Q4 2020 Commercial Metals Co Earnings Call
Hello, and welcome everyone to the full year and fourth quarter fiscal 2020, <unk> earnings call for commercial metals company. Today's call is being recorded after the company's remarks, we will have a question and answer session and we'll have a few instructions at that time.
I would like to remind all participants that during the course of this conference call. The company will make statements that provide information other than historical information and will include expectations regarding economic conditions. The effects of legislation U.S. steel import levels U.S. construction activity demand for finished.
Steel products, the company's future operations, the company's future results of operations 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 factors section of the company's latest annual report on form 10-K.
Although these statements are based on management's current expectations and beliefs CMC offers no assurance that these expectations or beliefs will prove to have been correct and actual results may vary materially.
All statements are made only as of the state except as required by law CMC does not assume any obligation to update amend or clarify these statements in connection with future events changes in assumptions, the occurrence of anticipated or unanticipated events information or circumstances or otherwise.
Numbers presented will be non-GAAP measure financial measures and reconciliations for such numbers can be found in the company's earnings release or on the company's website unless.
Unless stated otherwise all references made to year or quarter, and our references to the company's fiscal year or fiscal quarter.
And now for opening remarks, and introductions I will turn the call over to the chairman of the Board President and Chief Executive Officer of commercial metals Company Ms. Barbara Smith.
Good morning, and thank you for joining this morning's call to review Cmcs results for the fourth quarter of fiscal 2020.
I'll begin the call with highlights from what was an outstanding year for CMC, then turn to comment on our fourth quarter results before providing updates on our strategic projects and the current macro environment.
Lawrence will then cover the quarter's financial information in more detail and I will conclude our prepared remarks with a discussion of our outlook for the first quarter of fiscal 2021, after which we will open the call to questions.
Before jumping into my remarks, I would like to direct listeners to the supplemental slide deck that accompanies this call.
The presentation can be found on CMC Investor Relations website.
Let me begin by highlighting the fiscal 2020 was a historic year for CMC.
Showcasing the potential of a transformed company following nearly a decade of purposeful strategic repositioning and portfolio realignment.
The benefits of these efforts became clear in fiscal 2020.
She is now a company with significantly increased earnings cash flow and operational capabilities. These.
These actions also include an incredibly robust balance sheet positioning CMC to thrive and grow.
In addition to reaping the benefits of our strategic transformation CMC generated a long list of accomplishments in fiscal 2020 as we.
As we work to continue to strengthen our organization and build for the future.
First.
We reacted quickly to the COVID-19 outbreak to protect the health of our employees and the continuity of our operations.
We avoided business interruptions and disruptions to our customers and we suffered no loss of productivity.
We increased our core EBITDA over fiscal 2019 by 30%.
Generated a 12% return on invested capital and 604 million of free cash flow in turn creating meaningful economic values.
We initiated a network optimization effort in North America that we expect will yield significant profit and working capital benefits.
Early in the process, we've already seen positive results, including lower cost and a release of working capital.
CMC made significant progress on our M.B.Q. growth initiatives, we laid the groundwork for further expansion through an enhanced commercial focus supported by broader product line offerings and improve product quality with artist that's been an additional climate controlled storage and improved handling.
We acquired the Galvabar product line and production facility, providing our customers with a complete range of corrosion resistant options to choose from.
In August we held a virtual investor day, and provided a detailed view of the company's strategy and growth initiatives.
Lastly, our mill.
Our most important achievement in 2020, what's continuing to keep our people safe I'm proud.
I'm proud to report that 67% of our locations work incident free this past year.
Looking back on fiscal 2020, I'm extremely proud of our team.
They achieved these accomplishments in an environment of unprecedented challenges that turned many people work and home life upside down.
Our employees once again demonstrated their dedication to serving our customers needs and their ability to overcome obstacles safely through collaboration and innovative problem solving.
You will have seen that starting with the fourth quarter of fiscal 2020, C.M. cheat CMC changed its reporting approach by consolidating its former Americas recycling mills and fabrication segments into one North America segment.
This change was executed with a long term multiyear perspective, and aligns with the way, we manage and analyze our business.
