Commercial Metals Company (NYSE:CMC) First Quarter 2023 Results Conference Call January 9, 2023 11:00 AMm. ET
Participating companies
Barbara Smith – President, President and CEO
Paul Lawrence – Senior Vice President and Chief Financial Officer
Conference Call Participants
Emily Chieng – Goldman Sachs Group, Inc.
Timna Tanners – Wolfe Research, LLC
Lawson Winder – Bank of America Merrill Lynch
Philip Gibbs – KeyBanc Capital Markets Inc.
Tristan Gresser – BNP Paribas Exane
Operator
Good morning and welcome everyone to the call for first quarter of fiscal 2023 earnings for Commercial Metals Company. Today’s material, press release and other slides accompanying this call can be found on CMC’s investor relations website. Today’s call is recorded. And after the Company’s comments, we will have a query and response and we will have some commands at that time.
I would like to remind all participants that in this convention call, the Company may make statements that provide data other than the old data that will come with expectations related to economic conditions, effects of legislation, U. S. metal import levels, and the United States. In the U. S. , the activity of the U. S. structure U. S. services for finished metal products, the expected functions and benefits of the new facility, the Company’s long-term operations, the timing of the Company’s expansion plan, the Company’s long-term operating results, monetary measures and capital expenditures.
These statements and others like them are forward-looking and possibly would involve certain assumptions and speculations and are subject to dangers and uncertainties that may also cause actual effects to differ materially from those expectations. These statements reflect the Company’s ideals based on existing conditions, which are subject to certain hazards and uncertainties, adding those described in the Risk Factors and Forward-Looking Statements segment of the Company’s most recent filings with the Securities and Exchange Commission, adding the Annual Report on Form 10-K.
While such statements are based on management’s existing expectations and ideals, CMC does not guarantee that such expectations or ideals will prove to be correct, and actual effects are likely to vary materially. All declarations are made only on that date, unless required by law. CMC assumes no legal responsibility for updating, modifying or explaining those statements as a result of long-term events, adjustments in assumptions, expected or unexpected events, new data or cases or otherwise.
Certain figures presented will be non-GAAP monetary measures and reconciliations of such figures can be found in the Company’s earnings release, additional slides, presentation or on the Company’s website. Unless otherwise indicated, all references made at the end of the year or quarter are references to the Company’s fiscal year or quarter.
And now, for opening remarks and presentations, I would like to turn to the Chair of the Board of Directors, President and Chief Executive Officer of Commercial Metals Company, Ms. Barbara Smith.
Barbara Smith
Good morning, everyone, and thank you for participating in CMC’s first quarter earnings convention call. I hope everyone had a glorious holiday season. As we indicated in our press release issued this morning, the first quarter of fiscal 2023 was another exceptional period, marking the most productive time for core EBITDA functionality in our company’s history. I must thank the 12,000 CMC painters who made those effects possible. Their hard work and specific efforts are appreciated and are the driving force behind CMC’s success.
I’ll start today’s call with some feedback on CMC’s functionality in the first quarter and then talk about our key strategic expansion investments and sustainability efforts before offering an update on the existing market environment. Paul Lawrence will cover the quarter’s monetary data in more detail, and then I’ll conclude with our outlook for the fiscal quarter at the moment, after which we’ll open the call for questions.
Before we begin with my comments ready, I’d like to direct listeners to the additional slides that accompany this call. The presentation is available on CMC’s Investor Relations website.
As I mentioned, CMC’s earnings for the first quarter of fiscal 2023 were among the most powerful in our company’s 108-year history. We achieved a net revenue source of $261. 8 million or $2. 20 consistent with a diluted percentage consistent with net sales of $2. 2 billion. The effect on mill start-up prices incurred in our Arizona 2 project, the adjusted source of revenue from ongoing operations was $266. 2 million or $2. 24 based on diluted percentage.
CMC generated critical EBITDA for the quarter of $425 million, an increase of 30% year-over-year, resulting in an annualized return on invested capital of 23%. Results in our North American segment were exceptional as our team benefited from demand. Adjusted segment EBITDA was less than 1% below its record, excluding the impact of our California land sale in the current quarter of 2022. which resulted in significant year-over-year profit growth.
Our Europe segment performed well despite a challenging economic environment, generating adjusted EBITDA more than double the 10-year quarterly average. Faced with the much-publicized economic headwinds related to the existing energy crisis, our team in Poland has leveraged its right load design to obtain a profitable market share and a higher volume level.
Looking at the quarter as a whole, CMC found very different market environments within its two segments with tailwinds in North America and headwinds in Europe and demonstrated that we must perform well in either environment. Our well-aligned business style and methods have allowed us to make the most of opportunities when they arise or adapt and adjust temporarily when demanding situations arise.
