Commercial Metals Company (NYSE:CMC) Q2 2024 Earnings Call Transcript
Commercial Metals Company (NYSE:CMC) Q2 2024 Earnings Call Transcript March 22, 2024
Commercial Metals Company 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 Second Quarter Fiscal 2024 Earnings Call for CMC. Joining me today 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'll have a few instructions at that time. I would like to remind all participants that during the course of this conference call, the company will make statements that provide information other than historical information and will include expectations regarding economic conditions, effects of legislation, U.S. steel import levels, construction activity, demand for finished steel products, the expected capabilities, benefits and timeline for construction of new facilities, the company's future operations, the timeline for execution of the company's growth plan, the company's future results of operation, 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 belief 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 slides 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 conference over to Peter Matt, President and Chief Executive Officer.
Peter Matt: Good morning, everyone, and thank you for joining CMC's second quarter earnings conference call. I would like to begin this morning's discussion by congratulating the CMC team for setting a new standard in safety performance for our company, as they brought our total recordable incident rate to less than 1, significantly better than the U.S. steel industry as a whole. At CMC, it all begins with safety, and our goal is to ensure everyone leaves their shift in the same condition they arrived. I am particularly proud of the improvements made at recently acquired locations within our Engineering Business -- Emerging Businesses Group. An important part of our integration process is instilling CMC's industry-leading safety culture and practices, which employees at acquired businesses have been eager to adopt.
Compared to a year ago, the recordable incident rate for EBG has been cut in half, which equates to several injuries avoided and better outcomes for all stakeholders. The data for EBG and for all our operations can be seen on Slide 4 of our earnings presentation, and we are committed to further improvement on this strong record. This morning, I will provide an overview of CMC's second quarter financial and operating performance, after which I will share an update on the company's strategic outlook and growth projects. And then discuss our view of current and future market environment. Paul will cover the quarter's financial results in greater detail, and I will conclude with our outlook for the third 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 reviewing our financial results, I want to call your attention to yesterday's announcement of a 13% increase in CMC's quarterly dividend. The $0.18 per share quarterly payout represents growth of 50% since the end of 2021. The dividend increase together with January's $500 million increase in CMC's share repurchase authorization shows the cash generative power of CMC's business and demonstrates our commitment to returning back cash to our shareholders. CMC's strong financial position and balanced capital allocation strategy allows us to prioritize returning cash to investors, while simultaneously executing our growth plan.
As we reported in our press release issued this morning, the second quarter of fiscal 2024 was another strong period of financial performance. CMC generated core EBITDA and core EBITDA margin well above historic averages despite seasonal slowness and weather disruptions across much of our operational footprint. We continue to demonstrate the enhanced earnings and cash flow capabilities that were enabled by our recent strategic transformation and ongoing execution. CMC produced net earnings for the second quarter of $85.8 million or $0.73 per diluted share on net sales of $1.8 billion. Excluding the impact of non-operational items, which Paul will cover in more detail, adjusted earnings were $103.1 million or $0.88 per diluted share. CMC generated consolidated core EBITDA for the quarter of $224.4 million, producing a core EBITDA margin of 12.1% and a trailing 12-month return on invested capital of 14.5%.
Results in our North American Steel Group were impacted by challenging weather conditions and some metal margin compression on steel products. Digging beneath the reported metal margin figure, we actually experienced sequential monthly increases from December onwards and exited the quarter at a high point. Financial performance in our Europe Steel Group segment improved from recent quarters, excluding energy rebates. The market for long steel products has come into better balance, which has allowed selling price and metal margin to increase modestly. This combined with excellent cost performance, has set us on a path toward breakeven results in the near term. Activity levels in our Emerging Businesses Group were hampered by weather disruptions that delayed geogrid and Geopier project starts and hit our Texas-focused CMC Construction Services, particularly hard.
Outside the U.S., several projects were also delayed during the quarter. We believe these issues are temporary and we expect a strong rebound in sales and profitability heading into the spring and summer construction season. I would next like to discuss CMC's strategic outlook. As we plot CMC's future path, we are starting from a position of great strength with leading presence in each of our major products and solutions, a strong company culture, a healthy balance sheet and excellent customer relationships. From this starting point, our primary strategic focus will be twofold: to maximize value creation in our current businesses; and to accelerate growth across multiple platforms. Our ultimate goal is to create an organization that has higher and less volatile through the cycle margins and that fully leverages the enhanced margin profile by organically and inorganically expanding revenues.