This approach also reflects the way in which CMC creates economic value through its vertically integrated operations as we explained in.
Detail at our Investor day.
Turning to our fourth quarter financial performance.
As announced in our earnings release. This morning, we reported earnings from continuing operations.
67.8 million or 56 cents per diluted share on net sales of 1.4 billion.
Excluding the impact of one time charges, which Paul will cover in a moment our adjusted earnings from continuing operations were 95.3 million or 79 cents per diluted share.
This level of adjusted earnings represents a 35% sequential increase and a 4% year over year increase despite operating within economy impacted by the COVID-19 pandemic.
Activity levels across most of our major end markets remained robust pushing shipments of finished steel products during the fourth quarter to the second highest level ever for CMC.
Behind only the third quarter of fiscal 2019.
During the quarter, we generated 206 million of free cash flow.
I would now like to provide a quick update on recent strategic announcement.
In conjunction with our Investor day.
See announced that it would construct our third technologically advanced micromill adjacent to our existing mill in Mesa, Arizona.
This facility will have a name plate annual capacity of 500000 times and.
And be capable of flexing production between rebar and merchant bar.
A significant portion of the investment will be funded through the sale of our Rancho Cucamonga site.
We view this investment has a smart way to grow it read.
It replaces older high cost capacity leverages, our existing market position.
An existing Mesa site infrastructure and benefits from increased returns through the investment cost offset provided by the land sales.
We anticipate breaking ground in early calendar 2021, and reiterate our previous intention to begin commissioning in fiscal 2023.
The meantime, CMC is preparing for the decommissioning of steel, California, and a seamless transition of rebar supplied to the west coast, while maintaining high levels of customer service.
During the quarter, we made significant progress in the construction of our third rolling mill in Poland. Once operational this project will allow our facility to utilized 200000 tons of current excess not capacity by converting it to higher value add finished product.
In addition to increased finished goods out but.
And the resulting margin benefit the third mill will also enhance our production flexibility and leverage our fixed no shop costs.
We anticipate a late fiscal 2021 start up.
And expect total costs will be well below our original budget of $80 million.
As mentioned earlier in July we completed the acquisition of Galvabar, a growing provider of corrosion resistant coating services to fabricators.
Galvabar is the only galvanized rebar product that can be fabricated after coding which provides benefits to fabricators, including lower cost streamlined logistics.
And increase productivity.
Turning now to the market uptake.
We exited the fourth quarter at strong activity levels in both North America and Europe.
Domestic demand for rebar has been supported by a healthy backlog of work at our own fabrication facilities as well as our third party customers.
Consistent with our previous comments today, we have seen very few cancellations.
Demand for merchant products rebounded from the low point that occurred in the third quarter sales.
Service Center activity is now also recovering and customers appear to be buying in line with under no underlying needs.
CMC is current construction backlog in North America sits at a healthy level and we continue to hear a similar conditions at our fabricator customers.
However, we know there will be lingering market effects as a result of the pandemic.
The outcome of the up coming elections will also bring his current uncertainty regarding the direction of public policy and its impact on the economy we.
We are carefully monitoring the macro environment and building and flexibility to respond to <unk> to respond to changes in demand.
In Europe.
Instruction demand remains resilient in both the private and public sectors continue.
Conditions in residential our particularly strong and demand is currently growing on a year over year basis.
As we shared during our Investor day, the Polish government recently authorized infrastructure investment equal to about 200% of its normalized annual spend.
Which we expect to begin positively impacting construction activity levels this fiscal year.
On the industrial side manufacturing activity in Central Europe is recovering with PMI them, both Poland, and Germany, posting expansionary readings from the last several months.
Finally as noted in our press release, the board of Directors declared a quarterly cash dividend of 12 cents per share of CMC common stock for stockholders of record on October 29 2020.
The dividend will be paid on November 13, 2020. This represents cmcs 224th consecutive quarterly dividend.
With that as an overview I will now turn the discussion over to Paul Arndt, Vice President and Chief Financial Officer to provide some more comments on the results for the quarter.
Thank you Barbara and good morning to everyone on the call today.
Before getting into the results for the quarter I would like to provide a few comments on how we will describe operational performance going forward in light of the change segment reporting.
