Commercial Metals Company

Hello and welcome everyone to the full year and fourth 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 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 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, 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 in 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.

Good morning, and thank you for joining this morning's call to review CMC's results for the fourth quarter of fiscal 2020. I will begin the call with highlights from what was an outstanding year for CMC, then turn to comments on our fourth quarter results before providing updates on our strategic projects and the current macro environment. Paul Lawrence will then cover the quarter's financial information in more detail, and I will conclude our prepared remarks with a discussion of our outlook for the first quarter of fiscal 2021, after which we will open the call to questions. Before jumping into my remarks, I would like to direct listeners to the supplemental slide deck that accompanies this call. The presentation can be found on CMC's investor relations website. Let me begin by highlighting that fiscal 2020 was a historic year for CMC, showcasing the potential of a transformed company following nearly a decade of purposeful strategic repositioning and portfolio realignment. The benefits of these efforts became clear in fiscal 2020. CMC is now a company with significantly increased earnings, cash flow, and operational capabilities. These actions also include an incredibly robust balance sheet positioning CMC to thrive and grow. In addition to reaping the benefits of our strategic transformation, CMC generated a long list of accomplishments in fiscal 2020 as we work to continue to strengthen our organization and build for the future. First, we reacted quickly to the COVID-19 outbreak to protect the health of our employees and the continuity of our operations. We avoided business interruptions and disruptions to our customers, and we suffered no loss of productivity. We increased our core EBITDA over fiscal 2019 by 30%, generated a 12% return on invested capital and $604 million of free cash flow, in turn creating meaningful economic value. We initiated a network optimization effort in North America that we expect will yield significant profit and working capital benefits. So early in the process, we've already seen positive results, including lower costs and a release of working capital. CMC made significant progress on our MBQ growth initiative. We laid the groundwork for further expansion through an enhanced commercial focus supported by broader product line offerings and improved product quality with our investment in additional climate-controlled storage and improved handling. We acquired the Galvabar product line and production facility, providing our customers with a complete range of corrosion-resistant options to choose from. In August, we held a virtual investor day and provided a detailed view of the company's strategy and growth initiatives. Lastly, our most important achievement in 2020 was continuing to keep our people safe. I'm proud to report that 67% of our locations worked incident-free this past year. Looking back on fiscal 2020, I'm extremely proud of our team. They achieved these accomplishments in an environment of unprecedented challenges that turned many people's work and home life upside down. Our employees once again demonstrated their dedication to serving our customers' needs and their ability to overcome obstacles safely through collaboration and innovative problem solving. You will have seen that starting with the fourth quarter of fiscal 2020, CMC changed its reporting approach by consolidating its former Americas recycling, mills, and fabrication segments into one North America segment. This change was executed with a long-term, multi-year perspective and aligns with the way we manage and analyze our business. This approach also reflects the way in which CMC creates economic value through its vertically integrated operations as we explained in detail at our investor day. Turning to our fourth quarter financial performance, as announced in our earnings release this morning, we reported earnings from continuing operations of 67.8 million or 56 cents per diluted share on net sales of $1.4 billion. Excluding the impact of one-time charges, which Paul will cover in a moment, our adjusted earnings from continuing operations were $95.3 million, or 79 cents per diluted share. This level of adjusted earnings represents a 35 percent sequential increase and a 4 percent year-over-year increase, despite operating with an economy impacted by the COVID-19 pandemic. Activity levels across most of our major end markets remained robust, pushing shipments of finished steel products during the fourth quarter to the second highest level ever for CMC, behind only the third quarter of fiscal 2019. During the quarter, we generated 206 million of free cash flow. I would now like to provide a quick update on recent strategic announcements. In conjunction with our investor day, CMC announced that it would construct our third technologically advanced micromill adjacent to our existing mill in Mesa, Arizona. This facility will have a nameplate annual capacity of 500,000 tons and be capable of flexing production between rebar and merchant bar. A significant portion of the investment will be funded through the sale of our Rancho Cucamonga site. We view this investment as a smart way to grow. It replaces older, high-cost capacity, leverages our existing market position and existing Mesa site infrastructure, and benefits from increased returns through the investment cost offset provided by the land sale. We anticipate breaking ground in early calendar 2021 and reiterate our previous intention to begin commissioning in fiscal 2023. In the meantime, CMC is preparing for the decommissioning of Steel California and a seamless transition of rebar supply to the West Coast while maintaining