Q4 2019 Earnings Call
Hello, and welcome everyone to the full year and fourth quarter fiscal 2019 earnings call for commercial metals company.
Today's call is being recorded.
After the company's remarks, we will have a question answer session.
You instructions at that time.
I'd like to remind all participants that during the course of this conference call. The company will make statements to provide information other than historical information and will include expectations regarding economic conditions affects of legislation U.S. steel import levels U.S. construction activity demand for finished steel products the company's future.
Operations, the company's future results of operations and capital spending these and other similar statements are considered forward looking and may involve speculation and are subject to risks and uncertainties that could cause actual results to differ materially from these expectations. These statements reflect the company's beliefs based on current conditions.
But are subject to certain risks and uncertainties, including those that are described in the risk factor section of the company's latest annual report on form 10 Dash Cam.
Although these statements are based on management's current expectations and beliefs CMC offers no assurance that these expectations or beliefs fool proof.
Proved to have been correct.
Actual results may vary materially.
All statements are made only as of the states.
Except as required by law CMC does not assume any obligation to update a mentor clarify these statements in connection with future events changes in assumptions.
The occurrence of anticipated or unanticipated events, new information or circumstances or otherwise.
Some numbers presented will be non-GAAP financial measures.
Reconciliations for such numbers can be found in the company's earnings release.
On the company's website.
Unless stated otherwise all references made to your or quarter end or references to the companys fiscal year or fiscal quarter.
And now for opening remarks, and instructions or I'm, sorry, and introductions I will turn the call over to the chairman of the board President and Chief Executive Officer of commercial Metals Company Mr. Barbara Smith. Please go ahead.
Thank you.
Good morning, and welcome to everyone joining us to reviews Fancies result for the full year and fourth quarter fiscal 2019.
As we previously announced on August 30 for 2019, Mary Lindsey retired as Chief Financial Officer Commercial Metals Company married then with C. N C for 10 years, starting as vice President of tax in serving most recently as senior Vice President and Chief Financial Officer.
I'd like to thank Mary for her valuable contributions over the years.
And I also like to acknowledge the thoughtful and smooth transition to for duties.
We wish Mary all the best in the next chapter set for life.
I'm joined today by called Lauren.
The role as CFO effective September 1st.
Oh, it's worked in the steel industry and numerous financial roles for more than 20 years with the last three years and financial leadership roles at commercial Natalie.
I would also like to acknowledge all those impacted by the devastating tornadoes that came through Dallas Sunday night, including several of our employees and I think you keep them and your thought.
I will begin my remarks today with highlights for the fiscal year and fourth quarter.
Paul will then cover the year inquiry financial information in more detail and I will conclude our prepared remarks with a discussion of our outlet for the first quarter fiscal 2020 after which we will open the call to question.
As announced in our earnings release. This morning, we reported fiscal fourth quarter 2019 earnings from continuing operations.
85.9 million or 72 cents per diluted share on net sales of 1.5 billion.
Excluding the impact of certain integration costs, our adjusted earnings from continuing operations were 90.8 million were 76 cents per diluted share.
Your own actions combined with good market conditions in which we operate we've reported the highest consecutive quarterly earnings for CMC since the great recession.
I'm also pleased to report that the board of directors declared a quarterly dividend of 12 cents per share a CMC common stock for stockholders of record on November six 2019.
The dividend will be paid on November 20-F, 2019. This represents CMC 200, and twentyth consecutive quarterly dividend.
Fiscal 2019 was a significant and transformative year for CMC.
I would now like to recap some of the major accomplishment of this past year.
For doing so I want to recognize and congratulate all CMC employees for their contribution to this highly successful and transformative year.
Now, let's review some of the highlights.
On November five 2018, we concluded the largest acquisition in the history of the company acquiring for rebar Mills, and 33 fabrication facilities, adding two and a half million tons of rolling capacity and increasing our fabrication capacity by almost 50%.
The systems integration with flawless and completed in less than four months well ahead of schedule.
The confirmed commercial and operational synergies were double our original expectations and the operational results have also exceeded our initial business modeling.
As a result at the acquisition and our growth initiatives, our revenue grew by 26% and our adjusted earnings from continuing operations grew by 41% in fiscal 2019.