Reiterate what most of you are already aware, we operate our vertically integrated network to maximize profitability.
The raw material operations, providing a reliable low cost source of the principal raw material ferrous scrap for the mills and the <unk>.
In the downstream facilities, providing a base load of demand and protecting us from short term selling price volatility and surges of unfairly priced imports.
With 60% of our raw material flows going to the mill and four.
And 40% of the mill production going to the downstream locations.
Operating the value chain into different components for the purposes of financial reporting.
No longer aligned with how we run the business.
Or how we make capital allocation decisions.
In our commentary on reporting we will focus on the products prices and costs that are most impactful to our integrated operations and earnings stream.
Our volume commentary, we'll look largely at external shipments of finished steel products, which is a combination of what we now term steel products and downstream products.
Because those tons traveled the furthest.
Through our integrated value chain.
Are the most cost and also drive our profitability.
In addition to using these volumes level these volume levels as a gauge of activity.
Well give per ton rates using finished steel product shipments as the denominator.
Regarding margins, we intend to provide commentary with a focus on selling price spread over mill yielded scrap costs for both steel products and downstream products.
With respect to costs, we will be referring to controllable cost, which we define as costs excluding scrap.
But the thing I raw material steel products and downstream product operations.
This is because we own all of the economics from the point of charging scrap into the furnace to our final product sales.
This approach of describing our business separates costs that are largely out of our control I use scrap costs and.
And those which we actively manage.
Operational status, we provide in our release should allow the investing community to identify quantify and forecast each of these two buckets.
To help parties better understand the reporting transition we have posted several resources as Barbara mentioned to our Investor Toolkit section of our Investor Relations website.
Turning to the fourth quarter as Barbara mentioned, we reported earnings from continuing operations of 67.8 million or 56 cents per diluted share compared to earnings from continuing operations of 85.9 billion.
Or 72 cents per diluted share in the fourth quarter of 2019.
Fourth quarter 2020 result include net after tax charges of 27.5 million.
The largest of which related to the post closing working capital settlement associated with our fiscal 2019 rebar asset acquisition.
This is essentially a finalization of the purchase price as working capital balances were part of the consideration paid and certain amounts were under dispute between the parties.
Other charges taken in the quarter were largely non cash and included facility closure costs as we continue to optimize our footprint as well as debt extinguishment costs related to the early pay down of CMC is term loan.
Polluting these and other one time expenses adjusted earnings from continuing operations were 95.3 million or 79 cents per diluted share.
This marks the highest level of adjusted EPS in 13 years.
Our core EBITDA from continuing operations was 176 million.
For the fourth quarter of 2020, an increase of 11% compared to the 159.2 million reported in the fourth quarter of 2019.
Now I will review our results by segment for the fourth quarter of 2020.
The North America segment recorded adjusted EBITDA of 174.2 million for the quarter compared to adjusted EBITDA of $152.5 million in the same period last year.
Largest driver of this improvement was a reduction in controllable costs on a per ton of finished product basis.
Year over year reduction was driven by cost improvements throughout the vertical footprint.
Most significant of which was the lower mill conversion cost we can.
We continue to benefit from our decision in early fiscal 2020 to curtail melting operations at steel, California and supply the facility with lower cost billets from other plants.
Additionally, milk costs were helped by declining prices for consumables, such as electrodes and alloys.
Cost levels at our downstream operations also improved due in part to the consolidation of roughly a dozen facilities since the completion of the reset reap our asset acquisition.
The facility rationalizations have been carried out in regions, where our acquisition resulted in overlapping downstream footprint.
So when addressing this issue we have not reduced our service in any major local market.
Damn sales North American cost performance more than offset the margin compression seen on slide seven of the accompanying deck.
Year over year margin squeeze occurred primarily in steel products.
Driven by a multi quarter downward drift in average selling price against a modest rise in scrap costs.
Margins over scrap on the downstream business expand modestly from a year ago due to higher average selling prices.
These higher prices are a function of an attractively priced backlog.
We won't provide guidance as to the future pricing, but we can't indicate that the current average backlog pricing should support a downstream average selling price above the trailing five year average in the near term.
