Commercial Metals Company (CMC) on Q3 2021 Results - Earnings Call Transcript

Operator: Hello and welcome, everyone, to the Third Quarter Fiscal 2021 Earnings Call for Commercial Metals Company. 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 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, U.S. construction activity, demand for finished steel products, the company’s future operations, the company’s future results of operations, financial measures and capital spending. Barbara Smith: Good morning, everyone, and thank you for joining CMC’s third quarter earnings conference call. As we reported in the press release issued this morning, it was an outstanding quarter with record consolidated and segment results. And I would like to thank CMC’s 11,500 employees for their continued hard work and focused efforts on behalf of our customers and stakeholders. I’d also like to thank our customers for their continued trust and partnership with CMC during these unusual and rapidly changing market conditions. I will begin the call with brief remarks regarding our third quarter performance before offering some perspective on the current market environment. I will also provide an update on CMC’s key strategic growth initiatives. Paul Lawrence will then cover our financial results in more detail, and I will conclude the prepared remarks with a discussion of our fourth-quarter fiscal 2021 outlook, after which we will open the call to questions. Paul Lawrence : Thank you, Barbara, and good morning to everyone on the call today. I am pleased to review with you the outstanding third quarter results. As Barbara noted, we reported record earnings from continuing operations of $130.4 million or $1.07 per diluted share, roughly doubled the prior year levels of $64.2 million and $0.53 per diluted share. Barbara Smith: Thank you, Paul. We expect a strong finish to fiscal 2021. The summer construction season is underway and demand is robust across each of our major product lines in both North America and Europe. We anticipate margins over scrap and steel products in both segments to be consistent or up modestly compared to the third quarter. Our internal indicators such as bidding activity and backlog level support continued strength. The recent recovery of leading national construction indicators, such as the Architectural Billing Index, Dodge Momentum Index and Portland Cement Association forecast, each mirror our view. These external measures also point to good conditions into calendar year 2022. Once again, I’d like to thank all of the CMC employees for delivering an outstanding quarter of performance. Thank you and at this time, we will now open the call to questions. Operator: And our first question will come from Sathish Kasinathan with Deutsche Bank. Please go ahead. Sathish Kasinathan: Yes. Hi. Good morning. Thanks for taking my questions. My first question is on scrap. The reported scrap costs for the North American segment appear to be a bit lower than what we had modeled based on what we see on Platts of CRU. So, are you seeing any more than normal lag in scrap costs and when do you think this will normalize? Paul Lawrence: Good morning, Sathish. I appreciate you asking the question. With respect to our scrap inventory, we turn our scrap very quickly. And so, there is not a lot of lag in our scrap expenses in comparison to the indexes. I think the key driver of the difference between what we consume and many of the indexes is really our vertical integrated network of operations and the benefit that we have from two areas. One is of our own scrap assets and the second is the grade of obsolete scrap that we use to produce rebar in comparison to more of the volatility that has been seen on the prime grades of scrap. Sathish Kasinathan: Okay. Thanks for the color. My second question is on capital allocation. Can you talk about your priorities, particularly the potential for additional investments in Europe, as well as your updated view on buybacks given what we are seeing with some of your peers? Barbara Smith: Yes. Maybe, I’ll address this, and if Paul wants to add any additional color, I think our view on capital allocation is it remains consistent. We have, as you know and as we’ve indicated a number of very attractively returning investment projects, I mentioned the Danieli 3 line, which is coming online. We have the investment in AZ2 that we’ll prioritize some of our capital allocation, but the strong balance sheet that Paul outlined gives us enormous flexibility for organic growth, inorganic growth, and we continue to evaluate the dividend and share repurchase. At this time, on the share repurchase side, while it remains an option, our organic and inorganic investments are yielding a very attractive return, but, again we remain open to all forms of capital allocation. Sathish Kasinathan: Okay. Thank you. Congrats on a good quarter. Barbara Smith: Thank you so much. Operator: And our next question will come from Seth Rosenfeld with Exane. Please go ahead. Seth Rosenfeld : Good afternoon. Congrats on a very good quarter and also congrats on sustainability report. We look forward to seeing your new science-based targets, and this is a very good development. If I can ask