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Pierre Matt; President; Metals Trading Company
Pablo Laurent; Senior Vice President and Chief Financial Officer; Metals Trading Company
The Tanners of Timna; Analysts; Wolfe Research
Ken Jensen; Analyst; BMO Capital Markets
Tristan Gresser; Analysts; BNP Paribas Exane
Phil Gibbs; Analysts; KeyBanc Capital Markets
Operator
Hello and welcome everyone to the fourth fiscal 2020 second quarter earnings call for CMC. I’m joined today by Peter Matt, President and CEO of CMC, and Paul Lawrence, Senior Vice President and Chief Financial Officer. Today’s materials, along with the press release and additional slides accompanying this call, are located on CMC’s Investor Relations website. Today’s call is being recorded. And after the Society’s comments, we’ll have a question and answer session, and then we’ll get some instructions. I would like to remind all participants that at this convention the Company will make statements that will provide data different from the old data and will come with expectations related to the effects of US laws on economic conditions. metal import levels, structural activity, demand for finished metal products, expected capacities, benefits and schedule for the structure of new facilities, long-term operations of the company, schedule for the execution of the company’s expansion plan, operational effects long-term of the company, monetary metrics and capital expenditures. These and similar statements are considered forward-looking and may involve certain assumptions and speculation and are subject to risks and uncertainties that may also cause actual results to differ materially from those expectations. These statements reflect the Company’s ideals under existing conditions, but are subject to certain risks and uncertainties, in addition to those described in the Risk Factors and Forward-Looking Statements segment of the Company’s most recent filings with the Securities and Exchange. United States Commission. The Company’s most recent annual report on Form 10K. Although such statements are based on management’s existing expectations and ideals, CMC provides no assurance that such expectations or ideals will prove to be correct and actual effects may vary. substantially. All statements are made only as of this date, unless required by law, CMC undertakes no legal responsibility to update, amend or explain such statements in connection with long-term events, adjustments in assumptions, the occurrence of expected or unforeseen events, new data or cases or otherwise. Certain figures presented will be non-GAAP monetary measures and reconciliations of those figures can be discovered in the Company’s earnings press release, in a supplemental slide presentation or on the Company’s website. Unless otherwise indicated, all references to year-end or quarter-end refer to the Company’s fiscal year or quarter. And now, for opening remarks and introductions, I would like to turn the call over to Peter Matt, President and CEO.
Pedro Matt
Pablo Laurent
Thank you, Peter, and hello to everyone who responded to the call. As previously reported, we reported second-quarter fiscal 2024 net income of $85. 8 million, or $0. 73 on a diluted percentage basis, compared to prior year levels of $179. 8 million. dollars and $1. 51 consistent with the percentage, respectively. This quarter’s effects come with after-tax net fees of $17. 2 million beyond Arizona Two’s ongoing commissioning efforts. Excluding those items, adjusted earnings were $103. 1 million, or $0. 88 per diluted percentage, compared to adjusted earnings of $171. 3 million, or $1. 44 per diluted percentage, during the same period of the previous financial year. Core EBITDA was $224. 4 million for the second quarter of 2024, a 26% cut. compared to the $302. 8 million generated the previous year in the same period, however, this is still a traditionally strong result. Slide 10 of the supplemental presentation illustrates year-over-year adjustments to CMC’s quarterly monetary functionality. The profitability of our metal equipment in North America and Europe was impacted by reduced scrap margins, while benefiting from improved functionality at controllable costs. Adjusted EBITDA also decreased in CMC’s emerging business organization primarily due to adverse weather situations in the United States and delays in assignments outside the United States. Consolidated core EBITDA margin of 12. 1% remained above average at legacy levels and compares to approximately 15% a year ago. I will now review our segment effects for the second quarter of 2020 for CMC’s North American Steel organization, which generated adjusted EBITDA of $222. 3 million for the quarter, or $220 per ton of finished metal shipped. Segment adjusted EBITDA minimized 19% year over year, primarily due to minimized scrap charge margin on metals and downstream products. This pressure was partly offset by obtaining more controllable load levels per ton. The North American metals organization’s adjusted EBITDA margin stood at 15%, compared to 18. 