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Commercial Metals Company (NYSE:CMC) Second Quarter 2024 Earnings Call Transcript, March 22, 2024
Commercial Metals Company is among the top 30 most popular stocks among the hedging budget at the end of the third quarter (see main points here).
Operator: Hello and welcome everyone to the second fiscal quarter 2024 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 other slides incorporating this call, can be found on CMC’s Investor Relations website. Today’s call is being recorded. After the feedback from the company, we’ll have a query and answer query and we’ll have some commands at that time. I would like to remind all participants that this convention will call on the company to make statements that provide information that is different from the old and will come with expectations related to economic conditions, the effects of legislation, U. S. metal import levels, structural activity, metal demand. Finished metal products, expected capacities, profits and timing of the structure of new facilities, long-term operations of the company, execution schedule of the company’s expansion plan, long-term operating effects of the business, monetary measures and capital expenditures.
These and similar statements are forward-looking statements and would possibly involve certain assumptions and speculations and are subject to risks and uncertainties that may also cause actual effects to differ materially from those expectations. These statements reflect the Company’s reliance based on existing conditions. However, they 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 U. S. Securities and Exchange Commission. U. S. Annual Report by adding the company’s most recent Annual Report on Form 10-K. those statements are based on management’s existing expectations and trusts, CMC does not warrant that such expectations or trusts will prove to be correct and actual effects would possibly vary materially.
All declarations are made on this date only. Except as required by law, CMC assumes no legal responsibility to update, modify or explain such statements in connection with long-term events, adjustments in assumptions, the occurrence of expected or unexpected events, new data or cases or in a different manner. Certain figures will be presented on non-GAAP monetary measures, and reconciliations of those figures can be found in the Company’s press release, supplemental slide presentation or on the Company’s website, unless otherwise noted. All referrals were made by the end of the year. or quarter are references to the company’s fiscal year or fiscal quarter. And now, for opening remarks and introductions, I’d like to turn the floor over to Peter Matt, President and CEO.
Peter Matt: Good morning everyone and thank you for joining CMC’s second quarterly earnings call. I’d like to start this morning’s discussion by congratulating the CMC team for establishing a new folk protection functionality for our company, as they have brought our overall recordable incident rate to less than 1, i. e. , higher than the U. S. metal industry. The U. S. as a whole. At CMC, it all starts with protection, and our purpose is to make sure everyone leaves their shift in the same condition they arrived in. In other words, we are proud of the recently acquired improvements within our Emerging Ventures Engineering business group. A vital component of our onboarding procedure is instilling CMC’s industry-leading culture and safeguarding practices that workers at the acquired corporations are eager to embrace.
Compared to a year ago, EBG’s recordable incident rate has been cut in half, equating to several avoided injuries and better outcomes for all stakeholders. Data from EBG and all of our operations can be seen on the fourth slide of our earnings presentation, and we are committed to doing more on this strong track record. This morning, I will provide a review of CMC’s financial and operational functionality in the second quarter, after which I will provide an update on the company’s strategic outlook and expansion plans. And then we’ll talk about our vision of the existing and long-term market environment. Paul will describe the monetary effects of the quarter in more detail and conclude with our outlook for the fiscal third quarter and beyond. We will then open the call for questions.
Additional quarter-related data is provided in the additional slides accompanying this call, which can be found on CMC’s investor relations website. Before we review our monetary results, I would like to draw your attention to yesterday’s announcement of a 13% increase in CMC interest. Quarterly dividend. The quarterly payment of $0. 18 percent represents a 50% expansion from the end of 2021. The dividend accumulation, as well as the $500 million accumulated in CMC’s percentage repurchase authorization in January demonstrates the coin-generating strength of CMC’s business and demonstrates our commitment to supporting currencies to our shareholders. CMC’s strong monetary position and balanced capital allocation strategy allow us to prioritize the return of coins to investors, while executing our expansion plan.