two questions please, just with regards to your downstream operations to start out please. On downstream margins, you noted some compression in your fiscal third quarter. What should we expect for that as we look forward into Q4? I think you noted that for the more recent order intake, you are achieving good price appreciation, how should we expect that to compare versus scrap input costs into Q4? And then, a separate question also for downstream, can you just touch on the backlogs there? I think you commented stable sequentially in Q3. How would that compare to pre-COVID levels, please? Barbara Smith: Yes. Let me make a remark and then Paul can be a bit more specific. With regard to downstream margins, we manage the business through the entire value chain, and as you know that we went through the segment change as a result of that. And so, I think overall, you will see our margins in our North American and our European segment remain quite stable on a go forward basis, and that’s the strength of that integrated model. And it is designed to absorb changes in raw material pricing. And so, I think you can see some nice stability through the value chain. In terms of the backlog, while it is stable, I think that there are just lots of positive signs relative to a year ago. Bidding activity is good. All of the indicators that we highlighted in our remarks are continuing to improve and gain momentum. The reopening in the U.S. has been stronger candidly in the second half of our fiscal year than we might have anticipated a year ago. The reopening in Europe, as you experienced firsthand, Seth, has lagged the U.S. a bit, but that seems to be gaining momentum and certainly we are seeing those positive signs in our business, so. Seth Rosenfeld : Okay. Thank you very much. And one last question please. Can you talk on the downstream rolling capacity within Poland? You touched on earlier that you’ve already begun the ramp up process there. Can you just remind us please of the timeline to hit full capacity and full EBITDA contribution as expected, please? Barbara Smith: Yes. So, I think, we indicated it’s roughly 200,000 tons of additional capacity taking advantage of excess mill capability that we have, and we are in the early stages of the commissioning, but we have such a strong team in Poland, and they execute so well. I am very, very encouraged by the early days of the commissioning, nearly all of the product coming off of the line is saleable product. So, we anticipate a strong ramp up to that 200,000 tons, and certainly the market is supporting the need for that additional capacity. I don’t – at this stage, since we are literally just a few weeks into it, I don’t want to make some specific commitment because you are talking about a lot of complex equipment and debugging of software and other things that needs to occur over the next couple of months. But knowing how well the team in Poland executes, I would expect to see a very strong ramp up and be able to get to the targeted levels early into our fiscal 2022. Seth Rosenfeld : Okay. Thank you very much. Operator: And our next question will come from Timna Tanners with Bank of America. Please go ahead. Timna Tanners : Yes. Hey. Good morning, everyone. Barbara Smith: Good morning, Timna. Paul Lawrence: Good morning. Timna Tanners : I wanted to ask a follow-up on capital allocation and then hone in a little bit more on Europe. Just on the capital allocation side, I noticed you commented on opportunistic M&A and I just wondered if you could characterize the opportunities if they are more a downstream or upstream or how they are looking relative to the past or any color there, just how you are looking at that in light of current very strong conditions? Are there a lot of opportunities? Barbara Smith: Thank you, Timna. This is always a challenging one, because we can’t really talk specifics. But we are open and looking across the value chain, I would say, we would prioritize – prioritize upstream where we have needs to build that additional capability of recycling and collection to support our mills. We are in a great position, but with our broader footprint, there is some areas that might be attractive to us. We will look across our full geography. Probably, not going to see us build our rebar fabrication to any great extent and mostly we were to expand our mill capability in that area. But there are other possibilities. We now have wire rod as part of our capability. So, there could be some interesting assets both steel making or downstream that could be something worth considering. But I wouldn’t say that the market is – there are lot of assets that are coming to market. But we stay very close to the situation and we have a balance sheet to stand ready if something interesting comes along. Timna Tanners : Okay. Thanks for that. It’s helpful. And then on the Europe market conditions, if you could, I know, on the 9th Slide of your presentation, that looks like a massive step change in terms of margins for Europe. I just want to understand is that’s a new normal or how you think about that being sustained? Certainly, it looks like Turkey is offering tons and Europe is talking about some protection. And CIS tons, we are hearing a level