Commercial Metals Company

Hello and welcome everyone to the first quarter fiscal 2021 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, 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 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 and forward-looking statements disclaimer section of 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, 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 historical non-GAAP financial measures and reconciliations for such numbers can be found in the company's earnings release or on the company's website. Some numbers presented are forward-looking non-GAAP financial measures and reconciliations are not provided due to the unavailability of forward-looking reconciling information. Unless stated otherwise, all references made to year or quarter and are references to the company's fiscal year or fiscal quarter. And now for the 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 welcome to our first quarter earnings conference call. I'd like to wish everyone on the line a happy new year and extend my thanks to CMC's 11,500 employees for another great quarter. I'll begin the call with brief comments on our first quarter results before providing some color regarding the current market environment and how CMC is positioned to succeed. I will also give an update on CMC's strategic growth initiatives. 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 second quarter of fiscal 2021 after which we will open the call to questions. As announced in our earnings release this morning, we reported fiscal first quarter 2021 earnings from continuing operations of 63.9 million, or 53 cents per diluted share, on net sales of 1.4 billion. Excluding the impact of certain charges, which Paul will cover in more detail, our adjusted earnings from continuing operations were 69.8 million, or $0.58 per diluted share. CMC generated core EBITDA of $156.6 million, marking the seventh consecutive quarter near or above the $150 million level. This record underscores not only our company's enhanced earnings capability compared to past periods, but also the stability provided by our integrated value chains. Activity levels in CMC's core end markets remained strong during the first quarter, leading to an increase in the company's finished steel shipments compared to a year ago. In North America, demand for rebar from our mills was driven by resilient construction activity as contractors continued to work off the healthy backlogs they carried into the pandemic. Demand for merchant product benefited from the ongoing recovery of domestic industrial production as well as a lean supply chain following heavy service energy stocking in April and May. Demand for CMC's long products in Europe also remained strong during the first quarter. Residential construction in Poland continued to be strong and grew by 7% compared to a year ago, fueling rebar consumption. Meanwhile, demand for merchant and wire rod products was supported by recovering automotive and industrial production in Poland and Germany. Manufacturing PMI indices for both countries have consistently indicated growth since July. I would like to now spend a few moments discussing the current and near-term market environment. On our earnings call in October, we highlighted elevated levels of uncertainty. Market uncertainty continues to persist. The prospect of future COVID-related lockdowns and their potential impact on the economy has led to hesitation among project owners to award new work. However, in recent weeks, we've seen more willingness to move projects forward. We've also seen a rapid increase in global prices for steel and steelmaking raw materials. Domestic scrap has been particularly impacted, increasing significantly since the end of our fiscal fourth quarter. The current elevation in scrap pricing appears to be driven primarily by increased global demand particularly China, and by near-term shortages, as underutilized steel plants increase production levels. While the extent and duration of this rally is difficult to predict, it will certainly pressure margins in the near term on both our steel and downstream products. As we outlined during our investor day, CMC is built to weather turbulence and is structured to endure periods of volatility. Our vertical value chain and integration provides CMC with sources of strength at any point in the economic and steel price cycle. Our approach to operational excellence and optimization ensures that CMC is lean and efficient, and our team is always looking for further improvements. Let me give you a few examples of how CMC has responded to the current environment. In order to maintain metal spreads, we have responded to rapidly rising scrap costs with several rounds of announced price increases on each of our mill products. In addition, synergies we achieved following our fiscal 2019 rebar asset acquisition, as well as our ongoing network optimization efforts, have reduced CMC's