2% in the same period last year. As you may have read, scrap metal markets have slowed down in recent weeks. In this environment, we expect the metals margin on metal products to increase slightly during the third quarter, driven by minimum scrap rates. It should be noted that while metals margins, as indicated in our press release, are expected to improve sequentially in the third quarter, the positive effect on earnings will likely not be felt until further than expected later in the year. of the year. during or early in the fourth trimester. This is due to the general flow of stock rates in line with our thingy. A large portion of the scrap costs in CMC’s third quarter P&L will reflect the second quarter scrap charge levels we have in stock today. This is under our direction in the third quarter to deliver a strong adjusted EBITDA margin within our North American metals organization. Turning to slide 12 of the supplemental presentation, our annual metals organization reported an adjusted EBITDA loss of $8. 6 million for the second quarter of 2024. This marks an improvement of more than $20 million from average losses of $30 million in each one of the Beyond two quarters, when excluding the effect of energy rebates, the sequential improvement was due to a higher margin in scrap rates and minimum controllable rates per ton, which more than offset a 20% drop % in deliveries quarter by quarter. . Controllable charging functionality was improved sequentially and year-over-year due to minimization of energy values and consistent national movements across this footprint. As Peter mentioned, there have been encouraging signs that the Polish market is at least above the bottom and that supply and demand are becoming more balanced. Emerging Business Group, second quarter net sales of $156 million increased 1. 6% year-over-year compared to the prior year. Giant component assembly thanks to the incorporation of CMC anchoring systems. Underlying conditions requests were at times positive during the quarter, however, activity levels within several sets were affected by overseas weather conditions due to delivery delays in the United States and assignment delays in 10 fires, in Europe and the Middle East. market places. Despite weather concerns, order rates and visitor inquiries were high across North America, indicating momentum in the smart market and a season of strong structure ahead. We also expect our allocations in global markets to begin in the third quarter. Emerging Business Group adjusted EBITDA of $17. 9 million was down from $26. 6 million a year earlier. The adjusted EBITDA margin of 11. 5% represents a reduction compared to last year due to the positive effect of the addition of CMC anchoring systems and the strong profitability of our heat treatment activities. We are more than compensated through the market for the things already mentioned. As Peter highlighted, we expect a significant recovery in profitability for this business in the third quarter. Now let’s move on to the balance sheet, liquidity and capital allocation. As of February 29, money and money equivalents totaled $638. 3 million. Additionally, we had approximately $820 million in availability under our credit facilities and accounts receivable, bringing overall liquidity to just under $1. 5 billion. During the quarter, we generated $89 million of money from consistent maintenance activities despite using $62 million of money for current capital. Capital expenditures of $93. 8 million were generated by appliance purchases, primarily from our metals investments in West Virginia. CMC’s debt metrics have remained hot and improved significantly over the past few financial years. As can be seen on Slide 17, our net debt to EBITDA ratio is now only 0. 4 times, while net debt to capitalization is only 10%. Our balance sheet and overall monetary strength provide us with the flexibility to fund our strategic biological expansion allocations and execute our mergers and acquisitions while returning money to our shareholders. CMC’s effective tax rate was 26. 6% in the second quarter, which was slightly higher than our expected full-year rate due to reduced profit levels. Our two-quarter effective tax rate is 23. 3%. For FY24, we currently forecast an effective tax rate of between 24% and 25%. Regarding CMC’s fiscal 2024 capital expenditure outlook, we reiterate our guidance beyond a total of between $550 million and $600 million. outside of general maintenance investments. Planned spending for FY24 includes significant investments for Steel West Virginia’s structure, amounting to approximately $250 million. CMC has taken two significant actions since the release of the additional earnings to reinforce its commitment to delivering competitive cash returns to shareholders. As Peter mentioned, backing money to our investors is a key component of CMC’s strategy for capital allocation. To this end, our board of directors approved a 13% increase in the quarterly dividend payment. This follows the announcement in early January of a $500 million build in buyback authorization consistent with CMC percentage. We seek to use either avenue to distribute a large portion of our available cash flow among percentage holders. The execution of our repurchase program accelerated during the second quarter with the repurchase of approximately 945,000 per percentage at an average value of $50. 73 per percentage. Transactions during the quarter totaled $47. 9 million. And as of February 29, we had approximately $510. 4 million available for repurchases under our existing authorization, so that concludes my comments, and I’ll turn it back to Peter for further comment on our outlook.