high levels of customer service. During the quarter, we made significant progress in the construction of our third rolling mill in Poland. Once operational, this project will allow our facility to utilize 200,000 tons of current excess melt capacity by converting it to higher value-add finished product. In addition to increased finished goods output and the resulting margin benefit, the third mill will also enhance our production flexibility and leverage our fixed melt shop costs. We anticipate a late fiscal 2021 startup and expect total costs will be well below our original budget of $80 million. As mentioned earlier, in July we completed the acquisition of Galvabar, a growing provider of corrosion-resistant coating services to fabricators. Galvabar is the only galvanized rebar product that can be fabricated after coating. which provides benefits to fabricators, including lower costs, streamlined logistics, and increased productivity. Turning now to the market update, we exited the fourth quarter at strong activity levels in both North America and Europe. Domestic demand for rebar has been supported by a healthy backlog of work at our own fabrication facilities, as well as our third-party customers. Consistent with our previous comments today, we have seen very few cancellations. Demand for merchant products rebounded from the low point that occurred in the third quarter. Service center activity is now also recovering and customers appear to be buying in line with underlying needs. CMC's current construction backlog in North America sits at a healthy level and we continue to hear of similar conditions at our fabricator customers. However, we know there will be lingering market effects as a result of the pandemic. The outcome of the upcoming election will also remove current uncertainty regarding the direction of public policy and its impact on the economy. We are carefully monitoring the macro environment and building in flexibility to respond to changes in demand. In Europe, construction demand remains resilient in both the private and public sectors. Conditions in residential are particularly strong, and demand is currently growing on a year-over-year basis. As we shared during our Investor Day, the Polish government recently authorized infrastructure investment equal to about 200% of its normalized annual spend. which we expect to begin positively impacting construction activity levels this fiscal year. On the industrial side, manufacturing activity in Central Europe is recovering, with PMIs in both Poland and Germany posting expansionary readings from the last several months. Finally, 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 October 29, 2020. The dividend will be paid on November 13, 2020. This represents CMC's 224th 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.

Paul Lawrence Thank you, Barbara, and good morning to everyone on the call today. Before getting into the results for the quarter, I would like to provide a few comments on how we will describe operational performance going forward in light of the change segment reporting. To reiterate what most of you are already aware, we operate our vertically integrated network to maximize profitability. The raw material operations providing a reliable, low-cost source of the principal raw material, ferrous scrap, for the mills, The downstream facilities providing a base load of demand and protecting us from short-term selling price volatility and surges of unfairly priced imports. With 60% of our raw material flows going to the mills, 40% of the mill production going to the downstream locations, separating the value chain into different components for the purposes of financial reporting is no longer aligned with how we run the business or how we make capital allocation decisions. In our commentary and reporting, we will focus on the products, prices, and costs that are most impactful to our integrated operations and earnings stream. Our volume commentary will look largely at external shipments of finished steel products, which is a combination of what we now term steel products and downstream products. because those tons travel the furthest through our integrated value chain, incur the most cost, and also drive our profitability. In addition to using these volume levels as a gauge of activity, we will give per ton rates using finished steel product shipments as the denominator. Regarding margins, we intend to provide commentary with a focus on selling price spread over mill yielded scrap costs for both steel products and downstream products. With respect to costs, we'll be referring to controllable costs, which we define as costs excluding scrap, encompassing our raw materials, steel products, and downstream product operations. This is because we own all of the economics from the point of charging scrap into the furnace to our final product sale. This approach of describing our business separates costs that are largely out of our control, i.e., scrap costs, and those which we actively manage. The operational stats we provide in our release should allow the investing community to identify, quantify, and forecast each of these two buckets. To help parties better understand the reporting transitions, We have posted several resources, as Barbara mentioned, to our investor toolkit section of our investor relations website. Turning to the fourth quarter, as Barbara mentioned, we reported earnings from continuing operations of 67.8 million or 56 cents per diluted share, compared to earnings from continuing operations of 85.9 million or 72 cents per diluted share in the fourth quarter of 2019. Fourth quarter 2020 results include net after-tax charges of $27.5 million, the largest of which related to the post-closing working capital settlement associated with our fiscal 2019 rebar asset acquisition. This is essentially a finalization of the purchase price, as working capital balances were part of the consideration paid, and certain amounts were under dispute between