Commercial Metals Company

Hello and welcome, everyone, to the fiscal 2025 first quarter earnings call for CMC. Joining me on today's call are Peter Matt, CMC's President and Chief Executive Officer, and Paul Lourdes, 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'll have a few instructions at that time. I would like to remind all participants that today's discussion contains foreign looking statements, including with respect to economic conditions, effects of legislation, U.S. steel import levels, construction activity, demands for finished steel products, the expected capabilities, benefits, and timeline for construction of new facilities, the company's operation, the company's strategic growth plan, legal proceedings, the company's future results of operations, financial measures, and capital spending. These statements reflect the company's beliefs based on current conditions, but are subject to risks and uncertainties. The company's earnings release, most recent annual report on Form 10-K, and other filings with the Securities and Exchange Commission. contain additional information concerning factors that could cause actual results to differ materially from those projected in forward-looking statements. Except as required by law, DMC does not assume any obligation to update, amend, or clarify these statements. 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 referenced to the company's fiscal year or fiscal quarter. And now, for opening remarks and introductions, I will turn the call over to Peter.

Good morning, everyone, and thank you for joining CMC's first quarter earnings conference call. I hope each of you had a wonderful holiday season. I will start this morning's discussion with an overview of CMC's first quarter results. I will then provide commentary on current market conditions and share an update on CMC's strategic efforts, after which I will offer a few brief remarks on a recent jury verdict reached in litigation against CMC and certain subsidiaries. Paul will cover the first quarter's financial information in more detail, and I will conclude with our outlook for the second fiscal quarter of 2025. We will then open the call to questions. As a reminder, additional information regarding the quarter is provided in the supplemental slides that accompany this call, which can be found on CMC's investor relations website. CMC reported a net loss for the first quarter of $175.7 million, or a loss of $1.54 per diluted share on sales of $1.9 billion. The result included a $264 million after-tax charge for litigation expense as a result of a verdict the company intends to appeal. Excluding this item, adjusted earnings were $88.5 million, or $0.78 per diluted share. From an operational perspective, CMC's underlying financial performance remained historically though down from recent periods. For the first quarter, we generated consolidated core EBITDA of $210.7 million, producing a core EBITDA margin of 11% and a trailing 12-month return on invested capital of 8.4%. Results in our North America steel group were impacted by economic uncertainty that has weighed on new construction activity and pressured steel pricing and margins. This was partially offset by strong late season demand for rebar as job sites worked to catch up from days lost to weather disruptions earlier in the year. Our Europe Steel Group returned to profitability on the receipt of an annual CO2 credit, while underlying business conditions remained challenging, similar to recent quarters. Excellent cost management continues to be a bright spot and I would like to commend our team for their ongoing efforts. Profitability for CMC's emerging businesses group softened during the first quarter, driven largely by dynamics we view as temporary in nature, including a lower margin sales mix and project delays encountered in our TENSAR division, and a slower truck and trailer market affecting impact metals. We do expect to recapture the earnings impact from the 10 SAR factors later in fiscal 2025. Some of the first quarter weakness was offset by healthy activity in our CMC construction services division and in our performance reinforcing steel division. Turning now to CMC's markets in North America, demand for finished steel products was robust during the first quarter. with shipments reaching the highest level since the third quarter of fiscal 2023. As mentioned previously, construction activity was stronger further into the calendar year in several geographies than is seasonally typical. The stretch of favorable weather across much of the country in October and November provided an opportunity for many job sites to play catch up after enduring weather-related disruptions during the spring and summer months. In fact, shipments remained higher than expected into the first few weeks of December and only cooled off with the arrival of the holidays. While shipment volumes due to ongoing construction projects were strong during the first quarter, we continued to feel the impact of market uncertainties. Customers remain hesitant to award new contracts which has resulted in an overhang on steel pricing and margins. We mentioned this reluctance to finalize new work during our fourth quarter conference call, and we saw little change during the first quarter. Though uncertainty related to the outcome of the US election has been resolved, questions remain about the future