Commercial Metals Company

Hello and welcome everyone to the fourth quarter fiscal 2023 earnings call for CMC. Today's materials including the press release and supplemental sites 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 construction of new facilities, the company's future operations, the timeline for 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 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 differ 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 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 Executive Chairman of the Board of CMC, Ms. Barbara Smith.

Thank you. Good morning, everyone. Thank you for attending CMC's fourth quarter earnings conference call. As we reported in our press release this morning, It was another period of historically strong financial results. I would like to thank CMC's 13,000 employees who made these results possible. Your hard work and focused efforts are driving our success. I'm joined this morning's call by CMC's President and Chief Executive Officer, Peter Matt, and our Senior Vice President and Chief Financial Officer, Paul Lawrence. We will start today's discussion with comments on CMC's fiscal 2023 results and accomplishments during the year. Peter will then discuss fourth quarter performance, provide commentary on current market conditions, and offer an update on CMC's strategic growth projects. Paul will cover the fourth quarter's financial information in more detail, and Peter will conclude with our outlook for the first quarter of fiscal 2024. after which we will open the call to questions. Fiscal 2023 was another exceptional year for CMC, one that included record employee safety performance, historically strong financial results, and solid progress on our announced growth initiatives, including several strategic bolt-on acquisitions. As you know, the company and its board of directors began implementing a CEO succession plan this year. I announced my retirement as CEO in July, and our board unanimously voted to appoint Peter Matt as CMC's new chief executive, effective September 1st. My fellow directors and I are extremely confident in Peter's ability to lead CMC through this next chapter, and I look forward to continuing to support the company as executive chairman of the board. Turning now to our financial results, CMC generated core EBITDA of 1.46 billion in fiscal 2023, down only modestly from the record of 1.55 billion set in fiscal 2022. Without proper context, it's easy to lose sight of just how impressive these figures are. During each of the last two years, CMC's core EBITDA was nearly double that of any previous record year and was more than four times higher than the average annual EBITDA during the decade prior to the completion of our strategic transformation. These remarkable results clearly demonstrate the impact of the thoughtful and decisive strategic actions we took over the last several years, which have enabled us to significantly grow our company and set us on a path for continued success. Fiscal 2023's strong reported net income translated into an annual return on invested capital of 18%. This is well in excess of CMC's cost of capital and an unmistakable indication of the value we are creating for our shareholders. Of the accomplishments achieved in fiscal 2023, we are most proud of our record employee safety performance, It's CMC's mission that each employee leaves the work site at the end of each day in the same condition in which he or she arrived. CMC's safety culture of proactive awareness, accountability, and innovation continues to move us forward to our goal of zero incidents. Last year's incident rate was tied for the lowest on record, and the number of OSHA recordables declined from the prior year, despite having more employees at more sites and enduring in unusually hot weather across most of our operational footprint. Additionally, 114 of our facilities were incident free. While we are pleased with our continued improvement, the safety mission is never complete and we will continue to push forward toward our goal. CMC continued to make solid progress on our strategic growth initiatives during fiscal 2023. Peter will provide more details in his remarks, but at a high level, this includes the operational startup of Arizona 2, continued growth in TENSAR's EBITDA contribution, and the execution of several strategic bolt-on acquisitions. As I enter my retirement and evaluate CMC today, I could not be more pleased with where we stand. The company has a very strong foundation comprising of an excellent culture, great employees, leading market positions, a compelling growth strategy, and a balance sheet that provides tremendous confidence and flexibility. I know with Peter's leadership and the support of all 13,000 employees, the future of CMC is as bright as it's ever been. Before I turn the call over to Peter, I would like to express my deep gratitude to the many people on this call that have shown me so much support over the years. It's been my privilege to work with you and to call many of you my friends. Peter, over to you.