The rapid integration of the acquired assets along with the execution of our business plan also allowed us to reduce debt.
So theater with the acquisition 524, and a half million in the fourth quarter.
At the same time, we increased our cash on hand quarter over quarter, reducing net debt by 232 million from the fiscal first quarter 2019.
In addition, core EBITDA from continuing operations was 501.5 million for 2019 in comparison to 412.2 million in 2018.
Our results in fiscal year 2019 demonstrate the benefits of the strategic repositioning of the company that we have completed over the last several years.
Other noteworthy accomplishments in the past fiscal year include the ramp up of our second Micromill in Oklahoma has exceeded our original financial expectations.
Its differentiated hot Spooled rebar product has gained why its customer acceptance and <unk> is also producing very strong returns.
To expand this product offering we also successfully added this capability at our Arizona Micromill during the past fiscal year.
And our recycling segment, we continued our investment in separation technology innovation in our nonferrous operation.
Finally, our Polish operations generated EBITDA in excess of 100 million for the second consecutive year, while also achieving the best annual safety result in history.
Today CMC is the largest rebar producer in the United States, where demand remains strong and margins are differentiated from many other steel products.
Now turning to the market outlook.
We are poised to continue benefiting from the positive outlook in the markets in which we operate.
We remain optimistic about the construction market as many of the key indicators, we monitor supported positive view.
Let me now covers some of them U.S. construction activity remains resilient led by an increase in public sector spending.
According to Dodge Nonbuilding construction starts were 3% higher through the first eight months of this year compared to last year.
In the non residential sector commercial construction starts likewise, our 3% higher year to date.
The architectural billing index, a leading indicator for construction expansion continues to be strongest in the regional markets we serve.
Finally, U.S. unemployment rate in interest rates continue to remain at historically low.
This positive outlook and construction activity is further supported by our fabrication segment bidding and booking activity a key leading indicator for us.
We booked a record number of projects during our fiscal fourth quarter and bidding activity remains robust.
Good input prices averaged about $1000 per ton for the fiscal year, a level that will be profitable to us when shipping this material at current rebar prices.
Overall, but prices have increased 23% compared to same period in the prior year.
Turning to the markets we serve in Europe .
Polish economy continues to outperform the broader European market with GDP growing by 4.5% in the most recent quarter.
A 30 year unemployment rate of 5.2% insignificant wage growth have been catalyst for a record level consumer confidence for most of 2019.
Well it has been allocated 100 million euro from the European Commission structural and investment fund designed to spur economic growth.
Most recent reporting suggests roughly one through this allocation has been spent to date with the remainder to be spent between now and 2023.
Given these factors the outlook for steel demand remains strong in Poland.
With that as an overview I'll now turn the discussion over to Paul or as Vice President and Chief Financial Officer for further details on the fourth quarter and full year results. Paul. Thank you Barbara and good morning to everyone. Joining us this morning.
For the fourth quarter of 2019, we reported earnings from continuing operations of 85.9 million or 72 cents per diluted share compared to earnings of 51 point Threemillion or 43 cents per diluted share in the fourth quarter of 2018.
Included in the fourth quarter 2019 results, our after tax costs of 4.9 million related to certain integration costs.
Excluding these costs adjusted earnings from continuing operations were 90.8 million or 76 cents per diluted share.
For the full year 2019, we reported earnings from continuing operations of 198.8 million or $1.67 per diluted share compared to 135.2 million or $1.14 per diluted share in 2018.
As outlined in more detail in our earnings release included in the 2019 resolve our net after tax costs of 48.8 million related to certain integration costs inventory step up charges related to the acquisition and tax reform.
In comparison. The 2018 results include 40.8 million of costs related to non core operational items.
Excluding these items adjusted earnings from continuing operations for 2019 were 247.6 million or $2, an eight cents per diluted share versus 176.1 million or $1.49 per diluted share in 2018.
Our core EBITDA from continuing operations was 159.2 million for the fourth quarter of 2019 in comparison to 123.6 million for the fourth quarter of 2018.
For the full year 2019 year, our core EBITDA from continuing operations was 501.5 million in comparison to 412.2 million in 2018, a year over year increase of 22%.
