Commercial Metals Company

Hello and welcome, everyone, to the fiscal 2025 second quarter earnings call for CMC. Joining me today on today's call are Peter Matt, CMC's President and Chief Executive Officer, and Mr. 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'll have a few instructions at that time. I would like to remind all participants that today's discussion contains forward-looking statements including with respect to economic conditions, effects of legislation and trade actions, 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 and its anticipated benefits, 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 risk and uncertainties. The company's earnings release, most recent annual report on Form 10-K and other filings with the U.S. 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, CMC 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 references to the company's fiscal year and fiscal quarter. And now for opening remarks and introductions, I would like to turn the call over to Peter. Please begin, sir.

Good morning, everyone, and thank you for joining CMC's second quarter earnings conference call. I will start this morning's discussion with an overview of CMC's second quarter results. I will then provide commentary on current market conditions and share a brief update on CMC's strategic efforts. Paul will cover the second quarter's financial information in more detail, and I will conclude our outlook for the third fiscal quarter of 2025. We will then open the call for 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. Before discussing CMC's financial performance, I would like to highlight our team's outstanding safety performance. You have heard me mention many times that our highest priority is ensuring the safety and well-being of our people. We want everyone to lead their shift in the same condition in which they arrived. The first half of fiscal 2025 marks a new milestone on our journey toward that goal. we achieved a record low incident rate that was consistent with world-class performance. Additionally, and even more impressively, the number of OSHA recordable events was the lowest since the second half of fiscal 2018, when the company had nearly 4,500 fewer employees. I would like to congratulate the CMC team on this great accomplishment and challenge you to keep pushing towards the ultimate goal of zero harm. CMC reported net earnings for the second quarter of 25.5 million, or 22 cents per diluted share, on net sales of 1.8 billion. The result included 3.9 million of after-tax charges, which Paul will take you through in more detail. Excluding these items, adjusted earnings were $29.3 million or $0.26 per diluted share. Though down from recent earnings levels, I am proud of the CMC team's performance during the second quarter. Each of our segments was able to drive financial benefits to the bottom line by executing on targeted cost optimization and margin enhancement opportunities. These efforts were in addition to CMC's Strategic Operational and Commercial Excellence Initiatives, or TAG, and were aimed at pulling all levers of value within our reach to increase the degree of control over our financial performance within an uncertain economic environment. I couldn't be more pleased with how our businesses across our organization responded to the challenge by identifying and executing on available opportunities, generating real benefits, and setting the company up for even greater success as market conditions improve. Results in our North American Steel Group during the second quarter continued to be impacted by economic uncertainty, which has been an overhang on steel pricing and slowed the pace of new construction project awards. As I will discuss in a moment, we saw several bright spots emerge during the latter part of the second quarter, which we believe signal a near-term inflection in profitability. Our Europe Steel Group achieved a break-even performance, marking an improvement on both a sequential and a year-over-year basis when energy cost rebates are excluded. Excellent cost management continues to be a meaningful benefit to financial results. we also experienced modestly improved market conditions during the quarter as import flows moderated from recent elevated levels. Profitability for CMC's emerging businesses group also increased sequentially and compared to the year-ago period. Our performance-reinforcing steel division was a standout during the quarter, driven by strong demand for its proprietary corrosion-resistant solutions but all divisions within the segment perform well and have project pipelines to support a strong second half of the year. Turning now to CMC's markets in North America, the construction and industrial activity that drive consumption of our products was resilient during the quarter, which resulted in year-over-year growth of finished product shipments. Similar to the last two quarters, uncertainty continued to negatively impact the pace of new project awards for private construction. Project owners remain concerned about the future trend in interest rates and are now weighing in the effect of tariffs and other governmental policies on the economy. Though new work is slow to award, the pipeline of potential projects continues to grow, resulting in what we view as a significant amount of pent-up demand. We see evidence of this increase in pent-up demand in our downstream bid volumes, as well as the Dodge Momentum Index, which now sits at an all-time high and has registered growth in planning across a number of market segments. We also hear about it in our conversations with customers who remain optimistic regarding the