Commercial Metals Company (NYSE:CMC) Q1 2024 Earnings Call Transcript
Commercial Metals Company (NYSE:CMC) Q1 2024 Earnings Call Transcript January 8, 2024
Commercial Metals Company beats earnings expectations. Reported EPS is $1.63, expectations were $1.45. CMC isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome, everyone, to the First 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. [Operator Instructions] 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 the 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 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 under 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 would like to turn the call over to Peter.
Peter Matt: 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. As we reported in our press release issued this morning, the first quarter of fiscal 2024 marked another period of strong financial performance with core EBITDA, core EBITDA margin and free cash flow continuing at historically high levels. I would like to thank CMC's 13,000 employees who make these results, make results like these possible. Your hard work and focused efforts for customers are the driving force behind CMC's success. I will start today's call with a few comments on CMC's first quarter performance, and then discuss the rationale behind the realignment of our reportable segments, and then provide an update on the current market environment and our strategic growth investments.
Paul will cover the quarter's financial information in more detail, and I will conclude with our outlook for the second fiscal quarter and beyond. We will then open the call to questions. 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 commenting on CMC's financial performance during the quarter, I would like to highlight our exceptional safety performance. Our incident rate was the best on record, meaning we work safer than ever before. Keeping our employees safe is a core tenant of our culture and priority number one for every team member from the shop floor to executive leadership. Performance in the first quarter demonstrates how seriously we take this responsibility.
Despite records being set, there is more work to be done to push forward our ultimate goal of zero incidents. As I mentioned, CMC's first quarter financial results were among the strongest in our company's history, though down from recent record levels. CMC generated net earnings of $176.3 million, or $1.49 per diluted share, on net sales of $2 billion. Excluding the impact of non-operational items, which Paul will cover in detail, adjusted earnings were $192.7 million, or $1.63 per diluted share. CMC generated consolidated core EBITDA for the quarter of $325.3 million, producing a core margin of 16.2%, and an annualized return on invested capital of 14.9%. Results in our North America Steel Group were supported by healthy construction activity and near record margins on downstream products.
Our Europe Steel Group performed well against a difficult market backdrop, benefiting substantially from the recognition of $66.3 million related to energy cost rebate programs. The Emerging Businesses Group was a solid contributor to profits during the quarter, driven by supportive conditions in our North American markets, customers continued adoption of our high-margin proprietary solutions, and the recent acquisition of EDSCO Fasteners industry-leading portfolio of Anchoring Systems. I would like to next cover the recent realignment of CMC's reportable segments. This decision follows important changes we have made to our organizational structure to better facilitate the execution of our strategy. From a financial point of view, our objectives are to drive higher through-the-cycle margins and accelerate value accretive growth.
The new structure also better reflects the varying characteristics and needs of our business groups. Internally, we believe these changes will greatly enhance visibility into our key value drivers helping unlock commercial and operational synergies across the business, optimize capital resource planning and better focus our decision-making on value creation. Externally, CMC's realigned segment reporting should provide enhanced insights into the factors that drive value creation across the company and enhanced the investment community's understanding of our strategy, future growth plans and capital allocation. Slide 5 of the supplemental presentation offers a brief outline of the strategic focus for each business group. Our North America and Europe Steel Groups operate in large, more mature markets where they have a high degree of penetration and strong positions.
Their primary focus areas will be operational and commercial optimization to produce higher through-the-cycle margins with less volatility and value accretive growth that strengthens our core operations and enhances CMC's customer value proposition. The businesses in our Emerging Businesses Group or EBG, while often serving mature markets can bring innovative solutions with relatively low levels of penetration that typically have higher more stable margins. As an example, we estimate current penetration of CMC's Tensar Geogrid solutions is around 10% to 15% of the addressable market with margins that are higher than our overall Group margins. Our new structure will provide the attention and stewardship to these businesses to enable them to realize their full potential in the CMC portfolio.
Accordingly, we expect that over time, EBG will grow faster and maintain higher through-the-cycle margins compared with the more mature steel groups, driven by an increasing levels of market penetration, commercial synergies across our portfolio, organic investments and acquisitions. A key role of EBG will be to strengthen our core steel business through the creation of commercial solutions that enhance the value of our steel offerings to customers. In summary, we are excited about what these organizational and reporting changes will mean for the future of CMC. We believe tremendous value can be realized over time by optimizing how we manage each group and by working as a group to strengthen CMC's commercial proposition. We are committed to providing updates on the evolution of this strategy over time.