As Barbara mentioned the results of the rebar assets acquisition have exceeded our expectations and have been a meaningful contributor to our results.
As the operations are now embedded in our network of operations. This will be the last quarter in which we disclose the results separately.
The acquired Mills generated 58.1 million of EBITDA in the fourth quarter on shipments a 455000 tons.
The improved results from the third quarter to the fourth quarter are primarily the result of higher metal rebar metal margins.
Excluding 4.2 million of costs associated with the closure of certain locations you acquired fabrication facilities had an EBITDA loss of 9.0 million on 172000 tons shipped.
This EBITDA result is a 34% improvement from the third quarter.
The loss does not include the benefit of the amortization of unfavorable contracts of 16.6 million.
Looting the unfavorable contract amortization and excluding the facility closure costs the business generated 6.3 million of operating income in the quarter.
The remaining balance of the unfavorable contract amortization 35.4 million and is expected to be amortized over the next six to 12 months.
Now I will review our results by segment for the fourth fiscal quarter of 2019.
Our Americas recycling segment recorded an adjusted EBITDA of 4.2 million for the fourth quarter of 2019.
Impaired to adjusted EBITDA of 17.0 million for the fourth quarter of 2018.
Ferrous prices have declined by $81 per ton or 27% and non ferrous prices have declined by 7% over this period.
Not only did the declining price environment squeezed margins, but this also constrain scrap flows through our operations with total volumes down 13% compared to the fourth quarter of the prior year.
Our America.
Eric as the Mills segment recorded adjusted EBITDA of 160.8 million for the fourth quarter of 2019 compared to adjusted EBITDA of 106.8 million for the fourth quarter of 2018.
Putting our new Micromill in Oklahoma, which was completed and commissioning in the fourth quarter of 2018, and the acquired mills, our volumes increased by 375000 tons for 45% compared to the fourth quarter of the prior year.
We have experienced less price volatility in our primary finished goods market compared to the broader steel industry.
Average sales prices declined $25 per ton from the third quarter ferrous scrap cost declined $38 per ton, resulting in a $13 per ton increase in metal margins.
For the fourth quarter, our metal margins were $399 per tonne the highest that we have experienced since 2009.
Our manufacturing costs were essentially flat in the quarter. If you factor the lag effect of the reduced scrap costs being realized in our results.
Our Americas Fabrications segment recorded a substantially reduced adjusted EBITDA loss of 13.2 million for the fourth quarter of 2019 compared to an adjusted EBITDA loss of 24.6 million in the prior year fourth quarter.
This fiscal quarter includes $4.2 million of costs related to the closing of four of the acquired fabrication locations.
All of the closures were redundant operations in close proximity to existing CMC locations and do not reflect an exit from these markets.
As we transition from lower price backlog and ship projects booked into more favorable price environment average sales price of material shipped increased to $963 per tonne, which is $120 per ton increase compared to the fourth quarter of the prior year and a third $38 per ton.
On increase then the sequential third quarter.
Yes segment's results have now improve for two consecutive quarters and our legacy fabrication business produced breakeven results in the fourth quarter.
We anticipate that this trend of improved earnings will continue into 2020.
Moving the acquired facilities, the volume increased 141000 tons or 46% compared to the fourth quarter of 2018.
Our International Mill segment recorded adjusted EBITDA of 22.7 million for the fourth quarter of 2019 compared to 36.7 million from the same period over the prior year, which was a record quarter for the Polish operations.
Instructions sector remains strong in Poland, and rebar shipment volume increased 4% compared to the fourth quarter of the prior year to a new quarterly record of 151000 ton.
Alluded in the prior year fourth quarter total volume was up 54000 tons of opportunistic billet sales.
Ballooning. These sales total volume decreased 14000 tons or 4% primarily from lower merchant shipments.
Metal spread is down 15% or $15 per ton or 6% as Paul and experienced price pressures from a dramatic increase in long product imports into the European markets, primarily from Turkey and Russia.
With respect to our consolidated results our effective tax rate for the quarter was 16.4% as we realize certain discrete benefits during the quarter, we anticipate that our effective tax rate for 2020 will be approximately 25%.
Turning now to our balance sheet and liquidity.
At year end cash and cash equivalents totaled 192.5 million and we had availability under our credit and accounts receivable facility of approximately 611 million.
