Commercial Metals Company

Hello and welcome everyone to the third 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 call, the company will make statements that provide information other than historical information and will include expectations regarding economic conditions, effects of legislation, US steel import levels, US construction activity, demand for finished steel products, the company's future operations, the company's future results of operations, financial measures, and capital spending. These and other similar statements are considered forward-looking and may involve certain assumptions and 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 or are subject to risks and uncertainties, including those that are described and the risk factor 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 will be non-GAAP financial measures, and reconciliation 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 physical year or physical quarter. And now for opening remarks and introductions. I would now like to turn the call over to 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 third quarter earnings conference call. As we reported in the press release issued this morning, it was an outstanding quarter with record consolidated and segment results. And I would like to thank CMC's 11,500 employees for their continued hard work and focused efforts on behalf of our customers and stakeholders. I'd also like to thank our customers for their continued trust and partnership with CMC during these unusual and rapidly changing market conditions. I will begin the call with brief remarks regarding our third 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 our fourth quarter fiscal 2021 outlook, after which we will open the call to questions. Before starting my prepared remarks, I would like to direct listeners to the supplemental slides that accompany this call. The presentation can be found on CMC's investor relations website. I'm pleased to report that CMC's third quarter fiscal 2021 financial results were the best in our company's 106-year history. Earnings from continuing operations were $130.4 million or $1.07 per diluted share on net sales of $1.8 billion. Excluding the impact of a gain on the sale of a small rail reclamation business, adjusted earnings from continuing operations were $127.1 million, or $1.04 per diluted share. CMC reported core EBITDA of $230.5 million, generating an annualized return on invested capital of 18%. This level of performance underscores CMC's enhanced earnings capability following our multi-year strategic repositioning. Third quarter volumes were exceptionally strong in North America and Europe, and the ability of our commercial operational logistics and support teams to respond to the rise in customer demand generated our strong financial performance. Six of our 10 mills in the US and Poland set monthly shipment or production records during the quarter, enabling us to capitalize on market conditions. During the quarter, we also continue to execute on our previously discussed in-flight strategic initiatives and growth projects. We are expanding our capability to serve the merchant bar market. Customers appreciate CMC's expanded product range and service capabilities, and we're seeing our recent investments in handling and storage capacity pay off in increased volumes. We expect more growth in the future, especially once our state-of-the-art Arizona II micromills starts up in early 2023. We continue to execute on our network optimization efforts, and with recent actions firmly entrenched in our financial performance, CMC is roughly halfway to our longer-term goal of $50 million in annual cost efficiencies. You can see the benefit of these efforts in our controllable cost performance on a per-ton basis. Despite well-publicized inflationary pressures across the global economy, we were able to reduce this metric modestly on a year-over-year basis. In April, we received the required air permit for Arizona 2, CMC's planned state-of-the-art micromill at our Mesa, Arizona site. This was an important milestone, enabling us to begin construction, and we continue to anticipate an early 2023 startup. As a reminder, this plant will be the first micromill in the world capable of producing merchant bar as well as rebar. It will also be the first in North America with the capability to connect directly to an onsite renewable energy source. These capabilities combined with a micromill's inherent low cost and low carbon footprint will define a new level of operational and environmental excellence in long product steelmaking. In May, our team in Europe began hot commissioning their plant's third rolling line. The startup process is going very well, and we expect to begin commercial production late in the fourth quarter. This project was delivered on time and under budget, a testament to our Polish team's ability to execute. We will be ramping operations within a very strong market environment which will help shorten the time to achieve our targeted annual run rate incremental EBITDA of 20 million. I'd now like to provide an update on market conditions. The encouraging trends we discussed during our second quarter call continued and strengthened in the third quarter. As I will detail, project owners have grown more confident as the economy has recovered and states have reopened. and they are