year ahead. There are a handful of notable exceptions to the trend of slower awards that are worth mentioning. First is highway and infrastructure, where activity is increasing nicely, and we expect to see additional large projects entering the market during the spring and summer months. Next, unsurprisingly, is the data center segment, which is currently very strong and can be expected to continue growing rapidly for the foreseeable future. This view is solidified by recent announcements by leading technology companies to invest over a trillion in digital infrastructure in the coming years. Additionally, investment in LNG capacity is ramping up under the new administration, and we have seen some major projects announced while others are currently nearing construction. This type of work is not only a solid demand generator for our traditional rebar products, but also presents attractive opportunities for our higher value-added solutions, such as cryogenic steel and geogrid. As noted in our press release this morning, several encouraging developments emerged within our North American markets during the latter part of the second quarter. These included improved scrap market conditions and an inflection in long steel price levels, the combination of which we believe indicates that we have reached a floor in steel product metal margins and should see expansion heading into the third and fourth quarters. Higher mill pricing has carried over into our downstream operations, where average price levels on project bids and awards have risen proportionately. Lastly, we experienced the second highest volume of new project awards since late fiscal 2022, leading to a healthy sequential increase in downstream backlog. The rebound in awards does not necessarily signal that the slowing effect of uncertainty is dissipating. However, we believe it does show that there is a meaningful number of projects that owners are eager to construct despite the present challenges. Before leaving our North American market discussion, I would like to zoom out a bit from talk of uncertainty and take a broader view of the landscape. The last five years have brought tremendous economic, geopolitical, and technological change. Governments and businesses have responded by undertaking massive investment programs to realign supply chains, rebuild infrastructure, increase energy production and transmission, and upgrade computing capabilities. The common thread running through all of these developments is construction. As the pace of change accelerates, it is construction that makes this adaptation possible. This dynamism gives me a high degree of confidence in the future of CMC's markets. We likely won't be able to predict the next trend, but I'm confident that it will require construction solutions offered by our company. That's why I think it's important to keep a sense of perspective and look beyond the temporary slowness. Shifting gears to our European segment, conditions improved moderately compared to recent periods, largely as a function of reduced import flows and long steel products from Germany. Better balance in the market provided space for our team to maintain shipment levels on a sequential basis despite seasonally weaker demand. We also experienced some modest relief on metal margins and were able to increase pricing by $25 per ton from the low reached in December of 2024. Consumption remains in line with historical levels, but should grow in light of momentum within the residential market and increased funding for large infrastructure and energy projects. As noted on slide 11 of the supplemental presentation, numerous green shoots have emerged that could meaningfully impact Polish and Central European steel markets in the quarters and years ahead. Perhaps the most notable recent development is the German proposal to lift its budget constraints to modernize its military and invest $500 billion in infrastructure. Such an action could substantially increase the country's steel demand and redirect material currently flowing into the Polish market. Many other nations within the EU are also suggesting that significant incremental investment needs to be made in defense capabilities, which will include construction activities and should stimulate demand for long steel products. In addition, an end to the conflict in Ukraine would boost general business sentiment across the continent and could lead to a sizable rebuilding effort. Inside Poland, many large infrastructure projects of a national scale are nearing construction phase and should help support rebar consumption over a multi-year period. Lastly, on the supply side, there is increased discussion within the European Union regarding creating and protecting an attractive environment for capital to be invested in industrial activities. Taken together, these demand and supply developments could substantially improve what has been a very challenging industry landscape. It is too early to be definitive about any of these outcomes, but we are starting from a low base, and I think we can be cautiously optimistic. Next, I would like to provide an update on a few of CMC's strategic initiatives. As we discussed in the past, CMC is taking steps to achieve its ambitious vision to drive the next phase of value accretive growth. As outlined on slide 10, our aim with this strategy is threefold. First, to achieve sustainably higher, less volatile through the cycle margins and returns that are fortified by our operational and commercial excellence initiatives. to execute on attractive organic growth opportunities, and third, in a disciplined manner, 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. Earlier