Turning now to CMC's markets in North America, construction activity remained healthy during the first quarter, providing a good demand environment for our reinforcing products. Total finished steel volumes increased on a year-over-year basis, as did combined rebar shipments from our mill and downstream operations. Activity levels across our geographies and into our various customer groups were consistent with recent quarters. Overall, the seasonal volume pattern was normal. Last quarter, we discussed the pressure that increased import competition exerted on CMC's steel product margins. This trend continued during much of the first quarter, but has since abated. We expect that recent developments, including domestic price announcements and higher global rebar pricing will support an inflection in steel product margins over the next few months.
Turning to key external forward-looking indicators. The indices we track point to stability in non-residential construction overall, and the likelihood of increasing levels of infrastructure activity in the quarters ahead. The Dodge Momentum Index, which measures the value of non-residential projects entering the planning phase generally leads on-the-ground activity by approximately 12 months, while off highs above 200, it has registered four consecutive months of stability around 180, which is still within the top decile of all historical readings. On the infrastructure side, the value of projects in pre-design and design phases reflects by strong multi-year pipeline of future work. Data provided by Dodge Analytics indicate, that projects in these stages of development increased more than 10-fold during the three months ended in November, compared to the same period of the prior year.
This indicator has a long-lead time, because once the project has been designed, it generally moves to budgeting, funding and letting phases. It is in the letting phases that contracts are awarded, resources are scheduled, and on-the-ground activity can begin. The Dodge Analytics data has now been running at an elevated level for the past nine quarters. We are seeing average increases in State Department of Transportation budgets of around 15% and continued strong growth in highway contract awards. We expect this to drive increasing infrastructure activity during the upcoming construction season. Although the construction pipeline is robust, we have continued to experience a slower rate of contract awards. This in turn has caused some reduction to the volume and the value of CMC's quarter ended downstream backlog, which declined 13% by volume compared to the prior year.
We believe this weakness is temporary and would note that we saw a pickup in award activity during December. Looking beyond these near-term dynamics, we remain very confident in the long-term outlook for our business, which is driven by powerful structural trends that are remaking much of our economy, and will bolster construction activity for years to come. Enormous investments have been announced with some already underway to improve our nation's transportation infrastructure, reassure vital manufacturing, electrified vehicle fleets and upgrade the electrical transmission grid to facilitate the transition to renewable energy. As seen on Slide 8, we estimate that these structural trends could lead to incremental rebar consumption equal to 20% or more of the current domestic market.
So even with the challenges in some areas of construction, such as office, retail and hospitality, we anticipate higher overall rebar demand over a multi-year period. Additionally, the benefit won't be limited to rebar. We also expect a meaningful tailwind for many of the value-added solutions within our Emerging Businesses Group. I'll now turn to Europe, where market conditions remain challenging. Sluggish demand put pressure on pricing and margins during the quarter. General economic uncertainty continues to negatively impact sentiment and activity levels across our construction and industrial end markets. The Polish long steel industry has responded to market imbalances by meaningfully reducing production and right-sizing inventory levels.
These supply-side adjustments appear to be having an impact as long steel pricing has begun to rebound from the lows reached in our fiscal first quarter. Since our last earnings call, two potentially meaningful green shoots have appeared. The first is a rapid increase in new mortgage originations driven by a government program to assist first-time homebuyers. The value of new mortgages taken out in October improved fourfold from the calendar 2023 low and approached all-time highs. Higher new loan activity since late summer should support Polish residential construction over the next several quarters. The second development is the likely release of approximately $60 billion of European Union COVID relief funds that were held due to disputes with the prior government.
Following the Polish elections held in mid-October, the roadblocks have been cleared for receipt of the funding. In fact, $5 billion has been already released to projects in Poland. Much of this package is earmarked for renewable energy and the modernization of infrastructure and it should begin impacting construction activity within the next 12 months. The environment in Europe is currently difficult, but we expect that it will normalize. Given our view of market conditions and the steps we have taken to optimize costs, we expect that beginning with the spring construction season, operational EBITDA for our Europe Steel Group should improve sequentially for the remainder of fiscal 2024. Market conditions for the Emerging Businesses Group were supportive during the quarter, benefiting from good levels of construction in North America, where we derived nearly 90% of our net sales.
