Commercial Metals Company

Hello and welcome everyone to the third quarter fiscal 2024 earnings call for CMC. Joining me on today's call are Peter Matt, CMC's President and Chief Executive Officer, and Paul Lawrence, Senior Vice President and Chief Financial Officer. 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 to 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 operations, the company's strategic 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 statements section of the company's latest filings with the U.S. 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 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 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 Peter.

Thank you and good morning everyone and welcome to CMC's third quarter earnings conference call. I would like to start off by thanking our 13,000 employees for delivering another quarter of strong operational and financial performance. I am proud to announce that CMC has been named to the 2024-2025 list of best companies to work for by US News and World Report. Thank you to our dedicated employees for placing us among the best of the best. While I am proud of these results, I am even prouder that we have continued to improve our exceptional safety track record with reportable incidents well below the broader domestic steel industry. To that end, I would like to take a moment to recognize the outstanding improvements made at recently acquired facilities within our emerging businesses group. They have been eager adopters of CMC's industry-leading safety culture and practices, which has resulted in higher employee satisfaction, lower turnover, and fewer injuries. At CMC, it all begins with safety, and we won't be satisfied until we reach our goal of zero incidents, ensuring everyone leaves their shift in the same condition they arrived. This morning, I will provide an overview of CMC's third quarter financial and operating performance after which I will discuss our view of the current and future market environment before offering a brief update on key growth projects. Paul will cover the quarter's financial results in greater detail, and I will conclude with our outlook for the fourth fiscal quarter and beyond. We will then open the call to questions. Additional information regarding the quarters provided in the supplemental slides that accompany this call which can be found on CMC's investor relations website. As we reported in our press release this morning, the third quarter of fiscal 2024 was another period of strong financial performance. CMC generated core EBITDA margin and net earnings per diluted share well above historic averages. We continue to believe that our margin and earnings are normalizing at levels sustainably above pre-pandemic levels. This view is based on significant changes that have occurred in CMC's business and our industry over the last several years. The first change to mention is industry consolidation, in which CMC played a central role with its acquisition of rebar assets from Gerdau. From a CMC perspective, this transaction created a much larger company and market leader with increased scale, improved operating flexibility, and an enhanced value generating asset base. The second change is an improved trade environment that recognizes the importance of the basic industries that play a vital role in our national economy and provides mechanisms to level the playing field with unfairly traded imports. The third change is once in a generation structural demand trends that are reshaping our economy and can be expected to propel construction activity for years to come, providing more visible and longer duration demand drivers for our business. In summary, this improved business environment should provide a favorable backdrop for our company to continue generating significant value for our shareholders. We believe there is much more to come. As mentioned on our previous earnings call, CMC is developing a compelling strategy to drive the next phase of value accretive growth. Our aim is threefold. First, achieving sustainably higher, less volatile through the cycle margins that are fortified by our operational and commercial excellence initiatives. Second, execute on attractive organic growth opportunities and Third, in a disciplined manner, pursue inorganic growth opportunities that broaden CMC's commercial portfolio, improve our customer value proposition, and meaningfully extend our growth runway. We are extremely excited about the journey CMC is embarking on and equally excited to share our vision with you in the near future. Returning to our third quarter results, CMCs reported net earnings of $119.4 million, or $1.02 for diluted shares, on net sales of $2.1 billion. We generated consolidated core EBITDA for the quarter of $256.1 million, producing a core EBITDA margin of 12.3% and a trailing EBITDA return on invested capital of 11.3%. Results in our North America steel group benefited from good underlying market fundamentals that yielded modest sequential margin expansion for steel products, healthy shipment levels of finished steel products, and stability in our downstream backlog volumes. Our Europe steel group continued a trend of improving financial performance, nearing break-even on an