As we noted in our press release issued this morning, the second quarter of fiscal 2024 was another consistent period of strong monetary compliance. CMC generated core EBITDA and core EBITDA margin well above old averages despite slow seasonal and weather disruptions across the country. much of our footprint is constant. We continue to demonstrate the enhanced profit and cash flow functions that have been made imaginable through our recent strategic transformation and continuous execution. CMC generated a net source of revenue in the second quarter of $85. 8 million, or $0. 73 consistent with diluted revenue. share, on net sales of $1. 8 billion. Excluding the effect of non-consistent items, which Paul will discuss in more detail, adjusted earnings were $103. 1 million, or $0. 88 per diluted interest. CMC generated consolidated core EBITDA for the quarter of $224. 4 million, generating a core EBITDA margin of 12. 1% and a return on invested capital in 12 consecutive months of 14. 5%.
The effects of our metal organization in North America were affected by challenging weather conditions and some margin compression of metals in metal products. Digging under the announced metals margin figure, we saw sequential monthly accumulations that began in December and ended the quarter at a higher point. The monetary functionality of our Europe Steel Group segment advanced compared to recent quarters, excluding energy discounts. The market for long metal products has become more balanced, resulting in a slight increase in promotion costs and margin of metals. , combined with a fair price for the money, has put us on the path to a short-term break-even point. Activity levels at our emerging organization of corporations were hampered by weather disruptions that delayed the start of geogrid and Geopier projects and hit our Texas-centric CMC framing facilities hard.
Outside the U. S. , several projects were also delayed during the quarter. Those issues are transitory, and we expect a strong rebound in sales and profitability as we head into the structural spring and summer season. Next, I’d like to talk about CMC’s Strategic Perspective. As we chart CMC’s long-term path, we start from a position of wonderful strength with a leading presence in each of our core products and solutions, a strong corporate culture, a healthy balance sheet, and seamless visitor relationships. At this point, our main strategic objective will be twofold: maximizing price creation in our existing business; and drive expansion across multiple platforms. Our ultimate goal is to create an organization that has higher, less volatile margins throughout the cycle and takes full advantage of the improved margin profile by developing earnings organically and inorganically.
We have laid the groundwork for those efforts with recent adjustments to our reporting structure, which have in particular improved the visibility of our key price drivers and helped us better focus our decision-making. In our planning, we take a look at how CMC can boost our existing businesses to succeed to their full potential. It all starts with our ultimate and indispensable resource, our people, to sustain them and provide them with many opportunities for advancement. As I noted earlier, CMC has built a record of superty, yet there is still a long way to go to succeed globally, and we are working diligently to achieve it. We’re also expanding our skills progression systems to a diversity of core competencies to ensure we have a solid foundation to drive the long haul. One of the key drivers of company-wide margin improvement efforts is operational and business optimization efforts, which span the entire organization and build on a critical component of our company’s DNA.
To this end, we have created a Sales and Operational Excellence Group to collaborate heavily with CMC’s business clusters to identify, compare, quantify and seize margin opportunities. Our optimization efforts are still in their infancy, however, many concrete opportunities have already been found. whether at the individual corporate point or at the business point. I can give a few examples. First, there are significant opportunities to optimize logistics and shorten freight journeys between our factories and final shipping points, which will reduce prices and service to visitors. We also see operational improvements achievable through internal benchmarking and sharing of the most productive practices, which can lead to higher productivity and reduce prices and unplanned downtime.
On the business side, we are creating a unified platform that will enable data sharing across the sales group, opening up opportunities for cross-selling with customers, sharing leads, and bundling solutions. These efforts are aimed at expanding CMC’s portfolio percentage and service capabilities, representing a low-cost-of-capital avenue to generate revenue. In addition to our plans to maximize margins and create pricing in CMC’s existing businesses, we are working to prudently drive our expansion trajectory through biological and non-biological investments. As you know, giant biological projects are already underway, including Arizona 2 and Steel West Virginia, which will particularly increase CMC’s profits and money-flow capacity.