the parties. Other charges taken in the quarter were largely non-cash and included facility closure costs, as we continue to optimize our footprint, as well as debt extinguishment costs related to the early paydown of CMC's term loan. Including these and other one-time expenses, adjusted earnings from continuing operations were $95.3 million, or $0.79 per diluted share. This marks the highest level of adjusted EPS in 13 years. Our core EBITDA from continuing operations was 176 million for the fourth quarter of 2020, an increase of 11% compared to the 159.2 million reported in the fourth quarter of 2019. Now I will review our results by segment for the fourth quarter of 2020. North America's segment recorded adjusted EBITDA of 174.2 million for the quarter, compared to adjusted EBITDA of $152.5 million in the same period last year. Largest driver of this improvement was a reduction in controllable costs on a per ton of finished product basis. Year-over-year reduction was driven by cost improvements throughout the vertical footprint, most significant of which was the lower mill conversion costs. continued to benefit from our decision in early fiscal 2020 to curtail melting operations at Steel California and supply the facility with lower cost billets from other plants. Additionally, mill costs were helped by declining prices for consumables such as electrodes and alloys. Cost levels at our downstream operations also improved due in part to the consolidation of roughly a dozen facilities since the completion of the rebar asset acquisition. The facility rationalizations have been carried out in regions where acquisition resulted in overlapping downstream footprints. When addressing this issue, we have not reduced our service in any major local market. CMC's North American cost performance more than offset the margin compression seen in slide 7 of the accompanying deck. Year-over-year margin squeeze occurred primarily in steel products, driven by a multi-quarter downward drift in average selling price against a modest rise in scrap costs. Margins over scrap on the downstream business expand modestly from a year ago due to higher average selling prices. These higher prices are a function of an attractively priced backlog. We won't provide guidance as to the future pricing, but we can indicate that the current average backlog pricing should support a downstream average selling price above the trailing five-year average in the near term. Shipments of finished product in the fourth quarter were flat from a year ago, with growth in steel products offset by a modest decline in downstream products. Rebar volumes out of the mills were supported by sustained construction spend throughout the pandemic. Downstream product shipments were impacted by multiple storms in Texas and the Gulf region, as well as the wildfires in the west. Our Europe segment recorded adjusted EBITDA of $22.9 million for the fourth quarter of 2020, essentially flat to the prior year quarter. It should be noted that $10.7 million carbon credit was received during the quarter. We are not treating this as a one-time benefit, as this credit is for a 12-month period and part of an ongoing government energy program that will recur in the future, though the amount will likely differ. Our Europe operation also received a $3 million labor cost refund as part of a COVID-19 stimulus program, which is included in the segment EBITDA, but has been excluded from our consolidated core EBITDA figure. Margins over scrap were down on a year-over-year basis, but virtually flat from the prior quarter. Import flows remain a meaningful challenge to pricing and spreads in Central Europe across all long product categories. Several countries, namely Turkey, Russia, and Belarus, continue to aggressively fill import quotas after periodic resets. Europe volume decreases Europe volumes decreased just 2% compared to the prior year, due primarily to lower shipments of wire rot, which was impacted by reduced German automotive production. Rebar shipments were stable year over year, demonstrating the resilience of the construction-related demand in the domestic Polish market. Volumes of merchant product were also flat compared to a year ago, helped by a recovering Central European industrial activity level and restocking. Moving on to our consolidated results, our effective tax rate for the quarter was 21.4%, bringing the full year average to 24.9%. This is consistent with the 25% guidance we provided over the course of our last few earnings calls and in line with our current expectations of 2021 to be between 25% and 26%. Turning to our balance sheet and liquidity, as of August 31st, Cash and cash equivalents totaled $542.1 million and we had availability under our credit and accounts receivable programs of approximately $661.9 million. During the quarter, we generated $259.4 million of cash from operating activities. Strong earnings and working capital management allowed us to increase our cash balance sequentially, even while funding $53.5 million of capital expenditures and reducing debt by almost $100 million. As you can see by the trends on slide 14 of the supplemental slide deck, CMC's enhanced earnings and cash flow generation has allowed us to rapidly delever over the last six quarters. Our net debt to EBITDA ratio now sits below one times, while our net debt to capitalization is just 18%. Our robust balance sheet and overall financial strength provide us the flexibility to fund our strategic growth projects, navigate the uncertainties of the current economic environment, and still pursue opportunistic M&A. Lastly, I would like to provide a current outlook for capital expenditures for fiscal 2021. We expect to invest between $200 and $225 million, with roughly $85 million earmarked for our new micro-mill. For comparison purposes, we have previously stated that a typical capital spend averages around $150 million annually. This concludes my remarks, and I'll turn it back to Barbara for the outlook.