Commercial Metals Company

Hello and welcome everyone to the third 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 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 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 would 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 sections of the company's latest filings with the Securities and Exchange Commission, including 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 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, supplemental slide presentation, 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 third quarter earnings conference call. Before we begin, I'd like to congratulate CMC's employees on another remarkable quarter of performance. Your dedication, creativity, and customer focus are what makes results like this possible. And on behalf of the entire CMC leadership team, we're extremely proud and grateful for all your efforts. I'd also like to welcome our approximately 650 new CMC employees at Tensar. You have certainly joined at an exciting time for our company, and I'm confident that your contributions, along with those of your talented colleagues, will make CMC's future even brighter. I will start today's call with brief highlights from the quarter, as well as a discussion of CMC's markets and how we are positioned. I'll also share some early observations following the closing of the Tensar acquisition. before turning to commentary on market trends we see developing in Europe. Paul Lawrence will cover the quarter's financial information in more detail, and I will then conclude our outlook for the fourth fiscal quarter and beyond, 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. For fiscal third quarter 2022, net earnings were $312.4 million, or $2.54 per diluted share, on net sales of $2.5 billion. Excluding the impact of non-operational items that Paul will discuss, adjusted earnings were $320.2 million, or $2.61 per diluted share, the best in our company's history. CMC generated core EBITDA of $483.9 million, an increase of 110% from a year ago, and nearly 50% above the previous record, which was achieved in the first quarter of fiscal 2022. With this quarter's exceptional performance, CMC's trailing 12-month core EBITDA totaled roughly $1.4 billion, and our trailing 12-month return on invested capital was in excess of 24%. During the last 13 quarters, a time period that includes the global pandemic and widespread 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 our shareholders, and we are poised to continue doing so. I would like to now turn to CMC's market environment with a particular focus on the United States. Looking at our business, we see no signs of a slowdown. Demand in the third quarter was strong across each of our product lines and major geographies. The key indicators that lead rebar consumption by 9 to 12 months remain not only positive but robust. These indicators include both external and internal metrics that have a history of reliability and are indices we often reference in our forward-looking comments. First, I would like to discuss several of the key external indicators we track. The Architectural Billing Index has been an expansionary territory for over a year, signaling future growth in private non-residential spending. The most recent reading of 56.5 is noteworthy, as the ABI has rarely breached the 55 level in the 13 years since the global financial crisis. Additionally, readings for the southern and western regions, two geographies where CMC has a core presence, are particularly strong. The Dodge Momentum Index, another measure of non-residential projects entering the planning phase, hit a 14-year high in May. Both the commercial and institutional components of the index increased meaningfully on a year-over-year basis. driven by offices, hotels, education, and healthcare. Offices and hotels are two market sectors that many had assumed would take years to recover, if ever, but both are now making a comeback. CMC's own internal view mirrors the picture provided by the external measures. Our downstream bidding activity reached a new record high during the third quarter. driven by a broad basket of project types in both the public and private sectors. So, to sum up our near-term view, while we certainly don't discount the economic concerns making headlines, the best indicators of future construction activity continue to point toward expansion ahead. Beyond the near term, we believe there are several structural trends underway that will bolster domestic construction activity. The first is a federal infrastructure package signed in November of last year. At full run rate, this plan is expected to increase federal funding for core rebar-consuming projects such as highways, bridges, and related structures by 65% compared to the FAST Act that it replaced. We estimate the impact will be 1.5 million tons of incremental annual rebar demand within a domestic market of roughly 9 million tons, representing an approximately 17% increase in consumption. Spending is expected to ramp up over a period of five years, and assuming typical timeframes for project approvals, bidding, and awarding, we should begin to see the impact on construction activity in early calendar 2023. This timing matches very well with the anticipated startup of CMC's Arizona 2 micromill next year. This plant will have a capacity of roughly 500,000 tons and the ability to flex production between rebar and merchant products. The second structural trend to note is the expected follow-on local infrastructure and non-residential investment to support the recent rapid growth in newly formed residential communities. This