a bit. So, just trying to get a flavor for how to think about that market’s margins going forward? Barbara Smith: Yes. Thank you, Timna. So, as you know, the safeguards in Europe were initially designed somewhere to 232 and they were modified and changed to a quarter basis and then there have modifications and enhancements to that based on issues that arise in the implementation of all those strategies. So, I think, from the existing safeguard measures, I think we are seeing the effective of – the effectiveness of that and effectiveness of some of the modifications that have made – have been made over time. I think the second thing is if the demand profile is quite strong, which has helped to support the volumes and the margins in Europe. And candidly, the margins needed to heal and recover following some of the challenges that were brought about by the ineffectiveness of the safeguard measures. As you may have also read, there is news that the EU has recommended that the safeguards be extended. The vote is tomorrow. So we will be watching that vote carefully. But that’s a good indicator that they are recommending that the safeguards extend. So, I think the strong market conditions are having as much more to do with this as the safeguard has been in place for some period of time now. Paul Lawrence: Yes. I would just add that, different from the U.S., Europe was struggling economically going into the pandemic. And obviously, the pandemic has, as Barbara said, had a greater impact on Europe and – than it has on the U.S. And so, really for quite a period of time now, the European margins were at historical low levels. And part of this is a recovery back to normal and slightly above at this stage. But it’s not that far above the historical through the cycle levels. Timna Tanners : Okay. Thank you, both very much. Barbara Smith: Thanks, Timna. Operator: Our next question will come from Emily Chieng with Goldman Sachs. Please go ahead. Emily Chieng: Hi. Good morning, Barbara and Paul. Thanks for taking the time here. My first question is just around what you are seeing in Europe around? And then, from your customers around finding and buying low carbon products, particularly as you have a very attractive carbon profile relative to that some of your peers? Barbara Smith: Well, I think, the results somewhat speaks of themselves. We are very proud of our low carbon business model and we are very proud of our customer service and quality and we’ve been working on a number of projects in Europe to improve all those things. We have a great team that executes well and as Paul indicated, the market conditions are improving and the economies are healing from the pandemic. So, we see a nice demand profile going forward, which is a result of the combination of all of those things. Emily Chieng: That’s helpful. And my second question is just around your production expectations. I know you mentioned production records during the quarter. But for how long can you sort of continue to operate at such high utilization rates. So, is there some level of maintenance we should expect over the next couple of quarters there? Thank you. Barbara Smith: Yes. Emily, we conduct maintenance on an ongoing basis and our equipment is maintained incredibly well and we – so, we will comment on specifics as we move forward in the various quarters. But in the coming couple of quarters, there is nothing outstanding to highlight. Emily Chieng: That’s really helpful. Thank you. Barbara Smith: Thank you. Operator: And our next question will come from John Tumazos with John Tumazos Very Independent. Please go ahead. John Tumazos: Thank you very much. I have a couple of questions related to pricing to whatever extent you can describe it. What are current spot rebar prices? Why do bar products diverge so much CMA grew hot-rolled futures this morning by $17.20 per ton. And how much would it be reasonable to expect the August quarter realizations to improve from 794 in the U.S. and Europe at 664? Thank you. Barbara Smith: John, thank you very much for your question. Unfortunately, we don’t make comments about – specific comments around pricing and I think supply and demand tend to work really, really well. And so, unfortunately, I can’t get more specific than that. John Tumazos: What is your invoice price for – quoted price for rebar if somebody wanted to buy a 1,000 tons today? Barbara Smith: They could enquire on our customer service line and reach one of our sales folks. I am sorry. I am not going to comment on specific prices. John Tumazos: Thank you. Operator: And there appears to be no further questions at this time. I would like to turn the conference back over to Ms. Smith for any closing remarks. Barbara Smith: Thank you, Cole. Thank you, everyone, for joining us today on our conference call. And thank you again to the CMC team for an outstanding quarter of performance. We look forward to speaking with many of you during our investor calls in the coming days and weeks. Thank you again. Operator: And this concludes today’s Commercial Metals Company’s conference call. You may now disconnect.
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Commercial Metals Company (NYSE: CMC) Earnings Report Highlights