Now I would like to talk about CMC’s strategic expansion investments, i. e. our exciting new field assignments. Our Arizona 2 Micro Mill assignment is on track for commissioning later this spring. Quarter while we exercise and exercise our groups and begin to start the new equipment. We are excited to begin commissioning and look forward to offering updates as the procedure evolves.
Once the AZ2 is commissioned, CMC will function as one of the most exclusive metal complexes in the world. Not only will we be able to pioneer another industry by generating commercial bars in a microfactory, but we will also have co-located two of our microfactories. -Factories in a unique configuration. We expect this arrangement of the two generators to provide synergies, adding shared support, production optimization, higher production creation plans, and shared site infrastructure.
The rollout of Arizona 2 appears to be at the right time with the Infrastructure Investment and Jobs Act, which is expected to begin ramping up the public infrastructure structure later this calendar year. We intend to concentrate first of all on accelerating the production of corrugated rods with the start-up of commercial products to stick to later. Currently, we plan to produce a combination of about two-thirds rebar and one-third commercial bars annually. Of course, as we discussed earlier, Arizona 2 will have the operational flexibility to seamlessly adjust its production combine based on market demand.
Moving on to CMC’s other biological expansion projects, we announced in early December that our fourth microplant would be located in Berkeley County, West Virginia. Location in a state that helps innovation in production. I want to thank Governor Jim Justice and the entire West Virginia economic development team and the committed staff of Berkeley County for their assistance in the site’s variety procedure and their continued assistance as we become a vital member of the community.
During the plan drawing up phase, we called this expansion initiative MM4. I am pleased to say that after formalizing our selection, we will be changing the name of our plant to CMC Steel West Virginia. The plant is expected to have an annual capacity of approximately 500,000 tonnes and will be able to directly generate and corrugated coils. The new plant will feature the latest productivity-enhancing technologies for microsteel milling, adding Danieli’s Q-One feed formula we first implemented in Arizona, making CMC Steel West Virginia one of the cleanest and most energy-efficient plants in the world.
The site’s planned location in West Virginia’s Eastern Panhandle will adequately supply the dense rebar customer markets of the Northeast and Mid-Atlantic. Nearly 60 million people live within a popular shipping radius of this site, providing a variety of business opportunities in several primary metropolitan areas.
As can be seen from slide 6 of the companion presentation, it is also ideal for optimizing CMC’s existing operational network in the eastern United States. We expect to generate synergies through reducing logistics costs, optimizing combined production in factories and decreasing protective stocks. and intensified visitor service capabilities.
The allocation is expected to have a net charge of approximately $450 million. Based on the expected timelines for authorization and construction, the plant is expected to become operational by the end of 2025. Both assignments greatly promote CMC’s leadership strategy in strengthening scenario building. We will also bring significant cumulative gains and expansion money flow price to our investors.
In addition to our biological expansion plans, we remain very excited about the integration procedure of our acquisition of Tensar and Paul will talk about monetary contributions a little later.
During the quarter, we acquired two scrap recycling services and are pleased to welcome those workers to CMC. These two acquisitions are our captive waste strategy to obtain a cost-effective source of metals for our plants.
Before moving on to [market] (ph) comments, I’d like to take a moment to highlight the progress of CMC’s sustainability efforts. Our FY 2022 Sustainability Report released last month illustrates CMC’s leadership position in environmental functionality and our ongoing commitment to not stopping improvement.
In fiscal 2022, CMC’s Scope 1 and 2 greenhouse fuel emissions were just 0. 413 tons of CO2 per ton of metal produced, representing a 14% relief from 2019 and a minimum of 7% from fiscal 2021 grades. These Scope 1 and Scope 2 degree emissions intensity levels are nearly 80% below the global industry average. Some would be surprised to learn that, despite the higher concentration in ESG, global metal industry emissions consistent with tons have actually been higher in recent years. However, CMC is entering the opposite direction through employing innovation, improved procedures and energy sourcing to make the metal greener with less impact on the environment.
CMC’s microplant projects will increase our environmental footprint, as this generation consumes 32% less energy and emits 30% less greenhouse gases compared to popular mini-plants. Once AZ2 and Steel West Virginia are fully operational, approximately one-third of our products will be manufactured using the world’s cleanest steel generation. These investments are another example of how smart business decisions and environmental stewardship go hand in hand at CMC.
As you can read in our 2022 Sustainability Report, CMC is on track to meet or exceed its 2030 environmental targets similar to scope 1 and 2 greenhouse fuel emissions intensity, water use and energy intensity, and renewable energy supply. Soon, we will think about those goals again and set new goals.