activity generally lags residential spending by 12 to 24 months and includes projects such as roads, wastewater treatment, water supply, schools, and shopping centers. Over the last two and a half years, the north to south population migration that is already occurring has significantly accelerated. Of the five states that have experienced the greatest net in migration, CMC operates a rebar mill in four of them. The fifth state, Georgia, is next door to two CMC mills. So the pace of year-over-year growth in new single-family housing starts has slowed. Starts in the south are still more than 30% above the level seen in the first half of 2019 and 2020. The third structural trend is the reshoring of critical industries. We have previously mentioned the massive scale and pace of construction of new semiconductor facilities. There are five such projects now underway in the U.S. Four are in core CMC states, two each in Arizona and Texas. Those plants are the highest profile examples of reshoring. Given the ongoing supply chain disruption seen in everything from basic materials like fertilizer and chemicals to manufactured products, it's reasonable to expect other industries to invest heavily in domestic capacity. We have all learned over the last three years that global supply chains are more fragile than previously believed, and the loss of a few critical inputs can have a significant cascading effect throughout the economy. I have just discussed several reasons to anticipate continued strength in construction activity, and CMC is poised to capitalize on these trends. As I mentioned, we expect to start up our new Arizona 2 state-of-the-art micromill in early calendar 2023 that will feature world-class operations, operational footprint, and product quality. Along with AZ-2, the addition of TENSAR increases CMC's exposure to infrastructure through both existing and new markets, and TENSAR's already significant customer value proposition can create even greater value under the current labor, materials, and trucking availability constraints. Of course, we know from experience that markets can shift quickly, and the future does not always turn out as expected. If our markets do shift, CMC's business model is designed to weather the inevitable market cycles. To reinforce that point, our downstream backlog is sitting at record levels on both a volume and price basis, providing a strong baseload of highly profitable work into the future. We have invested nearly $900 million in working capital over the last two years, which would be harvested as cash in a softer environment. CMC also operates a world-class network of facilities across which we can optimize production, product mix, logistics, and customer service to meet virtually any demand scenario. Turning now to a quick update on CMC's acquisition of Tensar, please reference the presentation available on CMC's Investor Relations website for more information and a detailed description of the business. As we stated in this morning's press release, CMC's leadership is even more confident in the strategic rationale for the transaction after the first five weeks of having the TENSAR team on board. What we have learned thus far confirms our expectations regarding both organizations' shared customer solutions-driven culture, value creation through innovation, and expertise in stabilization applications. Our interactions and work to date have heightened our expectation that significant commercial synergies can be achieved and that CMC can build out a truly unique portfolio of solutions for both existing and new customers. We are still too early in the planning phase to share specifics, but I would say this. Any acquisition diligence process requires making certain assumptions about gray areas. Five weeks in, we can confidently share that our assumptions appear conservative and that the TENSAR team is proving to be an excellent addition to CMC's portfolio of construction solutions. While on the topic of strategic growth investments, I will offer a brief note on CMC's announced fourth micromill to be located in the eastern U.S. Currently, we are working through site selection and making progress toward a final choice of location. We remain fully committed to this strategically attractive project and look forward to providing a more complete update once the final decision is made. I would like to now provide some color on developments in Europe. At the time of CMC's last earnings call in March, the war in Ukraine had already driven roughly 1.4 million refugees into Poland. Given continuing hostilities and ongoing devastation, that number has unfortunately grown to over 3.5 million, which is equal to nearly 10% of the Polish population. No government can possibly be prepared to house, feed, and care for such a massive and sudden migration of people. Much of the burden has fallen to the Polish citizens who have responded with remarkable compassion and empathy. I am extremely proud of the efforts of CMC's team in Poland to assist those in need. Leadership continues to work with well-known humanitarian aid groups that specialize in helping victims of armed conflicts and natural disasters, and has also made CMC accommodations available to refugees. Many employees have taken refugees into their homes, providing them with shelter, food, comfort, and safety. The response to this tragedy is inspiring and we sincerely thank our employees in CMC Poland. In the midst of this crisis, our team in Poland has continued their exceptional performance. CMC's Europe segment generated record adjusted EBITDA during the third quarter on strong volumes and margins. It's worth sharing several