path of interest rates and the nature and speed of policy implementation by the incoming presidential administration. As a result of new construction projects being fewer and slower to award, competition has increased for the work that does come to the market, putting pressure on pricing and margins for our steel products. This hesitancy is widespread across most segments of the construction markets, with the notable exception of publicly funded work such as infrastructure. I should note, however, that the market signals can be difficult to interpret during the seasonally slower period we are currently in, particularly around the winter holidays. The next few months will be key to watch for signs of recovery as we will enter the typical season for contracting new construction work. As we mentioned during our last call, we believe these market conditions are transient in nature and will subside once greater clarity emerges, allowing strong underlying fundamentals to return. CMC's downstream bidding activity has remained resilient, which points to a solid pipeline of potential future projects. Our internal data is mirrored by external data points, such as the Dodge Momentum Index and insights from recent customer conversations. The Dodge Momentum Index, or DMI, measures the monthly value of construction projects entering the planning phase. Though off from its recent all-time high, the index remains 55% above its pre-pandemic average and appears to indicate that project owners are confident that construction activity will rebound as we move through 2025 and are building a sizable pipeline in preparation to act once conditions improve. A meaningful shift in business sentiment gives us hope that we may be nearing a turning point in our markets. As slide six of the supplemental presentation illustrates, optimism across many sectors has improved sharply over the last two months, driven by expectations for an improved regulatory environment, tax reforms, and policies to support U.S. manufacturing and job creation. In particular, the outlook among construction firms has improved notably, as evidenced by ENR's Construction Confidence Index, which recently hit its highest reading in over two years. I would also note that our recent conversations with customers indicate similar optimism about the future. Outside of the construction industry, both large and small businesses are feeling more confident about the months and quarters ahead. the NFIB's gauge of small business optimism registered the third strongest monthly increase in its 50-year history during November, while two separate measures of corporate CEO confidence also moved up meaningfully. These positive signals give us confidence that it is a matter of when and not if our markets return to growth. As we have discussed at length in the past, Powerful structural trends will benefit the US construction markets, including infrastructure investment, reshoring of manufacturing, energy transition, and transmission build-out, as well as measures to address chronic housing shortages. We believe these trends are in their early stages and will propel construction activity for years to come. Shifting gears to our Europe steel group, conditions were similar to recent quarters. Benefits from an improving Polish macroeconomic environment and supply discipline among domestic long steel producers have been offset by the influx of excess material from neighboring countries, namely Germany. Total imports of rebar are up 50% on a calendar year-to-date basis. while flows from Germany have increased by 75%. This foreign supply has more than matched the incremental demand from growing residential construction market and supply restraint from domestic players. As a result, margins remain under pressure. Amidst these difficult conditions, our team in Poland has performed commendably to manage all aspects of its business that can be controlled. taking an opportunistic commercial approach and aggressively managing costs. Based on our current view of the landscape, we would not anticipate a meaningful positive change in either the overall market environment or CMC's Europe Steel Group's earnings until an economic recovery develops in Germany or new sources of demand emerge, such as the rebuild of Ukraine. I would like to provide an update on a few of CMC's strategic initiatives. As we have discussed in the past, CMC is taking active steps to achieve our ambitious vision to drive the next phase of value of creative growth. As outlined on slide nine, our aim with this strategy is threefold. First, to achieve sustainably higher, less volatile through the cycle margins. that are fortified by our operational and commercial excellence initiatives. Second, to execute on attractive organic growth opportunities. And third, in a disciplined manner, to pursue inorganic growth opportunities that broaden CMC's commercial portfolio of early stage construction products, improve our customer value proposition, and meaningfully extend our growth runway. Last quarter, we introduced Transform, Advance, and Grow, or TAG as we call it, our enterprise-wide operational and commercial excellence initiative with the goal of generating a permanent improvement in our margin profile. This program is unlike any ever launched at CMC due to the breadth and depth of its reach as well as the visibility and the accountability structures built