adjusted EBITDA basis. CMC's team in Poland should be commended for the excellent job they have done managing all elements of the business under their control. They are cost leaders in the European industry and have reached new heights of resourcefulness and flexibility while managing through this challenging environment. CMC's emerging businesses group generated strong results during the quarter, and its adjusted EBITDA margin returned to a level we believe to be more representative of the segment's potential. Now turning to CMC's markets in North America, construction activity remains healthy, and as I mentioned, fundamentals are broadly supportive. We experienced a typical seasonal uplift in rebar demand as we moved into the spring and summer construction season, And regional markets appear to be in good balance from an inventory and import perspective. This environment has provided the backdrop for stable to modestly improving steel product margins at well above historic levels. We continue to see a good pipeline of future construction projects coming to the market as measured by bidding activity within our downstream operations. This view is mirrored by key external forward-looking indicators, such as the Dodge Momentum Index, which remains 40% above pre-pandemic levels. Within this environment, we have been able to maintain seasonally appropriate levels of new contract bookings and a stable downstream backlog. We are also starting to see signs of increased infrastructure activity across several of our geographic areas. As shown on slide nine of the supplemental presentation, highway construction is the largest and most usage-intensive market for rebar, so it is very encouraging to see growing demand. During the quarter, shipment volumes of fabricated rebar and mill direct material increased on both a sequential and year-over-year basis. Projects that were awarded over the last two years are entering the construction phase and beginning to consume steel. Additionally, there continues to be a solid pipeline of work entering the market for bidding. Texas in particular has seen an uptick in activity with the level of highway lettings this spring reaching multi-decade highs. Based on our current visibility and conversations with customers, we expect momentum in highway construction to build in the coming quarters and years. Leading forecasters anticipate similar trends. The Portland Cement Association expects cement consumption for highways and streets to grow approximately 4% in calendar year 2024 and approximately 5% in 2025. Dodge Analytics expects new highway construction starts to increase by 29% on an inflation-adjusted basis in 2024, following little change in either 2022 or 2023. Beyond highways, we are seeing good year-over-year growth in demand for public works, institutional buildings, and data centers. Construction activity and rebar consumption at manufacturing projects remain well above historic levels. That said, shipments have leveled off recently as we wait for the next round of construction to commence at several semiconductor plants. We believe this trend is transitory given the recent CHPSAC funding allocations and public commitments by sponsors to expand facilities. While structural forces are driving activity within infrastructure, reshoring, data centers, and energy projects, the market for interest interest rate-sensitive construction such as warehousing, office, and multifamily residential remains softer. An inflection in interest rates could provide some support, particularly within the residential sector where a significant shortage of housing units exists, but affordability has restricted construction activity. Several third-party estimates indicate the U.S. is facing a housing shortage of 1.5 to 3 million units, which need to be addressed at some point in the future. With each new unit consuming one to one and a half tons of rebar, we believe efforts to close the housing supply gap would meaningfully increase consumption. Based on each of the structural trends I just mentioned, we continue to believe that we are entering a once in a generation investment cycle that will power construction activity for years to come. These opportunities should extend well beyond our traditional steel value chain and reach into CMC's other key solution offerings like geogrid, geopier, anchoring systems, and high-performance reinforcing steel. In fact, we are seeing signs of this recurring across our emerging businesses group footprint. Interest has been good from large manufacturing projects, including semiconductor facilities and major electric vehicle plants. Activity is also increasing in solar, where the Inflation Reduction Act is driving investment in large-scale installations across several regions of the U.S. CMC's geogrid solutions are used to provide access roads that aid initial construction as well as ongoing maintenance. In the future, construction of these solar fields can be expected to also benefit demand for our anchoring systems as new electrical transmission lines and substations are required to connect them to the energy grid. Large projects are emerging in infrastructure, particularly for port construction and rehabilitation, which benefits TENSAR's business as well as its