emerging secular trends that may have a lasting impact on the Eastern European steel market. The first is the trade sanctions placed on Russia and Belarus, which are only beginning to be felt during the third quarter. These two countries generally account for over a quarter of the long product imports into the European Union and over half of the direct arrivals into Poland. The absence of these volumes will likely tighten the supply conditions meaningfully in Eastern Europe. The logical alternative for imported material to Europe is Turkey. However, logistics directly to Poland and its neighbors are challenging. This could result in little or no impact backfill for the Russian and Belarusian material blocked from the market, allowing CMC the opportunity to fulfill this demand. The other noteworthy secular trend is the ongoing energy shortage in Europe, which the war in Ukraine has only exacerbated. CMC is experiencing higher energy costs than in past periods, but to a far less significant extent than many competing producers. CMC's leadership in Poland has expertly navigated the situation by having in place physical and financial hedges prior to the start of the conflict which have defrayed much of the cost impact. Electricity and natural gas costs per ton were up 28% on a year-over-year basis, compared with an average spot price increase of over 200% in Germany, Spain, and France. The recent addition of CNC's Europe's third rolling line has positioned us to more fully capitalize on these trends. Over the last four quarters, volumes of finished product shipped have exceeded the mill's 10-year average by 35%. With the third rolling line operating, we are better leveraging our melt shots, benefiting from a higher-value product mix, and able to act with more commercial and operational agility. Finally, as stated in our press release, our Board of Directors declared a quarterly cash dividend of $0.14 per share of CMC common stock, for stockholders of record on June 29th, 2022. The dividend will be paid on July 13th, 2022. And this represents CMC's 231st consecutive quarterly dividend with the amount paid per share increasing 17% from quarter three of fiscal 2021. With that as an overview, I will 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 this morning. As Barbara noted, we reported fiscal third quarter 2022 net earnings of $312.4 million, or $2.54 per diluted share, compared to prior year levels of $130.4 million, or $1.07 respectively. The results this quarter include net after-tax charges of $7.8 million, the majority of which relates to CMC's acquisition of Tensar. These costs were in the form of acquisition expenses and purchase accounting adjustments related to inventory write-ups. The quarter also included a small asset impairment charge taken in North America. Including the impact of these items, adjusted earnings were $320.2 million were $2.61 per diluted share. The core EBITDA was $483.9 million for the third quarter of 2022, more than double the $230.5 million generated during the prior year period. Slide 11 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 $293. Now I will review our results by segment for the third quarter of fiscal 22. CMC's North American segment generated adjusted EBITDA of $379.4 million for the quarter equal to $332 per ton of finished steel shipped. Segment adjusted EBITDA improved 83% on a year-over-year basis, driven by significantly increased margins on each of our steel products, downstream, and raw material product groups over their underlying scrap costs. Partially offsetting this benefit were higher controllable costs on a per ton of finished steel, due primarily to the increased unit pricing for freight, energy, and alloys. The pace of unit price increases for these items moderated in the third quarter, and as a result, when combined with the impact of the fixed cost leverage, CMC was able to hold controllable costs per ton flat from the prior quarter. Selling prices for steel products from our mills increased by $316 per ton on a year-over-year basis and $69 per ton sequentially. Margin over scrap on steel products increased $213 per ton from a year ago and $33 per ton sequentially. Average selling price of downstream products increased by $281 per ton from the prior year. reaching a new record of $1,244. This increase was 2.7 times the rate of change in the underlying scrap costs, leading to significant expansion and profitability on volumes processed and shipped through CMC's vertically integrated value chain. During our fourth quarter earnings call in October, I indicated that CMC's downstream backlog was expected to reprice higher throughout fiscal 2022, as new higher price work replaces older, lower price work. We are seeing this scenario play out as demonstrated by the $230 per ton increase in downstream average selling price from CMC's fourth quarter of 2021 to the third quarter of 2022. We continue to expect further upward movement in CMC's average backlog price, particularly in light of strong market demand and bid volumes that we are experiencing within our downstream business. Shipments of finished product in the third quarter were largely unchanged from a year ago and followed a typical seasonal pattern compared to the second quarter. End market demand 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 2% from the prior year period, despite a mid-teen percentage increase in the backlog volumes. Progress on construction sites in certain geographies has been impacted due to the constrained supply of labor and materials. We expect this situation to dissipate heading into the autumn months. And as a reminder, projects in the CMC's downstream