Thank you, Barbara. It's an honor to take the helm of a company you've so masterfully led for much of the last decade. And good morning to everyone on the call. CMC's fourth quarter financial results were among the strongest in our company's history, though down slightly from recent record levels. CMC generated net earnings of $184.2 million, or $1.56 per diluted share, on net sales of $2.2 billion. Including the impact of non-operational items, which Paul will cover in detail, adjusted earnings were $200 million, or $1.69 per diluted share. EMC generated consolidated core EBITDA for the quarter of $340 million, producing an annualized return on invested capital of 15.2%. Once again, our North American segment demonstrated remarkable resilience, posting its 11th consecutive quarter of year-over-year adjusted EBITDA growth, excluding the gain on the sale of land recognized during the second quarter of fiscal 22. Even more impressive, excluding the land sale, our North American segment has increased EBITDA on a year-over-year basis in 21 of the last 22 quarters. Turning now to CMC's markets in North America, rebar shipments remained healthy during the fourth quarter and total finished steel volumes increased on a year-over-year basis. Activity levels across our geographies and into our various customer groups were consistent with the prior quarter. Overall, the seasonal volume pattern was very normal. The data we track indicates that annualized rebar consumption remained between 9 and 9.5 million tons during the third and fourth quarters. This level is consistent with the rate that has prevailed since early calendar 2021, which is a 5% to 10% increase compared to the pre-pandemic average. Strong pricing and demand conditions for domestic rebar have started to diverge from the weaker global environment, and growth within the U.S. construction sector similarly stands in contrast to most other global regions. This robust relative demand has attracted rebar imports from non-traditional suppliers, who have put pressure on domestic pricing in recent months. Despite these more challenging conditions, we expect CMC's North American business to continue generating margins well in excess of historical average levels, but down from the record highs of recent quarters. Turning to key forward indicators, CMC's new downstream bid volumes continue to grow by a solid double-digit percentage during the fourth quarter. signaling a large and expanding pipeline of potential future construction projects. Our internal view is directionally consistent with the Dodge Momentum Index, which measures the value of non-residential projects entering the planning phase and tends to lead on the ground activity by approximately 12 months. Index registered an average year-over-year increase of 15% during the three months of CMC's fiscal fourth quarter. with both institutional and commercial components improving from the prior year. While bid levels indicate an attractive future pipeline, we have experienced a slowdown in the rate at which contracts are awarded, which in turn has caused some reduction to the volume and the value of CMC's downstream backlog. Compared to the prior year, our quarter end backlog value declined by 8%. Based on our observations and conversations with customers, we believe there are a couple of factors driving the slowed pace of project awards. The first is tightness in the market for construction labor, particularly specialty trades, that continues to constrain project scheduling. Rather than incur construction delays driven by a lack of labor availability, some owners may choose to wait to award and construct a project. CMC and several other construction suppliers have discussed this dynamic in the past, and we believe it is likely to extend the duration of the current cycle. The second factor is a tighter credit market for many types of commercial projects. Current lending conditions do not preclude projects from obtaining financing, but the economic hurdles are higher. This dynamic also lengthens the amount of time between project bidding and award. Given the backlog contraction discussed, volumes of downstream products are likely to decline modestly on a year-over-year basis during the next couple of quarters. All that said, our downstream backlog remains at historically high levels and should continue to support healthy shipment levels going forward. Looking beyond these near-term dynamics, we remain very confident in the long-term outlook for our business, driven by powerful structural trends that are remaking much of our economy and should bolster construction activity for years to come. Enormous investments have been announced with some already underway to improve our nation's transportation infrastructure, reshore vital manufacturing, and upgrade the electric transmission grid to facilitate the transition to renewable energy. Each of these trends will benefit not just rebar consumption, but provide a meaningful tailwind to our TENSAR engineered solutions and other value-added product lines as well. We have frequently discussed the Infrastructure Investment and Jobs Act, IIJA, and its anticipated benefit to rebar demand. At run rate levels of spending, we expect IIJA to add an incremental 1.5 million tons of annual consumption. There are clear signs that enormous amounts of work are moving through the pipeline, as evidenced by data from Dodge Analytics, which tracks infrastructure projects in their pre-design and design phases. According to this data, the value of early phase projects increased over sevenfold on a year-over-year basis during the three months ending in August. Once designed, those projects will move to budgeting, funding, and letting phases. It is after the letting phase that contracts are awarded, resources are scheduled, and on-the-ground activity can begin. We have already seen the value of state transportation projects awarded year-to-date through July increase by 18% compared to the prior year according to the American Road and Transportation Builders Association, ARTBA. This year-to-date figure represents a 43% increase from just two years ago. Also, according to the ARTBA, total State Department of Transportation highway budgets are set to increase by 13% in fiscal 2024, which for most states started in July. Several states in our core Sunbelt region are budgeting even larger increases. As an example, Texas, by far CMC's largest state by shipments, recently proposed