During the quarter, we generated $256 million of cash from operating activities. This strong cash flow from earnings as well as diligent working capital management and the downward trending ferrous scrap market has allowed us to accelerate repayment of certain of our commitment.
During the fourth quarter, we repaid 124.5 million of debt, while also increasing our cash balance by 72 million.
For fiscal 2019 capital expenditures were 138.8 million.
We estimate that our capital spending for fiscal 2020 will be in the range of 150 million to 200 million, which includes some costs related to the previously announced investment in the third rolling mill in Poland.
This concludes my remarks, thank you very much and I will turn it back to fiber for her perspective on the outlook.
Thank you Paul.
Construction activity typically begins to slow toward the end of the first quarter as winter weather in the beginning of the holiday season start to affect shipment.
These seasonal effects continue into our fiscal second quarter as well. However, we remain bullish regarding our underlying demand our customers are indicating that their backlogs are robust.
And our fabrication backlog level as noted earlier.
He is healthy and priced attractively.
For our mill in contrast to the broader steel market rebar metal margins remain above historic norms.
And in Poland, the construction sector and the overall economic fundamentals fundamentals remain positive.
We're proud of the year, we accomplished in 2019 with our continued focus on providing our customers with exceptional product quality and service, while continuing to foster strong partnerships with our suppliers communities and other stakeholders.
I'm confident our team continued to produce differentiated results again in 2020 .
Thank you and at this time, we will now open the call to question.
Thank you we will now begin the question and answer session. We have a Chris we request that you ask one initial question and one follow up question.
If you have additional questions. Please reenter the question Q.
Up questions will be addressed if time permits to place yourself in the question Q. Please press Star then one on your touched on fan.
If you're using a speakerphone please pick up your handset before pressing star then one.
To withdraw your question. Please press Star then too.
We will pause momentarily to assemble our roster.
My first question comes from Matthew Korn with Goldman Sachs. Please go ahead.
Thank you good morning, Barbara Good morning, Paul right now.
A question on Poland could you expand maybe a little more on the situation on the ground there.
As you said and all we here is that demand there is rapidly softening across Europe .
Imports remaining high.
What gives you the confidence there the results will face any incremental headwinds relative to this year as you could you go into next year.
Yeah. Thank you Matthew.
You know.
The these trends have.
Existed in Europe for a period of time in Poland has consistently then.
A different economic situation than than other countries across Europe .
And I think you you have to look at the indicators that I I spoke of earlier GDP has been strong the outlook continues to be strong there is the the stimulus money for our for infrastructure build out.
Those funds are allocated they're going to continue to be utilized and and create.
Economic activity for us in Poland.
So I think it's really just a different economic situation in Poland No doubt as everyone is well aware.
During this period of trade action by by the U.S.
Turkey and other countries have diverted their product to to Europe .
Europe its course put in safeguard measures than that was then converted to quotas.
And they've made some revisions to those those quotas in order to further combat the onslaught of imports going into Europe .
This is a situation we've been dealing with all throughout 2019 and despite that Poland has produced.
Superior results.
Some of that doing due to our repositioning of Poland, increasing their product range.
Activities over the last six to eight years to continue to lower their cost.
The Poland is a very highly efficient high quality operation with a broader product range today than what is had historically.
With a very positive economic outlook in in Poland, which is our primary market.
Right. It seems like it's the right market.
Right time that continues.
Now, let me ask a little bit something on closer to home.
News. This morning any significance of this new trade case on the bid rebar from Mexico for you.
If I recall like the fabricated rebar was explicitly excluded from the structural steel cases, I think earlier. This spring. So I don't if this is a bit of a makeup but if it means anything for you and the anticipated effect there. Thanks.
Yeah, we we saw the news last last night and and that is a positive development for us it's clearly a circumvention.
The intent of the the trade action and so.
All of all of the produces in the U.S. They have good good communication and with the department of Commerce, and we have clear instructions from commerce. When we see circumvention that we report that and so we're very pleased that commerce is taking a look at that this was.
Very very clear cut case, circumvention, where they were welding hook on the end of straight rebar and designating that as fabricated rebar.
And we have produced all the evidence to commerce to to prove that it was really a circumvention.
