Commercial Metals Company

Hello and welcome everyone to the second quarter fiscal 2020 earnings call for Commercials 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, the impact of COVID-19, 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, and capital spending. These and other similar statements are considered forward-looking and may involve forecasts and are subject to risk 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 risk and uncertainties including those that are described in the risk factors and forward-looking statements disclaimer sections on the company's latest annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. Although these statements are based on management's current expectations and beliefs, CMC offers no assurance that these expectations or beliefs will prove to be 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, 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 are 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 would like to turn the conference over to Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, Ms. Barbara Smith. Please go ahead, ma'am.

Good morning, and thank you for joining the call to review CMC's results for the second quarter of fiscal 2020. I'll begin the call with highlights for the second quarter and a brief discussion regarding our company's exposure to and actions around the COVID-19 outbreak. Paul Lawrence will then cover the quarterly financial information in more detail, and I will provide a few closing remarks before opening the call to questions. Given the heightened level of economic and policy uncertainty caused by the COVID-19 outbreak, we will not be providing any forward-looking earnings commentary. As announced in our earnings release this morning, we reported fiscal second quarter 2020 earnings from continuing operations of 63.6 million, or 53 cents per diluted share, on net sales of 1.3 billion. As there were no charges or credits to call out this quarter, our adjusted earnings from continuing operations was also 63.6 million. The entire CMC team delivered another great result for the second quarter. Despite this being our seasonally weakest period, we generated strong results, highlighted best by the achievement of the second highest adjusted EBITDA margin in our company's history. The transformational actions we have taken over the last several years have realigned our portfolio to earn more on each dollar of sales and generate higher returns on each dollar of capital employed. Our efforts to date have been further bolstered by a supportive market environment with robust construction activity in both United States and Eastern Europe. In addition to enhancing our through-the-cycle earnings and cash flow capabilities, our repositioned capital structure provides us flexibility to manage through today's uncertain environment. I would now like to spend a few moments on some of the strategic initiatives that help drive our results. Mergent Bar has been an area of focus for us, and we have targeted growth in this market. The flexibility unlocked through our acquisition of Gerdau's rebar assets has allowed our legacy mills to redirect production toward MBQ products and steadily increase our participation in this market. There is further runway on this initiative, and we will continue to capitalize on opportunities as they arise in the marketplace. To further our optimization efforts, we have created a new senior management role to oversee our sales, inventory, and operations planning, or SIOP, functions across the Americas. This position, along with the organization he directs and the participation of all plant operations, will allow us to pursue product growth initiatives, optimize our production mix across mills, and reduce logistics costs. We've already captured some optimization benefit through our recent decision to shutter the Rancho Cucamonga melt shop and supply billets from other locations. We estimate this action alone will save us over 10 million on an annual basis. Progress on our third rolling mill in Poland continues. We've now received the required permits and construction is underway. Our targeted startup remains at late fiscal 2021. This expansion will take advantage of excess melting capability or capacity and further expand our value-added portfolio of products. On the topic of value-added products, our spooled rebar continues to gain ground in the marketplace. Volumes in the second quarter doubled from a year ago, consistent with the adoption rate we expected when justifying our investments in spooling technology. As a reminder, spooled rebar is a higher quality product compared to standard coil that reduces operating costs and waste at fabrication shops. It is best produced in micromills, and both our Oklahoma and Arizona micromills have spooling capability. In the second quarter, we further reduced our outstanding debt levels and reached our stated leverage target of two times gross debt to trailing adjusted EBITDA. The rapid de-levering of our balance sheet since the close of our acquisition of Gerdau's rebar assets puts us in excellent position in the face of the recent market turbulence. Also, 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 April 6, 2020. The dividend will be paid on April 20, 2020. This represents CMC's 222nd consecutive quarterly dividend. Now I'd like to provide a few comments regarding CMC's exposure and response to the COVID-19 outbreak. First and foremost, ensuring the health and welfare of our workforce and their families is, as always, our top priority. To that end, we are adhering to the most recent guidelines published from the President's Coronavirus guidelines for America. CMC is designated as a critical infrastructure industry as defined by Department of Homeland Security with a duty to maintain normal operations. We are also following the governmental guidelines relevant to our Polish operations and other foreign offices. In keeping with the guidelines, we have suspended air travel, implemented a rotating work from home schedule wherever possible, and asked our production sites to avoid large gatherings. We have implemented infection control measures at all our work sites. We are also encouraging all employees to practice good hygiene as well as monitor themselves and their families for virus symptoms and seek medical attention at the first instance of concern. This rapidly evolving environment presents unique and unprecedented challenges. We are managing all the factors within our control. However, we are subject to the actions of outside parties, particularly government authorities, that have the potential to be disruptive to our business. We have seen no measurable operating or shipping disruption at this point, but the situation remains dynamic and we have plans in place to respond to these changes. Turning back to those aspects of CMC's business that are under our control, Our expanded domestic footprint provides us the flexibility to react quickly in the event of a disruption at one of our facilities and continue serving customers from unaffected locations. Our new centralized SIOP function will be instrumental in making these rapid adjustments. We have also analyzed our supply chain, and we are not facing any imminent shortages of critical parts or inputs. The situations in the US and Poland are fluid, and