Now I would like to communicate about the CMC market environment, starting with North America. I hope it will be encouraging that my feedback is very similar to our recent updates as we continue to revel in solid market situations and see symptoms that strength will remain. We are well aware that recession fears are expanding in the investment network and are being reported in the monetary press, and we are very attentive to situations. However, in our business, we don’t see any significant symptoms of slowdown.
Demand in the first quarter remained solid at the highest levels across our product lines and key geographies. Most of the key signals driving nine- to 12-month corrugated consumption point to long-term growth. These signals come with external and internal measures that have traditionally been reliable in our indices that we have referenced in previous market comments.
Let me review several of those key external indicators. The Dodge Momentum Index, which measures the price of nonresidential projects entering the plan-making phase, hit a record high in November. The reading highlighted a strong expansion in advertising and institutional parts of the index, up 28% and 21%, respectively, since last year.
We recently began tracking a separate Dodge indicator that tracks the price of infrastructure projects entering the design and pre-design phases. It will soon begin to have an effect on the structure’s activity on land.
To give an idea of the scale, the price of assignments tracked through Dodge’s design phase index over the past 3 months doubled from the previous year and 12 times more than two years ago. CMC’s internal vision also gives us confidence for the future. The bidding business remained at the traditionally highest grades in the first quarter, driven by a wide diversity of assignment types in the public and personal sectors.
As shown on slide 9, our downstream order book continues to grow year over year when measured in terms of price and quantity. Beyond the short term, there are ongoing structural trends that will help strong nation-building activity.
The first, which I mentioned earlier, is the federal infrastructure package enacted a year ago. At full throttle, this plan is expected to increase federal investment for projects that use base bars, such as roads, bridges and similar structures, up to 65% of the FAST Act it replaced.
We estimate that the impact will be 1. 5 tonnes of additional annual demand for corrugated rods in a domestic market of around nine million tonnes, representing an increase of around 17% in consumption. Spending is expected to increase over five years and assuming typical timelines for approvals of allocations, tenders and awards, we deserve to start seeing how some affect structural activity in calendar year 2023. The Dodge knowledge I mentioned above supports this view.
Another significant structural trend is securing critical industries. We have already discussed the large scale and speed of the structure of new semiconductor services. Currently, there are plans to build at least 11 services with a total related investment of more than $275 billion. CMC already offers several such projects, they have not yet started and do not have an impact on the consumption of corrugated rods.
Semiconductor chip and wafer factories are the ultimate visual examples of relocation, although other industries are also experiencing increased activity or allocation planning. on electric cars and battery production.
The last 3 years have highlighted the vulnerabilities of concentrated global supply chains structured to function in sound situations and cooperative political regimes. The pandemic and geopolitical turmoil have reminded us of the need for a more distributed set of source options, ensuring reliability and flexibility in securing critical fabrics and equipment. Eventually, we expect the relocation to become larger beyond the spaces we just discussed.
For advertising steel, the underlying demand of situations and end-use OEM markets are sometimes stable. Following the downsizing event that occurred in our fiscal fourth quarter, shipments to service centers stabilized at higher levels in the first quarter. We expect genuine underlying demand to continue at a steady pace in the coming quarters.
As I indicated, market situations in Europe are more challenging. Overall, the structure’s activity continued to grow year-over-year in the first quarter. However, residential activity, which had been solid for more than a year, is now showing up. Symptoms of slowdown due to the effect of interest rates on emerging loans.
New mortgages have declined particularly in recent months. However, the systems are evolving to help first-time buyers, which is expected to attract more activity to the market through the middle of the 2023 calendar. In addition, due to the existing energy crisis, business activity in Central Europe has been contracting since the summer of 2022. This has had an effect on demand for commercial laminates and some wire rod products. On the other hand, energy costs have moderated somewhat since recent market highs and mild temperatures also deserve to bring some relief.
As illustrated in slide 10 of the follow-up presentation, the European energy crisis, combined with sanctions on industry, has had an effect on former industry flows in the region, benefiting Poland relatively. Corrugated export position compared to a fairly giant net import position a year ago.
The volatility of the value of electricity relative to the EU in general has tended to be less high in Poland over the past year due to factors that have created favourable load dynamics for Polish generators. Energy prices have been lower and more stable, offering some opposite coverage. to fabrics imported from other countries of the European Union.
As far as the rebar industry with countries outside the EU is concerned, few foreign curtains entered the Polish market to compensate for the loss of Russian and Belarusian corrugated rods. available and have higher energy costs. So, while European demand is a challenge lately, the source aspect of the economic equation is helping to offset much of the negative impact.
In this environment, CMC leveraged its strong relative load position and operational flexibility to profitably gain market share. Shipments of corrugated rod, commercial laminates and wire rod in the first quarter were well above the long-term quarterly average despite sluggish environmental demand. We would expect those benefits to continue to favor CMC.
