Commercial Metals Company

Welcome, everyone, to the first quarter fiscal 2022 earnings 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. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After the company's remarks, we will have a question and answer session. To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star, then 2. 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 expected capabilities and benefits of new facilities, the company's future operations, the timeline for execution of the company's growth plan, 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 the 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 the state, except as required by law, CMC does not assume any obligation to update, amend, or clarify these statements in connection with the future events, changes in assumptions, 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 earning release, supplemental slide presentation, or on the company's website. Unless stated otherwise, all reference is made to year or quarter and 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 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 first quarter earnings conference call. Hopefully each of you had a wonderful holiday season. As we reported in our press release issued this morning, the first quarter of fiscal 2022 was another outstanding period. with record consolidated and segment results. 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. And we thank our customers for their continued trust in and partnership with CMC. I will begin today's call with a few highlights from the quarter and commentary on CMC's strategic growth projects. Paul Lawrence will then cover the quarter's financial information in more detail, and I will conclude with a discussion of the current market environment and our outlook for the second quarter of fiscal 2022, after which we will open the call to questions. Before starting my prepared remarks, I'd 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 first quarter fiscal 2022 earnings were the best in our company's 106-year history. Earnings from continuing operations were $232.9 million, or $1.90 per diluted share, on net sales of $2 billion, excluding the impact of a tax benefit related to an international reorganization Adjusted earnings from continuing operations were $199.2 million, or $1.62 per diluted share. CMC generated core EBITDA of $326.8 million, an increase of 109% from the year-ago period, and an improvement of 28% from the prior quarter. This was the third consecutive quarter in which our company has reported record bottom line earnings, core EBITDA, and segment level EBITDA. These achievements are a result of the execution of our strategic plans presented to shareholders during our Virtual Investor Day in August of 2020. As noted in the press release, this very strong first quarter performance brings CMC's trailing 12-month core EBITDA to nearly $1 billion, and return on invested capital to 18.3%. Strong market conditions and strong margins across several product lines certainly contributed to these exceptional results. However, to put this performance into context, during the fiscal 2014 and 2015 time period, we experienced similar robust market conditions to what we enjoy today, and our 12-month EBITDA was between $375 and $400 million. with return on invested capital in the mid single digits. This significant improvement over the past six years underscores the enhanced earnings power of CMC today, and it is our objective to produce better returns with higher highs and lower lows through the economic cycle. To back up this statement, CMC achieved an annualized return on invested capital of 25.1% during the first quarter, and an annualized return on equity of 35.6%. Our team members continue to tightly manage controllable costs, reflecting changes to costs on a per-unit basis better than most industry and macro benchmarks we track. We are certainly proud of CMC's record financial results delivered by strong execution of our strategic initiatives, as well as solid market fundamentals. While we are proud of the performance to date, let me take a moment to explain why I believe CMC's best days are still ahead of us. I'll start with sustainability. Before we can responsibly talk about growth, we need to be certain that what we are growing is sustainable. CMC was founded 106 years ago as a metals recycler, and we carry on that legacy today, operating possibly the cleanest portfolio of steel mills in the world. We're also committed to further improvement as we make significant progress towards our 2030 environmental goals. CMC's Scope 1 and 2 emissions are already well under the 2040 Paris Accord target, and our emissions have improved by 6.2% per ton of steel produced compared to our fiscal 2019 baseline. This two-year improvement stands in stark contrast to the global industry which increased its emissions intensity over the same timeframe. Since fiscal 2019, we've also improved our energy efficiency by 7.8%, while the global industry's performance has deteriorated by nearly 6%. We are sourcing more renewable energy than ever before, and the proportion of green energy within our overall consumption has risen by roughly three percentage points over the last two years. And we continue to work every angle to move this figure higher. Our commitment to renewable sourcing is demonstrated by the design of our future Arizona II Micromill, now under construction in Mesa. This exciting new plant will be capable of directly