Commercial Metals Company

And welcome everyone to the third quarter fiscal 2023 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'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, construction activity, demand for finished steel products, the expected capabilities, benefits, and timeline for the construction 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 but are subject to certain risks and uncertainties, including those that are described in the risk factors and forward-looking statement 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 quarterly report on Form 10Q. 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, 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 and Chief Executive Officer of Commercial Metals Company, Ms. Barbara Smith.

Good morning, everyone, and thank you for attending CMC's third quarter earnings conference call. As we reported in our press release this morning, it was another period of outstanding financial results with quarterly core EBITDA performance among the best in our company's history. I would like to thank CMC's 12,500 employees who have made these results possible. Your hard work and focused efforts are driving our success. Before this morning's call, I'm joined by Commercial Metals Company President Peter Matt, as well as Senior Vice President and Chief Financial Officer Paul Lawrence. I will start today's discussion with a few comments on CMC's third quarter results and give an update on our strategic growth projects. Peter will then provide commentary on current market conditions and factors behind CMC's long-term demand outlook. Paul will cover the quarter's financial information in more detail, and I will then conclude with our outlook for the fourth fiscal quarter, after which we will open the call to questions. Before diving into more details on the quarter, 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. As I noted, CMC's third quarter fiscal 2023 earnings were among the strongest in our company's 108-year history. We recorded net earnings of $234 million, or $1.98 per diluted share, on net sales of $2.3 billion. Excluding the impact of non-operational items, which Paul will discuss in more detail, adjusted earnings were $239.7 million or $2.02 per diluted share. CMC generated core EBITDA for the quarter of 391.7 million, an increase of 29% from the prior quarter, producing an annualized return on invested capital of 19.1%. This marks the North America segment's 10th consecutive quarter of year-over-year EBITDA growth and the 20th quarter of year-over-year growth in the last 21 quarters, excluding the gain on the sale of land recognized during the second quarter of fiscal 2022. I will now provide an update on CMC's key strategic growth projects. I am pleased to share that operational startup of Arizona 2 is now underway. This operation marks yet another industry first for CMC as the only micro mill in the world capable of producing both rebar and merchant bar in a continuous process. As a reminder, at full run rate, we expect Arizona 2 to produce approximately 350,000 tons of rebar and 150,000 tons of merchant bar annually. The ramp-up to this level should cause minimal market disruption as we have maintained CMC's presence in the West Coast following the closure of our former Steel California operations in anticipation of bringing Arizona 2 online. Output from our new micro mill where we place shipments from locations in the Central and Eastern U.S., further optimizing our footprint. As we have discussed previously, the addition of Arizona 2 provides a number of strategic benefits to CMC's portfolio. It will extend our geographic reach in Merchant Bar to the West Coast and provide optimal access to the sizable Southern California and Arizona markets. Additionally, it will help form a unique steelmaking complex through its co-location with our existing Arizona micro mill, allowing for shared staff support, production optimization, improved production scheduling, and shared site infrastructure. The operational flexibility of Arizona 2 will also provide the ability to seamlessly adjust output of rebar and merchant bar to quickly address market conditions and opportunities. Looking ahead to fiscal 2024, we initially expect our new mill to produce approximately 400,000 tons with output approaching full run rate by the end of the fiscal year. We anticipate Arizona 2 will achieve breakeven on an EBITDA basis during the first quarter and improve from there as production increases, assuming metal margins remain fairly consistent with current levels. We believe Arizona 2 should add roughly $70 million to $80 million to CMC's sustainable through the cycle EBITDA. Turning to our other exciting new mill project, Progress at the future Steel West Virginia site remains on target. We anticipate receiving the air permit in the coming weeks and expect to break ground during the middle of summer. We look forward to providing further updates over the next several quarters as we hit key project milestones. We recently celebrated one year since the acquisition of TENSAR, an industry-leading provider of engineered solutions for ground and soil stabilization that uniquely complement our concrete reinforcing steel products. Several of the first year highlights are shown on slide six of the supplemental presentation posted to our investor relations website. We purchased TENSAR with the expectation that it would represent a significant new growth platform for CMC with a meaningful runway of long-term value creation opportunities through increased market adoption, commercial synergies, and additional growth targets. Our experience during the first year has validated this view and reinforced our expectations for future prospects of this business. The successful launch of Tensar's newest geogrid design, Interax, has shown the potential to achieve increased market penetration and share a wallet through engineered solutions that offer a compelling customer value proposition. We have a clear path toward executing on a broad commercial strategy, one that leverages a unique portfolio