of approximately $4 million or 6 cents per share related to IEPA tariff refunds.

Consolidated sales increased 13% to $344 million, demonstrating continued momentum across the underlying portfolio in addition to the contribution from our recent acquisitions, which added $19 million in net sales for Q1. Gross profit increased by nearly 11% in the quarter, while gross margin was 26.4% versus 27.1% a year ago, primarily reflecting lower volumes and less favorable mix in Building Performance Solutions where cooling and construction faced a particularly difficult prior year comparison. Adjusted EBITDA was $74 million compared to $67 million in the prior year quarter, while adjusted EBITDA margin was 21.5%. Importantly, even excluding the net tariff refunds, adjusted EBITDA increased year over year, reflecting underlying improvement across several of our businesses. On a trailing 12-month basis, adjusted EBITDA increased to $303 million. Turning to our capital allocation, we remain focused on reinvesting in our businesses and pursuing strategic acquisitions while returning excess cash to shareholders via dividends and share repurchases. Free cash flow remains one of our most important operating metrics, and Q1 demonstrated the strength of our cash generation.

Operating cash flow was $67 million, up from $41 million a year ago, while free cash flow increased to $54 million from $28 million, which is our second strongest quarter since becoming Worthington Enterprises, behind Q4 of fiscal 2026. This level of cash flow provides us with the flexibility to reinvest in our businesses, pursue additional growth opportunities and return capital to shareholders, supporting our ability to create value over time. Capital expenditures total $13 million in the quarter, and we return capital to shareholders through $9 million in dividends and spent $18 million to repurchase 335,000 shares of our common stock. Our joint ventures continue to deliver strong cash generation, providing $36 million in dividends during the quarter, representing 88% of equity income. Turning to our balance sheet and liquidity, we close the quarter with TTM adjusted EBITDA of $303 million and net debt of $250 million.

We continue to maintain a strong balance sheet with significant financial flexibility to execute our strategy. Yesterday, our board of directors declared a quarterly dividend of 20 cents per share payable in December 2026. Before I turn to segment performance, and as a reminder, we recently renamed our two business segments to better reflect the markets they serve, the solutions they provide to customers, and the continued evolution of our portfolio. Building products is now Building Performance Solutions, and consumer products is now Trade and Specialty Solutions. The names have changed the composition of the segments and our historical financial results remain unchanged. In Building Performance Solutions, Q1 net sales grew 16% year over year to $215 million, up from $185 million in the prior year quarter. Acquisitions contributed $19 million of net sales in the quarter, while organic sales increased 6% driven primarily by strength in our water and European businesses, partially offset by lower revenue in our cooling and construction business. Adjusted EBITDA was essentially flat at $60 million compared to the prior year quarter, with an adjusted EBITDA margin of 27.8%.

As Joe mentioned, the year-over-year comparison for Building Performance Solutions was impacted by the normalization of demand in cooling and construction following the A2L refrigerant transition, as well as less favorable product mix. Tight steel availability and extended lead times also created production scheduling and shipment timing challenges during the quarter. We continue to view the A2L impact as a timing and comparison issue rather than a structural change in the business. Importantly, adoption remains strong and continued installation of A2L equipment supports current demand for our product, while also building an installed base that we believe will create an attractive long-term service and replacement opportunity. Our teams have worked diligently and prioritized customer needs throughout this period, while positioning the business to benefit as these temporary headwinds normalize. We are particularly encouraged by the accelerating opportunity in our water business, where demand for engineered ASME tanks supporting liquid cooling applications for data centers continues to grow. As Joe discussed, this is becoming an increasingly meaningful organic growth platform for Worthington.

WAVE delivered another record quarter with equity income increasing approximately $3 million year over year to $35 million. ClarkDietrich also improved with equity income increasing more than $1 million year over year to $7 million despite commercial construction activity outside of data centers remaining relatively soft. We are pleased with the performance of LSI and continue to see attractive opportunities to expand the scale, profitability, and diversification of our Building Performance Solutions platform. In Trade and Specialty Solutions, Q1 net sales grew 8% year-over-year to $129 million, up from $119 million in the prior year quarter, driven by a combination of higher overall volumes and average selling prices. Adjusted EBITDA increased to $24 million from $16 million in the prior year quarter, while adjusted EBITDA margin expanded to 18.6% from 13.6%. The improvement in profitability reflected higher sales, pricing, and improved manufacturing performance, along with the net benefit from IEPA tariff refunds we discussed earlier. Importantly, underlying profitability improved, excluding the tariff benefit, particularly in our tools and portable fuel businesses.