cost structure meaningfully. During the first quarter, our controllable cost per ton of finished steel were 10% below the levels immediately following the transaction. This represents the cost incurred throughout CMC's vertical value chain from the scales at our recycling yards all the way to the shipment of downstream products from our fabrication facilities. These cost reductions are significant and fall directly to our bottom line. In Europe, our team reduced per ton controllable costs by roughly 10%, compared to the prior year, which is a remarkable feat given our belief that this was already one of the lowest-cost mills in the world. Even at the recent depressed metal margin level of $200 per ton, our European operation is generating segment-adjusted EBITDA at an annualized rate of $55 to $60 million. The fact that CMC Europe is succeeding in the current challenging environment gives us confidence that it will thrive in better times The first quarter margin over scrap was nearly an eight-year low and was $25 per ton below the long-term average. A return to mid-cycle levels would add 30 to 35 million of annualized segment adjusted EBITDA. Factors driving uncertainty in our markets have led to some erosion in the volume of work within CNC's downstream backlog. As previously mentioned, customers have delayed awarding projects. However, in recent weeks, Bookings have picked up and the backlog is starting to stabilize. Looking beyond the near-term uncertainty, longer-term indicators remain encouraging. The amount of potential work that downstream customers are asking us to quote remains strong, indicating a robust project pipeline. Our commercial teams continue to report that project owners, though currently hesitant to book work, are optimistic about future conditions. External indicators also point to reasons for confidence. Residential construction, which generally leads non-residential and local infrastructure by 12 to 24 months, is very strong. The regional population shift into CMC's core geographical markets has accelerated during the last year, voting well for medium to long-term activity. Additionally, the Portland Cement Association recently revised their 2021 and 2022 estimates for cement consumption growth upwards, roughly 1% and 2% respectively. PCA is a forecast provider we have highlighted in the past as having the highest correlation to domestic rebar shipments. I'd now like to provide a quick update on recent strategic announcements. In conjunction with our announcement last August of construction of our third technologically advanced micro mill, we announced that we would eventually curtail all operations at our Rancho Cucamonga site. At the end of December, we ceased production at the mill while maintaining full service to our customers. Operational changes and logistics were carefully planned, and we have experienced a seamless transition thus far. I would like to acknowledge and thank all of the CMC employees at the Rancho site for their service and professionalism through this difficult decision to cease operations. During the quarter, we made significant progress on the construction of our third rolling mill in Poland. Key equipment and support utilities are now being installed. We expect to begin testing equipment in a few months and continue to target commercial production later this fiscal year. As indicated during our last earnings call, total project costs should be under our original budget of $80 million. Once operational, the third rolling line will allow our facility to utilize 200,000 tons of current excess melt capacity by converting it to higher value-add finished products. This will further increase our production flexibility and leverage fixed melt shop costs. Construction of our new MBQ-capable micromill and our third rolling line in Poland, in conjunction with our ongoing network optimization efforts and other smaller organic projects, is expected to add approximately 135 million through the cycle EBITDA over the next few years. Before turning the call over to Paul, I will briefly mention efforts CMC is undertaking regarding sustainability. Sustainability is core to CMC and has been since our founding as a recycling company 105 years ago. Good business and good environmental stewardship are fully aligned at our company. This has been demonstrated by our adoption of the cleanest steelmaking technologies and our recent announcements of increased sourcing of renewable energy. In addition, to better communicate CMC's strong ESG performance, we are planning to offer new disclosures over the course of calendar 2021. Finally, 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 January 21st, 2021. Dividend will be paid on February 4th, 2021, This represents CMC's 225th consecutive quarterly dividend. That is an overview. I will now turn the discussion over to Paul Lawrence, Vice President and Chief Financial Officer, to provide more comments on the results for the quarter.