Shipments of finished product in the fourth quarter were flat from a year ago with growth in steel products offset by a modest decline in downstream products.
Rebar volumes out of the mills were supported by sustained construction spend throughout the pandemic.
Downstream product shipments were impacted by multiple storms in Texas, and the Gulf region as well as the wildfires in the west.
Our Europe segment recorded adjusted EBITDA of 22.9 million for the fourth quarter of Twentytwenty essentially flat to the prior year quarter.
It should be noted that 10.9, sorry $10.7 million carbon credit was received during the quarter.
We are not treating this as a one time benefit as this credit is for a 12 month period and part of an ongoing government energy program that will recur in the future they'll the amount will likely differ.
Our Europe operations also received a 3 million dollar labor cost refund as part of a COVID-19 stimulus program, which is included in the segment EBITDA, but has been excluded from our consolidated core EBITDA figure.
Margins over scrap are down on a year over year basis, but virtually flat from the prior quarter.
Import flows remain a meaningful challenge to pricing and spreads and central Europe across all long product categories.
Several countries, namely, Turkey, Russia, and Belarus continued to aggressively fill import quotas after periodic resets.
Europe volume decreases.
Europe volumes decreased just 2% compared to the prior year due primarily to lower shipments of wire rod, which was impacted by reduced German automotive production rebound.
Rebar shipments were stable year over year, demonstrating the resilience of the construction related demand in the domestic Polish market.
Volumes of merchant product were also flat compared to a year ago helped by a recovering central European industrial activity level and restocking.
Moving on to our consolidated results our effective tax rate for the quarter was 21.4%, bringing the full year average to 24.9%.
This is consistent with a 25% guidance we provided over the course of our last few earnings calls and in line with our current expectations of 2021 to be between 25 and 26%.
Turning to our balance sheet and liquidity.
As of August 30, Onest cash and cash equivalents totaled 542.1 million and we had availability under our credit and accounts receivable programs of approximately 661.9 million.
During the quarter, we generated 259.4 million of cash from operating activities.
Strong earnings and working capital management allowed us to increase our cash balance sequentially, even while funding $53.5 million of capital expenditures and reducing debt by almost 100 million.
As you can see by the trends on slide 14 of the supplemental slide deck Cmcs enhanced earnings and cash flow generation has allowed us to rapidly de lever over the last six quarters.
Our net debt to EBITDA ratio now sits below one times while.
While our net debt to capitalization is just 18%.
Our robust balance sheet and overall financial strength provide us the flexibility to fund our strategic growth projects Avenue.
Navigate the uncertainties of the current economic environment and still pursue opportunistic M&A.
Lastly, I would like to provide a current outlook for capital expenditures for fiscal Twentytwenty one week.
We expect to invest between 202 hundred $25 million with roughly 85 million earmarked for our new micro mill.
For comparison purposes, we have previously stated that it kept typical capital spend average is around $150 million annually.
This concludes my Mark My remarks, and I'll turn it back to Barbara for the outlook.
Thank you Paul.
We expect shipment in the first quarter to follow typical seasonal trends in both North America in Europe with some additional weather related impact from storms in Texas and the southeast.
As a reminder volumes tend to decline mid to high single digits.
From the fourth quarter to the first quarter as we exit the heart of the summer construction season.
Our view is supported by the backlog levels with which we entered the first quarter.
During our last earnings call. We shared the 2021, an outlook published by the Portland Cement Association, a forecaster, whose projections have historically anticipated construction activity.
Last week. This forecast was updated projecting a modest decline of roughly 1% for 2021.
Indicating continuing relative strength in construction activity when compared to other steel consuming sectors.
Fiscal 2020 was an exceptional year for CMC and fourth quarter was an exceptional quarter. Looking ahead, we see challenges, particularly in light of the economic uncertainty created by the upcoming presidential election, and the continued COVID-19 pandemic.
Over the long term, we remain confident that CMC is positioned to earn an average EBITDA of 540 million per year through the cycle.
As we shared with you during our Investor day.
Adding the growth projects that are currently underway, we remain confident that we can grow our through the cycle EBITDA.