We laid the groundwork for these efforts with our recent reporting structure changes, which greatly enhanced visibility into our key value drivers and helped us better focus our decision-making. In our planning, we are looking at how CMC can push our existing businesses to their full potential. It all begins with our most critical resource, our people, keeping them safe and providing ample opportunities for development. As I noted earlier, CMC has built a tremendous safety track record but there is more that can be done to reach world class, and we are working diligently on this. We are also expanding our talent development programs across a range of critical skills to ensure we have a deep bench to power CMC's future. A key driver of the company's -- company-wide margin enhancement efforts are efforts in operational and commercial optimization, which span the entire organization and build on a core part of our company's DNA.
To that end, we have created a commercial and operational excellence group tasked with working closely with CMC's business units to identify, benchmark, quantify and realize margin enhancement opportunities. Our optimization efforts are still in the early stages, but already many concrete opportunities have been found, both at individual businesses and across the enterprise. I can offer a few examples. First, there is significant opportunity to optimize logistics and shorten freight lanes between our mills and final shipping points, which will lower costs and improve customer service. We also see achievable operational improvements through enhanced internal benchmarking and best practice sharing, which can lead to increased productivity and reduced costs and unplanned downtime.
On the commercial side, we are creating a unified platform that we believe will enable information sharing across sales group, unlocking opportunities for customer cross-selling, lead sharing and bundling of solutions. These efforts are targeted towards increasing CMC's share of wallet and service capabilities representing a low capital cost avenue to grow revenues. In concert with our initiatives to maximize margins and create value in CMC's existing businesses, we are focused on prudently accelerating our growth trajectory through both organic and inorganic investment. As you know, there are large organic projects already underway, including Arizona 2 and Steel West Virginia that will meaningfully add to CMC's earnings and cash flow capabilities.
Beyond these, we see several opportunities for organic expansion in existing product lines that entail only modest capital outlays. Moreover, as we have indicated previously, CMC has a strong platform and a significant financial dry powder to achieve value accretive growth through acquisitions. We will seek to build out CMC's portfolio of early stage construction materials and solutions in a way that strengthens our core, improves our customer value proposition, leverages our end market expertise and enhances our margins. As we execute our strategic plan, we are extremely excited about the benefits these initiatives will bring to CMC and our shareholders. We run a great business today, but believe there is tremendous additional value to be unlocked by pursuing the next level of excellence and leveraging that excellence as we grow.
Planned development is ongoing, and we look forward to sharing more details regarding CMC's strategic vision later this year. Now I would like to provide a brief update on the progress we've made during the quarter on CMC's key strategic projects. As we noted in our press release, CMC's Arizona 2 plant set a new milestone by becoming the first micro mill in the world to produce merchant product -- merchant bar quality products or MBQ. We began commissioning MBQ in January and have successfully produced and sold a variety of profiles and grades. I would like to congratulate the operations team on this exciting achievement. During the quarter, California, an important end market for AZ2 experienced an historic amount of rainfall that led to a large number of lost days at construction sites across the state.
The outcome has been a temporary excess of rebar inventory on the West Coast. We can address this condition and help balance the market by altering our planned ramp-up schedule over the next several months. Given the realities on the ground, we believe the prudent approach is to continue to focus on commissioning efforts on our MBQ production capabilities and return to rebar when the market is in better balance. Despite the deviation from our original schedule, we don't expect any pushout in the total time frame to complete the final commissioning of all products that Arizona 2 is capable of producing. This change does, however, impact our ability to provide a volume forecast for fiscal 2024, given the fluid nature of how the West Coast rebar market will evolve over the next several months.
That said, we do not -- we do anticipate reaching our monthly EBITDA breakeven during the fourth fiscal quarter. Work at CMC's future Steel West Virginia site is progressing well, and we are on plan for start-up in late calendar 2025. Site improvements are nearly complete, and we have scheduled initial equipment deliveries for the spring and early summer. Turning now to CMC's markets in North America, construction activity remains healthy as we exit the slowest period of the year and head into the busy spring and summer seasons. We continue to hear encouraging signs from our customers, who indicate their backlogs are in good shape and that they see a strong pipeline ahead. This matches our own internal view, particularly following CMC's best quarter for downstream contract awards since mid-'22, and its second -- and its best second quarter on record.
The sharp rebound in new bookings drove an 11% sequential increase in construction backlog volumes and was broad-based across a number of project types. We saw particular strength in new awards for manufacturing facilities, institutional buildings, wind energy and residential structures. Additionally, CMC added to its backlog, the highest value contract in its history, a Department of Defense project in Hawaii. Looking ahead, we anticipate our construction pipeline will remain healthy with several key areas driving activity both in the near term and over a multi-year period. The first is infrastructure. We expect steel consumption for highways, bridges and other public works to increase in the second half of fiscal 2024 and onward, as projects awarded in previous years begin to mature.