performance reinforcing steel offerings of high strength and corrosion resistant products. Turning to the Europe Steel Group, the market environment was similar to last quarter, which marked a meaningful improvement from late fiscal 2023 and the first quarter of 2024. Consumption of long steel products have stabilized, but remains well below historic levels. Polish steelmakers are demonstrating good discipline through significant supply reductions that have facilitated a rebalancing of the market. Some of the beneficial impact of lower domestic production has been offset by increased imports from nearby countries, as steelmakers seek alternatives to weak home markets. Absent this dynamic, we believe the Polish long steel market could be further along in its recovery. As it stands today, the current supply-demand balance, even with increased imports, has provided a backdrop for greater stability in steel pricing and metal margins. We are seeing encouraging signs of a macroeconomic inflection in Poland. Inflation has cooled significantly and is now back to more normalized levels. The rate of GDP growth is expected to reach nearly 3% in 2024 with both residential construction and government sponsored investment on the rise. We are cautiously optimistic that the emerging macro improvement will provide an environment for our Europe Steel Group to continue moving closer to break even during the fourth quarter of fiscal 2024. Now I would like to provide a brief update on the progress we've made during the quarter on key strategic projects. At our new Arizona micro mill, we focused our efforts during the quarter on commissioning merchant bar quality product, or MBQ. As noted in our last earnings call, this action was intended to address pockets of excess rebar inventory that developed following the historic levels of rainfall in California during the second quarter. This surplus has been largely eliminated through a combination of better seasonal consumption and our market leadership in executing the temporary supply adjustments. As a result of the third quarter emphasis on MBQ, the AZ-2 team has now successfully produced key product sizes in four of the six product families that the plant is designed to make. It also accelerated our ability to begin supplying the Western U.S. with a suite of offerings that will eventually include nearly 200 different SKUs. Given improved inventory levels across the rebar supply chain and progress made in commissioning MBQ, we anticipate moving back to a more standard production schedule with a greater mix of rebar during the fourth quarter. Our current view is that the plant should achieve EBITDA break even on a monthly basis in the fourth quarter of fiscal 2024 or early in the first quarter of fiscal 2025. Work at CMC's steel West Virginia site is progressing well and we are on plan for startup in late calendar 2025. Foundations are nearly complete and we have begun receiving equipment deliveries. We remain very excited about these key organic growth projects which we expect, when fully operational, will lower costs to serve our markets, expand our product reach, and unlock meaningful internal synergies within our operational network. With that, I will turn the discussion over to Paul to provide more detail on our financial results.

Thank you, Peter, and good morning to everyone on the call. As noted earlier, We reported fiscal third quarter 2024 net earnings of $119.4 million, or $1.02 per diluted share, compared to prior year levels of $234 million and $1.98, respectively. You will have noticed from our press release this morning that we are no longer adding back Arizona 2 commissioning costs to either adjusted earnings or core EBITDA. This decision was made in light of heightened scrutiny around non-GAAP measures, particularly those involving operational startup costs. Though these adjustments will no longer be reflected in CMC's non-GAAP measures, we plan to provide quantification of startup costs as we view them as temporary in nature and not representative of our long-term earnings capability. For the third quarter, CMC incurred mill operational commissioning costs of $17.2 million on an after-tax basis. On a pre-tax basis and excluding depreciation, mill operational commissioning costs were $11.8 million. Consolidated core EBITDA was $256.1 million for the third quarter of 2024. representing a decline from the $384.5 million generated during the prior year period, but still a historically strong result. Slide 12 of the supplemental presentation illustrates the year-to-year changes in CMC's quarterly financial performance. Profitability at our North American and Europe steel groups were negatively impacted by lower margins over scrap. while benefiting from improved controllable cost performance. Adjusted EBITDA was unchanged in CMC's emerging business group, while consolidated core EBITDA margin of 12.3% remained above average historical levels in compares to 16.4% a year ago. CMC's North American Steel Group generated adjusted EBITDA of $246.3 million for the quarter, equal to $217 per ton of finished steel shipped. Segment-adjusted EBITDA decreased on a year-over-year basis, driven primarily by lower margin over scrap costs on steel and downstream products. This pressure was