Commercial Metals Company

Hello and welcome, everyone, to the second 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. After the company's remarks, we will have a question and answer session, and we will 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 the Russian invasion on Ukraine, effects of legislation, U.S. steel import levels, U.S. construction activity, demands 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 actual results to differ materially from these expectations. These statements reflect the company's beliefs based on current conditions that 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 filings with the Securities and Exchange Commission, including 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 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 reconciliations for such numbers can be found in the company's earnings release, supplemental slide presentation, or on the company's website. Unless otherwise stated, 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 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. Before we begin, I would like to again extend my appreciation and congratulations to CMC's 11,000 employees for another outstanding quarterly performance. Each day through your hard work, you find innovative ways for our company to drive efficiencies across the business, improve product quality, deliver world-class customer service, and advance our strategic vision. On behalf of the entire leadership team, we're extremely proud of your efforts and of the culture of teamwork and accountability that defines our organization and that you carry forward every day. I'll start today's call with highlights from the quarter and a brief status update on CMC's strategic growth projects. I will also provide commentary regarding the impact of the war in Ukraine on CMC's people and business. 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 third quarter of fiscal 2022, 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. Earnings from continuing operations were $383.3 million or $3.12 per diluted share on net sales of $2 billion, which is a record quarterly result for CMC. Excluding the impact of non-operational items that Paul will discuss, adjusted earnings from continuing operations were $187.6 million or $1.53 per diluted share, the second best in our company's history trailing only the prior quarter. CMC generated core EBITDA of 323.1 million, an increase of 89% from the year-ago period, and virtually unchanged from the historically seasonally stronger first quarter results. With this quarter's strong performance, CMC's trailing 12-month core EBITDA totaled more than 1.1 billion, and our trailing 12-month return on invested capital was 21%. This is a significant achievement. During the last 12 consecutive quarters, a time period that includes the global pandemic and broad supply chain and labor force challenges, CMC has generated annualized return on invested capital well above 10%. Our past and current strategic actions have clearly created consistent and substantial value for shareholders, and we are poised to continue doing so. CMC's excellent second quarter benefited from favorable demand conditions across virtually all end markets and a very strong margin environment for our major product lines. Our performance also benefited from CMC's ability to capitalize on these conditions. As one example, Europe's record quarterly EBITDA reflects the contributions of our third rolling line commissioned last May. This new line in our Polish mill can produce rebar, merchant bar, and wire rods simultaneously and is generating volumes and profits well above our initial expectations, enabling our European commercial team to more fully serve their very strong marketplace. This example is like many of the strategic initiatives investments that are allowing CMC to turn strong market conditions into record financial results. Let me now provide a status update on CMC's strategic growth project, starting with our announced acquisition of Tensar. We expect to close the Tensar transaction during the third fiscal quarter. As a reminder, this acquisition will meaningfully extend CMC's growth runway, providing a platform for further expansion into high-margin, high-customer service engineered solutions. Tensar's offerings provide best-in-class propositions to customers, and are currently under-penetrated in the marketplace. We believe this combination of attractiveness to customers and large potential market opportunity will support significant organic growth for TenSAR in the years ahead. Our Arizona 2 Micromill project remains on track for an early calendar 2023 startup. This timing lines up well with the expected ramp up in spending related to the Infrastructure Investment and Jobs Act signed last November. The new mill will provide CMC with 400,000 tons of rebar capacity to serve incremental infrastructure demand, as well as about 150,000 tons of merchant bar that will extend our sales reach to the West Coast. Lastly, CMC continues to study options regarding our announced fourth micromill to be constructed in the eastern U.S., We are currently in the site selection process and expect to be able to share project details in the coming months. The war in Ukraine has dominated the news cycle for several weeks, and we are monitoring the situation closely. For our