Thank you, Barbara, and good morning to everyone joining on the call today. Today we reported earnings from continuing operations of $63.9 million. or $0.53 per diluted share, compared to earnings from continuing operations of $82.8 million, or $0.69 per diluted share, in the first quarter of fiscal 2020. Salts in the quarter include net after-tax charges of $5.9 million related primarily to facility closure and asset impairment expenses at our Rancho Cucamonga Steel California operations. As Barbara mentioned, Production ended in late December. Excluding these and other one-time expenses, adjusted earnings from continuing operations were $69.8 million, or $0.58 per diluted share. Our core EBITDA from continuing operations was $156.6 million for the first quarter of 2021, a decrease of 10% from the near record level of $174.4 million reported first quarter of 2020. Slide five of the supplemental earnings call slides available on our website shows the stability of our core EBITDA on a per ton of finished steel ship basis over the course of the pandemic. Now I will review results of segments for the first quarter of fiscal 2021. North American segment recorded adjusted EBITDA of $155.6 million for the quarter. compared to adjusted EBITDA of $174.7 million in the same period last year. The largest driver of this reduction was lower margins over scrap costs on finished products. Margins for both steel products and downstream products were impacted by lower average selling prices compared to a year ago against higher scrap input costs. Selling prices for steel products from our mills decreased by $14 per ton on a year-over-year basis but did sequentially increase due to price increase announcements that became effective in the latter half of the quarter. These price increases, which Barbara mentioned earlier, occurred largely in late November and have continued into January. The impact of these increases will be realized by the end of the second quarter. The average selling price of downstream products declined by $42 per ton from a year ago as a result of the mix of work shipped as well as the impact of the high-priced projects booked in the immediate aftermath of Section 232 rolling off our backlog. Margins in our backlog remain strong and profitable relative to historical levels. As Barbara noted, exceptional operational performance helped offset the impact of lower margins. Prior to the first quarter of fiscal 2020, controllable costs per ton of finished steel shipped declined by roughly 5%, with improvements throughout our vertical footprint. The most significant benefit was lower mill conversion costs, which is our largest cost outside of scrap. We continue to benefit from our decision taken 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 benefited from declining prices for consumables such as electrodes and alloys. Shipments of finished product in the first quarter were essentially equal to the pre-pandemic volume of a year ago, with growth in steel products offset by a decline in downstream products. Rebar volumes out of the mills have been supported by sustained construction activity throughout the pandemic. Non-rebar volume, which is principally merchant bar and wire rod, saw an increase in volumes against the backdrop of flat industry consumptions. Downstream product shipments were impacted by lower activity in certain geographies, as well as multiple storms in the Gulf Coast region. Recent trend in North American margins, volumes, and cost performance can be seen on slide six of the accompanying deck. Our European segment recorded adjusted EBITDA of 14.5 million for the first quarter of 2021. compared to EBITDA of 11.4 million in the prior year quarter. Largest contributors to the improved year-over-year performance was strong cost management, higher shipment volumes, and a 1.3 million COVID-related benefit from the Polish government. Margins over scrap were down on a year-over-year basis, but virtually flat from the prior quarter. Import flows continue to disrupt pricing and spreads in Central Europe across all long product categories. Our Europe segment has experienced four consecutive quarters of margins over scrap between $195 and $200 per ton, which is well below the long-term average, as Barbara pointed out. Based on pricing developments over the last several weeks, we believe margins have bottomed. Europe volumes increased meaningfully compared to the prior year, rising 17% due primarily the impact of improving industrial demand in Central Europe, as well as service center restocking on merchant and wire rod. Rebar shipments were stable year over year, demonstrating the resilience of construction-related demand in the domestic Polish market. Now turning to our balance sheet and liquidity, As of November 30th, 2020, cash and cash equivalents totaled $465.2 million. And in addition, we had availability under our credit and accounts receivable programs of approximately $679 million. During the quarter, we used $12 million of cash to fund operating activities. Usage resulted primarily from the timing of payments related to certain accrued expenses. including the $32 million of acquisition working capital settlement highlighted in the fourth quarter earnings release. Looking ahead to the second quarter of fiscal 21, we believe the funding of working capital to be a meaningful use of cash. Both our inventory and accounts receivable balances will be impacted by the generally higher price levels for scrap and finished steel. Our leverage metrics remain attractive and have improved significantly over the last two fiscal years. As can be seen in slide 10, our trailing 12-month net debt to EBITDA ratio now sits at 1.1, while our net debt to capitalization is just 21%. Our robust balance sheet and overall financial strength provides us the flexibility to fund strategic projects Navigate the uncertainties of the current economic environment and still pursue opportunistic M&A. Our effective tax rate for the quarter was 25.3% and in line with our full year effective tax rate forecast of between 25 to 26%. Lastly, I would like to provide our current outlook for capital expenditures and 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 our typical capital spend averages around $150 million annually. This concludes my remarks. I'll turn it back to Barbara for the outlook.