of reinforcement solutions to deliver more value to project owners, general contractors, and project engineers. Since the acquisition, Tensar has generated EBITDA of $61 million, punctuated in May by the achievement of its best monthly results since joining CMC. While this first year performance was within our initial range of expectations, we see further upside ahead by executing across a number of fronts. First, we see significant opportunity to increase market penetration, which is currently in the mid single digits, through an excellent value proposition and sustained marketing efforts. The launch of the Interax product product line highlights Tensar's potential to drive broader adoption. In less than two years on the market, Interax has grown to roughly 20% of our geogrid volumes. This product has years of patent protection remaining and is by far the premier offering in the marketplace. In addition, we continue to improve production reliability and have an opportunity to add low-cost capacity to meet growing demand. Our recent acquisition of Boston and Oklahoma supports this goal by increasing CMC's control of our geogrid supply chain and providing the ability to expand production in the central U.S., which is a large and growing market. Longer term, we expect commercial synergies and expansion into new product adjacencies to drive meaningful earnings growth. We are confident in our outlook for TENSAR to become an increasingly important contributor to CMC's financial success. I would remind you that it is a highly seasonal business, so progress along this growth path may at times be less apparent due to typical quarter-to-quarter variations. Before turning the call over to Peter, I'd like to comment on the bolt-on acquisitions we have completed since the start of the fiscal year. Each transaction supports CMC's strategy by either securing critical inputs to our manufacturing operations or enhancing our ability to serve our customers. In three separate transactions, we acquired recycling operations in California, Texas, and Tennessee. The addition of the California location supports our growth in steelmaking in the western U.S., while the other facilities increase the security of scrap supply to our mills within core markets. Finally, the acquisition of Tendon Systems, a leading supplier of post-tension cable to the southeast market, complements CMC's existing footprint in the region and adds valuable engineering and commercial expertise. Post-tension cable is used in conjunction with rebar, and the ability to offer a bundled package increases the ease of doing business for customers. With that overview of strategic projects, I will now hand the call over to Peter to discuss conditions in CMCs and markets.

Thank you, Barbara, and good morning to everyone on the call. Before providing remarks on CMCs and markets, I would like to share a few observations from my first two months as president. My time has been filled with site visits and conversations with employees from across the organization, and I have come away with a true appreciation for the quality of our culture and our people. It's clear that our team members are truly dedicated to our customers and to each other. It's also clear that our people excel at meeting challenges, from routine business issues to spearheading the adoption of breakthrough technologies. After meeting these folks, it's no surprise that CMC has become an industry leader and built a track record of innovation and financial success. I am highly energized by the opportunity to work closely with such a talented group of people and to join a management team I greatly respected during my tenure on the company's board of directors. Now, turning to CMC's markets in North America, conditions remained strong with healthy demand for our products and generally favorable margin environment. The value of our downstream backlog ended the third quarter at a record level for this time of year, up roughly 4% from a year ago. Volume in our backlog is also at historically high levels, and conversations with customers indicate that other fabricators are similarly situated, which should support finished steel shipments over the next several quarters. CMC's downstream bidding activity for newly announced projects, which provides the best view of developments within the future project pipeline, also remained robust, increasing nearly 30% on a year-over-year basis. Projects in the pipeline continue to represent a healthy blend of both private and public work spanning across our geographies. We are experiencing particular strength in local infrastructure projects, manufacturing, data centers, LNG investments, and e-commerce. There is also surprising resilience in some construction market segments that are typically more sensitive to higher interest rates, including office space and general commercial. While we expect a slowdown in these areas, it is not yet reflected in our activity. Our view is echoed by external indicators that have been historically reliable. The first is the Dodge Momentum Index, which tracks projects entering the planning phase and generally leads on the ground activity by 9 to 12 months. The May reading increased by 11 percent from a year ago, and though down month over month, remained within the top decile of all months reported over the last 20 years of data. Moreover, both the commercial and institutional components grew, increasing by 7 percent and 18 percent respectively. Spending on highway and street construction, as tracked by the U.S. Census Bureau, has increased 20% or more on a year-over-year basis each month since August of 2022. This is consistent with comments that we have made on previous calls regarding the growth in state highway budgets and the record level of new highway and bridge contracts awards that occurred last year. We believe this uptick in activity represents the early stages of rising infrastructure investment. Another metric we watch is the Dodge Analytics Infrastructure Design Phase Index, which indicates that federal funding is flowing through the project pipeline. This