Beyond that, we see several opportunities for biological expansion in existing product lines that require only modest capital expenditures. In addition, as stated in the past, CMC has a strong platform and significant monetary cash to achieve price-generating expansion through acquisitions. We will look to grow CMC’s portfolio of fabrics and answers for early-stage construction in a way that strengthens our core, complements our visitor pricing proposition, leverages our end-market expertise, and improves our margins. As we execute our strategic plan, we are incredibly excited about the benefits those projects will bring to CMC and our shareholders. “Today we run a giant company, but there’s still a very additional price tag to unlock if we look for the next point of excellence and build on that excellence as we grow.
Planned progress is underway and we look forward to sharing more key points related to CMC’s strategic vision later this year. Now I’d like to give you a brief update on the progress we made during the quarter on CMC’s key strategic projects. As we noted in our press release, CMC’s Arizona 2 plant has reached a new milestone by installing the world’s first microfactory to produce marketable products: commercial-grade products, or QMFs. We started going live with MBQ in January and have effectively produced and sold a variety of profiles and qualities. I would like to congratulate the operations team on this exciting achievement. During the quarter, California, a primary destination market for AZ2, experienced a historic amount of rain that resulted in a large number of lost days at construction sites across the state.
The result was a transitory surplus of rebar inventories on the West Coast. We can address this situation and help balance the market by converting our planned ramp-up schedule over the next few months. Given the realities on the ground, we believe the prudent strategy is to continue to focus on getting our QBA production functions up and running and return to rebar when the market is more balanced. Despite the deviation from our original schedule, we do not anticipate any push in the overall timeline to complete final commissioning of all products Arizona 2 is capable of producing. However, this update impacts our ability to provide a volume forecast for fiscal 2024, given the fluid nature of the West Coast rebar market evolution over the coming months.
That said, we do not expect to break even in our monthly EBITDA in the fiscal fourth quarter. CMC Steel West Virginia’s long-term work is progressing well and we expect it to begin operations by the end of 2025. The innovations are nearing completion and we have planned the first deliveries of devices for spring and early summer. As for CMC markets in North America, structural activity remains healthy as we emerge from the slowest time of year and into the busier spring and summer. Seasons. We continue to hear encouraging signs from our consumers that their order books are in good shape and that they see a strong pipeline ahead. This is in line with our own internal view, especially after CMC’s most productive quarter for downstream contract awards since mid-2000. -2022, and its momentum, and the most productive quarter on record.
The strong rebound in new bookings resulted in an 11% sequential increase in structure portfolio volumes and was generalized to several types of allocations. We saw specific strength in new awards for production facilities, institutional buildings, wind energy, and residential structures. In addition, CMC has added to its order book, the largest contract in its history, a Department of Defense assignment in Hawaii. Looking ahead, we expect our portfolio of structures to remain healthy, with several key spaces driving activity in the near term and over a multi-year period. The first is infrastructure. We expect the inflow of metals for roads, bridges, and other public works to accrue in the second part of fiscal year 2024 and beyond as allocations awarded in previous years begin to mature.
New projects are also coming to market at a steady pace, as governments execute their increased transport and infrastructure budgets. Several of our key states are expected to release tenders for primary projects in the coming months. Leading the way will be Texas, which has so far only allocated about a quarter of its shipping budget for 2024. We are also seeing the effect of the Infrastructure Investment and Employment Act on physical activity in many of the geographic markets CMC serves. We continue to estimate that, once fully developed as mentioned above, beyond infrastructure, notable resources of structural need for expansion come from production and renewables.
The pipeline of projects in these spaces remains strong and the last few months have been rich in new awards in the wind energy sector. More recently, knowledge centers have become a driving force for business. The number of projects in the tender phase has increased especially in recent quarters and we anticipate that several dozen more opportunities will hit the market in the coming months. The investments made in the average progress of knowledge are very large and the amenities cannot be built fast enough to meet the needs. demand. Lately, we estimate that projects in the planning or structure phase account for between 250,000 and 350,000 tonnes of total rebar consumption. Those structural trends shape a once-in-a-generation investment cycle that aims to revitalize our country’s infrastructure. strengthen supply chains, drive the transition to cleaner energy sources, and seize the opportunities of great knowledge and synthetic intelligence.