New projects are also coming to the market at a healthy rate as states execute against their expanded transportation and infrastructure budgets. Several of our key states are expected to release significant projects for bidding over the next few months. Leading the pack will be Texas, which to date has only awarded about a quarter of its transportation budget for 2024. We are also seeing the Infrastructure Investment and Jobs Act impact on the ground activity across many of the geographical markets that CMC serves. We continue to estimate that once at full run rate, the program will generate incremental rebar consumption of roughly 1.5 million tons annually as well as provide a tailwind to CMC's broad portfolio of reinforcement solutions. As we have discussed previously, beyond infrastructure, notable sources of structural demand growth include manufacturing and renewable energy.
The project pipeline in these areas remains robust with the last few months seeing particular strength for new wind energy awards. More recently, we are seeing the emergence of data centers as a driver of activity. The number of projects in the bid stage has grown substantially over the last few quarters, and we expect several dozen additional opportunities will reach the market in the months ahead. The investment pouring into data center development is very significant, and the facilities can't be built fast enough to meet demand. We currently estimate that the projects in the planning phase or under construction represent 250,000 tons to 350,000 tons of total rebar consumption. We believe that these structural trends form a once-in-a-generation investment cycle that aims to reinvigorate our nation's infrastructure, harden supply chains, drive transition to cleaner energy sources and harness the possibilities of big data and artificial intelligence.
We remain confident that this long duration investment cycle will power construction activity for years to come, and its benefits will reach beyond rebar into CMC's other key product offerings like geogrid, Geopier, anchoring systems and high-performance reinforcing steel. Turning to steel product margins in North America, the environment improved throughout the second quarter. And as I mentioned, monthly levels increased from December onward. Import pressures that influence the domestic market in late -- late in fiscal 2023 and early fiscal 2024 have largely abated and current import offers in volume terms remain fairly limited. This should set the stage for metal margins to be driven by domestic market fundamentals heading into the third quarter.
We see a combination of seasonal volume recovery, good underlying demand and limited import participation providing a favorable backdrop for some margin expansion during the spring and summer construction season. The market environment for our Europe Steel Group improved during the second quarter, largely due to better supply and demand balance. Consumption levels remain subdued but in recent months, producers have responded with significant supply rationalizations, while inventories at intermediaries have sharply reduced, driving some pricing and margin recovery. Looking ahead, we expect demand in most of our markets to remain fairly stable with the exception of residential construction, which appears poised for a return to growth. The response to the Polish government's program to support first-time homebuyers has been significant, leading to record levels of new mortgage originations and a sizable increase in new building permits.
As we head into the spring, our team in Poland is seeing higher order rates related to residential projects. In the near term, an improved market backdrop, combined with strong cost management efforts should drive our operations toward breakeven profitability. Longer term, we see the potential for strong market fundamentals to emerge as Central European industrial production recovers to -- from the energy crisis and COVID relief funds from EUR65 billion are injected into the Polish economy. With that, I will now turn the discussion over to Paul to provide 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 second quarter 2024 net earnings of $85.8 million or $0.73 per diluted share compared to prior year levels of $179.8 million and $1.51 per share, respectively. Results this quarter included net after tax charges of $17.2 million related to the ongoing commissioning efforts of Arizona 2. Excluding these items, adjusted earnings were $103.1 million or $0.88 per diluted share in comparison to adjusted earnings of $171.3 million or $1.44 per diluted share during the prior year period. Core EBITDA was $224.4 million for the second quarter of 2024, representing a 26% decline from the $302.8 million generated during the prior year period, but it's still a historically strong result.
Slide 10 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 impacted by lower margins over scrap, while benefiting from strong controllable cost performance. Adjusted EBITDA also declined in CMC's Emerging Businesses Group due primarily to difficult weather conditions in the U.S. and project delays outside of the U.S. Consolidated core EBITDA margin of 12.1% remained above average historical levels and compares to approximately 15% a year ago. I will now review the results of our segments to the second quarter of 2024. CMC's North American Steel Group generated adjusted EBITDA of $222.3 million for the quarter, equal to $220 per ton of finished steel shipped.
Segment adjusted EBITDA decreased 19% 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 the improved controllable cost levels per ton. The adjusted EBITDA margin for the North American Steel Group of 15% compares to 18.2% in the prior year period. As you have no doubt read, scrap markets have softened over the last few weeks. Within this environment, we expect to achieve modest metal margin expansion on steel products during the third quarter as scrap costs decrease. It should be noted that although metal margins as reported in our press release are expected to improve sequentially, in the third quarter, the positive earnings impact will likely not hit until late in the period or early in the fourth quarter.
This is due to the normal flow of inventory costs through our mill operations. Much of the scrap costs on CMC's P&L during the third quarter will reflect the second quarter scrap cost levels that we have in inventory today. This factor lies beneath our third quarter guidance for stable adjusted EBITDA margin within our North American Steel Group. Turning to Slide 12 of the supplemental deck. Our Europe Steel Group reported an adjusted EBITDA loss of $8.6 million for the second quarter of 2024. This marks a more than $20 million improvement from the average losses of $30 million included in each of the prior two quarters when the impact of the energy rebates is excluded. The sequential improvement was driven by higher margin over scrap cost and lower controllable costs per ton, which more than offset a 20% quarter-over-quarter decline in shipments.