to support it. Every line of business, and every support function has been involved in identifying and quantifying opportunities that now include over 150 different initiatives. Currently, we are executing on the first wave of these initiatives and are seeing very strong early results. One such initiative is a program to reduce alloy consumption and waste. The effort is being led by process experts in coordination with melt shop operators from across our mill footprint. The team is working to minimize alloy costs while continuing to meet product quality specifications. We expect the efforts to date will produce a sustainable benefit of approximately $5 million annually. In another initiative, We are working to improve our melt shop yields through enhanced technical knowledge sharing, increased scrutiny around measurements and waste, and more disciplined process execution. We expect this effort to produce sustained benefits of between $5 and $10 million annually. These programs are just two of the larger initiatives that are being executed in the first wave and should provide a useful template for understanding the nature of these initiatives, how they are being delivered, and the overall scope and scale of CMC's broader TAG program. We have several other major operational and commercial work streams now underway that are intended to drive and sustain higher margins through a variety of pathways, including optimized logistics, lower insurance premiums, commercial excellence, and many more. Progress to date gives us confidence that our TAG-related efforts should provide financial benefit in fiscal 2025 with more to come in the years ahead. We are making solid progress on CMC's key organic growth projects, particularly at our new Arizona II facility. As a reminder, this plant is the first micromill in the world capable of producing both rebar and merchant bar product. and we are navigating the unique challenges that invariably come with any breakthrough technology. Good advancement is evidenced by the fact that our team was able to achieve two consecutive monthly production records at the end of the first quarter. Output levels should continue to increase as we move through fiscal 2025 and we expect to exit the year at a run rate near nameplate capacity of 500,000 tons annually. Meanwhile, progress at CMC's steel West Virginia site remains on track, and we are currently on target for the commissioning process to begin in late calendar 2025. On the inorganic front, we remain interested in entering attractive adjacencies for our business where we believe we have a clear right to play and an opportunity to offer immediate value given CMC's current customer knowledge, market positioning, and operational capabilities. We are targeting segments of the $150 billion early stage construction segment that touch the types of projects we are already servicing and feature higher, more stable margins. These adjacent markets should also benefit from megatrends that are expected to drive construction activity for years to come, which include infrastructure investment, reshoring, the general scarcity of labor, and environmental changes driving increased extreme weather conditions. Before I turn things over to Paul, I would like to make a brief comment on the litigation between CMC and Pacific Steel Group. In its complaint filed in the California courts in 2020, Pacific Steel Group claimed, among other things, various restraints on trade by CMC. A trial on Pacific Steel Group's claims concluded with a jury verdict and judgment in favor of Pacific Steel Group in an amount of $110 million, which was subsequently trebled as a matter of law. is very confident in how we conduct our business practices, and we were very surprised and deeply disappointed by the outcome of this trial. We are vigorously pursuing all appropriate avenues to appeal the decision. Because this litigation is ongoing, we are very limited in what we can discuss about the case or the potential outcome of the appeal process.

Paul? Thank you, Peter, and good morning to everyone on the call. As noted earlier, we reported a fiscal first quarter 2025 net loss of $175.7 million or a loss of $1.54 per diluted share, compared to net earnings of $176.3 million and net earnings per diluted share of $1.49 in the prior year period. Excluding an approximate $265 million after-tax charge related to the litigation accrual, Adjusted earnings for the quarter totaled $88.5 million or 78 cents per diluted share compared to $176.3 million and $1.49 per diluted share respectively in the prior year period. Consolidated core EBITDA was $210.7 million for the first quarter of 2025 representing a decline from $313.7 million generated during the prior year period. Slide 12 of the supplemental presentation illustrates the year-to-year changes in CMC's quarterly performance. Profitability at our North American steel group was negatively impacted by lower margins over scrap, while adjusted EBITDA at our Europe steel group declined on lower energy rebates. Results for CMC's emerging business group were hindered by lower contributions by our TENSAR and impact metals divisions. Consolidated core EBITDA margin of 11% remained above historical levels and compared to 15.7% in the prior year period. CMC's North American Steel Group generated adjusted EBITDA of $188.2 million for the quarter, equal to $164 per ton of