team in Poland, the war is very close to home. In only the last few weeks, an estimated 1.4 million Ukrainian refugees have crossed into Poland. I'd like to give you a sense of the quality and unselfish kindness of the CMC team members in Poland. Local leadership has acted swiftly to assist those fleeing for safety by coordinating with a well-known humanitarian aid group in Poland that specializes in helping victims of armed conflicts and natural disasters. Leadership has also made CMC's accommodations available to refugee families. Many employees are traveling to the Ukrainian border on their own time to transport refugees to safe areas. Many have also opened their homes to refugees and provided food, comfort, and shelter. The response by CMC's Polish team members to the human tragedy and need is inspiring, and we thank them for everything they are doing. To date, CMC has not experienced any disruptions to our operations. Currently, market demand has continued unabated within CMC's core Polish and German markets. Barring an expansion to the conflict, we did not anticipate any significant interruptions to business functions. EU sanctions placed on imported materials from Russia and Belarus, combined with the disruption of the flow of Ukrainian material, are expected to meaningfully tighten the supply of long steel products For reference, in calendar 2021, Russia, Belarus, and Ukraine accounted for 46% of the rebar imported into the EU and a higher percentage of the imports into Central and Eastern Europe. These countries also make up roughly 25% to 30% of imported merchant bar and wire rod into the EU. Looking at the impact on steelmaking raw materials, we are confident in our Polish supply chain. Scrap for our mill is domestically sourced, much of it coming from CMC's own facilities. Likewise, CMC has a strong procurement team in place to ensure access to alloys, electrodes, and other key inputs. These comments extend to our North American operations as well. And just as a reminder, CMC does not require pig iron or prime scrap at any of our steel mills. Finally, as stated in our press release, our Board of Directors declared a quarterly cash dividend of 14 cents per share of CMC common stock for stockholders of record on March 30th, 2022. The dividend will be paid on April 13th, 2022. This represents CMC's 230th consecutive quarterly dividend with the amount paid per share increasing 17% from second quarter of fiscal 2021. With that overview, I will now turn the discussion over to Paul Lawrence, Vice President and Chief Financial Officer, to provide, 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 second quarter 2022 earnings from continuing operations of $383.3 million. or $3.12 per diluted share, compared to prior year levels of $66.2 million or $0.54, respectively. Results this quarter include a net after-tax benefit of $195.8 million. The benefit was related to a large gain recognized on the sale of the California real estate which was partially offset by debt extinguishment costs associated with the opportunistic refinancing completed during the quarter. Excluding the impact of these items, adjusted earnings from continuing operations were $187.6 million, or $1.53 per diluted share. Core EBITDA from continuing operations was $323.1 million for the second quarter of 2022, nearly double the $171.1 million generated during the prior year period. Slide 9 of the supplemental presentation illustrates the strength of CMC's quarterly results. Both our North American and Europe segments contributed significantly to year-over-year earnings growth, while core EBITDA per ton of finished steel reached a record level of $226 per ton. Now I will review the results by segment for the second quarter of fiscal 2022. Excluding the gain realized on the California land sale, CMC's North American segment generated adjusted EBITDA of $262.1 million for the quarter, just $6 million below the record level achieved in the first quarter. Adjusted EBITDA per ton of finished steel shipped hit a new all-time high of $268. The segment adjusted EBITDA improved 53% on a year-over-year basis, driven by significant increases in margins on steel products and raw materials, partially offsetting this benefit for higher controllable costs on a per ton of finished steel basis due primarily to major maintenance programs and increased unit pricing for freight, energy, and alloys. Selling prices for steel products from our mills increased $346 per ton on a year-over-year basis and $65 per ton sequentially. Margin over scrap on steel products increased $254 per ton from a year ago and $57 per ton sequentially. The average selling price of downstream products increased by $240 per ton from the prior year, reaching a new record of $1,169. This increase was more than double the rate of change in underlying scrap costs, leading to a significant expansion in profitability on volumes processed and shipped. through CMC's entire vertically value chain. 