Commercial Metals Company

Hello and welcome everyone to the first quarter fiscal 2020 earnings call for Commercial Metals Company. Today's call is being recorded. After the company's remarks, we will have a question and answer session and we'll have a few instructions at that time. I would like to remind all participants that during the course of this conference call, the company will make statements that provide information other than historical information and will include expectations regarding economic conditions, effects of legislation, U.S. steel import levels, U.S. construction activity, demand for finished steel products, the company's future operations, the company's future results of operations, the ability to realize the anticipated benefits of our investment in our new micro mill in Durant, Oklahoma, and capital spending. These and other similar statements are considered forward-looking and may involve speculation and are subject to risks and uncertainties, that could cause actual results to differ materially from these expectations. These statements reflect the company's beliefs based on current conditions, but are subject to certain risks and uncertainties, including those that are described in the risk factors section of the company's latest annual report on Form 10-K. Although these statements are based on management's current expectations and beliefs, CMC offers no assurance that these expectations or beliefs will prove to have been correct and actual results may vary materially. All statements are made only as of this date. Except as required by law, CMC does not assume any obligation to update, amend, or clarify these statements in connection with future events, changes and assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances or otherwise. Some numbers presented will be non-GAAP financial measures, and reconciliations for such numbers can be found in the company's earnings release or on the company's website. Unless stated otherwise, all references made to year or quarter end are references to the company's fiscal year or fiscal quarter. And now for opening remarks and introductions, I will turn the call over to the Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, Ms. Barbara Smith. Please go ahead.

Thank you, Andrea. Good morning, and thank you for joining the call to review CMC's results for the first quarter of fiscal 2020. I'd like to start by wishing everyone a Happy New Year as we roll the calendar forward to a new decade. I'll begin the call with highlights for the first quarter. Paul Lawrence will then cover the quarterly financial information in more detail, and I will conclude our prepared remarks with a discussion of our outlook for the second quarter of fiscal 2020, after which we will open the call to questions. As announced in our earnings release this morning, we reported fiscal first quarter 2020 earnings from continuing operations of 82.8 million, or 69 cents per diluted share, on net sales of 1.4 billion. Excluding the impact of certain facility closure costs, our adjusted earnings from continuing operations were 87.8 million, or 73 cents per diluted share. I'm very proud of the CMC team's first quarter performance. Through our deliberate actions in a supportive market environment, we generated the highest quarterly core EBITDA in over a decade. These results are the best we have ever achieved with our strategically repositioned portfolio of manufacturing-focused operations. This quarter is certainly one in which we can see the full fruits of a sound strategy and our employees' ability to execute. While the CMC team should be proud of these results, There is still further to go and more opportunity ahead. It's worth reviewing some of the highlights and key accomplishments this quarter. Our fabrication segment was a strong contributor to earnings. Solid bottom line results should continue over the next several quarters. Our mills continued their work to enhance product mix capabilities. Domestic mill shipments of merchant bar, spooled rebar, and high value rebar increased by 14% over last year's first quarter. The addition of a new mill capacity gives us the flexibility to strategically redirect some production towards higher value products. We continued our mill network optimization efforts, most recently through the closure of the Rancho Cucamonga melt shop, a decision driven by the high energy and compliance costs of manufacturing in California. This move will lower the cost of finished rebar out of Rancho while supporting utilization rates at our other CMC mills. Strong financial results require satisfied customers, and we maintained our industry-leading customer service ranking in the most recent Jacobson survey. Solid earnings and good working capital management allowed us to further strengthen our balance sheet. We reduced total debt by $51.5 million during the quarter bringing gross debt to little over two times trailing 12-month core EBITDA. This is in line with investment-grade issuers and better than the metals and mining sector average of 2.5 times. As a result of everything I previously mentioned, CMC has generated a core annualized ROIC of nearly 15% over the last three quarters, a return well above our cost of capital that we believe provides attractive returns to our stakeholders. Finally, as I noted in our press release, as noted in our press release, the Board of Directors declared a quarterly cash dividend of 12 cents per share of CMC common stock for stockholders of record on January 15, 2020. The dividend will be paid on January 30, 2020. This represents CMC's 221st consecutive quarterly dividend. Turning to the market outlook, We are positioned to continue benefiting from the positive trends in our core markets and remain optimistic about the construction market, as many of the macro indicators we monitor point to resilience ahead. Let me now cover some of them. U.S. construction spending continues to grow year over year, led by public projects. In particular, we're seeing strength in state and local highway spending. The Architectural Billings Index, a leading indicator for construction expansion, remains supportive of future growth. The South and West regions show the highest readings, both core markets for CMC. U.S. unemployment rates and interest rates remain historically low, contributing to positive sentiment within our markets and giving customers confidence to make investment decisions. Finally, our own bidding activity remains strong. offering encouragement that the pipeline of work is solid. I would further add that our fabrication backlog sits at a healthy volume in pricing levels. The average price per ton in our backlog is up nearly $100 from one year ago, and we expect it to be profitable when shipped given current rebar prices. Turning to the markets we serve in Europe, The Polish economy remains among the fastest growing in Europe, with GDP expansion of 4.1% in the most recent quarter. The outlook for calendar 2020 calls for continued growth of 3.5% to 4.5%. Similar to the U.S., Poland's unemployment rate is at historic lows. Construction activity is healthy, with committed EU funding in place to support infrastructure investment through 2023, which we expect to benefit rebar demands. However, the outlook for nearby industrial markets, such as German manufacturing, is less robust, which will negatively impact exports of wire rod and merchant products. With that as an overview, I'll now turn the discussion over to Paul Lawrence, Vice President and Chief Financial Officer, to provide some more comments on the results for the quarter.