Finally, as stated in our press release, our Board of Directors declared a quarterly monetary dividend of $0. 16 consistent with a consistent non-unusual percentage of CMC for shareholders of record on January 19, 2023. This represents the 233rd consecutive quarterly dividend, with an amount paid consistent with a consistent percentage that expanded by 14% through the first quarter of fiscal 2022.
With that as an overview, I’ll now turn to Paul Lawrence, Senior Vice President and Chief Financial Officer, for some additional comments on the quarter’s results. Paul?
Paul Laurent
Thank you Barbara and Happy New Year to whoever is called.
As Barbara noted, we reported a net revenue source of $261. 8 million in the first quarter of 2023, or $2. 20 consistent with diluted share, compared to prior year securities of $232. 9 million and $1. 90, respectively. -$4. 4 million tax rate similar to CMC Arizona project start-up activities. We expect to continue to incur start-up pricing for the remainder of fiscal 2023.
Excluding the effect of this item, adjusted earnings were $266. 2 million, or $2. 24 consistent with diluted interest. Core EBITDA was $425 million for the first quarter of 2023, representing a 30% increase over the $326. 8 million generated a year earlier. consistent with iodine.
Slide thirteen of the companion presentation illustrates the strength of CMC’s quarterly results. Our North America segment drove significant year-over-year earnings growth, while Europe experienced some decline. to $223 in line with the ton a year ago.
Now I will review the effects through the segment. CMC’s North American segment generated adjusted EBITDA of $378 million for the quarter, or $348 consistent with the ton of finished metal shipped. The segment’s adjusted EBITDA increased 41% year-over-year, driven through consistency with margins on downstream and metal products relative to their underlying scrap costs.
Downstream products were a significant year-over-year contributor, as the average selling value increased more than $300 per ton compared to the first quarter of fiscal 2022. as well as consistent with controllable costs consistent with ton of finished metal basically due to consistent with unit values for alloys, energy and freight.
On a sequential quarterly basis, controllable prices consistent with the tonne remained relatively unchanged, with value symptoms for some key consumable inputs peaking and possibly beginning to decline in the coming quarters. Going forward, we have a number of maintenance outages planned that won’t have an effect on shipping volumes, but will result in a buildup of controllable pricing over the next few quarters.
Sales of steel products in our metal generators increased to $44 consistent with the ton year-over-year, but decreased to $84 consistent with last quarter’s ton. Iron and metal scrap margin rose to $147 consistent with the ton a year ago. Compared to our fourth quarter, metals margin decreased to $22 in line with tonne, as the average decline outpaced the decline in scrap costs.
Deliveries of finished goods in the first quarter were virtually unchanged from the previous year and followed a typical seasonal trend compared to the fourth quarter. Final market demand for our factory products remained strong. It is expanding year after year. They are still moderated due to the limited source of labor and apparatus in some geographical areas. Commercial laminate demand is strong at smart levels.
Let’s move on to slide 15 of the companion game. Our Europe segment generated adjusted EBITDA of $64. 5 million during the first quarter of 2023, which included receiving annual energy credits totaling approximately $9. 5 million. First quarter effects compare to adjusted EBITDA of $79. 8 million in the prior year period. at higher energy costs, negative effects have an effect on profit and loss of promoting higher-cost inventories in an environment of diminishing value; The reduction of energy credits, which exceeded 15 million dollars last year, as well as the weakening of the Polish zloty against the US dollar.
CMC’s energy hedging position returned significant dividends, as real prices were well below grades that would have been paid if we had purchased only locally. , as well as the effect of a planned major maintenance outage during the comparative era of the first quarter of fiscal 2022.
Demand situations in Central Europe are challenging. However, Poland’s structural market continues to grow by an average single-digit percentage, while commercial production has entered a contraction phase due to the existing energy crisis.
We CMC is well placed for this era of volatility in Europe. We are a cheap industry leader with operational flexibility to adapt and cater to conversion market conditions.
Tensar generated $11. 4 million in the first quarter, generating an EBITDA margin of 18. 9%. Margins were temporarily hampered by production issues at our geogrid plant in Morrow, Georgia. Increase in logistics prices and slowdown in delivery times due to the shipment of products from our operations abroad.
As a reminder, Tensar functionality is included in existing CMC segments. Of our $11. 4 million in EBITDA, $8. 1 million is included in CMC’s North America segment, with the remaining $3. 3 million recorded in our Europe segment.
Let us take stock. As of November 30, 2022, money and money equivalents were overall at $582 million. In addition to the money and equivalents, we had approximately $915 million in our credit, term loan and debtor line of credit, bringing overall liquidity to $1500 million.
