Commercial Metals Company

Hello and welcome everyone to the second quarter fiscal 2021 earnings conference call for commercial metal companies. 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, 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 factor 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.

Good morning, everyone, and thank you for joining CMC's second quarter earnings conference call. As we reported in the press release issued this morning, it was another excellent quarter, and I'd like to thank CMC's nearly 12,000 employees for their continued hard work and focused efforts on behalf of our customers and our stakeholders. I will begin the call with brief remarks regarding our second quarter performance before offering some perspective on the current market environment. I will also provide an update on CMC's key strategic growth initiatives, Paul Lawrence will then cover our financial results in more detail. And I will conclude the prepared remarks with a discussion of the third quarter fiscal 2021 outlook, after which we will open the call to questions. Before covering my prepared remarks, I'd like to direct listeners to the supplemental slide deck of information that accompanies this call. The presentation can be found on CMC's Investor Relations website. CMC reported fiscal second quarter 2021 earnings from continuing operations of 66.2 million, or 54 cents per diluted share, on net sales of 1.5 billion. Excluding the impact of certain charges, which Paul will cover in more detail, adjusted earnings from continuing operations were 79.8 million, or 66 cents per diluted share. For EBITDA of $171.1 million was the highest ever for a second quarter, which has historically been our seasonally weakest quarter. This record underscores CMC's enhanced earnings capability following our multi-year strategic repositioning and the earnings stability provided by our integrated value chain. To put this in context, Since the third quarter of fiscal 2019, CMC's average quarterly core EBITDA level has nearly doubled compared to the preceding eight years. Over that same period, quarterly EBITDA volatility in percentage terms has declined by 75%. We have now posted eight consecutive quarters of core EBITDA at or above $150 million. and seven straight quarters of annualized return on invested capital above 10%. These figures demonstrate the power of CMC's strategic repositioning over the past several years and provide a baseline for our strategic growth initiatives, three of which I will cover in a moment. Activity levels in CMC's core end markets remain strong during the second quarter. In North America, demand for rebar was driven by continued state and local infrastructure spending in our major geographies, as well as strong residential activity, which is a segment of the market where CMC has been growing its participation. Demand for merchant product benefited from the ongoing recovery of domestic industrial production and a lean service center supply chain. Demand for CMC's long products in Europe also remained strong during the second quarter. Construction activity is healthy while manufacturing in our core central European markets continues to expand. The industrial recovery is driving strong demand for merchant and wire products, which we were able to capitalize on during the second quarter. The most recent PMI readings for both Poland and Germany are at their highest levels in roughly three years, indicating further expansion ahead. Now I'd like to spend a few moments discussing the current and near-term market environment. During our previous calls in October and January, we noted heightened levels of near-term uncertainty within our markets. Uncertainty about states' COVID-related policies kept project owners on the sidelines. which resulted in delayed awarding of new work. The historic rise in scrap prices, which began in late 2020, also clouded our near-term view of the business. Today, those uncertainties are starting to clear. We've seen our backlog stabilize over the last quarter, with a level of new awards increasing. This occurred even before several governors began taking meaningful steps to normalize state economies by eliminating or rolling back COVID-related restrictions. These state-level government actions, as well as the positive impact of broader vaccine availability, are giving developers and project owners added confidence to move forward with projects under consideration. The pipeline of potential work is robust as reflected in the volume of bids within our downstream operations. Bid activity strengthened during the second quarter, growing on both a sequential and year-over-year basis. The key is turning bid activity into awarded contracts. As I previously indicated, this measure has improved recently as well. The rate of awards over the last several months has stabilized our construction backlog at a healthy level, which will support near-term shipping volumes. Conditions within the public construction sector are also encouraging. Key states have strong funding positions, and we expect to see good highway activity in calendar 2021. This should also be supported by the additional funds provided to state DOTs from the COVID relief bill passed in December. As we've shared in the past, the broadest and most historically accurate outlook for our construction markets comes from the Portland Cement Association. Their latest forecast provides two positive signals. First, growth expectations for 2021 were recently revised modestly upward to 1.2%. Second, consumption in 2020 was stronger than previously estimated, meaning 2021 will be growing off a higher baseline. Now let me make some brief comments on the domestic scrap market. Conditions appear to have settled following a six-month rally. From August to January, scrap input costs increased rapidly month to month, clouding our view of near-term profitability and creating uncertainty about the levels at which fair scrap and steel pricing would stabilize. As shared on our last earnings call, we expected margins on steel products would decline sequentially