Okay. Thanks, that's helpful.
Thank you Matthew.
Our next question comes from Seth Rosenfield with Exane BNP. Please go ahead.
Good afternoon.
Seth Rosenfeld Exane BNP.
Two questions. Please for some of the post market again going back to the U.S. with the pull US Rolling Mill development can you comment, but more on exactly what's being built in terms of the volume uplift you expect in this kind of your quite significant excess melt capacity versus rolling at present at the Capex budget and again the timeline for completion on that funerals.
That was healthy please.
And then separately with me back to the U.S.
<unk> industry pricing last couple of weeks about CMC shutting down one of the melt facilities in California recently acquired from good though can you comment on that its because we know how to capacity adjustments to be changing your overall about capacity and ability to service the west coast markets. Thank you.
Yeah. Thank you so good to hear from you again.
With regard to the third mill in Poland, That's a project that we.
I think we talked about last year as being in our capital plan and it will be another you know 18 to 24 months for that to complete construction and and begin the commissioning phase of it. The project was initiated to take advantage of excess melt capacity that we haven't should add a couple of hundred thousand.
Plus tons to to our Polish operation once it's up and fully commissioned.
In terms of Rancho Cucamonga.
I think it's no surprise to anyone on this call that doing business in California, if you're a large manufacturers such as we are is it's a very burdensome regulatory environment very very high energy costs.
And like many other steel producers, we do have excess melt capacity throughout the system and so these are operational decisions that we make on an ongoing basis really to awesome optimize our network of operations and to reduce cost.
So we are going to take advantage of or other melt shops provide bill it to the Rancho operation and continue rolling there and that should improve the overall costs of the product coming off of that now substantially.
Thank you can you confirm what the melt and rolling capacity will be pro forma for the closure of run so please and perhaps comment on which of your mills would be supplying the pellets that California mill given the logistical challenges.
Now I prefer not to confirm because it really depends on market demand and we will you know we're always evaluating.
You know how how to run our operations based on what the market demand is that the Rancho Middle will continue operations as it has in the preceding months.
And the supply a bill it will really flex lives demand and the other regional markets.
Thank you very much.
Our next question comes from Chris Terry with Deutsche Bank. Please go ahead.
Good morning, Barbara pull off thanks. Thanks for taking my question first one a wanted to touch on is just around the rebar spreads what gives you the confidence that they can stay above historical levels and maybe if you just touch on your view on the on the scrap processing into year end as part of the answer thank.
<unk>.
Yeah I think.
It's a dynamic market, we all know that and but I I think we use this past year is probably the best indicator you know that rebar metal margins have been more stable than other steel products and they there had been stable at.
I would call at elevated levels to historical norms I see that.
Speaks to the consolidation and speaks to the good demand environment that we see in our end markets.
And you know, we'll see where things go from from here, but in the near term you know we're fairly confident that we will be able to maintain.
Very attractive metal margins.
Based on all of that market factors.
In terms of scrap.
Look they.
If I can predict scrap prices I'd, probably be a on the beach somewhere and so I think you can look at all of the the the market data as you do normally.
Certainly scrap has retreated over the last couple of months. If you look at iron ore. It suggests as scrap is undervalued.
We're moving into seasonal period, as a year and scrap tends to fluctuate based on you know seasonal factors and weather and all of those types of things. So you will see our product prices tend to adjust and flex.
Yes.
You know when raw material prices change.
Thanks, Thanks, <unk> and then just in terms of the comment on you paying down debt quicker than expected and can potentially look at growth initiatives I. Just wondered if you could touch on what would be more color on what that commitment and maybe if you could just talking about into your priorities of cash of cash the for.
Our growth initiatives versus.
Capital management. Thanks.
Yeah I think we're we're just we're very proud of the fact that we were able to accelerate the debt repayment in terms of a if you looked at our original expectations. When we took on the debt to fund the acquisition were basically paying that back at least a year or two.
Two sooner than what we had anticipated if you take the payments that we made in the fourth quarter, it's all of our.
Debt metrics and very very comfortable position significantly strengthens our balance sheet.
And bottom line gives us a lot of flexibility there and there's nothing specific on the horizon in terms of growth, but it's really a state and evolve the work that's been done over the last eight years to reposition the company focused on our core manufacturing integrated.