finished steel shipped. Segment adjusted EBITDA decreased 29% compared to the prior year period, driven primarily by lower margin over scrap costs on steel and downstream products. Controllable costs per ton of finished steel shipped improved on both a sequential and year-over-year basis, helped by lower freight costs, better cost performance at our Arizona 2 micromill, and improved fixed cost leverage across CMC's mill footprint. The adjusted EBITDA margin for the North American steel group of 12.4% compares to 13.5% in the fourth quarter of 2024. As Peter indicated earlier, demand for long steel products was strong during the quarter. Finished steel shipments increased by 4.4% compared to a year ago and were up 2.3% on a sequential basis, which compares to a normal fourth quarter to first quarter seasonal reduction of between 4% and 7%. Turning to slide 14 of the supplemental deck, our Europe Steel Group reported adjusted EBITDA of $25.8 million for the first quarter of 2025, compared to $38.9 million in the prior year period. The reduction was driven by lower receipts from energy cost rebate programs. During this year's first quarter, total receipts amounted to $44.1 million and came solely from an annual CO2 credit, compared to receipts in the prior year period of $66.3 million from two different programs, $27.7 million from the annual CO2 credit, and $38.6 million related to a temporary energy cost reimbursement program. Polluting the impact of energy rebates, Europe Steel Group's financial performance improved by $9.2 million from the prior year period, as strong cost management efforts more than offset a 9% decline in shipment and stagnant metal margins. Results for the quarter include approximately $4.7 million in costs related to planned maintenance overhauls and a $1.2 million expense associated with early retirement and layoff costs. Employee-related costs are expected to drive further improvements in controllable costs at the facility as we move forward. Margin levels have been range-bound between roughly $270 per ton and $290 per ton for the last six quarters, despite an improving Polish economic environment and positive developments within the Polish construction sector. We would expect margins to remain under pressure until the level of rebar imports begins to recede, a scenario that would likely require an economic recovery in Germany or new sources of demand, such as the rebuild in Ukraine. Merging business group first quarter net sales of 169.4 million decreased by 4.4% on a year-over-year basis, while adjusted EBITDA of 22.7% sorry, 22.7 million declined by 26.6%. The decline was driven by lower margin product mix and project delays within our TENSAR division, as well as reduced truck and trailer sales at CMC's impact metals division. We believe that the reduced profits in the TENSAR division incurred during the quarter should be largely recaptured later in fiscal 2025 primarily in the third and fourth quarters. Internally, our annual outlook for the emerging business group is unchanged in the wake of the first quarter disappointing results. Strong project-related shipments of performance-reinforcing steel and healthy activity levels in our construction services business help to offset some of the softness elsewhere in the EBG group. A weaker sales mix during the first quarter led to a 400 basis point decline in the adjusted EBITDA margin compared to the first quarter of 2024. But we expect recovery for the remainder of the year. As of November 30th, cash and cash equivalents totaled 856.1 million. In addition, we had approximately 815 million of availability under our credit and accounts receivable facilities, bringing total liquidity to just under $1.7 billion. During the quarter, we generated $213 million of cash from operating activities, which included a $26.2 million release of cash from working capital. Capital expenditures of $118.2 million were largely driven by construction activity related to a steel West Virginia micromill project. DMC's leverage metrics remain attractive and have improved significantly over the last several fiscal years. As can be seen on slide 19, for the first fiscal quarter of 2025, our net debt to adjusted EBITDA ratio now sits at just 0.6 times, while net debt to capitalization is only 6%. 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. As we look towards fiscal 2025 capital spend outlook, we expect to invest between $630 and $680 million in total. Outside of normal sustaining investments of approximately $250 million in CAPEX, Our 2025 includes substantial dollars related to the construction of Steel West Virginia. As a reminder, approximately $200 million of spending related to this project was deferred from fiscal 24 into 2025. As outlined on past earnings calls, CMC targets a prudent and balanced approach to capital allocation. Our first priority is value accretive growth that furthers our strategy and strengthens our business. Coming in a close 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 returned approximately $71 million to our shareholders during the first quarter, as we repurchased approximately 919,000 shares at an average price of $54.83 per share. As of November 30th, we had $353.4 million available for repurchase under our current authorization. I'll now turn the call back over to Peter for additional comments on CMC's financial outlook. Thank you, Paul.