partially offset by improved controllable costs on a per-ton basis. The adjusted EBITDA margin for the North American Steel Group was 14.7% compared to 20.2% in the prior year period. We protect ourselves against price volatility exposure in the key non-ferrous metals that we process at our recycling facilities. As a result of the historic run-up of copper prices that occurred during the quarter, We incurred an approximate $6 million charge during the quarter related to our open positions. As indicated earlier, rebar demand was healthy during the quarter, and we experienced a normal season uptick in volumes. Finished steel shipments increased by 12.3% on a sequential basis, with similar performance across all geographies. Shipment volumes declined modestly on a year-over-year basis. And steel product metal margins increased marginally during this quarter and continues to demonstrate stability throughout fiscal 2024. Turning to slide 14 of the supplemental deck, our Europe Steel Group reported an adjusted EBITDA loss of $4.2 million for the third quarter of 2024. This compares to a loss of $8.6 million in the prior quarter and marks the trend of continued improvement from the levels of the fourth quarter of fiscal 2023 and the first quarter of fiscal 2024, during which time quarterly losses averaged $30 million, excluding the impact of energy rebates. The sequential improvement was driven by higher margin over scrap costs, increased shipment volumes, and lower controllable costs per ton. Controllable cost performance improved both sequentially and on a year-over-year basis as a result of lower energy pricing and operational measures taken across the footprint. As Peter mentioned, there have been some encouraging signs that the Polish market is past the bottom, that the national economy is in a recovery mode. The emerging business group third quarter net sales of $188.6 million and adjusted EBITDA of $38.2 million were unchanged compared to the prior year period. On a sequential basis, net sales increased by 20.9%, while adjusted EBITDA improved by 113%, marking a strong rebound from the second quarter levels that were depressed due to the challenging weather. Activity benefited from improved seasonal demand and the startup of several European and Middle East projects, as well as strong product-specific demand for our proprietary performance-reinforcing steel. A healthy pipeline of new projects and good success in new contract awards provide for a strong order book as we exited the quarter. Adjusted EBITDA margin for the emerging business group was 20.3%, was flat compared to a year-ago period, but a significant recovery from our second quarter. Margin benefited from a richer mix of CMC's latest and higher margin geogrid solution, as well as our proprietary reinforcing steels. Moving to the balance sheet, as of May 31st, cash and cash equivalents totaled $698.3 million. In addition, we had approximately $794 million of availability under our credit and accounts receivable facilities, bringing total liquidity to just under $1.5 billion. During the quarter, we generated $197.9 million of cash from operating activities, which included a modest release of cash from working capital. Capital expenditures of $82 million were driven by construction activity principally related to our steel West Virginia micromill project. CMC's leverage metrics remain attractive and have improved significantly over the last several fiscal years. As can be seen on slide 19, our net debt to EBITDA ratio now sits at just 0.5 times, while net debt to capitalization is only 9%. We believe our robust balance sheet and overall financial strength provide us the 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 25.5% in the third quarter. The year-to-date figure through three quarters stands at 24%, and we anticipate the effective full-year tax rate of being between 24% and 25%. Turning to CMC's fiscal 2024 capital spending outlook, we are reducing our guidance to a range of between $400 and $425 million. This is down meaningfully from the outlook we previously shared of $550 to $600 million. The reason for this adjustment is the timing of specific payments related to equipment purchases for Steel West Virginia, which will slip from late fiscal 2024 into early fiscal 2025. This development only reflects recognition of payments and is not expected to impact the construction timeline or the startup for CMC's newest micromill. As outlined on previous calls, CMC targets a prudent and balanced approach to capital allocation. Our first priority is value accretive growth that furthers our strategic strategy and strengthens our business. Second is providing our shareholders with an attractive level of cash distributions in the form of both dividends and share repurchases. To this end, CMC has returned approximately $186 million to our shareholders through the first three quarters of fiscal 2024, equal to 49% of our net earnings. Looking at the third quarter, CMC repurchased approximately 931,000 shares at an average price of $55.64 per share. As of May 31st, we had $458.6 million available for repurchase under our current authorization. With this, that concludes my remarks, and I'll turn it back to Peter for additional comments on CMC's outlook.