During the quarter, CMC took some notable investment stocks. First, we repurchased $115. 9 million of CMC’s 2023 senior bonds through a tender offering process, leaving $214. 1 million outstanding, due in May. Second, our revolver increased to $600 million and at the same time, we canceled our accounts receivable program in the U. S. This resulted in a net accumulation of $50 million in availability. And finally, CMC has established a $200 million term line of credit that can be used to refinance maturing notes if we choose.
During the quarter, we generated $372. 4 million in money from operating activities, with current capital being a relatively unbiased factor. Our loose money was $239. 3 million, explained as our operating money minus $133 million in capital expenditures. It has taken a step forward especially in recent years.
As you can see on slide 19, our net debt to EBITDA ratio is now only 0. 4x. While our strong balance sheet and overall monetary strength give us the flexibility to fund our strategic biological expansion plans and pursue opportunistic mergers and acquisitions while proceeding to return money to shareholders. CMC’s effective tax rate was 22. 7% in the first quarter. Looking ahead to fiscal year 2023, lately we expect a full-year effective tax rate of between 23% and 25%.
Regarding CMC’s capital expenditure outlook for fiscal 2023, we expect to invest between $500 million and $550 million in total. to happen this year.
Finally, CMC purchased approximately 1. 3 million shares in the first quarter of the fiscal year at an average value of $38. 53 in line with the stock. Transactions from the inception of the buyback program through the first quarter totaled approximately $211 million, leaving $139 million remaining under authorization.
That concludes my remarks. And I’m going to refer to Barbara to comment on our perspective.
Barbara Smith
We remain convinced that fiscal 2023 will be another year of strong economic performance. The backlog and downstream tenders are traditionally at the highest levels and are expected to help volumes in the short term. In addition, we look to the future until the commissioning of our new microplant, Arizona 2, in the spring, which will be particularly CMC’s ability to leverage the strength we see in the structures markets.
We expect smart monetary effects in the current quarter compared to old standards, seasonally low compared to the first quarter. We expect a healthy call for our products to continue in North America while situations in Europe are more challenging and may be affected by visitor pessimism and general uncertainty.
However, as I mentioned earlier, CMC’s operations in Poland are very well placed to be competitive given its leading position in costs and operational flexibility. to compress from first trimester levels.
Once again, I must thank all of our CMC employees for delivering an extraordinary quarter of performance.
Q&A session
Operator
Merci. Et at that time, we will now open the call for consultations. [Operator Instructions] And our first consultation will come from Emily Chieng of Goldman Sachs. Continue.
Emily Chieng
Good morning, Barbara and Paul. Thank you for this morning’s update. I would like to start by asking about the Europe segment there. Volumes were much higher than expected. Of the still solid strength of the Polish structural market that you see?And then, if you have an idea of what volume expectations might look like for the rest of the year?
Barbara Smith
Yes. Thank you, Émilie. Happy New Year. Then I would say the following. If you take a look at our strategy in Europe, we have had a planned strategy over time for our Polish operations by creating a scenario where we have great operational flexibility and expanding the diversity of products we have to offer. If you go back 10 or 15 years, we relied heavily on construction products, rebar and wire rod. And there has been a planned investment strategy to invest in traders and even some SBQ diversities.
And what it does for us is it gives us flexibility as market situations change to move the product line to markets with smart demand or increased demand. In addition, we have worked very hard to have an advantageous cargo design compared to other features in the region. And the two points combined have allowed us to move to the markets that have the highest demand. Therefore, I would say that we are encouraged, as I said earlier, through the basics of design in Poland in the future, even if there is some relief in residential expansion, still smart and smart: there is a positive GDP in Poland compared to other parts of the region.
There are, as I indicated, industrial flows replaced as a result of the war. This created an opportunity for CMC to interfere and fulfill the call that met across Russia and Belarus. So, all those points combined, we will continue to leverage our economical design and operational flexibility to move where the most productive market opportunities lie. And this will allow us to have intelligent operational effects in the future.
Emily Chieng
Great. It’s very clear, Barbara. As a follow-up, I would like to delve deeper into the cargo observation that was provided. It turns out that things are peaking and you may start to see the first symptoms. From the fall in some prices, warmer weather has probably also knocked down the structure of the energy load. But could you perhaps also share what you see in each of the other parts of the controllable load calculation?Do you expect maintenance activity to arrive this year?I’ll leave it at that. Thank you.
Barbara Smith
Let me make some general comments and then I’ll let Paul explain further. If you take a look, and you step back and look at what happened when COVID hit, there was only a serious supply chain disruption and a serious economic backlash because there were so many unknowns. If you fast forward to the moment when the war broke out between Russia and Ukraine, you saw a similar scenario where, in the example, I’m moving to using the power that has just skyrocketed because there’s all this uncertainty about how Europe gets its power and what the value would be.