from the first quarter. However, despite the scrap price volatility, CMC was able to achieve margin stability during the second quarter. Looking further ahead, we see several positive long-term developments. The population migration into CMC's key geographies appears to have accelerated over the last year. Although new residential construction has been strong across the U.S., growth has been particularly significant in the Sunbelt. New single-family housing permits in CMC's core southern and western metro areas are up over 40% from the average level in 2017, compared to an increase of 18% in other metro areas. CMC is geographically well-situated to benefit in both the immediate and long term. Of the five states identified by the truck rental company U-Haul as having the highest net in-migration of residents during 2020, CMC operates three bar mills and four of them. Based on past experience, residential construction leads local infrastructure and non-residential investment by 12 to 24 months. Additionally, although we do not have a view on ultimate timing and composition, The enactment of a long-term federal infrastructure package appears likely. Previous versions of potential legislation circulated in the Senate and House of Representatives last year would have added 1 million to 1.4 million tons of incremental annual rebar demand. Clearly, we see a number of favorable near-term and longer-term indicators for our business. However, the pandemic caused disturbances across the global economy, including a swift reduction in new U.S. construction starts during 2020. Though we have not seen this impact to date and do not see it in our current backlog, we continue to monitor economic indicators for signs of emerging air pockets and demand. I'd now like to provide an update on three key strategic initiatives I referenced earlier. We are nearing the completion of the third rolling line in Poland. Hot commissioning is scheduled to begin during the current quarter with commercial production to ramp up shortly thereafter. This project will come in meaningfully under budget and has hit all major timeline milestones, a testament to the strength of our Polish teeth. The project is starting up within a strong market environment and will give our operations improved flexibility to serve its multiple end markets across several products. As we previously indicated, once fully commissioned, this investment is expected to generate incremental annual EBITDA of 20 million and will utilize excess melt capacity to increase finished product output by roughly 200,000 tons. Moving to the second key initiative, We completed the closure of our sealed California operations in January and have fully transitioned our supply chain for the California market to lower cost material produced in our Central and East regions. This was a major commercial, logistical, and operational undertaking that our team executed flawlessly. We expect the meaningful financial impact of the rolling mill closure to accrue further benefits to our results beginning in the third quarter. With this action complete, CMC is nearing the halfway mark of achieving the annual network optimization benefit of $50 million that we shared during our investor day last August. Next, I'll comment on the third major strategic initiative. Site work at our Arizona 2 micromill project is progressing well and we remain on target for startup in early 2023. As a reminder, this will be our third micro mill and the first in the world capable of producing Merchant Bar product. Once fully operational, we expect this state-of-the-art mill to contribute roughly 50 million of annual EBITDA. We look forward to giving future updates as activity progresses. During our conference call in January, I discussed efforts that CMC is undertaking to expand our sustainability disclosures and reporting. Those efforts have progressed swiftly, and we will share the results in our latest corporate sustainability report this summer. Finally, as stated in our press release, the Board of Directors declared a quarterly cash dividend of $0.12 per share of CMC common stock for stockholders of record on March 31st, 2021. The dividend will be paid on April 14th, 2021. This represents CMC's 226th consecutive quarterly dividend. And 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?

Thank you, Barbara. And good morning to everyone on the call today. I'm pleased to discuss with you our results for the second fiscal quarter of 2021, in which we reported earnings from continuing operations of $66.2 million, or $0.54 per diluted share, compared to earnings from continuing operations of $63.6 million, or $0.53 per diluted share, in the second quarter of fiscal 2020. Results in the quarter include net after-tax charges, $13.5 million related to costs for debt extinguishment and decommissioning of CMC Steel California operations, which were partially offset by a gain on the sale of certain facilities. We expect both the debt extinguishment and closure of Steel California to provide meaningful cost and cash flow benefits going forward. Our January refinancing will reduce annual pre-tax debt service costs by roughly $8.5 million, while ceasing rolling activity at Steel California is estimated to provide a go-forward annual EBITDA benefit of approximately $10 million. In addition to the similar level of savings already realized as we ended melting operations at the facility last year, Including the charges taken in the quarter, adjusted earnings from continuing operations were 79.8 million or 66 cents for diluted share. Our core EBITDA from continuing operations was 171.1 million for the second quarter of 2021, an increase of 18% from a year ago. Slide five of the supplemental earnings call package illustrates the stability of our core EBITDA per ton of finished steel shipped over a period of time that included not only a global pandemic, but also a steep rise in ferrous scrap costs. CMC has managed core EBITDA per ton of finished steel within a range of plus or minus 10% for eight consecutive quarters and nine of the last 10. Now I will