Commercial Metals Company

And welcome, everyone, to the fourth quarter fiscal 2021 earnings conference call for Commercial Metals Company. Today's materials, including the press release and supplemental slides that accompany this call, can be found on CMC's Investor Relations website. 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 to 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, 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 but are subject to certain risks and uncertainties, including those that are described in the Risk Factors and Forward-Looking Statements 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 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, 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 the 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. Please go ahead.

Good morning, everyone, and thank you for joining CMC's fourth 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'd like to thank CMC's 11,000 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. I'd like to begin the call with a few highlights from CMC's historic fiscal 2021. Then I'll turn comments to our fourth quarter results before providing updates on our strategic projects and current market 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 2022, after which we will open the call to questions. I'm pleased to report that fiscal 2021 marked the best financial performance in our company's 106-year history. CMC generated its highest ever earnings from continuing operations, as well as record consolidated core EBITDA. Both the North America and Europe segments also reported record results. I'm also pleased to discuss our newly authorized share repurchase program and increased quarterly dividend payment, which should provide meaningful cash distributions to our shareholders. EMC's exceptional fiscal 2021 performance translated to a return on invested capital of 14%, more than double the average for the three-year period preceding our fiscal 2019 rebar asset acquisition. We believe this sharp increase clearly demonstrates the dramatic strategic transformation CMC has undertaken in recent years. Not only has our bottom line grown significantly, but the returns on capital deployed have created tremendous value for our shareholders. We believe our record performance in fiscal 2021 was also a testament to our team's ability to respond quickly to robust market conditions. CMC shipped more product out of our mills than ever before, with six of our 10 mills setting all-time shipment records and seven achieving best-ever production levels. Our team continues to demonstrate their ability to optimize facilities and further increase the productivity of CMC's assets. This showed at several plants as improvements across a variety of KPIs, including optimized melt yields and energy consumption in melt shops, higher tons per hour in rolling mills, as well as shortened lead times in shipping bays. Efficiency gains at our mills, combined with strong cost management throughout the entire North America vertical value chain, enabled CMC to achieve a year-over-year reduction in controllable costs on a per-ton basis. To underscore the strength of this accomplishment, particularly with an inflationary environment, I would point out that over the same time frame, the Census Bureau's producer price index index increased almost 10%. It was also a timeframe in which the entire US economy was challenged by supply chain disruptions and labor shortages. Late in fiscal 2021, CMC commissioned its third rolling line in Europe. This is an important strategic growth investment we've been discussing for some time. I'm pleased to share that the project was completed well under budget and production was ramped up more quickly than anticipated. Both achievements are a testament to the capabilities of our Polish team. This new asset ran at a high rate of production during the latter part of the fourth quarter and was a meaningful contributor to Europe's segment earnings. During the year, CMC also made significant progress on our network optimization efforts, Following the full closure of CMC's former Steel California operations, we're now capturing an annual EBITDA benefit of approximately $25 million, while continuing to serve the West Coat market effectively and efficiently with bar source from lower-cost CMC mills. With these actions complete, we are halfway to our stated target of $50 million on an annual optimization benefit. On the sustainability front, CMC published its latest report in June, featuring enhanced disclosures and a commitment to achieve ambitious environmental goals by the year 2030. CMC has been sustainable since its inception 106 years ago as a single location recycling operation in Dallas, Texas, and we have carried that legacy forward into the 21st century. Slide six of the supplemental posted materials provides a clear illustration of CMC's industry leadership position as an environmental steward. Going forward, we intend to publish our sustainability report on an annual basis, reflecting our commitment to transparency and timely measurement against our stated environmental goals. Turning to fourth quarter performance, CMC generated earnings from continuing operations of $152.3 million, or $1.24 per diluted share. Excluding the impact of a small one-time charge related to the rise down of a recycling asset, adjusted earnings from continuing operations were $154.2 million, or $1.26 per diluted share. This level of adjusted earnings represents a 21% sequential increase and a 62% year-over-year increase, driven by strong margins on steel products and raw materials, as well as robust demand from nearly every end market we serve. During the quarter, CMC generated an annualized return on invested capital of 20%, which is far in excess of our cost of capital and a clear indication of the economic value we are creating for our shareholders. I would now like to provide a quick update on the status of CMC's key strategic growth projects. I've already mentioned strong execution to date on both our network optimization initiative and the rolling line in Europe. We are proud of the progress made on each. The only comment to add is that during the two months of commercial production at our new rolling line, EVA DAW on an annualized basis far exceeded the $20 million target used to justify the project. Timing of startup could not have been better. We've stepped into a very strong market with both demand and pricing at healthy levels. Construction of our revolutionary third micromill, dubbed Arizona 2, remains on schedule for an early calendar 2023 startup. At this point, we have completed earthwork and now are pouring foundations and beginning vertical construction. 