backlog are contractually committed and for the most part fully financed. We believe current constraints are likely to extend the construction cycle rather than pose a threat to the ultimate shipping volumes. Turning to slide 13 of the supplemental deck, our Europe segment generated an impressive adjusted EBITDA of $121 million for the third quarter of 2022, compared to adjusted EBITDA of $50 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 mill consumables partially offset these positive factors. However, on a sequential quarter basis, controllable costs per ton were largely unchanged, which is a remarkable accomplishment given the inflationary environment we are currently experiencing. Margins over scrap increased $149 per ton on a year-over-year basis, reaching $437 per ton. Robust market conditions provided a backdrop to achieve a $303 per ton increase in average selling price with solid year-to-year trends across each product we sell. Europe volumes increased 18% compared to the prior year as a result of favorable market fundamentals and CMC's strong competitive position. The supply side and energy cost factors that Barbara discussed have created commercial opportunities in our primary markets, while the addition of the third rolling line has allowed us to more fully respond to these circumstances. Shipments of each of our major mill products, rebar, merchant bar, and wire rod were up 20% or more from the prior year period. In addition to incremental production, the third rolling line has enhanced our margin mix and improved our ability to leverage fixed costs. Demand conditions within Central Europe remain supportive. The Polish construction market continues to grow, driven by solid expansion in residential spending. In addition, the EU COVID recovery funds should provide a tailwind to Polish construction activity towards the end of the calendar year. Pensar generated EBITDA of $4.9 million during the first five weeks as a CMC company. Including a $2.2 million adjustment related to purchase accounting effect on inventory, EBITDA amounted to $7.1 million, a net sales of $28 million. EBITDA margin of 25.2% was consistent with the trailing five-year average of the business. As noted in this morning's press release, TENSAR performance will be included within CMC's existing segments, but we intend to provide ongoing visibility into the business results and developments. Of the $7.1 million in EBITDA, excluding purchase accounting adjustments, $5.4 million was included within CMC's North American segment, while the remaining $1.7 million was reported within the Europe segment. Based on the preliminary allocation of purchase price, we expect to incur annual depreciation and amortization of intangibles related to the acquisition of $10 and $20 million, respectively. Turning to the balance sheet, liquidity, and capital allocation, as of May 31, 2022, cash and cash equivalents totaled $410.3 million. CMC also had $126.3 million of restricted cash, which is primarily earmarked for the funding of Arizona II and was raised through the offering of the 25-year tax-exempt bonds. In addition to cash and equivalents, we had approximately $623 million of availability under our credit and accounts receivable programs, bringing total liquidity to slightly over $1 billion. CMC's $330 million 2023 notes have moved into current on the balance sheet. We are currently evaluating refinancing alternatives that are consistent with our commitment to maintaining a healthy balance sheet, financial flexibility, in a strong liquidity position as well as utilizing cash to lower CMC's overall leverage. During the quarter, we generated $187 million of cash from operating activities despite $212 million increase in working capital. The rise in working capital was driven by the significant increase in average selling price across CMC's legacy businesses. Our leverage metrics remain extractive. and we have improved significantly over the past several fiscal years. As can be seen on slide 17, our net debt to EBITDA ratio now sits at just 0.7 times, even after the purchase of Tensar. We believe our robust balance sheet and overall financial strength provide us flexibility to finance our strategic organic growth projects and pursue opportunistic M&A while continuing to return cash to shareholders. CMC's effective tax rate was 22.9% in the third quarter, and we expect the forecast for the full year tax rate to be between 23 and 24%. Turning to CMC's fiscal 2022 capital spending outlook, we expect to invest between $475 to $500 million in total this year, roughly half of which can be attributable to Arizona, too. Looking ahead to fiscal 2023, we anticipate our capital investment will be relatively consistent with the level of 2022, with a large portion continuing to be attributable to strategic growth projects. As Barbara noted, our announced fourth micromill project remains in the site selection phase. As a reminder, we assess projects like this using a view of through-the-cycle cash flow expectations. So while site selection has taken longer than anticipated, we remain very encouraged by the strategic merits of this project. Lastly, CMC purchased roughly 1 million shares during the fiscal third quarter at an average price of $38.34 per share. Transactions since the initiation of the buyback program have amounted to roughly $55.6 million, leaving a little over $294 million under the authorization that we announced in October. We plan to maintain the pace of repurchases in the fourth quarter consistent with what we have accomplished to date. This concludes my remarks, and I'll turn it back to Barbara for the financial outlook.