this fiscal year, we introduced Transform, Advance, and Grow, or TAG, our enterprise-wide operational and commercial excellence program with the goal of generating a permanent improvement in our margin profile. This program is unlike any other ever launched at CMC due to the breadth and the depth of its reach as well as its visibility and accountability structures built to support it. Every line of business in every support function and every support function, excuse me, has been involved in identifying and quantifying opportunities that now include over 150 different initiatives. Currently, CMC is executing over 25 first wave initiatives with very strong early results. Last quarter, we provided some color regarding two specific initiatives aimed at reducing alloy consumption and improving melt shop yields. with a combined sustainable annual benefit of 10 to 15 million. These programs continue to perform well and are expected to become permanent improvements to our cost structure. This quarter, I would like to highlight our efforts to enhance CMC's logistical capabilities. This initiative is expected to drive between 5 million and 10 million in annual benefits by optimizing delivery routes improving asset utilization, increasing the use of rail versus truck, and more effectively capturing backhaul opportunities. Progress to date has been encouraging, and just like our alloy and melt shop initiatives, we expect our logistics efforts to translate into sustainable financial benefits. Beyond the initiatives mentioned, several other major operational and commercial work streams are underway. Overall, our performance to date, as well as the focused determination of the teams from across the organization, give me confidence that CMC's TAG-related efforts will provide approximately $25 million of benefit over the remainder of fiscal 2025, in addition to the $15 million that we have already achieved in the year. And the really exciting part is that there's a lot more to come in the years ahead. We continued to make progress at our Arizona 2 micromill, which included producing an increased volume of merchant bar products during the quarter. Looking ahead, we expect to achieve meaningful advancements in production volumes during the third and fourth quarters, with growth in both rebar and merchant bar output. Meanwhile, progress at CMC's Steel West Virginia site remains on track. and we are currently on target for a commissioning process to begin in the late part of 2025. Beyond our mill projects, we are also making investments to meet customer demand and strengthen our core offerings by growing our capabilities in more specialized solutions. These undertakings include the expansion of CMC's post-tension cable production in our North America Steel Group, and adding a second galvabar coating line and increasing geogrid manufacturing capability in our emerging businesses group. These investments and others like them require significantly less capital than our traditional steel business, but generate high returns on capital and strong cash flows. We are making good progress on these projects and expect each of them to be placed into service over the next 18 months. On the inorganic front, we remain interested in entering attractive adjacencies to our business where we believe we have a clear right to play and opportunity to offer immediate value given CMC's current customer knowledge, market position, and operational capabilities. We are targeting segments of the $150 billion early-stage construction market that touch the types of projects we are already servicing and feature higher, more stable margins. We anticipate these adjacent markets will also benefit from the megatrends that are expected to drive construction activity for years to come. With that, I'll turn the call over to Paul.

Paul Farmer- Thank you, Peter, and good morning to everyone on the call. As noted earlier, we reported fiscal second quarter 2025 net earnings of $25.5 million, or $0.22 per diluted share, compared to net earnings of $85.8 million and net earnings per diluted share of $0.73 in the prior year period. Excluding estimated net after-tax charges of approximately $3.9 million, Adjusted earnings for the quarter totaled $29.3 million, or $0.26 per diluted share, compared to $85.9 million and $0.73 per diluted share, respectively, in the prior year period. Charges incurred during the quarter were primarily related to interest expense on our judgment amount associated with the previously disclosed Pacific Steel Group litigation verdict reached in November. Consolidated core EBITDA was $131 million for the second quarter of 2025, representing a decline from the $212.1 million generated during the prior year period. Slide 13 of the supplemental presentation illustrates the year-to-year changes in CMC's quarterly financial performance. Profitability at our North American Steel Group was negatively impacted by lower margins over scrap while EBITDA at both our Europe Steel Group and Emerging Business Group increased compared to the second quarter of fiscal 24. Consolidated core EBITDA margins of 7.5 percent compared to 11.5 percent in the prior year period. DMC's North American Steel Group generated adjusted EBITDA of 128.8 million for the quarter, equal to $123 per ton of finished steel shipped. Segment-adjusted EBITDA decreased 42 percent compared to the prior year period, driven primarily by lower margin over scrap costs on both steel and downstream products. We believe this represents a trough level of EBITDA and expect earnings to rise as we enter 2025 construction season and as a result of increased volume, realizing