He has also noticed a large buildup in various materials, alloys and other raw elements as a result of this disruption. that interruption of the source chain. COVID probably isn’t such a clever example of war because it was far-reaching and we had a very concentrated chain of origin.
But in the case of war, over time we saw that the chain of origin began to adjust and, in particular, the costs of the alloy continued: they began to be transmitted and the costs adjusted downwards as we discovered other characteristics of the source and the uncertainty is: it began to clear. . So, inflation is still largely a factor in the world, but there is definitely a relief that happens because of this initial reaction and then everyone figures out how to adjust their supply chain. But I’ll let Paul make a few other comments.
Paul Laurent
I think Barbara’s comments point to what we’re seeing in North America on the charges side. Really, the only comment that would go up to our charges overall is about the aspect of herbal fuel in Europe, herbal fuel contracts are reinstated, essentially twice a year in October and May. And so, until October, we operate with loads of herbal fuel that were before the war, and then they restart. Fortunately, our herbal fuel is limited to the reheating furnace. The charge has increased approximately 6 times more than before. That’s the only domain where we’ve noticed an increase in charges. And that’s express for European operations. Regarding your other query about maintenance failures, we have some major breakdowns coming in the latter part of this year. And in fact, starting at the end of the week, our plant in Seguin, Texas, will be closed for a while because it will upgrade the furnace.
There will be a long era of time during which we do not melt steel. However, we have many billets in the field and will continue to laminate the product, serving consumers in this era. But when we get out of the outage, we’ll have more effective installations and get some benefits from the new generation that’s being deployed. I’m very excited about that. It’s a furnace that has produced far beyond the overall lifespan, just a testament to the ongoing maintenance and operations the equipment is doing there.
Then in the third quarter, we have another outage, and I named it just because it’s at our Alabama plant. And again, this is a new renovation of some of our roughing and rolling cages, which not only increases the reliability of those, but also allows us our product line. And so we are reaping benefits from it in the future. Therefore, they will be important, but we look to the future to ensure continued reliability and offer us opportunities as we move into the future.
The reliability of this device is essential. We ran hard while enjoying this complicated era: those complicated market conditions, those smart market conditions. And so we want to make sure we continue to do maintenance to make sure the reliability is there.
Operator
And the next one will be from Timna Tanners of Wolfe Research. Continue.
Timna Tanners
Hello, hello, guys, and happy new year. I sought to know a little more, if possible, about slide nine and the trends you see on the downside. I only seek to reconcile the decline in source and accumulation with comments about the upward trend in falling commodity prices. Is there an explanation for why it turns out to turn around, but there are also reviews about higher prices?I’m just looking to reconcile the comments. Thank you.
Barbara Smith
Happy New Year, Timna. Thanks for the question. We have a seasonality in the bidding activity in the production aspect of the company. And normally, as we move towards the end of the year because there’s a decrease in structure activity in the winter months, we have an end to seeing adjustments in the decline in activity at that time, and then it accelerates when it goes through the first of the year. The other thing I would say is that we’re seeing a little more spotty activity in auctions and electronic reserves in the factory because of those very big tasks that I mentioned, like the semiconductor and some of them, are out there and they’re in the painting, but there could be a project that we plan to publish and it’s a quarter missing and it falls into the next quarter. We had some very large paintings that were only a matter of time.
Overall, we are following the scenario largely because we all know all the economic concerns. And we continue to see a very, very strong portfolio of deals and confidence in the owners of those projects that they’re going to go ahead, commercial projects in particular, the balance sheets are solid. Companies have money. They do not have the investment to carry out these projects.
And those types of projects, once they are set aside and funded, will be completed. Therefore, we do not see an accumulation of activity in the new offerings. We are not seeing an accumulation of activity in cancellations and we are still very encouraged. Go ahead.
Timna Tanners
Everything is fine. It is useful and logical. I guess as a follow-up, if I could. Can you tell us a little bit about Arizona 2’s acceleration speed?I know it’s destined to increase over the course of the calendar year, but I just think about where it will be in a year and the speed?And then, in the same way, would any comment on the speed of what you see in terms of the infrastructure recovery timeline be great?Thank you.
Barbara Smith
The most productive thing I can tell you, Timna, in AZ 2 is to step back and take a look at the ramp in Oklahoma. This is our third microplant. And although this is more complex because we uploaded a merchant to the product line. We started, through design, with rebar because it’s anything we know perfectly. So, I expect the ramp to be very similar to what we experienced in Oklahoma. I don’t have that precise ramp in front of me, but it was fast in 3, 4 quarters. We were 3 groups and we were building the 4th team. And I foresee a similar scenario here and the trader will stick and it will be layers and production capacity. So, I’d like to remind you of the trajectory we’ve noticed for Oklahoma.