We were pleased with the performance of the segment, which continues to demonstrate the resilience of our portfolio of market-leading brands. Looking ahead, we remain focused on driving profitable organic growth through the Worthington business system, including continued innovation and transformation across the segment, along with opportunities to expand distribution. We've seen good results from 80-20 in our water business, and we're now applying those same principles to portable fuel and torch to simplify the portfolio, improve mix, and drive sustainable margin improvement. Overall, we are encouraged by our start to fiscal 2027. We are driving continued organic growth with innovation and solid execution, improving performance across several of our wholly owned businesses, strong contributions from our joint ventures, and growing and attractive end markets like data centers, all while still GENERATING NEAR RECORD CASH FLOWS. These results provide further evidence that our strategy is working. Looking ahead, we see multiple opportunities to strengthen earnings through continued execution, maturing 80-20, normalization and cooling and construction, growth and higher value applications, continued progress integrating recent acquisitions and continued progress productivity improvements through the Worthington business system.

We believe these initiatives are improving the quality, sustainability, and trajectory of our earnings and cash flows, strengthening our ability to invest for growth and create long-term value for our shareholders. With that, we're happy to take your questions.

Operator

We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to turn off your audio to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Brian Beros with Thompson Research Group.

Your line is open. Please go ahead.

Unknown Speaker

Hey, good morning, everyone. Thanks for taking my questions today. I want to start with a question about the steel market overall. You mentioned it's tight, lead times extended, not the ideal supply chain setup, but Worthington should be in a position to navigate that better than almost every other competitor you guys. So maybe help us understand kind of where things stand today in the field and kind of what Worthington can do that others can't to navigate that.

Joseph Hayek

Sure, Brian, it's a very topical good question and steel market has absolutely tightened. We are seeing longer lead times and certainly the price of steel has come up in certain areas. You probably, well, it did start last fall, and then 232 tariffs on imported raw steel doubled. That really chilled imports and since then, we've seen the price of steel creep steadily up and the market started to see some lead times get extended. That was certainly the case in Q1. But as you say, tight markets can create challenges, but there are also environments where we think some of our capabilities really do matter. We're a pretty sophisticated buyer of steel.

We have very strong supply chain and we have a broad manufacturing footprint, it gives us additional options to manage through periods of compliance, and the strain supply. So we've been actively managing in that environment by looking across suppliers, products, and our network to be sure that we're serving customers maintain when it's been appropriate. We have taken pricing actions as well, since input costs have increased the way that they did. So, you know, the availability was a headwind for us in Q1, particularly as we mentioned in going in construction and balloon time. I think that we're better positioned going forward certainly through the end of the calendar year. Beyond that, we have limited visibility. It doesn't mean we don't necessarily think that it'll get worse again beyond that, but as I said, we just don't have a lot of great visibility kind of into the new calendar year. We ultimately think about that as it probably cost us, you know, a few million dollars in the quarter. Yes.

Unknown Speaker

Okay, thank you. And follow up I guess would be on the JV WAVE, up 8%. Great to see on a already pretty strong comp anyway. So maybe some more clarity on kind of what the the driving factor for that was if that's data center demand starting to flow through distribution yet? Is that pricing just from steel, or just strong core end markets? And kind of the demand for that would be helpful. Thank you.

