Commercial Metals Company

Hello and welcome everyone to the third 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, which will 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 the 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 statements and may involve forecasts and are subject to risks and uncertainties that could cause actual results to material different from the 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 and forward-looking statements disclaimer sections of the company's latest annual report on Form 10-K and subsequent quarterly reports from 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. Expect as required by law. CMC does not assume any obligation to update, amend, or clarify these statements in connection with future events. Changes in 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 earning release or on the company's website, unless otherwise, 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 Chairman of the Board, President and Chief Executive Officer of Commercial Metal Companies, Ms. Barbara Smith.

Good morning, and welcome to our third quarter earnings conference call. I'd like to begin with a sincere thank you to our 11,500 CMC employees around the world. The COVID-19 crisis forced each of them to make significant adjustments and sacrifices in nearly every aspect of their lives. In the face of these challenges, they proved they are adaptable, creative, and collaborative while showing their commitment to their communities and each other through countless acts of kindness. The last several months clearly demonstrate the power of CMC's people and our culture. They are the backbone of CMC, and I'm enormously proud of how they perform during this personally and professionally difficult time. Turning to our third quarter results, I will now review highlights from the quarter, including a discussion of the impact of COVID-19, as well as our response to the crisis, and also provide a brief update on current business activity levels. 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 fourth quarter of fiscal 2020, after which we will open the call to questions. As announced in our earnings release this morning, we reported fiscal third quarter 2020 earnings from continuing operations of $64.2 million, or 53 cents per diluted share, on net sales of $1.3 billion. Excluding the impact of certain charges, which Paul will cover in more detail, our adjusted earnings from continuing operations were $70.4 million or $0.59 per diluted share. Both our GAAP and adjusted earnings from continuing operations increased sequentially from the second quarter. CMC's entire third quarter was impacted by the COVID-19 pandemic. From the onset of the crisis, each of the U.S. jurisdictions where we operate, BMC was recognized as an essential business, reflecting our company's role in supplying the necessary materials and services for the construction of much of our nation's most vital infrastructure. Just a few examples of these critical projects include an expansion of the MedStar Georgetown Surgical Hospital in Washington, D.C., a new Emory Windship cancer treatment center in Atlanta, the DC Clean Water Project, and the refurbishment of the New York LaGuardia Airport. The regulatory designation in Poland is different, but the practical outcome was identical and construction activity continued largely unabated. While the essential business designation allowed CMC to avoid any mandatory curtailments, We took actions to ensure our people remained safe and all our plants remained open, serving customers. The NC acted early to institute practices that limited the spread of the virus at our facilities, including social distancing, enhanced sanitation, visitor restrictions, and remote work arrangements. We formed a task force to respond to a constantly evolving set of circumstances in a timely and open manner. This group worked tirelessly to coordinate efforts and share best practices across our organization. I'm very proud to report that not only did CMC avoid any infection-related disruptions, we also avoided any loss of productivity, which is highlighted by our third quarter cost performance. This achievement can be attributed to our operating teams who, given any set of challenges, always find a way to improve efficiency. The COVID-19 pandemic created economic stress and uncertainties unique in our lifetimes. In such an environment, we concentrated our efforts on the elements of our business we can directly control, in particular, customer service, cost, and cash management. On the customer front, we enhanced our collaboration even further to accommodate changing needs in an environment where forward visibility was diminished. Fluid situations in their own businesses led customers to quickly adjust product needs, quantities, turnaround times, and even delivery procedures. Our ability to rapidly adapt was recognized with increased market share in both the U.S. and Poland. The difficulties presented by the pandemic gave CMC an opportunity to further prove our value to customers, and our commercial, operations, and logistics teams seized upon it. The next lever, cost management, yielded equally impressive results. As noted in our press release, the Americas Mills achieved its best conversion cost levels since our November 2018 acquisition. This accomplishment was aided by our