Pedro Matt
Thank you pablo. We expect shipping volumes within our North American metals organization to remain on a typical seasonal trend during the third quarter, while our EBITDA margin for the segment will remain largely stable on a sequential basis, with situations in Europe . Expected to remain challenging, but adjusted EBITDA is expected to break even during the third quarter, the monetary effects of our emerging business organization are expected to improve significantly, driven by the overall seasonal increase in the demand. Strong underlying market fundamentals and a healthy order book. We continue to expect physically strong structural activity in the spring and summer, driven by increased infrastructure investments, which we believe will contribute to an already strong demand environment in both the North America Steel organization and emerging industry business situations. organization. for our Europe Steel Group are slowly improving and are expected to gain additional benefits from increased residential structure activity as a government first-time customer scheme and other government-sponsored investment schemes begin to take effect. have an effect on the demand for metal. We are proud of CMC’s monetary effects and the transformation that has made them possible. We are even more excited about our prospect of reaching new heights over the long term as we execute on our key strategic priorities and create meaningful value for our shareholders. Powerful structural trends in North America are expected to drive structural activity in the coming years, and CMC has positioned itself as a key beneficiary. I would like to thank our consumers for their acceptance of CMC and all of our employees. We are achieving yet another quarter of very strong performance. THANK YOU. And maybe at that moment, we open the door to questions.
Operator
We will now begin the Q&A consultation to request (Operator Instructions). So, the first time comes from Timna Tanners of Wolfe Research. Please go ahead.
Tanners Timna
Hey HELLO. And I just looked to probe those indications at constant margins in North America, if we can communicate a little bit about that, I think they’ve already done some of them and some of the explanations seem to be similar to the scrap pricing moment. It’s stabilizing after the recent drop, maybe in inventories, as you mentioned, but overall, it’s not unusual that in the last few years you’ve noticed a really big increase. And I would imagine that I might have some absorption of I think prices are constant as volumes and there’s a big climate impact in this second quarter of two, so I’d like to have a little bit more explanation on why margin indications, if there’s anything else to read and what’s driving that. panorama?
Pedro Matt
Yes, Timna, I think in terms of the effect of waste reduction, waste prices have come down especially here in March. And so it depends on the effect of what we actually accomplish through the P.
Timna Tanners
They gave it to me. Well, that’s helpful. Thank you. And then my current question is: could you touch on some of the hot topics that you discussed about knowledge centers and the 200, but the 350,000 tons of total rebar consumption?Can you put that in the context of what it means?In years past? And also, is this in the context of a U. S. market of around $9 billion or are those figures the right ones?And then as far as infrastructure goes, any feedback on cadence would be helpful.
Pablo Laurent
Thanks joe. So, for knowledge centers, this occurs in the context of a nine-million-ton rebar market. And what I don’t have in front of me to comment on the situation in the past, however, what I can tell you is much less and today there are figures of around 120 million square feet of need in knowledge centers. a dramatic accumulation of desires on the middle side of knowledge. On the infrastructure side, again, we’re seeing spending materialize, as we said last quarter as well, we’re starting to see it materialize. But now all the knowledge, all types of key indicators, whether it’s the Dodge Momentum Index or some kind of state budget, continue to show strong progress year over year and through some anecdotal conversations that we’ve had with the DOT, and we sense that you’re sure to see IGA cash coming in and spending going up accordingly. It is also vital to know that everyone indicates, and we have also said in the past, that spending is expected to increase over the life of the program.
Pedro Matt
So, it’s going through getting started. It’s going to build up to 2024 and then 2025 will deserve to be at a point higher than 2024 and 2026 will deserve to be at a point higher than 2025 and again, just to get back to your query about cargo tons. As we have said in the past, we think this represents an increase of 1. 5 million tonnes per year. Again, at that figure of nine million tons. I’m not sure I can add a little bit of color to that to still be the main signs that we’re hunting in this area.
Pablo Laurent
If we take a look at the early construction of Dodge in particular for infrastructure and again, more particularly for highways, they have it. They forecast a 25. 6% increase in home starts this year compared to 2023. That’s an incredible number. But again, this is an initial figure and literally reiterates the long-term nature of how long this tailwind will last, because those projects may not be completed this year. As Peter says, they’ll run out during the next one. In a few years, compare this to PCA data, which is based on cement intake in 2024. It is expected to increase by another 5. 5% and then another 4% next year, and this will continue until 2025. So, it’s more about metal in the sector. But it’s very impressive to see Dodge’s startup forecasts for the current year.