now more willing to contract new work. This view is supported by the strong level of new awards booked in the quarter. The strength in new project opportunities is occurring in both the private and public sectors. On the private side, CMC is seeing work related to the hardening of supply chains, as well as the trend toward investments in e-commerce infrastructure. The ongoing global semiconductor shortage has spurred several very large investments within CMC's core geographical markets. At the same time, public demand is solid and we are experiencing good activity for highways, bridges, and other infrastructure-related applications. Activity in residential markets also continues to be strong. CMC is growing our participation in this area and our mills have capitalized on the increased demand. The benefit to CMC of new housing investment and community formation is twofold. The first phase is underway, and we are currently benefiting from direct demand from the residential sector. We believe the next phase will include local infrastructure and commercial centers that support new communities. Historically, the lag between new residential activity and the inflow of supporting non-residential investment has been 9 to 24 months. Finally, domestic demand for merchant product continues to benefit from the ongoing recovery of industrial production, as well as a lean service center supply chain. Looking further ahead at our markets, we see several positive long-term developments. Over the last year, the population migration to southern states has accelerated, with metro areas in our core Sun Belt geographies being the primary beneficiaries. The continuation of this trend could provide a long-term tailwind to growth of construction in our most important states compared to the broader US market. Serious discussions regarding a potential long-term infrastructure package are also encouraging. Several proposals are under consideration, any of which would provide a meaningful increase to annual federal infrastructure funding relative to current levels. Based on our analysis, we believe the annual percentage increase to funding ranges from 30 to 60 percent across the various proposals. Turning to Europe, demand for CMC's long products remained robust during the third quarter. Like the U.S., construction activity in Poland is healthy and supporting strong volumes of rebar. The residential market is an important driver of demand in the Polish market, and new housing permits and units under construction are growing by double digits on a year-over-year basis. Industrial activity continues to recover in Central Europe, driving consumption of CMC's merchant bar and wire rod products. Germany's manufacturing PMI in May was amongst the strongest globally, while Poland's reading reached a new all-time high. Before I turn it over to Paul, I'd like to briefly touch on the efforts that CNC is undertaking to expand our sustainability disclosures and reporting. We will soon publish our latest Corporate Sustainability Report, featuring greatly enhanced disclosures around three key pillars of environmental, social, and government. You will see that as CMC has improved its operational and financial performance, we have also improved our already industry-leading environmental performance. That's what we mean when we say that good business and good environmental stewardship go hand in hand. We will also be setting ambitious environmental goals in line with science-based targets. I hope that once you read our upcoming report, you'll have a better understanding of the value we place and steps we've taken to serve our people, customers, communities, and environment. 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 June 30th, 2021. The dividend will be paid on July 14th, 2021. This represents CMC's 227th consecutive quarterly dividend. 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. I am pleased to review with you the outstanding third quarter results. As Barbara noted, we reported Record earnings from continuing operations of $130.4 million, or $1.07 per diluted share, roughly double the prior year levels of $64.2 million and 53 cents per diluted share. Results this quarter include a net after-tax benefit of $3.3 million related to the sale of a small rail reclamation business. Excluding the impact of this, Adjusted earnings from continuing operations were $127.1 million for a $1.04 core diluted share. Core EBITDA from continuing operations was $230.5 million for the third quarter of 2021, up 49% from the year-ago period and 35% on a sequential basis. Slide 7 of the supplemental presentation illustrates the strength of CMC's quarterly results. Both our North America and Europe segments contributed significantly to year-over-year earnings growth, while core EBITDA per ton of finished steel reached a record level of $144 per ton. The third quarter marked the ninth consecutive quarter in which CMC generated an annualized return on invested capital at or above 10%, which is well above our cost of capital. This translates into meaningful value created for our shareholders. Now I will review the results of our third quarter of fiscal 2021. The North America segment recorded adjusted EBITDA of $207.3 million for the quarter, an all-time high compared to adjusted EBITDA of $159.4 million in the same period last year. The largest drivers of this 