You know approximately $675 million over the next three to four years.
Once again I would like to thank all of the CMC employees for delivering an outstanding year of performance.
Thank you and at this time, we will now open the call to questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to drive your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question will be from Chris Terry of Deutsche Bank.
Oh, I love her and Paul Thanks for taking my questions.
Just wanted if you could give an update on the potential timing for the ranchers sales.
I think thats all in quite so just wanted a few more details on on how that how that fits together with the capex profile and getting the money in from that and the second one just relates to the market just trying to I appreciate the seasonal comments around the next couple of quarters, just maybe if you could give an indication of where well go.
I'm from into maybe over the last several several months and so a little bit more detail around you know certain states and what you're seeing within the U.S. in particular thanks.
Okay. Thank you, Chris hope you're doing well.
The the marketing of the of the Rancho sale is underway and you know theres a team of folks that are working on that and were also utilizing some external resources we.
We would expect to to get that.
To get that concluded over the next 12 months.
So so it's it's underway and tracking well and we'll provide additional updates as as time goes on.
In terms of the market and the the seasonal effects.
You know generally at this time of year.
The construction season winds down we move into the holidays.
Typically there is time taken during the Thanksgiving holiday and then again during the Christmas holiday. So you end up losing some.
Some days of work and shipments, but that's all very normal and what we see.
And you know I tried to get that indication in my remarks about what what you can factor in in terms of.
Change in our shipping profiles.
In terms of the backlog.
We also historically would see our backlog start to.
Declined a bit in the in the fall season, and then it picks back up when when construction activity.
Begins to prepay.
Prepare for the busy season in the coming year, So I don't think.
No I don't think there's anything remarkable or outstanding going on here.
Clearly this has been an unusual year.
I would say that every year when they are facing an election.
We do tend to see a projects that that are slower to to be committed to because there's uncertainty and and.
Whoever the owner is of the project. They just like to know the outcome and what the the major public policy will be based on the outcome of the election.
So our sales team and as well as our customers see a lot of good work and a lot of good projects that are out there, but we are.
But we are seeing folks who are just sitting on the sidelines a bed waiting for the outcome of the legs of the elections and again I want to emphasize that.
That is something a phenomena that we see every four years when we have a presidential election.
In terms of state I think theres been a good development over the last three or four months.
If you go back six months or at the beginning of the pandemic. There was a lot of concern around state revenues.
And the reduction in state revenue revenues and that affecting all of the projects that states.
Have on their agenda and have in their budget.
But what we've seen is really a very nice recovery in state revenue receipt and that's consistent with the fact that tax filings were delayed from the normal March timeframe.
The July timeframe, but I think that's a real positive development over the last couple of months that the revenues going into states, obviously that's variable.
State to state, but in general state revenues have recovered not.
Not quite to the pre pandemic level, but we are seeing that similar vs. The shaped effect as we've seen in other aspects of the.
The recovery.
Thanks, Barbara that's helpful. Thank you.
Thank you Chris.
The next question will be from Matthew fields with Bank of America.
Oh, Hey, Barbara Paul.
So.
Yeah, obviously finished the year in pretty comfortable spot on your balance sheet.
You're well below that two times gross debt target that you've talked about in the past.
I know you are kind of going to kick up the spending for the next couple of years and the new micro mill.
Partially offset by some sales proceeds but.
The time now for kind of a return to shareholder returns or do we think that that gross debt target.
You know take get taken down much lower and maybe some some aspirations for an upgrade to investment grade.
Well, there's a lot there let me start and then I think Paul can add some color.
I think that.
Right now our focus is on the plan that we laid out in the Investor day in a number of really interesting high returning growth projects.
And keeping our balance sheet strong too so.
To fund those as well as have the flexibility.
To deal with any of the economic aftermath that that is undoubtedly going to going to follow this this global pandemic.
We always evaluate our capital allocation, Lisa revisit that topic every quarter with our board, we revisit the dividend and other capital allocation I think at this time, we're comfortable with the yield on our on our dividends and.
Our share price.
Wouldn't suggest to us that buying back shares is is the best use of capital at this time, but it's something that we are always looking at and always evaluating.