Tanners Timna
They gave it to me. It is ok. Thanks again.
Pedro Matt
Thank you, Timna.
Operator
And the next one is from Ken Jensen of BMO Capital Markets. Please come forward.
Ken Jensen
Hello, thank you for answering my questions. First of all, could you remind us what the seasonality of catch volumes is in North America?It regularly ranges from 5% to 10% from time to the third trimester. We will be at the top of the ranking. This time we thought about diversity, given the most dramatic climate we’ve ever had. So that’s the kind of general diversity we’re hoping for. And then maybe in the group of emerging corporations, when I know you said it would add up. sequentially significantly. Now, when I look at last year, the EBITDA was around $38 million, how do we think about this segment compared to last year?
Pablo Laurent
I mean, we’ll expect the emerging organization of corporations to return to trendline performance. So, again, the quarter, as we said, we had some conditions, adding the weather, as well as delays in shipments out of the United States. that impacted us. But if we look at this business going forward, it deserves to have an EBITDA margin of 15% to 20% and it deserves to grow organically and we expect it to come back to something like that. We did it last year.
Ken Jensen
Again, thank you very much.
Pablo Laurent
Yes, absolutely.
Pedro Matt
Thank you.
Operator
Tristan Gresser of BNP Paribas Exane
Tristan Gresser
Yes Hello. Thank you for answering my questions. So I’ve been given two. The first is the Mexique. Et and then when we look at the products, the imports from Mexico, it’s probably the one that’s increased in the last few years, there’s been a lot of noise and I think the senators want to come to an agreement to go back to the price lists of imports from Mexico. So, can you talk a little bit about the stage there?And what do you think is the likelihood that we will get industrial measures?And that’s my first question. Thank you.
Pedro Matt
Yes, absolutely. Then you’re right. There was recently a bill introduced through Senators Brown and Cotton. And the purpose of the bill is also to repair price lists in grades that are modeled after Divisions Two, 3 of the waiver and the USMCA, and it’s too early to see what happens there. So we’re going to continue to monitor that. But yes, it would have an impact, because there has been. There has been an increase in shipments of rebar and commercial bars to the U. S. But it’s still early days and we’ll want to monitor that.
Tristan Gresser
It is ok. But you have noticed that the habit of Mexican manufacturers who increase their production is to be more competitive in prices. Has this been a challenge for you in the market you operate in?
Pedro Matt
Yes, we are aware of that, but we have them. But, at the same time, we’ve noticed a decline in some imports from other regions, right?So I would say that overall, you know, imports were less important in the quarter and we expect them to be less important in the next quarter. So yes, we can see it. But again, it’s hard to say what the effect of the finish or the end results will be.
Tristan Gresser
It is ok. That’s all. It’s useful. And maybe just some other about infrastructure, at the risk of sounding a bit like a damaged record. But I mean, we were talking about infrastructure, I think a year ago would have been consistent days. And I was wondering if he mentioned it a little bit. I think the delays were also partly due to the political situation. Now that we’re getting closer to American unity, elections. Could this happen with the upgrade or not?Does no replacement in management add a little more delay?And if so, I mean, 2025. Si we take a look at the original situation, I could share some ideas. So if you think there might be a delay, we’re seeing a significant increase in capacity throughout this year. This is true towards the end of the year. But I’m still a little worried given the political situation, the expansion of the fountain in 2025. We may see a gap between source and demand. Basically, I’d like to hear from you.
Pablo Laurent
Thanks, Tristan, and thanks for the question. And we are not worried about delays. And if you think about what we’ve been saying for the last few quarters, there’s a complete pre-design phase. There is a design phase that these projects will have to go through until they reach the spending period. And in our conversations with some transportation departments, what they took us to and told us is that, yes, not often those predefined payment stages can take years, right? what not, etc. This is the moment we thought we would see this come true. But today we are seeing it become a reality, as I mentioned in my answer to one of the previous questions. So we see spending going down and the other thing I would say is when we look at the kind of political situation, we think either party helps our current infrastructure spending. It was a bipartisan bill when it passed. And we didn’t see any hesitation, either on the Republican side or on the Democratic side. That’s why we remain positive about it. And maybe just to keep your point about capacity? Yes, there is some capacity in the pipeline, but there is a difference between the announced or indicated capacity and the capacity that is actually being built. And we are very satisfied with our estimates on the amount. our capacity is really enhanced and the market can take care of that capacity. So overall we are very positive. The context of the request is, as I said in my prepared remarks, a kind of generational change from what has been, and it is a multi-year expenditure that is being made to put us in a smart position, I think, for the next few years. .