  • Commercial Metals Company (NYSE:CMC) reported earnings per share (EPS) of $0.78 (adjusted EPS which excluded the $265 million after-tax litigation expense), missing the estimated $0.83 but generated revenue of approximately $1.91 billion, surpassing the estimated $1.83 billion.
  • The company faced a net loss of $175.7 million due to a $265 million litigation expense, contrasting sharply with the previous year's net earnings of $176.3 million.
  • CMC's consolidated core EBITDA for the quarter was $210.7 million, with a core EBITDA margin of 11.0%, and generated $213 million in cash flow from operating activities.

Commercial Metals Company (NYSE:CMC) is a prominent player in the steel and metal industry, known for its production and recycling of steel and metal products. The company operates in North America and Europe, providing a range of products including rebar, wire rod, and merchant bar. CMC competes with other industry giants like Nucor Corporation and Steel Dynamics.

On January 6, 2025, CMC reported earnings per share (EPS) of $0.78 (adjusted EPS which excluded the $265 million after-tax litigation expense), which fell short of the estimated $0.83. Despite this, the company generated revenue of approximately $1.91 billion, surpassing the estimated $1.83 billion. This performance aligns with the Zacks Consensus Estimate, although it marks a significant decrease from the previous year's EPS of $1.63.

The company's first-quarter fiscal 2025 results revealed a net loss of $175.7 million, or $1.54 per diluted share, primarily due to a $265 million litigation expense. In contrast, the previous year's first quarter saw net earnings of $176.3 million, or $1.49 per diluted share. Despite the loss, CMC achieved adjusted earnings of $88.5 million, or $0.78 per diluted share.

CMC's consolidated core EBITDA for the quarter was $210.7 million, with a core EBITDA margin of 11.0%. Late-season construction activity contributed to growth in North American finished steel shipment volumes, although margins were pressured by declines in average steel and downstream product pricing. The North American downstream backlog volumes remained stable, with a strong pipeline for future projects.

The company generated $213 million in cash flow from operating activities, equaling 101% of its consolidated core EBITDA. CMC returned $71 million to shareholders through dividends and share buybacks. The company continues to focus on its strategic growth plan, including organic growth investments and its "TAG" program, which is expected to yield financial benefits in fiscal 2025.

Commercial Metals Company (NYSE:CMC) Quarterly Earnings Insight

  • Earnings per share (EPS) of $0.83 and projected revenue of $1.87 billion for the first quarter ending in November 2024.
  • Analysts predict a decline in earnings, with a focus on the company's price-to-earnings (P/E) ratio of 11.79 and price-to-sales ratio of 0.72.
  • CMC showcases a strong financial foundation with a debt-to-equity ratio of 0.28 and a current ratio of 3.94.

Commercial Metals Company (NYSE:CMC) is a prominent player in the steel and metal industry, known for its production and recycling of steel and metal products. The company operates in a competitive market, with key competitors including Nucor Corporation and Steel Dynamics. CMC's diverse operations span across the United States and Europe, providing a wide range of products to various industries.

On January 13, 2025, CMC will release its quarterly earnings, with Wall Street estimating an earnings per share (EPS) of $0.83 and projected revenue of $1.87 billion. These figures are crucial as they provide insights into the company's financial health and performance during the first quarter, which ended in November 2024. Analysts are keenly observing these metrics to gauge CMC's market position.

Despite the anticipation, analysts predict a decline in CMC's earnings, suggesting the company may not meet the necessary factors for an earnings beat. This expectation is based on the company's current financial metrics, which include a price-to-earnings (P/E) ratio of 11.79 and a price-to-sales ratio of 0.72. These ratios indicate the valuation investors place on CMC's earnings and sales.

CMC's enterprise value to sales ratio is 0.76, slightly higher when accounting for debt and cash, while the enterprise value to operating cash flow ratio is 6.69. These figures reflect CMC's ability to generate cash from operations relative to its overall valuation. The company's earnings yield stands at 8.48%, offering a return on investment for shareholders.

Financially, CMC maintains a conservative debt-to-equity ratio of 0.28, indicating prudent use of debt in its capital structure. The company also boasts a strong current ratio of 3.94, highlighting its ability to cover short-term liabilities with current assets. These metrics underscore CMC's solid financial foundation as it approaches its earnings release.