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 this footprint. As Peter mentioned, there have been some encouraging signs that the Polish market is at least that past the bottom and that supply and demand are moving into better balance. Emerging Businesses Group second quarter net sales of $156 million increased 1.6% from the prior year period, driven largely by the addition of CMC anchoring systems. Underlying demand conditions were generally positive during the quarter, but activity levels within several units were impacted by weather related to shipment delays in the United States and project delays in Tensar's Europe and Middle East markets.
Despite weather issues, customer order rates and inquiries were strong across the North American footprint, pointing toward good market momentum and a robust upcoming construction season. We also expect the delayed Tensar projects in the global markets to begin in Q3. Adjusted EBITDA for the Emerging Businesses Group of $17.9 million were down from $26.6 million in the prior year period. The adjusted EBITDA margin of 11.5% represented a decline from a year ago as the positive impact of the addition of CMC anchoring systems and a strong profitability from our heat treating operations were more than offset by the market factors already mentioned. As Peter noted, we expect profitability in this business to recover meaningfully in the third quarter.
Turning to the balance sheet, liquidity and capital allocation. As of February 29, cash and cash equivalents totaled $638.3 million. In addition, we had approximately $820 million of availability under our credit and accounts receivable facilities, bringing total liquidity to just under $1.5 billion. During the quarter, we generated $89 million of cash from operating activities despite a $62 million use of cash for working capital. Capital expenditure of $93.8 million was driven by equipment purchases, principally from our investments in Steel West Virginia. CMC's leverage metrics remained attractive and have improved significantly over the last several fiscal years. As can be seen on Slide 17, our net debt-to-EBITDA ratio now sits at just 0.4 times, while net debt to capitalization is only 10%.
We believe our robust balance sheet and overall financial strength provide us the flexibility to finance our strategic organic growth projects and pursue M&A, while continuing to return cash to shareholders. CMC's effective tax rate was 26.6% in the second quarter, which was slightly above our expected full year rate due to the lower earnings levels. Our effective tax rate through two quarters stands at 23.3%. And looking ahead for fiscal '24, we currently anticipate an effective tax rate of between 24% and 25%. Turning to CMC's fiscal 2024 capital spending outlook, we reiterate our previous guidance of between $550 million and $600 million in total. Outside of normal sustaining investments, anticipated expenditure in fiscal '24 includes substantial capital dollars for the construction of Steel West Virginia of approximately $250 million.
CMC has taken two meaningful steps since the prior earnings call to further our commitment of providing competitive cash returns to shareholders. As Peter mentioned, returning cash to our investors is a core tenant of CMC's approach to capital allocation. To that end, our Board of Directors approved a 13% increase to the quarterly dividend payout. This follows the announcement in early January of a $500 million increase to CMC's share repurchase authorization. We seek to utilize both avenues to distribute an attractive portion of our free cash flow to shareholders. The execution of our buyback program accelerated during the second quarter with the repurchase of approximately 945,000 shares at an average price of $50.72 per share. Transactions during the quarter totaled $47.9 million.
And as of February 29, we had approximately $510.4 million available for repurchases under our current authorization. This concludes my remarks, and I'll turn it back to Peter for additional comments on our outlook.
Peter Matt: Thank you, Paul. We expect shipment volumes within our North America Steel Group to follow a typical seasonal pattern during the third quarter, while our EBITDA margin for the segment should be largely stable on a sequential basis. Conditions in Europe are expected to remain challenging, but adjusted EBITDA is anticipated to approach breakeven levels during the third quarter. Financial results for our Emerging Businesses Group should improve meaningfully, driven by the normal seasonal uptick in demand, strong underlying market fundamentals and a healthy order book. We continue to expect robust spring and summer construction activity driven by increased infrastructure investments, which we anticipate will support an already strong demand backdrop in both the North America Steel Group and the Emerging Businesses Group.
Business conditions for our Europe Steel Group are slowly improving and should further benefit from increased residential construction activity as a government program aimed at first-time buyers and other government-sponsored investment programs begin to impact steel demand. We are proud of CMC's financial results and the transformation that made them possible. We are even more excited about our potential to reach new heights in the future as we execute our key strategic priorities and deliver significant value for our shareholders. Powerful structural trends in North America should drive construction activity for years to come, and CMC has positioned itself as a key beneficiary. 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.
Thank you. And maybe at this time, let's open it to questions.
Operator: [Operator Instructions] Our first question comes from Timna Tanners with Wolfe Research. Please go ahead.
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