We remain confident that this long-term investment cycle will drive structural activity for years to come and that its benefits will extend beyond rebar to CMC’s other key product offerings, such as geogrids, Geopier, anchor systems, and high-performance reinforcing metals. With respect to margins for metal products in North America, the environment advanced in the second quarter. And as I mentioned, monthly grades went up in December. The import pressures that influenced the domestic market at the end of FY2023 and the birth of FY2024 have largely eased and existing import materials in terms of volume remain quite limited. This deserves to set the standard for metals margins to be boosted through domestic market fundamentals heading into the third quarter.
We are seeing a combination of seasonal recovery in volumes, smart underlying demand, and limited import share, creating a favorable backdrop for some margin expansion in the structural spring and summer season. The market environment for our Europe Steel Group took a step forward at this time. quarter, largely due to a better balance between origin and demand. Consumption levels remain subdued, but in recent months manufacturers have responded by especially rationalizing their origin, while intermediary inventories have fallen sharply, leading to some recovery in costs and margins. Looking ahead, we expect demand to remain relatively strong in most of our markets, with the exception of residential structure, which appears poised to return to growth. The reaction to the Polish government’s program to help first-time homebuyers has been significant, resulting in record levels of new loan issuances and a huge backlog of new structure permits.
As spring approaches, our team in Poland is seeing an increase in order rates similar to those for residential projects. In the short term, the improving market environment, combined with strong charge control efforts, merits driving our operations towards balanced profitability. In the longer term, we believe that strong market foundations may emerge as commercial production in Central Europe recovers from the energy crisis and €65 billion in aid budget is injected into the Polish economy. To Paul to provide more important points about our financial results.
Paul Lawrence: Thank you, Peter, and a happy day to everyone who answered the call. As previously reported, we report a net source of revenue for the second quarter of fiscal 2024 of $85. 8 million, or $0. 73 consistent with diluted interest, compared to prior year levels of $179. 8 million and $1. 51 consistent with participation, respectively. Results for the quarter include net after-tax fees of $17. 2 million, similar to Arizona 2’s ongoing commissioning efforts. Excluding those items, adjusted earnings were $103. 1 million, or $0. 88 consistent with diluted stock, compared to adjusted earnings of $171. 3 million, or $1. 44 consistent with diluted stock, in the prior-year quarter. Core EBITDA was $224. 4 million for the second quarter of 2024, down 26% from $302. 8 million a year earlier, but still a traditionally strong result.
Slide 10 of the supplemental presentation illustrates year-over-year adjustments in quarterly monetary compliance consistent with CMC compliance. The profitability of our North American and European steel equipment was impacted through lower scrap margins, while benefiting from a strong controllable charge consistent with compliance. Adjusted EBITDA also declined in CMC’s Emerging Business organization primarily due to severe weather situations in the U. S. and Canada. U. S. and delays in assignments outside the U. S. U. S. The consolidated core EBITDA margin of 12. 1% remained above average of old levels and compares to around 15% a year ago. Review our segment’s effects for the second quarter of 2024. CMC’s North American Steel Group generated adjusted EBITDA of $222. 3 million for the quarter, or $220 per tonne of finished metal shipped.
Segment-adjusted EBITDA decreased 19% year-over-year, primarily due to a margin decrease in scrap metal and derivative products. This stress was partially offset by improved controllable load grades consistent with the tonne. North American Steel Group’s adjusted EBITDA margin was 15%, compared to 18. 2% in the same period last year. As you’ve probably read, scrap metal markets have slowed down in recent weeks. In this environment, we expect a slight increase in the margin on metal products in the Third Quarter as scrap prices decline. It should be noted that while margins on the metals announced in our press release are expected to improve sequentially, in the third quarter, the positive effect on earnings will likely not be felt until the past year. due in the same period or early in the fourth quarter.