connecting to an onsite solar field making micromill steelmaking, the world's cleanest steelmaking technology, even cleaner. In our industry, sustainability also means treating our people the right way and keeping them safe on the job. BMC's mission is that each day, every one of our employees finishes their shift in the same condition they started. We have developed a unique safety culture that leans on innovative thinking, emphasizes shared accountability, and aims toward an ultimate goal of zero incidents. Through this approach, CMC has achieved several consecutive years of improvement in our incident rates, including dramatic improvements at acquired facilities where we have instilled our CMC culture. Across each line of business, we focus extensively at keeping our people safe and healthy. Not only is this the right thing to do, but over the long term, we expect the care we have for our employees will lead to long-term retention of our exceptional workforce and make CMC an employer of choice within our industry. I touched on only a few highlights of our ESG commitment, which is detailed in our sustainability report published in December 2021, and I encourage you to read the report. To sum up, I would say that CMC is not just sustainable, but a sustainability leader. Being a leader means always pushing further and never standing still. In the years ahead, we will do just that, and our clearly sustainable platform gives us a solid foundation on which to grow. I'd like to now discuss some of our exciting initiatives which are a result of the disciplined and deliberate execution of CMC's strategic plan. These projects strengthen and reinforce our organization's core capabilities while extending CMC's growth runway into markets, customer groups, and applications we already know well. Recently, we announced a series of exciting growth initiatives which have been under consideration for some time. I'd like to emphasize that we have been disciplined in knowing the strategic direction and goals that most benefit our shareholders, disciplined in taking the next step in identifying opportunities that move our organization towards these goals, and then acting decisively when these opportunities arise and the timing is right. Let me begin with an update on CMC's third micromill currently under construction in Mesa, Arizona. This plant will be the first micromill in the world capable of producing merchant bar and, as I mentioned earlier, will be among the greenest in the world. Arizona II, as we are calling it, provides significant strategic value to CMC. It will replace the much higher cost and inefficient rebar capacity of the former Steel California operations, the sale of which will fund over half the cost of our new plants. Arizona 2 will also give CMC a coast-to-coast merchant bar footprint and serve several customers we already know well through our MBQ operations in Alabama, South Carolina, and Texas. Importantly, Arizona 2 will help further optimize CMC's operational network and enhance customer service. We are equally excited about CMC's fourth micromill announced this morning. The new mill, dubbed MM4, will augment our operational footprint in the eastern United States and enhance our ability to serve markets in the Northeast, Mid-Atlantic, and Midwest. We expect significant internal synergies from this investment, including enhanced production flexibility among our eastern US mill network, improved customer service capabilities, as well as enhanced delivery times and logistical efficiencies in getting steel to its destination. MM4 is a project we have studied for several years and now feel the time is right to execute. MM4 will be rebar-centric with additional capabilities under consideration. As stated in the press release, the competitive site selection process is now underway and we will provide an update when the search is finalized. This investment further demonstrates our commitment to a sustainable future for CMC. Both mill projects stand to benefit directly from the largest infrastructure package to be enacted in the U.S. in several decades. The Infrastructure Investment and Jobs Act signed last November will provide $1.2 trillion in funding over five years and stimulate an estimated 1 to 1.5 million tons of incremental annual rebar demand at full run rate. This would add roughly 15% to current domestic consumption of around 8.5 million tons. We expect the time between the bill's enactment and the commencement of significant construction activity to be in the range of 18 to 24 months, which lines up very well with the scheduled future commissioning of Arizona II. We further anticipate a late calendar 2024, early 2025 startup of MM4. and this would coincide with infrastructure-related demand nearing full run rate. Stepping beyond mill investments, CMC's agreement to acquire Tensar Corporation announced last month will add additional products and capabilities which will make CMC a unique provider of value-added reinforcement solutions for the domestic and international construction markets. This transaction represents CMC entry into an adjacent and complementary product space through the purchase of a proven market and innovation leader. The acquisition meaningfully extends CMC's growth runway and provides a platform for further expansion into high-margin, high-customer service engineered solutions. As we discussed in our call in December, TENSAR's offerings provide best-in-class value propositions to customers, particularly against competing