Pedro Matt
Tristan, I’ll just upload something regarding your comment that we’ll see some capacity online in 2025, and I don’t think that’s necessarily correct. I think if you take a look at the timeline related to our projects and so on. And if you look at the time related to the start-up of the plants, I think from a genuine product to the market, we’re looking at this point beyond 25 years to bring the new capability online.
Tristan Gresser
It is ok. Thanks for the replies, I do.
Pablo Laurent
Thank you.
Operator
Phil Gibbs of KeyBanc Capital Markets
Phil Gibbs
Good morning, Phil, I’m just curious about the cadence of capital spending right now and in FY25. Are you completing any of those projects?
Pablo Laurent
And sometimes speaking, our CapEx procedure is pretty consistent year after year. We started the year relatively slowly and then sped up the summer months. And we anticipate that as we complete the civil structure paintings in West Virginia, we’re definitely going to continue to see an increase in spending at this site, which drives the bulk of our CapEx in the third and fourth quarters. So, given where we are so far this year, we expect the third and fourth quarters to reach our guidance is fairly light between those two months. And if you imagine that the year 25 will complete those projects, how do we deserve to think about it?Yes, our spending in West Virginia deserves to be, and probably equal to, the $250 million we spent. are forecasting for this year.
Phil Gibbs
And then just in terms of plant start-up costs, I know he said he was given some of the first initial upheavals with MBQ, which is great. And rebar turns out to be a little more measured here in the short term. How should we think about start-up costs at NAM in the third and fourth quarters?
Pablo Laurent
Well, as far as rebar goes, we’ve largely crossed the bridge in terms of commissioning. I mean, we’re in good shape as far as rebar goes. So I think it’s really about continuing to expand the product families on the MBQ side. We have already had good fortune and we will continue to grow so, as we indicated in our reviews, we still expect to succeed in breaking even in EBITDA in our fiscal fourth quarter. I think you’ll see those lines disappear. And they will simply be ongoing upfront costs, as it is for us. But those will be much lower numbers because we will be looking for profitability.
Phil Gibbs
So, quarters, the rule of maximum commissioning and commissioning costs?
Pablo Laurent
Yes, I say that, with a bit of luck we can say that the second quarter of this year is the peak and things are going to be minimized from here.
Phil Gibbs
It is ok. And just in terms of your net current capital outlook for the rest of the year, I think the first part would have arguably been a little heavier than expected, however, you’ve probably built buildings that you’re dominating right now. During the year, as shipments increase and are scrapped, it has also decreased. So, it has several elements going for it, but it also has higher degrees of trading activity. So how do we think about working capital?
Pablo Laurent
Yes, Phil, current capital deserves us to invest as I mentioned in my remarks, about $60 million of current capital that was strictly due to the accumulation of scrap cargo in the second quarter, because our scrap was finished at that point. quarter. in the 3rd quarter. We anticipate that most of that will come back and, you know, offsetting with other points is that yes, we built up a small amount of stock in the second quarter for the next structural season. And that deserves to contribute to the expansion that we’re expecting from accounts receivable, so I think both will be net. And that’s why we deserve to be at a working capital generation here as we close out the year and, indeed, the third quarter with the start of that.
Phil Gibbs
Thank you.
Pablo Laurent
Thanks, filo.
Operator
At the moment it turns out that there are no more questions. Peter, Matt, I’ll call you back.
Pedro Matt
It is ok. Well, I’d just like to thank everyone for joining today’s call. We are satisfied with the effects we have been able to generate and remain very committed to the structural perspective in terms of demand for our products and this is the result. Thank you very much for your interest in CMC and we look forward to speaking with you in the future.
Operator
Thank you for joining us at today’s conference call, and we look forward to speaking with many of you on our investor calls in the coming days and weeks. This concludes today’s CMC telephone convention. You can now log out. And I don’t know in the U. S. or right now.