The only thing I would add is you know our our indentures are essentially of investment grade type and so really the the benefits that we assess in terms of making the leaf and having that constraint against us to be investment grade or are not worth the the.
The hurdle and as Barbara said, we've got a pipeline of projects with very attractive returns that we would rather focus our investments.
Okay. That's a good answer thank.
Thank you. Thank you very much and good luck next year.
Thank you Matt.
The next question will be from Seth Rosenfeld of Exane BNP Paribas.
Hi, Barbara involved congrats and strong sales results.
If I could ask a few questions. Please starting out in Europe can you. Please give a little bit more color behind the carbon credit gain that was reported this quarter and your prepared remarks, you mentioned that you do think this might repeat in the future and can you give us a sense over what frequency and perhaps scale about going forward is that something style.
I Wonder if you know that would reflect perhaps spot carbon prices within Europe I'll start there. Please.
Sure. Good good morning, so the carbon tax credit in Poland is seen.
Seen in quite a bit of fun to eastern Europe, where their energy costs as a result of the carbon tax burden that they pay on their energy rates is quite elevated to remain business friendly. The the government has put in place. These ah.
The subsidies to maintain the Polish economy competitive with the with the rest of the world.
So this is a multi year program. The the the credit received was for calendar 2019. So a a 12 month period, it is and legislative circles, and and will be paid for calendar year Twentytwenty as well.
Now, we do anticipate a similar amount to be paid in the fourth quarter of of 21.
Great. Thank you very much clear second question that I make on working capital. Obviously, you were able to release, a very large amount of working capital throughout the course of this year, you've talked previously about how asset optimization and streamlining our production footprint well Austin structural relief.
Are you able to give some guidance what we should expect for fiscal 21 do you still see further working capital release or depending on market conditions demand pricing would you expect that reverse so what you saw in the last fiscal year.
Yeah, I'll start that hope you're doing well and thank you for the question you know.
You know the optimization effort is in its early stages and certainly we're going to be careful as we lose that initiative forward that we don't jeopardize any of our customer service, but we.
But we do think that there is additional opportunity now that we have the larger network of operations.
To continue to optimize the level of working capital that we have across that entire network and.
And the idea is that you would not have safety stock everywhere. If you can still provide that the customer with quick turn.
Quick turnaround and delivery for all of their needs.
So.
I think that you will see those dividends paid.
Hang out in the coming year and of course that will be offset by whatever price fluctuations that were going to see whether it's fluctuations in scrap price or fluctuations in selling price.
Really the objective on a tons basis is to carry a more optimal level of product while.
While also balancing and maintaining exceptional customer service.
That's great. Thank you, so perhaps assuming stable market conditions, even more to come in 21, not necessarily waiting for the shift to the new mill in Arizona.
And then just a last question. Please in your earlier remarks, you commented on again put proposition improving your conversion costs I'm good.
I'm given that rental was initially close some time ago just to be clear in fiscal Q4 did you see sequential improvement compared to Q3 or are you looking at us on a year over year basis, but column b.
The they did there was clear larger benefits year over year. However, we continue to focus on optimizing cost so even even quarter over quarter sequentially. There were there were improvements, but but not to the same magnitude as the as the year over year changes.
Great. Thank you very much.
Thank you Seth.
The next question will come from Timna Tanners of Bank of America.
Hey, good morning, I'm Mad Catz. Some clarification question clarification questions regarding outlook that comments about the storm impact just curious is that reflecting just the risk around the corner and now that we're halfway through your November corner or is there something you've already experienced if you could just clarify that a bit.
Yeah. I mean, you have followed these storms and the her two hurricanes that went through the Louisiana and.
Here's what happens from an operational perspective 10 that is.
That.
When the storm is coming where of course following the development and generally we have to repair operation for the surge and so we we tend to hunker down and.
Protect our facilities, which means sometimes we have to to shut down when the storm hits land. So you have some some sort of disruption there obviously our customers are doing the same thing and so there's there's not going to be construction or steel being laid down when you have a hurricane coming.
Onshore.
And in that given you know let's call it corridor.