ongoing optimization efforts that included the earlier decision to curtail California melting operations and supply billet from more efficient plants. Cost reduction also benefited from the operating flexibility gained through the 2018 acquisition. In fact, in an environment of general economic malaise, we continue to improve. As an example, one of our mills set a new quarterly production record, while in May, two others posted their best monthly conversion costs under CMC ownership. Not to be outdone, our Polish team demonstrated their ability to lower costs and improve efficiencies. Conversion costs per ton declined both on a sequential and year-over-year basis, despite modest reductions in shipping volumes. Additionally, in our fabrication segment, reduced its controllable costs per ton to the lowest level in two years, as we continue to optimize our network of fabrication facilities, allowing us to rationalize the location in California. Turning to cash management, you can clearly see the results on our balance sheet. We nearly doubled our cash balance during the quarter, increasing it by $230 million and ending the quarter with $462 million of cash on hand. We tightly controlled working capital, striking the right balance between keeping material in stock to provide a high level of customer service and mitigating the amount of cash tied up in inventory. We reduced inventory by approximately 10% from the second quarter, Much of this reduction was driven by our efforts to optimize our network and eliminate redundant stock. We also closely monitored accounts receivable and were proactive in collection efforts. We did not occur any significant deterioration in our aging. In total, CMC was able to harvest $157 million of cash from working capital during the quarter and generate cash from operations of $278 million. As a result, our strong balance sheet and leverage profile improved further. Our net debt to trailing 12-month adjusted EBITDA stands at 1.2 times versus 1.6 times at the end of the second quarter, and our net debt capitalization improved from 32% to 24%. CMC's performance within a turbulent economic environment demonstrates both the strength of our vertically integrated business model as well as the attractiveness of construction and markets. Looking first at our vertical structure, a robust backlog of pre-funded fabrication projects supported volumes at our domestic mills during the quarter. Additionally, our downstream presence provided our mills with forward visibility which allowed us to optimize production during the quarter and manage conversion costs and logistics costs. The stabilizing nature of fabrication was evident in third quarter. While many businesses across the U.S. industrial landscape experienced margin compression, our fabrication business achieved significant expansion as spreads between fixed selling prices and lower spot input costs widened. This more than offset market challenges faced in our upstream recycling business. More broadly, the third quarter showed that construction and markets don't behave like other steel-consuming sectors. They're not driven by near-term discretionary spending and don't quickly shut down. Projects already underway are pre-funded and will generally become income-generating properties upon completion. This means that work continues even as other sectors slow. We also experienced the same pattern during the last recession. The combination of our vertical structure securing mill volumes, the impact of expanding margins on fixed price work, and the resilience in construction activity led to an extraordinary outcome when viewed within the broader global economic context. CMC's finished product volumes, which excludes recycling, declined only modestly year over year. Our gross margin as a percent of net sales actually increased from a year ago, while core EBITDA and EBITDA margin also increased. As a reminder, our Polish operations also benefited from an identical vertical structure, which helped to stabilize performance during the quarter in an equally challenged European market. Let me now make a few comments regarding current activity levels. Our domestic mills remain busy and are shipping at a historically normal rate for this time of year. We did experience a temporary decline in order rates for merchant products during April as service centers purposefully destocked. There was a rebound in merchant volume in May and buying patterns appear to be normalizing as the economy reopens. The volume in our current fabrication backlog is near record levels. and metal margins on that work are very attractive at current rebar prices. Fabrication bidding activity has remained strong. Our recent booking rates has also been good. Metal margins within our America's Mill segment exited the third quarter at levels above historical cycle average. Also, as a reminder, the majority of our U.S. business is driven by pre-funded construction projects that are six months or longer in duration. Construction demand in Poland continues to also be robust, as I noted earlier. Finally, as I stated in our press release, the Board of Directors, as stated 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 July 6, 2020. The dividend will be paid on July 20, 2020. This represents CMC's 223rd consecutive quarterly dividend. 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.