Manufacturing platform and at this stage you know given that we concluded the CRE Dow acquisition and it was highly successful.
We have the balance sheet flexibility to either continues.
To reduce a bit of the debt or.
Remain open if some interesting opportunities were to come along.
Okay. Thanks, Thanks, Barbara away with the thank you.
Our next question comes from Martin Englert with Jefferies. Please go ahead.
Hi, good morning, everyone.
Good morning aren't arm.
Over the past month or so in recent weeks as well there's been some speculation in the us to three two duties against Turkey, good both increase or decrease or be eliminated altogether.
If you see the import duties eliminated all together can you talk about if you would expect Turkey would reemerge as a competitive important source of today's market and regain any share there or has anything changed markedly with a dynamics that might prevent them from participating as they did historically.
Yeah.
As you know the trade.
Situation is is fluid.
And I think what I would say is at the given the current.
Environment with Turkey.
You know I think the the 25% is more likely than not to remain in effect.
And we'll see where those relationships evolve over time.
I think the president is in the administration is consistent in their message of creating a fair and level playing field and that's all we're asking for we know that we are low cost on a global basis.
And if given a a level playing field, we can be competitive regardless, so rather than speculate I would say that when things change. We will we will have a plant and we will we will respond.
With with pace to whatever changes in the market I think.
You know the case overnight with Mexico in Circumvention is evidenced again supporting the trade policy of creating a fair and level playing field.
And given that we we know we are highly competitive on a global basis.
So should I read that is there might be other if 25% duties would go away tomorrow, there maybe other levers to be pulled from Oh on the trade front to potentially provide to influx of imports against Turkey.
Again, I'm not I'm not going to speculate we will we will utilize the trade.
Well, it's for the purpose that they they were were put in place.
And I think again there is you know the policy of this administration.
Yes to have a fair level, playing field and the industry and CMC will respond quickly as we see that that's not the case, but.
Primary focus is to be you know high quality producer.
Serve our customers in a differentiated fashion and to be very very efficient and low cost. So that's what we focus on every single day, but we will take advantage of of our trade.
Trade trade laws to to support that fair and level playing field.
Okay. Thanks for the color there and one more if I could on downstream fabrication. One will segment results turned positive potentially on a quarterly basis. It seems like maybe this is getting pushed a little bit here. If you can talk about some of the dynamics or it seems like you're booking at a pretty healthy price level at plus $1000 a ton.
I'm going to let Paul get involved in the conversation here at Martin I I think a you know as as we said we crossed a milestone which we had been a targeting the entire year, which was by the exit of the fourth quarter that we would be positive in the legacy fabrication business and to follow.
So soon thereafter with getting the you acquired fabrication backlog positive.
Recall that Ah you know when we acquired those locations the acquired backlog was slightly valued less than than ours. So it's taken a little bit longer to get through the the the older older work, but going forward, we anticipate that we will be positive from this.
Point forward at today's rebar prices I think we will continue the upward trend of profitability as as the selling price continues to ER to increase.
For the for the.
Oh, the at least the next six months and at today's rebar pricing that that is a very a valuable backlog that we have in the fabrication business.
Sure and to be clear you expect to be positive moving forward on a segment EBITDA level from this point not just the legacy business correct correct.
Excellent. Thanks, so the color there and nice job on results.
Thank you Martin.
As a reminder, you can press Star then one to enter the question Q. Our next question comes from Curt Woodworth with Credit Suisse. Please go ahead.
Yeah. Thanks, good morning, everyone.
Prepared.
Barbecuing can you talk more about your leverage the public infrastructure and you know, there's obviously been it pretty sharp acceleration and living activity and it seems like the geographies you serve would be.
I'm very lover to that so just curious to get any sort of anecdotal corporate color on what you're seeing there.
Yeah, I think that that's always been an important part of our backlog and we track all those projects and there has been a trend you know.
For some period of time, where at public infrastructure has been increasing.
The fast act money took a while to make its way through the system and you know we're starting to see quite a few of those those projects, we're well positioned across you know the country and certainly we've always had to southern footprint now with our presence in New York and increased.
Residence in California.
We really are in the largest consuming.
Rebar markets and and well positioned to serve.