It's very difficult to make up that time lets say that you know you you prepare and you shut down the day before the storm comes on on land, you're you're done and then you have to restart and so you lose 234 days in a specific region.
And then things come back to normal and this is absent any any kind of re reconstruction effect and its hard within a 90 day timeframe to make up those shipments.
So you know I'm not prepared to give a quantification of.
Plus days or or volume does obviously it didnt those those events did not affect the entire.
Network, but we have had a number of weather related events that caused those kinds of disruptions and.
And clearly the work will be will be shipped over the longer term.
Timeframe, just within a quarter it can cause.
Some disruptions.
But I can say that our shipping rates.
So far within this quarter I continue to be.
Good and consistent with what we've seen over the last period of time.
Okay helpful. So I'll watch to see what storm activity over the next six weeks or so and then just really wanted to follow up on you know any further items that we might expect to see related to that carried out transaction I just looked up it's over almost two years ago. So is this kind of the last none of those items and and issues relate.
To that transaction or when might we expect more to come.
Yeah. Thank you tend to I think the best guidance I can give you is is really pointing back to the investor day, where.
You know we laid out what we.
What we saw is the next phase and that being this optimization.
And of course, there's cost benefits, whether it's logistics or other operating costs and there's the working capital benefit, which we just discussed with us and.
And so the big integration and benefit items are behind us and clearly as Paul reported we had a number of fabrication location consolidations. This past year, where we had facilities within the same geography and.
So most of the major benefit it has already been accrued but I can tell you. This past year, there's significant progress.
All of our locations not just the newly acquired ongoing cost initiatives and.
Activity initiatives.
Process improvement initiatives that have yielded.
Nipigon.
Benefit.
Clearly the California decision.
[noise] was was also key and we really look forward to.
The new mill, and and serving that market in a different way.
Differentiated much much lower cost way, but in the meantime, we'll take advantage of capacity.
Capacity across the system in order to make sure that we have no disruption in service to our to our customers.
Okay. Thanks for that and hope everyone stays low thanks. Thank you Timna you too.
Once again, if you have a question. Please press Star then one the next question will come from Phil Gibbs of Keybanc capital markets.
Hey, good morning, good morning, Phil.
Borrower I just wanted to confirm that the guidance that you provided on the mill side of high single mid to high single digit decline was that from both north.
North America, and Europe or was that just for North America.
Okay. So that would be not just know that overall shipments we would see that seasonal effect and I think.
And that's across the entire.
Network, including the U.S. and Poland.
Obviously, Poland weather can become a factor.
Just depending on whether they have a a harsh winter or a mild winter and sometimes winter can come a little bit sooner in Poland and certainly here in the U.S.
And then and then it's the holiday effects.
Okay. So this does include Youre your downstream products in North America that's.
That's right.
Okay.
And then just in terms of the downstream products backlog in North America. Historically, that's been equally weighted between public and private work is that still about the same.
We haven't seen a significant change over the last few quarters. So I think it tips a little bit more towards private.
In the current such as.
Situation, but it's been consistent over the last several quarters.
Thank you and then lastly.
Any changes and.
Demand that you're seeing among the regions.
To serve you and I know you are predominantly a sunbelt company prior to the grid owl acquisition, So you've got a bigger.
You got a bigger network now.
Sales of serving all the regions any.
Francis and some being stronger than others or weaker than others. Thank you.
Thank you Phil at this point.
I wouldn't point to anything dramatic or significant in terms of the shift I think that we're trying to to ferret out the lingering effects of the pandemic and I could paint a scenario of some positive and in other words I think it's no surprise that the.
Population migration to the Sunbelt states the business friendly states to lower tax states.
He has been going on for quite some period of time and I think it is is continuing and will continue which I think plays to our sweet spot in terms of our our footprint.
You know clearly the shutdown related to the pandemic the state shutdowns, there's been a fair amount of variability in that.
But I think it's just going to take some time for all of those effects.
The shake out and in the current moment.
We're not seeing any dramatic trends that that it that I can point to.
Thanks, so much thank you Phil.
The next question will be from Sean Wondrack Deutsche Bank.
Hi, Barbara Paul Nice.
Nice job operating in a pretty tough environment out there.