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. We are seeing this scenario play out. As demonstrated by the $155 per ton increase in downstream average selling price, from CMC's fourth quarter of 2021 to the second quarter of 2022. We continue to expect further upward movement in CMC's average backlog price through the remainder of the fiscal year, particularly in light of the strong market demand and bid volumes that we are experiencing within our downstream geographies. Shipments of finished product in the second quarter decreased approximately 10% from a year ago due to a difficult comparison to unusually strong volumes in the prior year period, as well as weather challenges in much of the eastern U.S. And markets for our mill products remains robust, which we are seeing in both order rates and broader industry data we track. downstream product shipments decreased by roughly 5% as weather slowed construction activity in several geographies. However, we have seen downstream backlog volumes increase, providing good optimism of the strength of underlying demand. Turning to slide 11 of the supplemental deck, Our Europe segment generated record adjusted EBITDA of $81.1 million for the second quarter of 2022, compared to adjusted EBITDA of $16.1 million in the prior year quarter. The improvement was driven by expanded margins over scrap and a significant increase in shipment volumes. Higher costs for energy and milk consumables partially offset these positive factors. Margins over scrap increased $203 per ton on a year-over-year basis, reaching $407 per ton. Robust market conditions provided the backdrop to achieve a $319 per ton increase in average selling price with solid year-to-year trends across each product we sell. Europe volumes increased 27% compared to the prior year as a result of strong market fundamentals and the absence of major plan maintenance that occurred during the second quarter of fiscal 2021. Shipments of merchant and other products were relatively unchanged as sales of higher margin finished product from our third rolling line replaced sales of semi-finished billets. This positive shift in sales mix has provided a strong benefit to segment earnings, and as Barbara mentioned, the recently commissioned rolling line continues to materially outperform expectations. Demand conditions within Central Europe remain strong. The Polish construction market continues to grow, while consumption of our merchant and wire rod products have been supported by expanding manufacturing activity. Polish and German PMI readings have registered growth for 20 consecutive months. Turning to the balance sheet, liquidity, and capital allocation, as of February 28, 2022, cash and cash equivalents totaled $846.6 million. Our cash position was augmented by the successful $600 million senior note offering completed in January. which provided CMC with 300 million of new funding and advantageously allowing us to redeem 300 million of outstanding five and three eighths interest rate notes due in 2027. The new senior notes due in 2030 and 2032 were repriced to yield four and one eighth and four and three eighths respectively. enabling us to cost-effectively fund our business and extend our maturities. Further, in conjunction with the Industrial Development Authority of the County of Maricopa, CMC issued 25-year tax-exempt bonds to fund a portion of our new Arizona 2 Micromill. This offering was structured to yield 3.5% for the $150 million of proceeds received. We have regularly discussed our Arizona 2 project since announcing it in August of 2020. We are proud not only of its first-in-the-world merchant bar capabilities, world-class environmental footprint, and strategic value to CMC's position in the western U.S., but also from its financing. The vast majority of funding for AZ2 was sourced by unlocking the significant real estate value gained in CMC's 2018 rebar asset acquisition, as well as now the long-term financing at just 3.5%. So not only will AZ-2 have world-class operating costs, but it will also have a world-class capital structure as well. As of February 28, 2022, we had approximately $685 million of availability under our credit and accounts receivable programs. bringing total liquidity to $1.5 billion. A portion of this liquidity will be used to fund the Tensar acquisition on the close of the transaction. During the quarter, we generated $29 million of cash from operating activities, despite almost a $200 million increase in working capital. The rise in working capital was driven by the significant increase in average selling prices. Over the course of the past six quarters, CMC has invested over $800 million in working capital, which will be converted to cash when prices retreat. Our leverage metrics remain attractive and have improved significantly over the last three fiscal years. As can be seen on slide 15, our net debt to EBITDA ratio now sits at just 0.5 times, while our net debt to capitalization is at 14%. 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 24.8% for the second quarter, and we forecast the full year rate to be between 24 and 25%. Turning to CMC's fiscal 2022 capital spend outlook, we continue to expect to invest between $475 and $525 million in this year for a total, roughly half of which will be attributable to Arizona too. Lastly, CMC repurchased 335,500 shares during the fiscal second quarter at an average price of $34.85. These transactions amounted to approximately $11.7 million, leaving $333 million remaining under our current authorization. We plan to increase the pace of repurchase activity during the second half of fiscal 2022. This concludes my remarks, and I'll turn it back to Barbara for an outlook of the current market environment.