Regarding the infrastructure bill, it was very encouraging and revealing to see the trend in the numbers from the design and pre-planning phase that I cited in the Dodge reports. And there has been a lot of construction year after year in infrastructure, pre-planning and then moving into the design phase. And once it’s in the design phase, then, of course, it moves on to active projects and tenders, and then metal orders.
The precise timna is difficult to predict. But if you take a look at the magnitude of that construction and use some kind of those old references, those projects take 12 to 24 months to translate into field activities. Start moving to the order book and start materializing, and then from there.
Timna Tanners
Good, excellent. Thank you so much.
Barbara Smith
Thank you Timna.
Operator
And the next one will come from Bank of America’s Lawson Winder. Continue.
Lawson reel
Hello, thank you, operator. Happy New Year! I look forward to hearing from all of you and thank you for the update. I would like to make a query on slide 16. They discussed opportunistic mergers and acquisitions. consider, either downstream or diversifying into other products or other geographies?Thank you.
Barbara Smith
Thank you Lawson. I appreciate the question. Unfortunately, historically, we haven’t provided a lot of color in express lenses. So I think if you move on to our investor’s day a few years later, we’ve been pretty transparent about who we are and what we’re not. And I think whatever you see us doing, you’re moving on to build on the foundation that we have today.
Clearly, we are excited about our foray into geosynthetics with the acquisition of Tensar. Obviously, this is the place you can turn to. But I would say we see a lot of opportunities from a biological attitude with Tensar, and we’re very focused on smart integration and leveraging our sales organizations to expand this amazing product that they have, and we are encouraged every day with what we’re seeing on that front.
But if you take a look at the core business that we have, i. e. we have the complete price chain, recycling and rebar, merchant, wire rod and then downstream. And we’re looking at that total range. In terms of geography, if we’re strong, as you know, in North America, and it’s a key and core market for us. We also feel very, very strong in Europe, with our Polish operations as a bridgehead. I don’t rule out opportunities there, although Europe is a bit more confused with all the other countries and the differences and other expansions in other countries in Europe. We know that Europe is going through this total power transition, which will create great adjustments and opportunities in our industry. And we are leaders in this field. So to the extent that we can leverage that leadership, that’s something we might be interested in. Beyond that, we cannot reach express objectives.
Lawson reel
Yes, I know it was fantastic. Very useful. He discussed Tensar several times in his response, and I think maybe he wanted to ask him a question about the demanding production situations he faces. Could you provide some information about the remediation plan for this and the timeline for?an improved functionality? Thank you.
Barbara Smith
This is one where there is a wonderful synergy and synergy that we have not necessarily known through our due diligence. But in the end, we lost a press. And those things happen. They happen in other operations and in our metallurgical operations from time to time. They had already asked for a press because they knew they had to update it. But then there were challenges in the supply chain, which delayed the delivery of this press and the installation of the press. So that was the challenge. The press is there, it’s installed, it’s efficient. So this challenge was left behind.
The synergy that actually comes from Tensar is simply wonderful in the innovation and progression of new products and the commercialization of new products. But their core expertise is rarely necessarily on the production side. We are very good at production. And so, when we saw some of the demanding situations that Morrow was facing, we were able to send some of our technical experts and help them get through it or locate other innovations in productivity and protection and all sorts of things that just harnessed our strength and increased their capabilities. So the challenge is us, and we would expect to see fairly quick relief in the additional prices we had to incur to move products differently around the world.
Lawson reel
Now, I hope I’m not rushing my luck too much to maybe ask one more question, but I just wanted to stick to this slide 9, the down-order book and bid volumes. Thank you for offering it. Could you provide a bit of detail about the composition of that?Like, for example, what proportion is garage and what proportion is relocation?Thanks a lot.
Barbara Smith
I do not think we are in a position to give that granularity. What I would say is that it is a solid balance between infrastructure and non-residential. And we would expect infrastructure to be built over time. Balanced mix. And I don’t think it weighs much in any specific segment. And the projects, once they are in this backlog, will be concluded and completed. I think the good look or genuine message in the curtains that we’ve provided is that there’s a huge margin opportunity in the order book that’s going to evolve and develop as we manage that order book.
Lawson reel
Ok great. Thank you so much.
Barbara Smith
Yes. Thank you Lawson.
Operator
And the next one will come from Phil Gibbs of KeyBanc Capital Markets. Continue.
Philippe Gibbs
Hey HELLO.
Barbara Smith
Hi Phil
Philippe Gibbs
Many smart questions have been asked and we are already focused on what I sought to address. But what is the openness to additional mergers and acquisitions in terms of its long-term strategic expansion framework?