traditional reinforcing solutions. but are under-penetrated in the marketplace. We believe this combination of attractiveness to customers and large potential market opportunity will support significant organic growth at TenSAR in the years ahead. TenSAR is already very well managed with a strong reputation and proven innovation in operational capabilities. We believe these factors greatly reduce the execution risk of this transaction while providing CMC with solid commercial synergy opportunities out of the gate. Currently, we expect to close on the acquisition during the fiscal third quarter. The two U.S. mill expansions plus the TENSAR acquisition combined with our recently commissioned rolling line in Europe should provide CMC with at least $200 million of sustainable through the cycle EBITDA once fully operational. My belief that CMC's best days are ahead is based not just on our announced strategic investments, but several other factors as well, including the quality of our people. We've not discussed this topic much in the past, but it's vitally important to the future of CMC with a longer term impact greater than any new capital project. As we sit here today, I'm very confident regarding the new generation of leaders that are developing at every level of our organization. Our bench strength has never been better. CMC's transformational growth projects over the last several years have expanded our North American business by nearly 50%, necessitating organizational adjustment to accommodate such rapid growth. Employees were provided with opportunities to take on new responsibilities and new roles across the company, giving each an expanded perspective of CMC's business and valuable experience in managing through change. Additionally, the last two years have involved unprecedented challenges, first related to complications due to the pandemic, followed by high inflation, logistical issues, and labor shortages. Our team has responded exceptionally well to the series of challenges, and we have all seen the outcome, a stronger company generating record financial results. With hindsight, it's clear the events of the last several years has created an innovative, adaptable, stress-tested roster of current and future key leaders at CMC. Lastly, and while this is outside CMC's control, I'm confident about the future of our core geographical markets. CMC has exposure to the most economically vibrant and rapidly growing regions in both the US and Europe. For more than a decade, population growth within CMC's key US markets have outpaced the broader United States. This trend has picked up pace considerably since early 2020 and has been reflected in new community formation and relocation of businesses. Ultimately, population drives construction over the long term, and CMC is well positioned to benefit. Finally, as stated in our press release, the Board of Directors declared a quarterly cash dividend of 14 cents per share of CMC common stock for stockholders of record on January 20th, 2022. The dividend will be paid on February 3rd, 2022. This represents CMC's 229th consecutive quarterly dividend with the amount paid per share increasing 17% from a year ago. As we announced last quarter, we are also committed to returning capital to shareholders through our share repurchase program, and Paul will give you an update on our activity this past quarter. With that as an overview, I'll now turn the discussion over to Paul Lawrence, Senior Vice President and Chief Financial Officer, to provide some more comments on the results for the quarter.

Thank you, Barbara, and good morning to everyone on the call today. As Barbara noted, we reported record fiscal first quarter 2022 earnings from continuing operations of $232.9 million, or $1.90 per diluted share, more than triple prior year levels of $63.9 million and 53 cents, respectively. Results this quarter include a net after-tax benefit of $33.7 million primarily related to a tax capital loss recognition on an international tax restructuring transaction which took place in the quarter. Excluding the impact of this item, the adjusted earnings from continuing operations were $199.2 million or $1.62 per diluted share. Core EBITDA from continuing operations was $326.8 million for the first quarter of 2022, more than double the $156.6 million generated during the prior year period. Slide 9 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 $233 per ton. The first quarter marked the 11th consecutive quarter in which CMC generated an annualized return on invested capital at or above 10%, which is in excess of our cost of capital. Now I will review our results by segment for the first quarter of fiscal 22. The North American segment recorded adjusted EBITDA of $268.5 million for the quarter, an all-time high. This compares to adjusted EBITDA of $155.6 million in the same period last year. The largest driver of this 73% improvement was a significant increase in margins on steel products and raw materials. Partially offsetting this benefit were higher controllable costs on a per ton of finished steel bases due primarily to increased unit pricing for freight, energy, and alloys. Selling prices for steel products for our mills increased by $364 per ton on a year-over-year basis and $76 per ton sequentially. Margin over scrap on steel products increased $202 per ton from a year ago and $82 per ton sequentially. The average selling price of downstream products increased by $158 per ton from the prior year, reaching $1,092. This increase was consistent with the rise in underlying scrap costs, resulting in unchanged margins over scrap relative to the prior period. During our fourth quarter earnings call, I indicated that CMC's downstream backlog was expected to reprice higher throughout fiscal 2022, as new higher-priced work replaces older, lower-priced work. Through the first four months of the fiscal year, we are seeing the anticipated rate of repricing play out. We continue to expect further upward movement in CMC's average backlog price through the remainder of the fiscal year, particularly in light of strong market demand and bid volume, which we are experiencing in our downstream geographies. Shipments of finished product in the first quarter were essentially flat from a year ago, and market demand for our mill products remained strong. This is supported by our own shipment volume and industry-wide data we track regarding consumption of rebar, merchant bar, and wire rod. Downstream product shipments increased by nearly 8% from the prior period, driven by the beneficial impact of our growing construction backlog. Turning to slide 11 of the supplemental deck, our Europe segment generated record adjusted EBITDA of $79.8 million for the first quarter of 2022, compared to adjusted EBITDA of $14.5 million in the prior year period. This improvement was driven by expanded margins over scrap, the receipt of a $15.5 million energy credit, and strong profit contributions from our new rolling line. Higher costs for energy and milk consumables partially offset these positive factors. Energy credit received was for calendar 2020. Legislation is currently before the Polish Parliament to extend this credit further. Margins over scrap increased $236 per tonne on a year-over-year basis and were up $120 per tonne 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 $869 per ton during the first quarter. This level represented an increase of $408 per ton compared to a year ago and $106 per ton sequentially. Europe volumes declined 8% compared to the prior year as a result of extensive planned maintenance performed at our rebar rolling line. Shipments of merchant and other products were relatively unchanged. The sales of higher margin finished products replaced sales of semi-finished billets. Demand conditions within Central Europe remain strong. The Polish construction market continues to grow at a robust rate, with particular strength in the residential and infrastructure sectors. Construction of our merchant and wire rod Consumption of our merchant and wire rod products has been supported by expanding manufacturing activity, as highlighted by several key macroeconomic indicators, including the Polish and German PMI readings and Polish new industrial orders. The combination of good demand and strong pricing has provided an ideal backdrop for the start of our third rolling line. This new asset is significantly outperforming the original investment case. Turning to capital allocation, balance sheet and liquidity, as of November 30th, 2021, cash and cash equivalents totaled $415 million. In addition, we had approximately $650 million of availability under our credit and accounts receivable programs, bringing total liquidity to nearly $1.1 billion. In addition, as we announced last week, In late December, we closed on the sale of our Rancho Cucamonga, California site and received gross proceeds of $313 million. Proceeds received represent approximately 45% of the entire purchase price of the rebar acquisition we completed in 2019. During the second quarter, we will record a pre-tax gain of approximately $275 million related to this transaction. During the quarter, we generated $26 million of cash from operating activities, despite a $252 million increase in working capital. The rise in working capital was driven by the increase in average selling prices. Looking beyond price factors, our days of working capital have decreased from a year ago. Over the course of the past four quarters, CMC has invested roughly $500 million in working capital. Our leverage metrics remain attractive and have improved significantly over the last two fiscal years. As can be seen on slide 15, our net debt to EBITDA ratio now sits at just 0.7 times, while our net debt to capitalization is 18%. We believe our robust balance sheet and overall financial strength provides us the flexibility to finance our strategic organic growth projects and complete the acquisition of Tensar while continuing to return cash to shareholders. CMC's effective tax rate was 11%, which was driven sharply below our typical statutory rates by the international reorganization performed during the quarter. Absent the enactment of any corporate tax legislation that would impact fiscal 2022, we forecast our tax rate to be approximately 25 to 26% for the balance of the year. With respect to CMC's fiscal 2022 capital spending outlook, we currently expect to invest $475 to $525 million this year, roughly half of which will be attributable to Arizona 2. Lastly, after approving the program in mid-October, CMC repurchased 159,500 shares during the first fiscal quarter of 2022 at an average price of $33.28 per share. These transactions amounted to approximately $5.3 million, leaving $344 million remaining under the current authorization. We expect share buyback activity to increase in the second half of the year. With that, this concludes my remarks, and I'll turn it back to Barbara for her comments and the outlook for the balance of the year.