Any and all of those projects that yes, we've seen a lot of interesting projects.
Come to market over the last period of time.
And what's the magnitude of that end market in terms of like a percent of.
Revenue for the mill segment.
You know were essentially two thirds three quarters public and Ah you know the overall construction market I guess it better said is overall two thirds three quarters, a private work and then a third do a quarter of public.
Okay.
And then on Fab [noise].
Can you give us a sense of.
The timing of when the lower rebar appraisal really flow through like I understand up into the pricing is very strong, but when you look at.
You know just inventory cycling or how you book the transfer price would.
You know if rebar goes down a lot month, one what when does that flow through your fab cost of goods sold.
You know our working capital levels are fairly tight through the through the system. So you know the fabrication business may have a.
The one month type lag, but it's nothing significant it would certainly within the quarter. It will realize the benefit of the a the lower cost rebar and you know you saw the the selling average selling price in the quarter for the fabrication segment was $963 at times, So I think that.
Gives good credence that a good portion of the low price backlog has a has flowed through.
And like any given quarter at any given quarter what percent of your fab volumes would be.
Backlog base for spot is is there any spot in the given quarter I you should that the discussion on pricing going to a thousand should that.
Occur even given the fact that scrap has gone down so much which I assume when the pack spots I business.
The the spot is pretty minimal in terms of.
Overall fab.
And then.
You, but you do have jobs said you know maybe they are booked and they ship over one or two months. Some that are three months and some that are up to two or three years.
So there's a lot of variety and in terms of timing of when its booked and when it ships but.
Just pure spots hat business is probably a pretty low percentage of the total.
Our next question comes from Matthew Fields with Bank of America Merrill Lynch.
Hey, guys, Matt Cassel, leading here on for that fields.
Just wanted to get a sense of what that was sort of specifically paid down was it the tableau day, along with the our facility and Ah. So just wanted to confirm just how much of each.
At this fall, yes, your assumption is correct.
Okay, great and.
So after that reduction how do you sort of feel about your overall debt level now.
Do you think you need to reduce it any further depending on what steel prices do moving forward or you sort of comfortable with generally where it is.
I think as a as Barbara mentioned, you know our debt ratios are in a in a place that are but we're very comfortable with however, you know as we look to our outlook a we believe that the the strong cash flow generation will will continue and that will give us opportunities and certainly apps.
Of any other use of the cash we would value de levering further as a strong alternative but we'll make those decisions as we as we go.
Okay, great. Thanks, congrats on the quarter.
Thanks, Matt.
Our next question comes from Phil Gibbs with Keybanc capital markets. Please go ahead.
Hey, good morning.
Thanks, Phil corridor.
Couple of questions for me just because I know, we've got nearly a full year of grid I Wonder about now you gave though a 150 million to 200 million a capex guidance next year, how much of that number is going to be maintenance and how much of that is going to be growth. Just so we can understand what the what projects you've got out.
There I mean, I know you pointed to Europe .
Yeah, It's still I think the big growth one is is the.
The project in Europe that we announced last year.
The top of my head I don't know how much we have allocated to next year for that project, but.
You know it would be.
Meaningful.
25 million. Okay. So 25 million is is the third now and the rest is a combination of normal sustaining capital and then we always have.
Ah interesting cost reduction or efficiency type projects that are that are included in a in the budget. If you recall you know we.
We allocated some funds over the next number of years or we need to allocate more sustaining capital to the larger footprint of of mills that we have that there's nothing.
Extraordinary and again, it's a combination of productivity productivity efficiency cost reduction and pure sustaining.
You can appreciate that and then speaking of some cost reduction and I wanted to loop and then some of the grid, though [noise] synergies can you just bring us up to speed in terms of what the operational synergies.
Our year, achieving now from from call. It a it on an annualized basis relative to today and then also some of the commercial synergies and whether or not.
We should expect more at the margin given some of the things like Rancho.
At this point Phil.
We have fully integrated bigger now assets into our entire portfolio and we now do all of our production planning and based on one footprint of of operations and so you know we're making decisions.
Irrespective of whether it was the acquired or Oh legacy operation and the savings come both ways as you optimize you know your production planning logistics et cetera.
Having said that when we announced good now we said 40 million of of operational synergies and you know we have completed.