Activity remains slow within our European markets, primarily due to the impact of economic uncertainty on construction activity in the region. Encouragingly, across our global footprint, we continue to see increasing adoption rates for CMC's newest and highest margin Tensar Geogrid solution, driven by a superior customer value proposition that reduces project costs and extends asset life. Growing investment in infrastructure, renewable energy and electricity transmission capacity have supported demand for EBG's soil stabilization, performance-reinforcing steel and anchoring systems solutions. Before turning the call over to Paul, I would like to provide a brief update on CMC's key strategic projects, where we made significant progress over the quarter.
First, after a successful summer startup, production levels at our new state-of-the-art Arizona 2 micro mill have increased each month and are now routinely setting new daily output records. The team has done an exceptional job commissioning a very technologically advanced operation. However, the learning curve has been more extended than we originally anticipated. We now expect to produce approximately 250,000 tons in fiscal 2024, compared to our previous guidance of 400,000 tons. As a reminder, we are targeting 500,000 tons of output at a full run rate, consisting of 350,000 tons of rebar and 150,000 tons of merchant product. Currently, the mill is focused on increasing rebar production and will begin commissioning merchant products early in calendar 2024.
We anticipate monthly EBITDA break-even for AZ2 by the end of the third quarter. Work at CMC's future Steel West Virginia site is progressing well. Civil work is nearly complete after which we will begin setting foundations. We expect to begin commissioning this exciting project in late calendar 2025. Finally, we have successfully integrated a number of recent acquisitions, which extend our operational and commercial capabilities and further our strategic position. CMC's mill projects along with our recent strategic bolt-ons, broaden our exposure to favorable structural trends powering domestic construction and are expected to drive strong future growth in earnings, cash flow and shareholder value. With that, I will now turn the call over to Paul for more detail on our financial results.
Paul Lawrence: Thank you, Peter. And good morning to everyone on the call. As noted earlier, we reported fiscal first quarter 2024 net earnings of $176.3 million or $1.49 per diluted share, compared to the prior year levels of $261.8 million and $2.20 respectively. Results, this quarter include net after-tax charges of $16.4 million related to the ongoing commissioning efforts at Arizona 2. Excluding these items adjusted earnings were $192.7 million or $1.63 per diluted share in comparison to adjusted earnings of $266.2 million or $2.24 per diluted share during the prior year period. Core EBITDA was $325.3 million for the first quarter of 2024, representing a decline from recent levels, but still among the most profitable quarters in CMC history.
Slide 11, of the supplemental presentation illustrates the year-to-year changes in CMC's quarterly results. Financial performance at our North American Steel and Europe Steel groups declined from the prior year, while results of the emerging business group were largely unchanged. Consolidated core EBITDA margin of 16.2% remained well above average historical levels. Before reviewing our segment results, I would like to make a few comments on how CMC will report and discuss each group. For both the North America Steel Group and the Europe Steel Group, we will continue providing the same operating statistics as we did under the previous segmentation. You can find the recast figures on our investor relations website. We view these metrics as offering valuable insight into the factors that drive these businesses, including selling prices, margins over scrap and product volumes.
We will also begin highlighting adjusted EBITDA margins as a percentage of net sales to support our focus on higher through-the-cycle margins across our businesses. The two key metrics for the emerging business group are net sales and EBITDA margins. As Peter mentioned, we expect faster growth from this segment over time and a fundamental measure of our success will be the ability to increase top-line performance in an EBITDA and value-accretive manner. Given the high-value-add proprietary nature of the solutions offered by EBG, we anticipate EBITDA margins will be higher and more stable relative to traditional steel industry levels. With that, I will now review our segments for the first quarter of fiscal 2024. CMC Steel Group generated adjusted EBITDA of $266.8 million for the quarter, equal to $243 per ton of finished steel shipped.
Segment-adjusted EBITDA decreased on a year-over-year basis, driven primarily by a lower steel product margin over scrap costs, as well as higher costs related to the operational startup of Arizona 2. The adjusted EBITDA margin for the North American Steel Group of 16.8% compares to 21% in the prior year period. Turning to slide 13, of the supplemental deck, our Europe Steel Group reported adjusted EBITDA of $38.9 million for the first quarter of 2024, compared to $61.2 million in the prior year period. The decline was primarily driven by a lower margin over scrap costs and a 27% reduction in shipment volumes. Partially offsetting these headwinds was the recognition of energy rebates totaling $66.3 million during the quarter. Of these, $27.7 million is related to an annual CO2 credit under a government program that extends to 2030.