Colin Souza

Yep, sure, Brian. So WAVE, as you mentioned, another really excellent quarter delivering record equity income of $35 million and we continue to be very pleased with the performance of that business and the team there. The end markets, at WAVE, they remain generally stable, although performance varies by sector. So education, health care, transportation and as you mentioned, data centers continue to remain healthy and in drive volume while channels like retail and office are a little more muted. So WAVE also does benefit from meaningful exposure to repair and remodel activity, which tends to be more resilient than the new commercial construction space. So they're a little insulated there, which is good. The team continues to really innovate around solutions that help contractors reduce labor and improve installation efficiency and that's always going to be valuable in the market and they continue to create meaningful value for their customers that way and that supports the attractive economics of the business. And so, more broadly, WAVE is just a great example of the types of businesses that we like to own. They're a market leader, an attractive niche with strong customer relationships, differentiated products, and the ability to perform very well across different different market environments. As we look into Q2, you know, there is normal seasonality to the business.

Uh She wants a strong quarter for them always during the year. What we would expect as we look into Q2, some sequential moderation, but overall they remain very healthy and we're very confident in the team there. Great, thank you.

Operator

Your next question comes from the line of Walter Liptak with Seaport Research. Your line is open. Please go ahead.

Perguntas e respostas

Walter Liptak

Hi, thanks. Good morning, guys, and good quarter. I wanted to ask about um uh the data center product. And it sounds like you hit the targets that you set out to uh to get the $13 million. I wonder if you can talk about just the experience during the quarter, um you know, any, you know, as you're going through any ramp costs or productivity that you're working through. And, you know, as you've been able able to maintain and come out with a new ASME products, are you able to get more visibility beyond kind of what you've talked about in the past, which is getting to kind of that run rate of $13 million in revenue per quarter?

Joseph Hayek

Sure, Walt. Good morning. We're talking here about, you know, ASME tanks and if people aren't sure it's it's that stands for the American Society of Mechanical Engineers, it's a it's a certain code and approval process, but you know these are these are tanks that are used in liquid cooling systems that support next gen computing infrastructure. Their purpose is to build vessels used for liquid cooling and thermal management. And we've actually been in this business for a long time. We've been innovating in pressure and hydronic systems for 80 years. In fact, Amtrol invented the first pre-pressurized, not to get too technical on you, diaphragm. expansion tank seven years ago. So this isn't new to us, but as we listened to customers and understood what they were trying and needed to accomplish, we knew we could be helpful. So we leveraged the core competency, our engineering and innovation expertise, and created this emerging suite of solutions that we think really do help our customers solve problems that they're they're trying to solve.

And so you said it, $13 million last year, $13 million in Q1. I do think that we should grow sequentially in Q2, Q3, and Q4. More of that growth being weighted on the back half of the year, the back part of the year. But keep in mind that this market is still developing, and these opportunities are sometimes 18 to 24 months removed from a quote-unquote announcement that you might hear about a data center being greenlit. We do think that we'll have some variability from quarter to quarter, but this is a multi-year opportunity. We think it's accelerating. And as I mentioned before, we think that the liquid cooling and thermal management market just for data centers, you know could be 10X what the legacy market was in the next few years and so, We absolutely have invested and are continuing to invest in engineering talent, in new equipment and in production capacity as we're really trying to be and believe that we're very well positioned to be part of the solution. And so if you think about the way people describe this market, they talk about hyperscalers, data center builders, and then ultimately, they get into the picks and shovels that make data centers work.

You know, it's oversimplifying, but you can think of our solutions as types of picks and shovels. And so, you know, we make various kinds of tanks and separators, but what really sets us apart is the services that we can provide around these solutions, our engineering expertise, our design expertise. Ultimately helping our customers design or refine their designs for these fluid management solutions. We're good, you know, we get sort of spec'd in, thought about by things like the basis of design, but we like to get spec'd in to some of these designs as as we go forward. And I think we'll be able to grow in and grow with this market pretty nicely.

Walter Liptak

Okay, thanks for that. Appreciate it. And yeah, good luck with that rapidly expanding market. I wonder if you could talk about, you know, the strategy that you guys are going after. I think you've talked about some capacity expansions. You just mentioned engineering and, you know, and production. I wonder if you can talk about what you're doing there. Uh, sure. So it is it is is it is a pretty.

Joseph Hayek

I think it's a pretty fulsome approach, heavy on, engineering and process. A lot of capacity expansion and investments in our own facilities. But in cases where it makes sense for somebody else to manufacture these, we've got a group of partners that we are relying on and that we are partnering with to help us essentially expand our own capacity and ultimately do the design work, do the commercial work, do all the things that need to happen, but ultimately take advantage of some capacity that's already in the ground.