The whole list of projects and can confirms that we have you know captured that on a run rate basis.
As we enter fiscal 2020 .
And as indicated earlier, we're saying that that we can confirm roughly double that in terms of commercial and operational synergies.
I'm not going to go into more specific details.
Project by project and its hard to predict.
No commercially where the markets are going to go a little it depends on on so many different factors, but we are very encouraged as he said earlier by the stable margins by the elevated margin and it really confirms our thesis when we announced that the transaction originally.
Terrific and just one last one.
Great quarter from pre cash flow and I'm not working capital.
Perspective, a lot coming your way in terms of cash this quarter as we've talked about so far.
But how should we think about not working capital.
How are you thinking about net working capital for for 2020, assuming that there's a have a square a little bit of a scrap recovery or not you next year and call business levels stay reasonably consistent thanks.
Yeah, working capital and Paul can add if he has any additional thoughts when I finish working capital capital is always seasonal for us.
You know when we move into the busy season and throughout the busy season, our working capital tends to peak in the summer months not highest a part of the year and then that working capital turns a and we convert that to cash and our high point is generally this time of year.
In terms of turning the working capital because we're going into the seasonally slower a part of our of our year and then all of that is also affected by raw material price changes, which happened to occur.
This past quarter. So the the release of working capital was in part just normal.
Conversion and then in part was the retraction in raw material price.
And so as raw material prices and adjusting the other direction, we'll see some additional investment in working capital.
I don't see that being necessarily that significant or meaningful but again, we were we think theres strong market conditions that will be sustained and 2020. So we'll have our normal seasonal working capital builds and releases and I think the.
Cash flow generation again is reflective of.
Where a larger company and the the combination of of the assets with the existing CMC.
Portfolio has a much stronger cash generation potential is also confirming the the work that we've done around the rapid integration and synergies.
Thanks, borrower and see nice work.
Thank you Phil.
Our next question comes from Aldo Mazzaferro with Mazzaferro Research. Please go ahead.
Hi, a barbara already.
Great how are you all to.
Well I was a I was looking at the trying to work the grid our assets into overall is you laid out you know what it looks like.
If you addressed with a metal spread improvement there was it was still a deterioration year to year in the manufacturing costs and I know that's to be expected as you work it would be assets and I was just wondering how close do you think you can come to the <unk>.
CMC run rate of manufacturing assets in those good though assets that you so nicely acquired.
Thanks.
Yeah, again, I think I look at Pollo bid into the conversation here, but as you know, although we don't disclose specifics mill Dine mill and we have.
And this rebar in some production that's merchant and there are different costs associated with the product it's that you're producing.
I think most of the cost change year over year was things that have been talked about in the past the full year effects of.
Of raw material price increases that had occurred.
And layered in over time.
I think there could for example, like electrodes now I think in the case of electrodes that possibly there could be some abatement and and in those costs as time goes on we'll see.
That market and seems to be.
You know certainly stabilized and I don't think that it can support the same.
Hi spot prices that that we've been experiencing the last couple of years.
But we're really pleased with the progress that we've made on these operations and.
Even though we've confirmed and conclude it all the projects that we had identified when we did our due diligence it doesn't mean that we're going to stop.
Looking for ways to improve efficiency and cost.
That at these operations and that's just what CMC does day in day out and we think we're we're quite good at that because we have as I indicated earlier some of the lowest cost mills in the world and you know further to that we're very pleased with the performance of Oklahoma.
Uh huh.
It was obviously assisted by our experience in Arizona.
Likewise, we introduced a school or in Arizona, and you know within days of startup it was producing.
Commercial grade product and that was due to the fact that we had experience as cooler in Oklahoma and how well our operations work together.
To to share the learnings and accelerate the.
The benefits of those types of projects.
Great.
Thanks, Barbara and Doug Congratulations on progress in 2019.
Thank you all to look forward to seize.
That concludes our question and answer session I would like to turn the call back over to Miss Barber Smith for any closing remarks.
Thanks, then.
Well. Thank you all for joining us on today's conference call. We look forward to speaking with many of you during our investor visits in the coming days and weeks.
Thank you so much.
This concludes todays commercial metals Company conference call you may now disconnect.