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 capable to connect directly to an on-site renewable energy source. We believe 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. When CMC announced the construction of Arizona II in August of 2020, we also indicated that a meaningful portion of the investment cost would be funded through the sale of the land underlying our former Steel California operations. On September 29th, CMC entered into an agreement to sell that parcel for roughly $300 million. I would note that the sale price was much higher than the figure we estimated in August 2020, when we gave an expected net investment figure of $300 million for Arizona II. Paul will provide more detail on this in a moment. Now turning to market conditions, first in North America, we are seeing strong activity levels within nearly all our end markets. At the mill level, demand for rebar, merchant bar, and wire rod is robust. Rebar is being supported by continued construction growth, particularly in our core geographies. People are moving in, businesses are investing, and state-funded infrastructure spending is healthy, which is reflected in residential, non-residential, and public construction spend data. These factors have also benefited our shipments of wire rods. In addition to construction, CMC's merchant product is sold into a number of end-market applications. and nearly all are growing on a year-over-year basis. As you know, construction is by far CMC's largest end market, and our best leading indicator is our volume of downstream project bids. Activity levels have been very strong for the last two quarters, driven by a good blend of private and public sector work. Project owners are also awarding high volumes of new work which has allowed CMC to replenish our downstream backlog following the lull that occurred in late 2020. In fact, we've actually built backlog over the summer months, a period that typically entails a seasonal runoff. The picture in Europe looks very similar to North America. Construction activity is strong, with new residential construction starts increasing by double-digit percentages on a year-over-year basis. The Central European industrial sector continues to grow, highlighted by the current 14-month trend of expansionary PMI readings for both Poland and Germany. CMC is now even better positioned to capitalize on this growth with production from our new rolling line, which allows our Polish operations to produce each of our three major product groups simultaneously. Lie conditions in Central Europe are tight, which has driven margins sharply upward from the historic lows of fiscal 2020 and early fiscal 2021. Finally, as stated in our press release, the Board of Directors approved a 17% increase in CMC's quarterly cash dividend. The new rate of 14 cents per share of CMC common stock is payable to stockholders of record on October 27, 2021. The dividend will be paid on November 10, 2021. Additionally, as announced yesterday, the Board of Directors has also authorized a new share repurchase program of $350 million. Paul will provide additional details regarding our capital allocation strategy during his remarks. 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 review with you our outstanding fourth quarter results. As Barbara noted, we reported record earnings from continuing operations of $152.3 million, or $1.24 per diluted share. more than double prior year levels of $67.8 million and $0.56 respectively. Results this quarter include a net after-tax charge of $1.9 million related to the write-down of recycling assets. Excluding the impact of this item, adjusted earnings from continuing operations were $154.2 million or $1.26 per diluted share. Core EBITDA from continuing operations was $255.9 million for the fourth quarter of 2021, up 45% from a year-ago period and 11% on a sequential basis. Slide 8 of the supplemental presentation illustrates the strength of CMC's quarterly results. Both of 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 $155 per ton. Fourth quarter marked the 10th consecutive quarter in which CMC generated an annualized return on invested capital at or above 10%, which is above our cost of capital. Now I will review the results by segments. The North American segment recorded adjusted EBITDA of $212 million for the quarter, an all-time high compared to adjusted EBITDA of $174.2 million in the same period last year. Largest drivers of this 22% improvement were a significant increase in margins on steel products and raw materials, as well as solid volume growth. Partially offsetting these benefits was an increase in controllable costs on a per ton of finished steel basis. Prior to the fourth quarter of fiscal 21, CMC had achieved seven consecutive quarters of year-over-year reductions to our controllable costs per ton. Selling prices for our steel products from our mills increased by $300 per ton on a year-over-year basis and $106 per ton sequentially. Margin over scrap on steel products increased by $103 per ton from a year ago and $41 per ton sequentially. Average selling price of downstream products increased by $44 per ton from the prior year, reaching $1,014. This increase did not keep pace with underlying scrap costs, leading to a year-over-year decline in margins. At this point, I'd like to spend a moment to discuss the pricing dynamics of our downstream backlog. Average price per ton of our downstream shipments is a function of the volumes and price points on the hundreds of fixed price projects that comprise the total backlog at any given time. The average price of our total backlog will move up or down over time based on the new work we are awarded and the older work that is being completed. Currently, we are in an environment in which our backlog is repricing upward, with new work coming in at much higher prices than the completed work it is replacing, reflecting a margin above current spot rebar prices. We expect this upward pricing trend in our backlog will translate into the average shipment price increasing throughout much of fiscal 22. CMC does not give price guidance, but we can say, absent a run-up of scrap costs, the margin benefit of our backlog repricing is expected to be significant in future periods. Shipments of finished product in the fourth quarter increased 2% from a year ago. Demand for rebar out of our mills remained strong, but as shipments declined modestly from the prior year due to a shift in our mix towards merchant and wire