a 17% expansion to its 10-year DOT budget. Based on these signals, we expect that by next year's construction season, the IIJA and increased state DOT budget should have a material impact on construction activity and rebar consumption apart from transportation the announced investments in major reshoring and energy transition projects are staggering the 52 billion chips act has helped drive over 315 billion of announced projects to build semiconductor fabrication plants and supporting facilities over the coming decade these massive installations are generally constructed in multiple phases spanning several years and require unparalleled amounts of rebar. The necessary structural rigidity and broad footprint also make these facilities strong candidates for TENSAR soil stabilization solutions. Additionally, the scale of the semiconductor plants and their workforces attract investments from suppliers, retail stores, restaurants, et cetera. and require expenditures for local infrastructure, all of which consume rebar. Approximately $150 billion of investments in electric vehicle and EV battery manufacturing have been announced since 2021 according to the Environmental Defense Fund. The expected spending on energy transition is similarly impressive. According to the American Clean Power Association, roughly $150 billion of renewable energy projects have been announced during the 12 months ended in August, with an additional $22 billion being invested in the construction of clean energy manufacturing facilities to produce utility scale batteries, wind turbines, and solar panels. The $250 billion IRA is expected to support these projects and additional energy transition and manufacturing projects in the future. which presents a significant opportunity for CMC. Our rebar is used in the foundations and structure of the manufacturing facilities, as well as the foundations of wind turbines. TENSAR's engineered solutions are used extensively for temporary and service roads to access wind farms and solar fields. Additionally, CMC's Anchor Cage business, which was acquired through our purchase of EDSCO, provides foundation support to the transmission lines that will carry electricity from new energy projects to the grid. Taken together, the construction activity required to upgrade our nation's infrastructure, harden critical supply chains, and transition to greener energy is expected to provide a meaningful tailwind to CMC's North America operation for years to come. I'll now turn to Europe. where market conditions are challenging. Sluggish demand and excess supply have combined to put pressure on pricing and compressed margins. General economic uncertainty continues to negatively impact sentiment and activity levels across our key end markets. Additionally, high interest rates, despite recent central bank easing, remain an overhang to the Polish residential construction sector. We responded to the current market imbalances by reducing costs and right-sizing production and believe that others have done the same. These supply-side adjustments should help stabilize the market. The environment in Europe is currently difficult, but will normalize. We remain committed to our strategic presence in Poland, which greatly out-earns its cost of capital over the course of an economic cycle and provide CMC with valuable optionality for the future. We have an exceptional team in Poland, as well as best-in-class cost structure that ensures our long-term competitiveness. As noted in our press release, CMC's first quarter results are expected to benefit from two large rebates totaling $60 million, which we will discuss more fully during our outlook commentary. Before turning the call over to Paul, I would like to provide an update on CMC's key strategic growth projects, where we have made significant progress during the quarter. First, we successfully started operations at our new state-of-the-art Arizona 2 micromill, and we are now in the process of ramping up output. This is an exciting milestone and the culmination of years of effort by our team on-site and support staff across the company. As a reminder, we are targeting 500,000 tons of output at full run rate, comprised of 350,000 tons of rebar and 150,000 tons of merchant product. Initially, the mill will focus on increasing rebar production before commissioning merchant later in fiscal 2024. We anticipate fiscal 2024 production to approach 400,000 tons and expect to achieve EBITDA breakeven by the end of the first half of fiscal 2024. Beyond steel, we made meaningful progress on our 10th hour platform. The division achieved its highest quarterly EBITDA to date, driven by strong customer adoption of its latest proprietary offering, Interax. The new product is being recognized by customers for delivering strong value by reducing construction time lowering project costs, and increasing asset life. Our financial performance is also benefiting from improved manufacturing performance and the integration of the recently acquired GeoGrid production line in Oklahoma. CMC continued to expand its commercial portfolio in the fourth quarter with the acquisition of EBSCO, a manufacturer of rebar anchor cages for the electrical transmission and wind energy markets. The company is a leader in its space and poised to benefit from anticipated strong growth in U.S. energy markets. This transaction is an example of the type of value-accretive bolt-on acquisitions we will continue to pursue, which deepen, broaden, and diversify our construction reinforcement offering to customers and enhance our margin profile. In addition, we conducted the groundbreaking ceremony at Steel West Virginia earlier this summer. Our operations and leadership teams are on-site, and early construction activity is now underway. One final note, earlier this month, CMC announced a refreshed brand and logo to better reflect our strategic direction. Commercial Metals Company now has become CMC, a name that both ties our organization to its strong legacy and broadens its horizon beyond metals to include an expanded array of engineered solutions. CMC strives to become the clear leader in early phase construction solutions, which requires offering our customers value options across a number of platforms and materials. The company's new brand reflects who we are today and our broader aspirations for the future. With that, I will now turn the call over to Paul to provide more detail on our financial results. Paul?