This is due to the overall share price in our factory operations. A giant share of scrap prices in the P
Performance in terms of controllable costs improved sequentially and year-over-year thanks to decreased energy costs and operational measures taken on this footprint. As Peter mentioned, there have been encouraging signs that the Polish market has at least bottomed out and that supply and demand are moving towards greater balance. The Emerging Markets Group’s second-quarter net sales of $156 million increased 1. 6% compared to the prior-year period, largely due to the addition of CMC anchoring systems. Underlying demand situations were positive in the quarter, however, activity levels in several sets were impacted by weather situations similar to delays in deliveries in the U. S. Tensar has been forced to meet the needs of the U. S. and Tensar markets in Europe and the Middle East.
Despite weather issues, order rates and visitor inquiries have been high across North America, indicating momentum in smart markets and a solid structure season ahead. We also expect Tensar’s projects in global markets to start late in the third quarter. Group adjusted EBITDA of $17. 9 million, compared to $26. 6 million in the year-ago period. The adjusted EBITDA margin of 11. 5% represents a reduction compared to last year, as the positive effect of the addition of CMC anchor systems and the strong profitability of our heat treatment operations was more than offset by the aforementioned market issues. As Peter pointed out, we expect the profitability of this business to recover especially in the third quarter.
Let’s move on to the balance sheet, liquidity, and capital allocation. As of Feb. 29, money and money equivalents totaled $638. 3 million. In addition, we had approximately $820 million of money available in our credit and accounts receivable services, bringing overall liquidity to just under $1. 5 billion. During the quarter, we generated $89 million of money from operating activities despite $62 million of money for current capital. Capital expenditures of $93. 8 million came from equipment purchases, primarily from our investments in Steel West Virginia. Signs of . CMCs have remained warm and have improved particularly in recent years. As you can see on slide 17, our net debt to EBITDA ratio is now only 0. 4 times, while net debt to capitalization is only 10%.
Our strong balance sheet and overall monetary strength give us the flexibility to fund our strategic biologic expansion plans and conduct mergers and acquisitions, while proceeding to return money to shareholders. CMC’s effective tax rate was 26. 6% in the second quarter, which was slightly higher than our full-year forecast rate due to declining profit levels. Our two-quarter effective tax rate is 23. 3%. And for FY24, we ultimately expect an effective tax rate of between 24% and 25%. With respect to CMC’s FY2024 capital outlook, we reiterate our previous guidance of between $550 million and $600 million in total. Aside from general maintenance investments, planned FY24 spending includes significant investments for the Steel West Virginia structure, in the amount of approximately $250 million.
CMC has taken two significant steps since the last earnings call to reinforce our commitment to delivering competitive monetary returns to shareholders. As Peter mentioned, returning money to our investors is a critical 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 increase in CMC’s consistent percentage repurchase authorization. We are looking to use either route to distribute a significant portion of our loose cash flow to percentage holders. The execution of our buyback program accelerated the second quarter with the repurchase of approximately 945,000 per percentage at an average value of $50. 72 per percent. Transactions for the quarter totaled $47. 9 million.
And as of Feb. 29, we had approximately $510. 4 million available for rebates under our existing authorization. That concludes my remarks and I will turn it over to Peter for further comment on our perspective.
We expect shipment volumes within our North America Steel organization to remain on a typical seasonal trend in the third quarter, while our EBITDA margin for the segment is expected to remain broadly stable at a lower level. The monetary effects of our organization of emerging corporations are expected to improve significantly, driven by the overall economy. seasonal 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 building infrastructure investments, which will support an already strong demand for the environment in either the North America Steel Group or the Emerging Companies Group.
Our Europe Steel Group’s business situations are slowly improving and they are expected to reap additional benefits from increased residential structure activity as a government program for first-time customers and other government-sponsored investment schemes begin to have an impact on metal demand. We are proud of “Strong Structural Trends” in North America expected to drive structural activity in the coming years, and CMC has positioned itself as a key beneficiary. I would like to thank our customers for their acceptance into CMC and all our workers for providing other very solid projects. quarter of the yield.
Merci. Et at that point, let’s open the query to querys.
Operator: [Operator’s Instructions] Our first comes from Timna Tanners of Wolfe Research. Please come forward.
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