Walter Liptak

Okay, great. Okay, thanks. I'll get back in queue. Thank you.

Operator

Your next question comes from the line of Susan Maklari with Goldman Sachs. Your line is open. Please go ahead.

Susan Maklari

Good morning, everyone. My first question is around the broader state of the, good morning, the broader state of the consumer and what you're seeing there. It sounds like from what we're hearing from the homebuilders, things certainly moderated in the quarter as rates rose and the geopolitical environment. Can you just talk a bit about what you're seeing now and what that implies as we think about the growth in the next couple quarters?

Joseph Hayek

Sure. So, you know, within Trade and Specialty, one of the reasons, obviously, that we decided to realign and rename those businesses, as you know, is an awful lot. A lot of our products that were sold through what's historically been consumer end up in the hands of contractors. They're working on commercial buildings or in residential buildings. But for us, it's really around that team continuing to execute exceptionally well. They've got good pricing discipline. They've done a really good job commercially. There's a lot of energy around NPD and new products that we expect kind of to see in the back half of our fiscal year. But, you know, I would say generally, yeah, you're right. Interesting. Rates are still high but people are still repairing remodeling unemployment is still pretty low and we've always used unemployment as a pretty good kind of indicator for us.

And so we haven't seen any material weakness and our customers' point of sale is hanging in there. And so, you know, we think that, our products are awfully resilient and have typically shown that way. And it's not as though the market is worse than it was in the past three years. So it's been relatively steady from that perspective.

Susan Maklari

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

Colin Souza

Yes, so thanks Susan. So I'll take the pipeline question first and we continue to see a healthy pipeline of opportunities you know a slight uptick if anything you know more recently with just activity there which is good uh and And as you know, we're focused on businesses where we see strong strategic and cultural fit. These are in attractive niches and where Worthington has a clear opportunity to create some additional value. And we've got a strong balance sheet. We've got really good free cashflow generation, like we talked about earlier. Low leverage and that creates significant financial flexibility for us to pursue these opportunities when they make sense. Our capital allocation framework is balanced, as you know, with a bias towards growth. And we're actively evaluating opportunities and we feel good about what we're seeing there. Just on the recent acquisition, so we also, we continue to feel pretty good about Our most recent acquisition, both Elgen and LSI. In the quarter, the acquisitions contributed approximately $19 million of sales, uh just in Q1.

With Elgen specifically, we've made good progress on that integration. It's been over a year at this point. focused heavily on the operations and deploying the Worthington business system to really realize the full potential of the business. The commercial HVAC end markets that they serve remain pretty healthy, and we continue to believe Elgen has significant opportunity over time. On LSI, that's our most recent acquisition. We closed in January. It's earlier in the integration process, but we are very pleased with performance there. It's a high quality business, really attractive margins, a strong position in a very specialized niche. There are critical components of the overall kind of metal system, which is an attractive market to be in.

So we're increasingly focused on LSI with how we can deploy Worthington's capabilities to accelerate growth. We think that's the real unlock for LSI and most importantly kind of both of those businesses Elgen and LSI are great cultural fits so people are our most important asset and with the acquisitions where we'd much rather spend our time improving operations expanding commercial opportunities than trying to change the culture and in both cases we feel pretty good about the teams there and the culture.

Joseph Hayek

At those businesses. Yes, and Susan, the only thing I would add comes, when you talk about the increase in rates and the rate environment, you know, that's actually a good thing for us. We, as you know, have a pretty good balance sheet and have a fair amount of liquidity if competitive situations arise for acquisition that are far more borrowing base and our borrowing basis is probably going to be better than a lot of folks that we might be in competition with. So environments like this are actually better for us, relatively speaking, than when interest rates are very, very low and capital is everywhere.

Susan Maklari

Yes, okay. That's very helpful. Thank you both for the color and good luck with the quarter.

Operator

Your next question comes from the line of Walter Liptak with Seaport Research. Your line is open. Please go ahead.