Thank you, Barbara, and good morning to everyone on the call today. I would like to begin with a few comments regarding CMC's balance sheet and liquidity profile, which is currently at its strongest level in well over a decade. Our purposeful actions over the last several quarters to reduce debt levels have positioned us well to maneuver through today's uncertain environment. As Barbara mentioned, net debt stood at just 1.2 times trailing EBITDA at quarter end, and our gross debt ratio was two times. We have a conservative capital structure with net debt of only approximately $700 million outstanding. Given the current economic backdrop, we are encouraged to see each of our bonds trading above par, a sign that creditors also appreciate our solid financial position. At quarter end, we had liquidity in excess of $1 billion, including $462 million of cash and $604 million of availability on our credit and accounts receivable programs. We currently have no plans or need to draw against our credit facilities. Turning to the third quarter financial results, we reported earnings from continuing operations of $64.2 million or $0.53 per diluted share compared to $78.6 million or $0.66 per diluted share in the third quarter of 2019. We incurred net after tax charges of $6.2 million during the quarter primarily related to our decision to continue to consolidate our West Coast operations and exit a fabrication facility. This is another action in our ongoing effort to optimize CMC's network following the 2018 REBAR asset acquisition. The vast majority of the charges taken were non-cash, and we expect to realize cost benefits in future periods. Our core EBITDA from continuing operations was $154.8 million for the third quarter of 2020, a slight increase from the $153.6 million reported in the third quarter of last year, despite the pandemic impacting global economies. The Americas recycling segment recorded an adjusted EBITDA loss of $1.7 million in the third quarter of 2020. compared to EBITDA of $12.3 million in the same period last year. The market environment for scrap was already challenging exiting the winter months. The additional strain of COVID-19 pushed lower pricing even lower and caused several third-party mill customers to significantly reduce their buy programs. We were able to preserve metal margins during the quarter by making early and rapid adjustments to our scale prices and tightly managing inventory turns. However, this was more than offset by the effect of sharply lower volumes, as industrial scrap generation was meaningfully slowed due to the temporary idling of manufacturing facility. The total ferrous and non-ferrous shipments declined by 21% from a year ago, hitting their lowest mark in over three years. We did not, however, have any issues getting sufficient scrap into our mill operations. The Americas Mills segment recorded adjusted EBITDA of $133.2 million for the third quarter of 2020, compared to adjusted EBITDA of $158.1 million for the third quarter of 2019. Shipment volumes declined by only 4% from a year ago. When compared to the broader steel market, which will likely experience a sharp double-digit decrease, we believe the single-digit decline highlights the relative strength and near-term stability of construction end markets. Shipments of merchant products also decline only modestly due largely to being able to gain incremental market share. Barbara mentioned our domestic mills achieved their best per ton conversion cost levels in the last two years despite incurring some incremental costs relating to keeping our employees safe. Metal margins remained at historically high levels. The third quarter average of $367 per ton increased $17 per ton sequentially. That scrap cost fell, but was down $19 from a year ago. Over the last eight quarters, we have managed our metal margin within a $50 band, from $350 per ton 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 market's biggest, largest volume product category, experienced a $250 per ton swing from peak to trough. America's fabrication segment recorded its best quarterly profit in nearly 12 years. Adjusted EBITDA of $31.9 million improved significantly from the adjusted EBITDA loss of $23.3 million in the prior year quarter. Similar to the America Mills, volume was only marginally impacted by select job outages in certain jurisdictions. Financial results improved as a result of the rising average selling prices against declining rebar input costs, which led to margin expansion. Average selling prices of $966 per ton increased $41 per ton compared to the third quarter of 2019. Margin in our backlog is solid, and we expect material to be profitable when shipped in future quarters based on current rebar pricing. Also, the volume of our backlog remains strong, sitting at approximately 96% of recent peak levels. The international mill segment recorded adjusted EBITDA of $14.3 million for the third quarter of 2020, compared to adjusted EBITDA of $24.1 million in the prior year quarter. The modest decline in shipments from a year ago was driven by lower opportunistic billet volumes last year. Finished goods shipments out of our mill actually increased by 2% year-over-year, helped by continued strength of demand for construction steel and market share gains in merchant and wire rod products. Within an environment of contracting central European industrial activity, our Polish team added new customers and took share. Metal margins were down year over year, but stable on a sequential quarter basis, pressured by import orders and the overall challenging steel market in Europe. Turning back to our consolidated results, Our effective tax rate for the quarter was 27% and we anticipate that our effective rate for 2020 will be approximately 25 to 26%. The third quarter we generated $278 million of cash from operating activities with $157 million coming from working capital liquidation. Looking at cash flow performance over the last 12 months gives us an even bigger picture of CMC's capabilities for following our strategic 2018 acquisition. We generated $787 million of cash from operating activities and free cash flow, defined as cash flow from operations minus capital expenditures, has totaled $606 million. This has allowed us to pay down $200 million of debt over that time period and increase our cash balance to $462 million at May 31st. We estimate that capital expenditures for fiscal 2020 will be in the range of $155 to $170 million. This is down slightly from our prior guidance of $160 to $185 million and is based on a clearer view of total spend as we approach the end of the fiscal year. This concludes my remarks and now I'll turn it back over to Barbara.