price increases that have been announced, and continued focus on our costs. Controllable cost per ton of finished steel was largely unchanged on a year-over-year basis, with cost management efforts offsetting the impact of weather-related operational disruptions and approximately $8 million of unrealized losses on copper hedging positions due to the volatility in this commodity over the past month. The adjusted EBITDA margin in the North American steel group of 9.3% compares to 15% in the second quarter of 2024. As Peter indicated, demand for long steel products was resilient during the quarter, as demonstrated by our finished steel shipments increasing by 3.3% compared to a year ago. Turning to slide 15 of the supplemental deck, our Europe Steel Group reported adjusted EBITDA of $0.8 million for the second quarter of 2025, compared to a loss of $8.6 million in the prior year period. The improvement was driven by ongoing cost management efforts, as well as a $4 million rebate for natural gas costs and increased shipment volumes. Similar to recent quarters, the team in Poland continued to drive efficiency gains throughout the operations with success in nearly every major cost category, including energy, consumable usage, maintenance, labor, and overhead. These efforts have allowed the Europe Steel Group to remain roughly cash flow break-even within a challenging market backdrop. Most of these improvements are permanent in nature and set us up well to capitalize on market recovery. As Peter mentioned, we also saw a pullback in the level of long steel imports into Poland that provided CMC the opportunity to achieve strong shipping volumes within a seasonally weaker second quarter and to modestly increase metal margins on a sequential basis. The emerging business group second quarter net sales of 158.9 million was an increase of 1.8% on a year-over-year basis, while adjusted EBITDA of 23.5 million increased by 31%. The improvement was largely driven by strong demand for our proprietary products within the performance-reinforcing steel division. This business has had success in penetrating several major infrastructure projects requiring enhanced lifespan strength and corrosion-resistant characteristics. Financial performance of CMC's TNSAR and construction services divisions were little changed from a year ago, but it's worth noting that TNSAR saw good recovery from sequential Q1 results. Indications of future market conditions remained encouraging with pipeline measures such as project quotes and new planning activity at healthy levels. Earnings at CMC's impact metals division continue to be impacted negatively by weaker truck and trailer demand, though we are seeing signs that conditions are beginning to stabilize in this market. A higher mix of sales of our performance-reinforcing steel within the EBG total sales, as well as the continued adoption of Tensar's latest geogrid solutions, led to a 330 basis point improvement in adjusted EBITDA margin compared to the second quarter of 2024. Moving to the balance sheet, as of February 28th, cash and cash equivalents totaled $758.4 million. In addition, we had approximately $815 million of availability under credit and accounts receivable facilities, bringing total liquidity to just under $1.6 billion. During the quarter, we generated $32.4 million of cash from operating activities, which included a $67.5 million usage of cash for working capital, principally driven by the scrap cost increase which occurred during the quarter. Capital expenditures of $86.3 million were largely driven by construction activity related to our steel West Virginia micro-mill project. In addition, we received $25 million in cash incentives during the quarter related to the Steel West Virginia project. And in total, we anticipate receiving approximately $75 million of upfront incentives related to this project. Our leverage metrics remain attractive and have improved significantly over the past several years, as can be seen on slide 20 For the second quarter of 2025, our net debt to adjusted EBITDA ratio now sits at one time, while the debt to capitalization is only 18 percent, 8 percent. 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 have stated in the past, we value the financial flexibility that our strong balance sheet provides us, as well as the support it offers to execute the strategic growth plan that Peter outlined. As we implement this ambitious plan, we will target a through the cycle net leverage ratio at or below two times adjusted EBITDA. Turning to CMC's fiscal 2025 capital spending outlook, We now expect to invest between $550 and $600 million in total. This is down from previous guidance of between $630 and $680 million, with the reduction related to the timing of certain expenditures at CMC's West Virginia project. I would note that this adjustment does not affect the anticipated start date for commissioning of the new mill. As outlined in past earnings calls, CMC targets a prudent and balanced approach to capital allocation. Our first priority is value of creative growth that furthers our strategy and strengthens our business. Coming in a so close second is providing our shareholders with an attractive level of distributions in the form of both dividends and share repurchases. To this end, CMC returned approximately $68 million to our shareholders during the second quarter. CMC repurchased approximately 907,000 shares at an average price of $52.96 per share. As of February 28th, we had approximately $305.3 million available for repurchases under the current authorization. This concludes my remarks, and I'll turn it back to Peter for comments on our outlook.