Paul? Thank you, Barbara, and good morning to everyone joining us on the call. As Barbara mentioned, for the first quarter, we reported earnings from continuing operations of 82.8 million, or 69 cents per diluted share, compared to earnings from continuing operations of 19.4 million, or 16 cents per diluted share, in the first quarter of 2019. First quarter 2020 results include after-tax costs of 5.0 million related to the closure of the Rancho Cucamonga, California, melting operations. Including these costs, adjusted earnings from continuing operations were $87.8 million, or $0.73 per diluted share. Our core EBITDA from continuing operations was $174.4 million for the first quarter of 2020, an increase of 78% compared to the $97.7 million reported for the first quarter of 2019. This does not include the $8.3 million benefit from the amortization of the unfavorable acquired contracts. As a reminder, we no longer provide specific financial performance for operations related to the rebar assets acquisition completed last year, as these locations are now fully integrated into our network of operations. That said, we continue to be pleased with their performance. The acquired mills remained nicely profitable in the first quarter, and the acquired fabrication facilities contributed to the overall positive EBITDA results of the fabrication segment. Now I will review our results by segment for the first quarter. America's recycling segment recorded adjusted EBITDA of $3.4 million for the first quarter of 2020 compared to adjusted EBITDA of $15.4 million in the same period last year. Market environment was challenging. with the recycling segment facing the effects of low ferrous pricing, as well as constrained scrap flows in our yards. Our average ferrous selling price declined by 33% from the first quarter of 2019, while total ferrous and non-ferrous shipments declined by 14%. Importantly, we were able to continue to generate positive EBITDA in this difficult environment through a focus on disciplined material buying, cost control, and rapid inventory turnover. The America Mills segment recorded adjusted EBITDA of $155.0 million for the first quarter of 2020 compared to adjusted EBITDA of $113.9 million for the first quarter of 2019. Shipment volumes increased compared to the first quarter of last year, primarily driven by two additional months of contribution from the acquired mills. Selling prices declined by $34 per ton from the fourth quarter, but the reduction in ferrous scrap costs of $20 per ton allowed our mills to maintain high metal margins of $385 per ton. This was $10 per ton higher than a year ago, but a $14 per ton sequential quarter decline. Within the context of a significant pricing volatility across the steel industry, we have managed five consecutive quarters of metal margins within a tight $25 per ton range. We believe that this points to greater stability of our products and end markets compared to the broader domestic steel industry. America's fabrication segment recorded adjusted EBITDA of $17.5 million in the first quarter of 2020 compared to an adjusted EBITDA loss of $37.0 million in the prior year quarter. As in the past, These results do not include the benefit from amortization of the unfavorable acquired contracts. Financial performance improved as a result of rising selling prices against declining rebar input costs, which led to significant margin expansion. Average selling prices of $976 per ton increased by $108 compared to the first quarter of 2019. High-priced work booked more recently has replaced the lower-priced projects awarded prior to the Section 232 tariffs being implemented. As mentioned by Barbara, our backlog is favorably priced, and we expect it to be profitable when shipped in future quarters. The international mill segment recorded adjusted EBITDA of $11.4 million for the first quarter of 2020, compared to adjusted EBITDA of $32.8 million in the prior year quarter. Volume decreased by 54,000 tons, or 14% compared to the prior year, due primarily to the absence of opportunistic billet sales made during the first quarter of 2019. Rebar shipments increased year over year, demonstrating the ongoing health of the construction-related demand in the domestic Polish market. Volumes of merchant product were impacted, however, by lower German industrial demand. Metal margins were down on both a year-over-year and sequential quarter basis, pressured by a continued surge of imported material. European safeguard measures have thus far been ineffective in deterring disruptive imports from countries like Turkey, Russia and Ukraine, as demonstrated that during the third quarter of 2019, the market share of rebar imported into the EU spiked to over 18%, which is the highest level since 2017. With respect to our consolidated results, our effective tax rate for the quarter was 24.8%, which we anticipate will approximate our effective tax rate for 2020. Turning to our balance sheet and liquidity, As of the end of the quarter, cash and cash equivalents totaled $224.8 million, and we had availability under our credit and accounts receivable program of approximately $660 million. During the quarter, we generated $146 million of cash from operating activities. Strong earnings and working capital management allowed us to increase our cash balance sequentially, even while funding $45.6 million of capital expenditures and reducing debt by $51.5 million. Turning to capital expenditures, we estimate spending for fiscal 2020 will be in the range of $160 to $185 million. As we look forward, our capital allocation will continue to place debt reduction as a priority. Finally, as you'll note on our balance sheet and in our Form 10-Q to be soon filed, CMC adopted the new lease accounting standard this quarter, which resulted in an opening balance sheet adjustment to gross up our assets and liabilities by approximately $115.8 million. This concludes my remarks and now I'll turn it back to Barbara for the outlook.