measure increased by nearly 700% on a year-over-year basis in the three months ended in April. So to sum up, While we continue to monitor a range of market indicators on balance, we see good activity and positive future signals for our key segments. Now, let me zoom out a bit and discuss where we are, where we came from, and more importantly, where we believe we are going in terms of domestic rebar demand. U.S. consumption has been consistently above 9 million tons on an annualized basis since mid-2021. and is running about 6% to 10% above the pre-pandemic average from 2015 to 2020. This level of demand already reflects the downward adjustment in the housing market that occurred in early to mid-2022. Following a sharp decline, US new housing starts have stabilized at rates 10% to 15% above where they were prior to the pandemic. We believe the powerful structural trends we are witnessing have the potential to drive rebar consumption well above the level seen on slide seven. These trends include the reshoring of critical manufacturing, infrastructure investment, and investments in energy to support the transition to renewables and the realignment of global energy trade. There is over $1.1 trillion of either direct federal funding or announced large private projects that will be executed over the next several years to address these needs. This massive figure incorporates approximately $350 billion in reshoring projects within the semiconductor and automotive supply chains. there are likely to be added hundreds of smaller reshoring investments across a number of other industries that will also benefit rebar demand. Slide eight provides an overview of domestic rebar consumption and some of the major factors that we believe could have an impact on demand over the next several years. As you can see, about 55% of consumption is in markets that are or will be receiving direct federal funding or incentives, much of which will be subject to Buy America provisions. We would also categorize about two-thirds of demand as having relatively low sensitivity to interest rates. These are markets that are driven by necessity and rely heavily on either public funding or strong corporate balance sheets. Further, of the remaining third of consumption that tends to be interest rate sensitive, the majority is residential construction. As I indicated earlier, new residential starts have actually stabilized above pre-pandemic levels, despite 30-year mortgage rates nearly doubling since 2022. We believe this points to structural support for new construction provided by an ongoing shortage of housing inventory in most metropolitan areas. This leaves about 10% of U.S. rebar consumption that is both highly sensitive to lending conditions and unsupported by structural factors such as economic necessity or low levels of existing inventory. Taken together, we believe the multiyear outlook for rebar demand is strong. The markets that are most rebar intensive are receiving increased investment dollars. While the construction segment is likely to contract such as office, retail, and hospitality are far less rebar intensive and comprise a relatively small portion of overall consumption. As an example, a dollar of infrastructure construction will consume roughly five to six times more rebar than a dollar spent on construction of a standard office or retail building. While my comments regarding the potential impact of structural economic trends have focused on rebar, we also expect these benefits to carry over to our engineered solution businesses. TENSAR soil stabilization solutions are used in highway applications access roads into green energy projects, and to improve the structural rigidity of massive building foundations such as those under manufacturing plants. Looking briefly at CMC's merchant bar and markets, we continue to experience stable demand across most applications and supply chain inventories appear to be in good shape. Turning now to Europe, current market conditions are more challenging and the near-term outlook is less certain. Construction activity in recent months has slowed, driven by the impact of higher interest rates on the residential market. The pipeline for new home construction, as indicated by building permits, has contracted sharply since mid-2022 and is now affecting on the ground activity. Some relief may be ahead. We mentioned in our second quarter earnings call that the Polish government was developing a plan to support the housing market through assistance to first-time home buyers. We are encouraged that this measure pass through the Parliament in late May and is expected to be implemented on July 1st. The legislation will provide qualified buyers with mortgages at 2% interest compared to the current market rate of 9% to 10%. This should benefit residential construction activity, but the magnitude of the impact remains to be seen. Another encouraging development is the recent announcement by Intel regarding the planned construction of a 4.6 billion semiconductor assembly plant, which is expected to be completed in 2027. The project is the largest greenfield investment in the history of Poland and highlights that the build-out of semiconductor supply chains is not limited to North America. Industrial activity in Central Europe continues to be impacted by ongoing energy concerns and weak economic sentiment. The current state of manufacturing in the region is best highlighted by 11 consecutive contractionary monthly readings for German manufacturing PMI and 13 straight in Poland. Despite this challenging backdrop, our team in Poland has been able to maintain historically strong shipment volumes by leveraging their operational flexibility. Looking ahead, we believe that lower European energy prices and the stimulus of Polish home buying will provide support to our key end markets. We expect that our strong competitive position with both cost and operational flexibility will allow us to maintain volumes above historical levels. And with that, I will now turn this discussion over to Paul to provide more detail on our financial results.