And the remaining $38.6 million is structured as a reimbursement by the Polish government for elevated energy costs incurred during the European energy crisis. The prior year period includes $9.5 million related to the annual CO2 program. The first quarter adjusted EBITDA margin for the Europe Steel Group of 17.3% compares to 15.8% in the prior year period. Despite lowering production levels to meet demand, controllable costs benefited from lower energy costs during the quarter. The emerging business group first quarter net sales of $177.2 million decreased 3.9% from the prior year period, driven largely by the addition of anchoring systems, previously called EDSCO fasteners. Demand conditions were generally positive during the quarter, with relative strength in North America and a weaker environment elsewhere.
Construction activity in the United States drove solid demand for Tensar Geogrid solutions. Construction services, anchoring systems and performance reinforcing steels. Adjusted EBITDA for the emerging business group of $30.9 million during the first quarter was flat compared to the prior year period. The adjusted EBITDA margin of 17.4% represented a decline of 100 basis points as a positive impact from the addition of CMC anchoring systems and the benefit of improved adoption rates for the proprietary geogrid solutions in North America were offset by lower construction activity in Europe and the Middle East impacting our geogrid business outside of North America. Turning to the balance sheet, moving as of November 30th, cash and cash equivalents totaled $704.6 million.
In addition, we had approximately $820 million of availability under our credit and accounts receivable facilities, bringing total liquidity to just over $1.5 billion. During the quarter, we generated $261 million of cash from operating activities. Our free cash flow amounted to $194.1 million, defined as our cash from operations less $67 million of capital expenditures. Our leverage ratios remain attractive and have improved significantly over the past several fiscal years. As can be seen on slide 18, our net debt to EBITDA ratio now sits at just 0.3 times with no maturities until 2030. We believe our robust balance sheet and overall financial strength provide us 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 for the quarter was 21.6% due to the release of evaluation allowance. Looking ahead for the remainder of fiscal 2024, we currently expect an effective tax rate of approximately 24% with a rate slightly higher in the second quarter. Turning to CMC's fiscal 2024 capital spending outlook, we reiterate our previous guidance of between 550 and 600 million in total. Outside of normal sustaining investments, anticipated expenditures in fiscal 2024 include substantial capital dollars for the construction of steel West Virginia of approximately 250 million. Lastly, CMC repurchased nearly 622,000 shares during the fiscal first quarter at an average price of $45.70 per share. Transactions since the initiation of the buyback program through the first quarter have amounted to approximately 292 million, leaving 58 million remaining under our current authorization as at November 30th, 2023.
This concludes my remarks, and I'll turn the call back to Peter for additional comments on CMC's financial outlook.
Peter Matt: Thank you, Paul. We expect shipment volumes within our North America Steel Group to decline sequentially due to normal seasonality during the winter months. Margins on steel products are likely to experience some further compression during the second quarter. However, recent price announcements on rebar, merchant bar, and wire rod should support an inflection point in the coming months. Downstream product margins should exhibit good stability sequentially. Conditions in Europe are expected to remain challenging, but adjusted EBITDA excluding energy rebates should improve from the levels of the past two quarters. Financial results for our Emerging Businesses Group are anticipated to follow a typical seasonal pattern with some slowing of activity in Q2.
Looking beyond the second quarter, which is CMC's seasonally slowest period, we expect robust spring and summer construction activity driven by the increased impact of rising infrastructure investment, which should support an already healthy demand backdrop. Both the North America Steel Group and the Emerging Businesses Group should benefit from anticipated strong activity levels. Regarding the Europe Steel Group, supply-side adjustments and the impact of increasing levels of residential and infrastructure construction should drive sequential improvement in financial results beginning with the spring construction season. It's an exciting time for CMC. We believe the realignment of our organizational and reporting structure will allow us to better execute our key strategic priorities and harvest significant value for shareholders.
Powerful structural trends in North America should drive construction activity for years to come, and CMC has positioned itself as a key beneficiary. Additionally, the green shoots emerging in Poland and our strong cost position should provide an opportunity for results to rebound going forward. Once again, I would like to thank our customers for their trust and confidence in CMC and all of our employees for delivering yet another quarter of very solid performance.
Operator: Thank you. At this time, we will now open the call to questions. [Operator Instructions] Today's first question comes from Phil Gibbs with KeyBanc Capital Markets. Please go ahead.
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