rod, Volumes of merchant and other steel products hit a record level during the quarter, increasing 29% on a year-over-year basis and were 20% higher than the trailing three-year average. Downstream product shipments were impacted by a reduced backlog we had at the beginning of the year and resulted in a 3% volume decline from the fourth quarter of fiscal 2020. Barbara mentioned our backlog was replenished during the latter half of fiscal 21. and has actually grown on a year-over-year basis for the past several months. Turning to slide 10 of the supplemental deck, our Europe segment generated record adjusted EBITDA of $67.7 million for the fourth quarter of 2021, compared to adjusted EBITDA of $22.9 million in the prior year quarter. Improvement was driven by expanded margins over SCRAP, strong volumes across our range of products, and contributions from our new rolling line. We should note that the prior year period included a roughly $11 million energy credit that the current period does not. We expect to receive a similar size credit during the first quarter of fiscal 22. Margins over scrap increased by $119 per ton on a year-over-year basis, and were up $27 per ton from the prior quarter. Tight market conditions provided the backdrop to achieve the segment's highest average selling price in more than a decade, reaching $763 per ton during the fourth quarter. This level represented an increase of $317 per ton compared to a year ago, and $99 per ton sequentially. Europe volumes increased 21% compared to the prior year, and reached their highest level on record. The strength was broad-based, with shipments of rebar, merchant bar, and other steel products increasing by double-digit percentages on a year-over-year basis. The Polish construction market remains robust, with new residential activity growing strongly. Consumption of our merchant and wire rod products has been supported by an expanding Central European industrial sector. Barbara mentioned the ramp-up of our third rolling mill helped CMC capitalize on these strong conditions and increase volumes during the quarter. Turning to capital allocation on our balance sheet, we are excited to issue yesterday's press release that CMC is increasing its cash distribution to shareholders in the form of an enlarged dividend, the first increase in 13 years, and a sizable share repurchase program. The new share repurchase program equates to roughly 9% of our market capitalization and will replace the previous program enacted in 2015. These actions highlight the confidence that CMC's board and senior leadership have in the earnings capability of CMC, as well as our future prospects. Our intention is to target a cash distribution to shareholders that represents a meaningful portion of free cash flow and is competitive with sector peers. We plan on executing against this target by utilizing share repurchases to supplement our dividend payments. We believe this approach will allow CMC's strategic flexibility in our deployment of capital, as well as provide a mechanism to directly return excess cash flows with shareholders during the periods of strong performance. CMC's rebalanced capital allocation framework with its greater emphasis on cash distributions, should in no way impede on our first priority, which is pursuing value accretive growth. We expect to fully fund our current strategic growth projects with organic cash generation, while simultaneously providing enhanced cash returns to shareholders and maintaining a high-quality balance sheet. Our capital allocation priorities are laid out explicitly in simple terms on slide 14. We have proven ourselves as excellent stewards of capital and generator of economic value. We believe our best use of capital is the execution of attractive, value-creating growth. As we look beyond the completion of the slate of strategic initiatives outlined during our Investor Day last year, we are encouraged by the pipeline of attractive, strategic growth projects that are currently being explored. However, we believe that given the robust and stable cash flows we expect to generate through the cycle, CMC will have the ability to both fund attractive growth and return elevated levels of cash to our shareholders. We always look to optimize our debt costs. However, given the current slate of our balance sheet, we do not believe delevering is the best advantageous strategy to us at this time. Overarching our entire capital allocation strategy is our objective to maintain a strong balance sheet that provides strategic flexibility and gives CMC the wherewithal to navigate any economic environment. Moving to the balance sheet, as of August 31, 2021, cash and cash equivalents totaled $498 million. In addition, we had approximately $699 million of availability under our credit and accounts receivable programs. During the quarter, we generated $134 million of cash from operations, despite a $48 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. Looking past these factors, our days of working capital have decreased from a year ago. Our leverage metrics remain attractive, and we have improved significantly over the last two fiscal years. As can be seen on slide 17, our net debt to EBITDA ratio now sits at just 0.8, while our net debt to capitalization is at 17%. We believe a 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 while returning cash to shareholders. CMC's effective tax rate for the quarter was 21%. For the year, our effective tax rate was 22.7%. Absent the enactment of any new corporate tax legislation, we forecast our tax rate to be between 25 and 26% in fiscal 22. Lastly, I would like to provide CMC's fiscal 22 capital spending outlook. We currently expect to invest between $450 to $500 million this year, with a little over half of which can be attributed to Arizona 2. We are entering the middle phase of mill construction, when investment and on-site activity is anticipated to be the highest. As we indicated in the past, proceeds from the sale of our Rancho Cucamonga land are expected to be used to offset much of the cost of the state-of-the-art mill. Total gross investment for Arizona 2 is forecast to be approximately $500 million, against which we will apply roughly $260 million net after-tax proceeds from the land transaction. This nets out to be $240 million of spend for the new mill, compared to the $300 million net investment figure we had previously provided. The difference, as Barbara previously mentioned, is due to the higher than expected valuation on the land sale. This concludes my remark, and now I will turn it back to Barbara for the outlook.