review our results by segment for the second quarter of fiscal 2021. The North America segment recorded adjusted EBITDA of $171.6 million for the quarter, compared to adjusted EBITDA of $152.8 million in the same period last year. Largest drivers of the improvement were a meaningful reduction in controllable costs, the benefit of selling lower-cost inventory into a rising price environment, and expanded margins on raw material sales. These factors more than offset the impact of lower margin over scrap on shipments of steel and downstream products. Selling prices for steel products from our mills increased by $70 per ton on a year-over-year basis and were up $83 per ton sequentially due to announced price increases adjustments taking effect during the second quarter. Margin over scrap increased $5 per ton on a sequential quarter basis, increasing each month during the quarter. The average selling price of downstream products declined by $5 per ton from our first quarter. However, I would like to note that over the last several months, we have seen higher mill rebar sales prices translate into higher bidding and booking prices for our downstream operations. In a period of rise in scrap costs, we realized higher margins on sales of raw materials, which, as a result of the vertically integrated network of operations, helped provide the earning stability to our consolidated results that I previously mentioned. Operational performance was a meaningful driver of improved results in North America. Compared to the second quarter of fiscal 2020, controllable costs per ton of finished steel shipped declined by 9%, with improvements throughout our vertical footprint. The most significant benefit was lower mill conversion costs, which is our largest cost outside of scrap. We are benefiting from our efforts to optimize the mill network, with additional cost reductions to come in future quarters. Mill costs in the second quarter also benefited from lower prices for consumables such as electrodes and alloys. Shipments of finished product in the second quarter increased 2% from the pre-pandemic volume of a year ago, with growth in steel products partially offset by decline in downstream products. Rebar volumes out of our mills have been supported by resilient construction activity. CMC has grown its presence in residential construction, which added meaningfully to the year-over-year growth in rebar shipments. Volumes of merchant and other products also grew during the quarter. Downstream product shipments were impacted by lower backlog in certain geographies, as well as the extreme weather experience within the Texas and Gulf regions during February. We estimate that the weather disruption accounted for roughly half of the 6% decline in downstream shipments compared to the second quarter of 2020. The recent trend in North America margins, volume, and cost performance can be seen on slide 6. Our Europe segment recorded adjusted EBITDA of $16.1 million for the second quarter of 2021, compared to adjusted EBITDA of $13.5 million in the prior year quarter. Improvement was driven largely by expanded margins over scrap and the benefit of selling lower-cost inventory. Margins over scrap increased $6 per ton on a year-over-year basis and were up $5 per ton from the prior quarter. Import flows remain a negative factor, but have eased compared to levels experienced at times during the last two years. Average selling prices of $532 per ton reached its highest mark since the second quarter of fiscal 2019. Similar to North America, average pricing and margins improve sequentially each month throughout the quarter. Europe volumes decreased compared to the prior year, down 7% due primarily to the unusually strong level of rebar shipments achieved in the second quarter of 2020. Volumes of merchant and other products increased on a year-over-year basis, driven by good demand for industrial customers in Central Europe, as well as some opportunistic billet sales. The decline in rebar sales effects reflects a return to more seasonally normal levels compared to a year ago, as well as an intentional commercial decision to capitalize on the strength in industrial markets during the quarter. Turning to our balance sheet and liquidity, as of February 28, 2021, cash and cash equivalents totaled $367 million. In addition, we had availability under our credit and accounts receivable programs of approximately $693 million. In January, we opportunistically refinanced the $350 million of outstanding notes maturing in 2026 with an issuance of $300 million of notes due in 2031. This action had the beneficial effect of delevering CMC's balance sheet by $50 million. lowering our weighted average coupon by 63 basis points, thereby reducing annual interest expense by approximately $8.5 million, and extending our weighted average maturity by slightly over 1.5 years. The new 2031 notes were sold to yield just 3.78%, a level that demonstrates the confidence that the fixed income market has in CMC's cash flows and credit worthiness. During the quarter, we generated $13 million of cash from operating activities, despite a $98 million increase in working capital. Rise in working capital has been driven by the significant increase in both scrap input costs and average selling prices. we would expect working capital balances to stabilize heading into the back half of fiscal 2021. Our leverage metrics remain attractive and have improved significantly over the last two fiscal years. As can be seen on slide 10, our net debt to EBITDA ratio now sits at 1.2, while our net debt to capitalization is just 22%. 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 pursue opportunistic M&A. CMC's effective tax rate for the quarter was 24.0%, which was slightly below our full-year effective rate forecast to be between 25% and 26%. Lastly, I would like to provide that our current outlook for capital expenditures in fiscal 2021 is 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 is approximately $150 million annually. This concludes my remarks. I'll now turn the call back to Barbara for the outlook.