we are continually monitoring conditions. Our senior management team is meeting regularly to gather information from across our operational footprint, respond to issues as they arise, and provide communications to our employees. Outside of the COVID-19, turmoil in global oil markets has also weighed on our investor confidence. CMC has little direct sales exposure to the oil and gas markets. As I previously mentioned, we will not be providing an earnings outlook, but I would like to offer comments regarding a few key internal metrics. The volume in our current fabrication backlog is solid by historical standards, and metal margins on that work is at very attractive levels. Fabrication bidding activity has remained strong. Our recent bookings rate has also been good. Metal margins within our America's Mills segment exited the second quarter at levels above historical cycle averages. Also, as a reminder, the majority of our business is driven by construction projects that are six months or longer in duration and are generally pre-funded. We believe this positions CMC well for the eventual normalization of business activity once the current crisis abates. With that as an overview, I will 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 Lawrence Thank you, Barbara, and good morning to everyone joining us on the call today. I would like to begin with a few comments regarding the strength of CMC's balance sheet and liquidity profile. Our purposeful actions over the last several quarters to reduce debt levels have positioned us well to confidently maneuver through today's uncertain environment. As Barbara mentioned, at quarter end, gross debt stood at just two times trailing EBITDA, while our net debt ratio was only 1.6 times. In addition, We also have a favorable maturity profile, with the shortest dated bond not coming due until 2023. Looking at our quarter-end liquidity, we had $617 million of availability on our credit and accounts receivable programs, as well as $232 million of cash on hand. In addition to a conservatively structured balance sheet, we believe that our transformed portfolio of operations enhances our earnings and cash flow generation ability compared to past business cycles. Also, as a reminder, CMC tends to experience cash inflows from working capital in times of declining prices or volumes as inventory and receivables are liquidated. So to summarize all of those comments, CMC stands ready and able to navigate through today's uncertain marketplace and be well positioned to take advantage of these opportunities that come in these times. Turning to the second quarter, we reported earnings from continuing operations of $63.6 million, or $0.53 per diluted share. compared to earnings from continuing operations of 14.9 million or 13 cents per diluted share in the second quarter of 2019. Our core EBITDA from continuing operations was 145.3 million for the second quarter of 2020, an increase of 60% compared to 90.9 million reported in the second quarter of 2019. This does not include the $6 million benefit from the amortization of unfavorable acquired contracts. Now I will review the results by segment for the second quarter of fiscal 2020. The Americas recycling segment recorded adjusted EBITDA of $5.8 million for the second quarter of 2020, compared to adjusted EBITDA of $10.1 million in the same period last year. The market environment was challenging, with the recycling segment facing the effects of low ferrous pricing as well as lower shipment volumes. Our average ferrous selling prices declined by 15% from the second quarter of 2019, while total ferrous and non-ferrous shipments declined by 8%. Despite these headwinds, the segment remained EBITDA positive through a focus on rapid inventory turnover which help mitigate the impact of the price volatility. The Americas Mills segment recorded adjusted EBITDA of $125.7 million for the second quarter of 2020, compared to adjusted EBITDA of $112.4 million in the second quarter of 2019. Shipment volumes increased compared to the second quarter of last year on the strength of rebar consumption and our focus on growing merchant bar sales. Despite scheduled seasonal maintenance shutdowns, we are able to reduce conversion costs by 6% year-over-year on continued operational improvement, higher production volumes, and the decision to curtail melting operations at our California mill. Tunnel margins declined to $350 per ton in the second quarter, compared to $374 per ton a year ago, but remain at historically high levels. Over the past seven quarters, we have managed our metal margins within a $50 band between $350 to $400 per ton. This stability occurred within an environment of pronounced price volatility in the broader steel market. As a comparison, during the same timeframe, margins over scrap for hot rolled coil, the domestic steel market's largest volume product category, experienced a $250 per ton swing from peak to trough. The Americas fabrication segment recorded adjusted EBITDA of $16.1 million in the second quarter of 2020, compared to an adjusted EBITDA loss of $49.6 million in the prior year quarter. As in the past, these results do not include the benefit from the amortization of the unfavorable acquired contracts. Financial performance improved as a result of the rising average selling price against declining rebar input costs, which led to significant margin expansion. Average selling price of $984 per ton increased by $139 compared to the second quarter of 2019. As higher price work booked more recently has replaced lower price projects awarded prior to Section 232 tariffs being enacted. As mentioned by Barbara, margin in our backlog is solid, and we expect material to be profitable when shipped in future quarters. The international mill segment recorded adjusted EBITDA of $13.5 million for the second quarter of 2020, compared to adjusted EBITDA of $20.5 million in the prior year quarter. Volume increased by 76,000 tons, or 25% compared to the prior year, due largely due to the strong demand from the Polish construction sector. Volumes of merchant product were impacted by tepid Central European industrial demand. Metal margins were down on both a year-over-year and sequential quarter basis, pressured by the continued overhang of material imported during the calendar third quarter. European safeguard measures reduced the total volumes of rebar imports in calendar 2019 compared to calendar 2018, but did so in a way that led to significant pricing and margin disruption on a quarter-to-quarter basis. We hope to move past these effects in the second half of fiscal 2020. With respect to our consolidated results, our effective tax rate for the quarter was 26.4%. and we continue to anticipate that our effective rate for 2020 will be approximately 25%. In the second quarter, we generated $107 million of cash from operating activities. Strong earnings and working capital management allowed us to increase our cash balance sequentially, even while funding $51 million of capital expenditures and reducing long-term debt by a net $35 million. We continue to estimate capital expenditures for fiscal 2020 will be in the range of $160 to $185 million. However, we have demonstrated in prior years how we can reduce capital spend if necessary. This concludes my remarks, and now I'll turn it back over to Barbara.