Walter Liptak

Okay, thanks. I've got a couple of follow-ups. One on the um the free cash flow, as you guys pointed out, was very strong. I wonder if you could talk about uh some of the some of the programs that you guys are doing to improve working capital? And is that sort of a one-time inflow of cash from working capital accounts, or is this going to be a – can you continue to generate high levels of free cash flow?

Colin Souza

Yes, so thanks Walt. It's been, this has been an important point for us and we're really pleased with the cash flow generation. As you mentioned, as we talked about earlier, up $26 million year over year from operating IN AND THAT'S THE UNDERESTIMED IN AND THAT'S THE UNDERESTIMED QUESTION. QUESTION. QUESTION. I HAVE SOME THANKS, I HAVE SOME THANKS, I HAVE SOME THANKS, IT'S AN EXCITING, IT'S AN EXCITING, IT'S AN EXCITING, UNDERSTANDING, UNDERSTANDING, UNDERSTANDING, MINIMUM DOLLARS TO FIND MINIMUM DOLLARS TO FIND MINIMUM DOLLARS TO FIND SOME NEW CASH. The working capital measures we've been very intentional about, which has been helping us drive that free cash flow generation, and we believe it is sustainable. We've been working hard with our teams to continue to pull levers to really compound our cash flow and in particular it's showing up as we talked about in our working capital. And so just, you know, from a cash conversion cycle standpoint, just over the last year, I think we're down about eight or nine days, which we're really pleased with, over that period. And then just from a networking capital as a percent of sales, we're down, I think almost 3% just over the last couple of years. And so, that's a lot of incremental things, working around customer terms, working around our supply base, and then just more efficiently and effectively managing inventory.

Things like 80-20 always play a role in that as well. And so, we're really pleased with the performance and do view it as sustainable. As we move forward, you know, we're going to continue to drive that free cash flow generation and, you know, there is some normal kind of cyclicality or seasonality to it. We do have an extra tax payment in Q2, which is normal, of course, but outside of that, uh, we feel pretty good from a free cash flow standpoint.

Walter Liptak

Okay, all right, thanks for that insight. And then just the last one for me, the A2L tough comparison. You know, we saw that last quarter. You know, it's here again. How you know that inventory correction that's going on, how long do you think it'll take to clear you know, do you expect more, especially in the second quarter going into the end of the calendar year? And at what point do you think we start getting onto a positive comp?

Colin Souza

Yes, so Walt, so it is that transition, it did have an impact in the quarter. The unfavorable mix was primarily driven by the pooling construction business and the difficult comparison there related to A2L. Um, just a little more background there, the prior year benefited from this unusually strong demand as manufacturers, distributors, contractors simultaneously established inventory ahead of this regulated transition. And that included kind of heavy demand on our products, obviously. And we estimate the year-over-year impact to adjusted EBITDA this quarter was approximately $7 million, which is more than we anticipated a quarter ago. And Joe mentioned this earlier. Channel inventories are taking a little longer to normalize, and particularly against the the backdrop of the muted housing environment. We expect Q2 to remain a difficult comparison because of that prior year, quarter benefited from the H2L related volumes.

But as we move to the second half of the year, Q3 and Q4 are seasonally stronger in this market, including in construction. So we do expect normalization there. Importantly, we continue to view this primarily as more of a timing and comparison issue rather than a change in the long-term fundamentals of the business. Nearly all the new residential equipment now utilizes A2L refrigerants, and so every new installation expands the installed base for our service business. Products and over time that should create a growing service and repair opportunity for the products that we sell in the space. All right. Thanks very much.

Operator

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

Brian McNamara

Hey, good morning, guys. Thanks for taking the question. Just one for me as all my other questions have been addressed. Can you characterize or quantify the growth you're seeing in data centers outside of ASME tanks, whether it be WAVE, Elgen, or LSI? And specifically, are you bundling your solutions there to win business, or has it largely been kind of out of the box? All cars to this point.