Barbara Smith
Phil, I think you’ve followed us through the good, the bad, and the ugly, and our balance sheet has never been in an incredibly falsified state. It gives us the flexibility to do many things. As you know, in recent times we have been rewarding shareholders through percentage buybacks and dividend increases. We think of this only in terms of a balanced capital allocation strategy. Expansion that we have talked about and leave openness and flexibility to mergers and acquisitions if the right thing comes up.
And I think he’s also been with us long enough to know that we’re very disciplined in terms of capital allocation, and we’re very disciplined acquirers to make sure it’s the right strategy and that we have something to offer when we mix and when we acquire. So we remain open, and I think the balance sheet can allow for this kind of activity while we have a fairly balanced capital allocation strategy.
Philippe Gibbs
Merci. Et then just a follow-up. You discussed anything about a thirteen – excuse me, a building 12 times anything. I think they have been infrastructure appointments or something like that. Did I miss exactly what he said about it?
Barbara Smith
Around the infrastructure, I think, Phil, that the big building was built in the pre-planning and then in the design phase.
Paul Laurent
Against two years ago.
Barbara Smith
Compared to two years ago for infrastructure projects, which is the main indicator for the new infrastructure bill to start translating into orders and delays for us. So, this is an incredibly encouraging sign that we will, in fact, see this come to an end. Market here in the short term.
Philippe Gibbs
Thank you so much. Enjoy.
Barbara Smith
Yes. Thank you Phil
Operator
And the next one will come from Tristan Gresser of BNP Paribas. Continue.
Tristan Gresser
Yes. Hello. Thank you for answering my questions. Maybe I’ll start with a source tracking and recall for the consumption of corrugated rods in the United States. If you look at the medium-term situation, there have been a number of projects announced at the national level, perhaps about 3 million tons of new corrugated rod capacity. Potentially until 2026, he noted that it will have an effect on 1. 5 million tons of corrugated rods from the infrastructure bill. But there may also be a situation where this is not enough. And I just wanted to get your input on what you think the medium-term balance will look like for the U. S. rebar market. Are you really worried that too much capacity may be being built?
Barbara Smith
Thanks Tristan. Je I don’t know if our numbers would be as high as 3 because I think some of that has already been absorbed by the market. If you go back to the investment we made in Oklahoma, there’s a lot of fear at the time we were introducing new capacity that may simply not be absorbed through the market, and absorbed altogether. And from what I can see and I think what you’ve noticed is that it hasn’t disrupted the market.
I recognize that Nucor has made investments. And certainly, we have Arizona, which actually is: It’s a delay from the complicated resolution that COVID took to shut down the California facility. Therefore, I am not too worried at the moment. I think what I’ve noticed and what our numbers would tell us is like this: you won’t see significant capacity buildup, unlike maybe other products where there’s been a lot more new capacity coming online and not necessarily the same backlog in demand for that capacity, but we’re still watching it. And I think the other point I’d like to make is that the capacity of many factories or microfactories is very flexible and can be adjusted when changes are required. We have a very low constant loadpercentage in this model, unlike the capacity of blast furnaces, which does not flex as smoothly as the capacity of mini factories or micro plants.
Tristan Gresser
Very well. It is very transparent and useful. Thank you for that. My query at the moment is more about the progression of the spot market. Do you think the structural adjustment you saw in the U. S. rebar market?Before the infrastructure bill, the one you discussed in your presentation, is now fully reflected?in the allocation of points of reinforcing metals that are of superior quality to flat products, which means we now see a return to a more general cost-price date for rebar costs and costs in the U. S. Compared to what we have observed in recent years?So, I just wanted to get your opinion on existing progressions. Thank you.
Barbara Smith
Thank you, Tristan. Es a confusing question. There are many factors. But I think consolidation in the long aspect of the market, especially in the corrugated space, has brought a lot of stability. I think there is an upward structural shift in the long- and medium-term margins per cycle. They deserve to take a look and compare the steel margin between long and flat products. Long products have had a much more solid margin design: it fluctuates, but in a much narrower band than the minimum peak that tends to be seen in flat products.
And I don’t see anything recommending that stability be disrupted. So we’ve known for a long time that even before consolidation, rebar and long products, the margin on metals is much stronger than what you see on the flat look. of the equation
Tristan Gresser
Very well. Thank you so much.
Barbara Smith
Thank you Tristan.
Operator
And that will conclude our question and answer session. I would like to turn to Barbara Smith for any final comments.
Barbara Smith
Thank you all for joining us in today’s convention call. We look forward to speaking with many of you as we call investors in the days and weeks ahead. Have a day. Thank you.
Operator
The convention is now closed. Thank you for attending today’s presentation. You can now log out.