30% improvement were significant increase in margins on steel products, strong volume growth, and expanded margins on sales of raw materials. Continued management of controllable costs also allowed us to fully capitalize on the robust market conditions during the quarter. These factors more than offset the impact of lower margin over scrap on downstream products. Selling prices for steel products from our mills increased by $170 per ton on a year-over-year basis and $99 per ton sequentially. Since bottoming in August 2020, our average monthly selling price has rebounded roughly $220 per ton. Margin over scrap on steel products increased $40 per ton from a year ago and $74 per ton sequentially. the average selling price of downstream products of $963 per ton shipped was essentially flat compared to a prior year third quarter. A flat selling price coupled with higher underlying scrap costs resulted in lower margins on downstream products. In a period of elevated ferrous and non-ferrous scrap pricing, we realized higher margins on sales of raw materials. which as a result of our vertically integrated network of operations helps provide earning stability to our consolidated results. Shipments of finished product in the third quarter increased 9% from a year ago. Both rebar and merchant bar volumes out of our mills reach record levels, increasing 8% and 28% respectively compared to the third quarter of fiscal 2020. As Barbara noted, We experienced good activity in both public and private construction. CMC also continued growing its presence in residential construction, which added meaningfully to the year-over-year increase in rebar shipments. Downstream product shipments were impacted by a reduced backlog and weather challenges in certain geographies, resulting in a 4% reduction in year-over-year volume declines. The recent trend in North American margins, volumes, and cost performance can be seen on slide eight. Our continued focus on operational performance allowed us to achieve record North American financial results. Our team was able to generate a modest reduction in controllable costs per ton of finished steel shipped compared to a year ago, despite inflationary pressures in freight and certain other costs. A quick glance at recent producer price index or manufacturing ISM reports should underscore the strength of this accomplishment. The most significant benefit came from volume-driven efficiencies at our steel mills and recycling yards, as well as the impact of closing the former Steel California rolling operations. Turning to slide nine, our Europe segment generated adjusted EBITDA of $50 million for the third quarter of 2021. compared to adjusted EBITDA of $14.3 million in the same period of the prior year. The improvement was driven by expanded margins over scrap and strong volumes across all ranges of products. Margins over scrap increased $90 per ton on a year-over-year basis and were up $84 per ton from the prior quarter. Tight market conditions provided the backdrop to achieve the segment's highest average selling price in nine years reaching $664 per ton during the third quarter. This level represented an increase of $227 per ton compared to a year ago and $132 per ton sequentially. Europe volumes increased 8% compared to the prior year and reached their highest third quarter total in a decade. The strength was driven primarily from the market for rebar. Volumes of merchant and other products also grew on a year-over-year basis, supported by good demand from industrial customers in Central Europe, as well as some opportunistic billet sales. As Barbara mentioned, the demand environment during the quarter was robust, with indications that conditions should remain favorable in the near term. Turning to our balance sheet and liquidity, As of May 31st, 2021, cash and cash equivalents totaled $443 million. In addition, we had approximately $639 million of availability under our credit and accounts receivable programs. In March, we upsized our revolving credit facility to $400 million from $350 million and extended the maturity until 2026. During the quarter, we generated $94 million of cash from operating activities despite a $79 million increase in working capital. The rise in working capital was driven by the significant increase in both scrap input costs and average selling prices. We expect working capital balances to increase modestly heading into the end of the fiscal year. Our leverage metrics remain attractive, and we have improved significantly over the last two fiscal years. As can be seen on slide 12, our net debt to EBITDA ratio now sits at 1.0 times, while our net debt to capitalization is just 20%. We believe our robust balance sheet and overall financial strength provides us the flexibility to fund our strategic growth projects, navigate economic uncertainties, and pursue opportunistic M&A. CMC's effective tax rate for the quarter was 22.6%, which was below our full-year effective rate forecast to be around 25%. Lastly, I would like to provide that our current outlook for capital expenditures in fiscal 2021 remains between $200 and $225 million, of which roughly $100 million will be used for the new micromill. For comparison purposes, we have previously stated that our typical capital spend averages around $150 million annually. This concludes my remarks, and I'll turn it back to Barbara for the outlook.