Joseph Hayek

It's a great question, Brian. Good morning, it's Joe. The way that we think about data centers, we talked a lot about the ASME tanks, but yes, absolutely. Every data center is a commercial building and a number of our value streams provide Building Performance Solutions that are integral to the way those buildings function and setting up to do what they're supposed to do. That certainly includes WAVE and ClarkDietrich. It's Elgen and LSI. Across those value streams, data centers are a very important part of the growth that we're seeing. And I would say our revenues are growing commensurate, maybe a bit better or a bit worse, depending on the application with the proliferation of data centers. Because of the market and data centers operate the way that they do, it's relatively decentralized from a construction and from a guts perspective.

So the bundling would be an overstatement, but we are increasingly collaborating across value streams and talking about opportunities and prioritizing and ultimately kind of making the case that we can refer or otherwise make warm introductions for other pieces of our business that we probably couldn't a couple years ago.

Brian McNamara

Maybe just a quick follow up on that. I think in Q3 last year you said that your data business, data center business was expected to triple in fiscal '26. Well, it sounds like the ASME tanks are about to quadruple at least if they sequentially grow each quarter this year. How would we, can we at least characterize the other businesses exposed to data centers that you guys own kind of multiplying this year? Is that a fair way to characterize the growth you're seeing there?

Joseph Hayek

So, now your question, Brian, the non-ASME tanks, Yes. Can I ask that again? I just somehow misunderstood it, maybe. Say that again. I think I misunderstood your question. Can you ask it again?

Brian McNamara

Yes, so I think in Q3, I think you said your data center business overall last year was expected to triple. I don't know where that landed. Are we expecting that kind of same maybe doubling, tripling kind of this year? It sounds like the ASME tanks are going to at least quadruple if you grow sequentially quarter after quarter this year.

Joseph Hayek

Yes, yes, right. So yes, we have $13 million was effectively 3x what it had been the year before. We did that in Q1, which on a run rate, you know, so it would have it being 4x, but we think that, and we said this much, that we're going to grow sequentially. So yes, it's the, we We do absolutely believe that this market is accelerating.

Brian McNamara

All right, apologize for the confusion, Joe. Thanks for taking the question.

Joseph Hayek

No, no, it's my fault. Thank you.

Operator

Your next question comes from the line of Will Gildea with CJS Securities. Your line is open. Please go ahead.

Will Gildea

Good morning. Can you add some more color on the really solid growth in trade and specialty solutions? I think you described as volume and price-driven just wondering are there any product lines or customers where you saw more strength in the quarter.

Colin Souza

Yes, so thanks Will. So the Trade and Specialty Solution segment, really good performance in the quarter. Sales increased approximately 8% driven by a combination of higher overall volumes and selling prices. We saw some good broad-based growth uh across most of the portfolio, particularly portable propane and tools. Those were driven by higher volumes, expanded distribution, and then both of those segments had some pricing actions as well, which was helpful. The balloon time business was the primary exception, volumes were down, but that was more a function of a really strong prior year comparison. Which impacted in the current quarter. So more broadly really pleased with the performance of the segment and they had good margin expansion even excluding the tariff kind of positive in the quarter as well.

Will Gildea

That is very helpful, thank you. And then just one more, you know, I think you described, uh, increasing raw material prices, the headwind of a few million dollars, you know, how quickly can you mitigate that? And how are you thinking about mitigating that? And does that headwind, uh, get worse throughout the to the end of the calendar year uh does it improve.

Joseph Hayek

I'm just making sure I clarify, Will, My comment on a few million dollars was around steel being late and ultimately us needing to prioritize and think about shipments and manufacturing and things like that. We do think that near term we'll be in better shape there. Steel is more expensive. It was a year ago but also as we mentioned that's not ideal but we have taken price actions where we thought we needed to but But these are environments where we ultimately can separate ourselves from others. And so with our relationships and our capabilities and our optionality, it's something that will continue to address. I think we'll address it successfully. With the caveat, obviously, that things are certainly more expensive than they were a year ago from a raw material perspective. And that's true across the board.

Will Gildea

All right, thank you very much.

Operator

There are no further questions at this time. I will now turn the call back to Joe for any closing remarks.

Joseph Hayek

Big thank you. And thank you all for joining us this morning. Look forward to potentially seeing some of you at our Investor Day in November. Hope you have a great day.

Operator

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