Hi, just wanted to follow up follow up on a on an earlier question somebody asked considering an investment grade ratings.
I totally understand that.
You guys are operating with your own plan in the best interest for sort of creating value for the shareholders in mind.
But when you talk about sort of like a 675 million through cycle EBITDA.
You talk about sort of maintenance capex, and the 150 million ish level.
Even with growth Capex included and now you're still going to generate a significant amount of free cash flow.
Was curious.
Just what you're hearing from the rating agencies in terms of of your progress even if you stick with your plan and then also.
You know.
Yeah as you as you continue to move forward is there a chance that you might achieve that split rating.
Without even keeping their their big things in mind, what are the gating factors there is it a scale issue.
Thank you.
Thanks, Sean for the for the question and I think in a lot of cases, you have a you have outlined the answer I'm going to provide in the in the question that you gave.
Clearly to get to where we aspire to be where we have the vision to be at 675 million or we're going to have to make some some investments and that's what we laid out on the the investor day.
So our capital allocation and and.
The priority Sorta are point in time, and so as of right now where we find the most attractive use of our capital is reinvesting in the business through these growth initiatives.
That we believe will provide very attractive returns once.
Once we get to that level, we will have to have another assessment as to where are the opportunities for us to invest the cash is that a that we want to prioritize being investment grade or are there future opportunities available to us and so I think where we sit right now we are we.
He that are the best opportunities for us are too to invest we do have good discussions with the rating agencies and frankly of the discussion is similar to this around what what do we want and and it's it's it's currently.
Currently we're looking to invest.
In in the business were looking to build the third micro mill, which is a considerable investment, but we think we can do that through our free cash flows over the next couple of years. So I think that's going to be the primary focus but once we get those in place, we'll reassess and the priorities may may change.
I think that makes a lot of sense and I appreciate the thoughtful answer there.
And then just quickly if I could add one more in there there's been some M&A recently in the.
The U.S. steel sector.
I was curious if you had seen any increased interest in your business and maybe what you're seeing sort of on the M&A front in general.
Yeah Shaun.
I think I would answer that by saying thanks.
Well laid out our capital allocation strategy, we have a number of really attractive.
Organic growth opportunities and projects that were.
That we're pursuing that leaves and you know.
Made the investment community aware of.
We made a transformational acquisition a couple of years ago.
And I think all the acquisitions Weve done in recent times Weve demonstrated a really strong discipline for evaluating any growth opportunity that we would undertake said its its clearly within our strategy and our core capabilities and that is something that we see.
Where we can create significant value for our shareholders.
So we are always monitoring and M&A activities that.
Is is potentially out there that could create attractive growth for the company and I can I can assure all of you that we will apply that same disciplined approach to anything that we would consider.
And as Paul indicated in his remarks, we want it.
We want to have a balance sheet that has a lot of flexibility flexibility too.
Under under take disruptions in the economy like we saw this this past year I call. It shocks to the system things that are unknowable to us today, but might occur we have to have the flexibility to respond to changes in demand and changes in market conditions or macro issues.
We have to always make sure we have the flexibility to fund those internal organic needs that we have and then we want to maintain a certain level of flexibility. If there is a very unique opportunity that comes.
So for us and those.
And those are always you know.
Things that we have to balance between between all of those those different priorities and opportunities that come to us.
Appreciate it thanks very much thank you Sean.
The next question will be from Andreas Bokkenheuser VBS.
Well. Thank you very much I just wanted one follow up question from you I mean, you answered some of it already but just kind of when you look forward over the next couple of years and you look at your original product specific segments and in terms of growth. I mean, you always are told about Dnbi Cume, Bill, where you're putting up some of the capex inherently no.
Where do you see the market growing.
You always feeding into that and also where do you see less growth, but you're still investing.
I used to get to take market share from from is effectively over the next couple years, obviously, we have an infrastructure bill potentially happening. So maybe you can roll that into the answer as well that would be great. Thank you very much.
Thank you.
I'd say.
I think.
I think it's clear that we are very oriented to construction markets.
And so.
You know the growth that that is going to have the biggest impact on the company would be growth in construction and that can come from.
Infrastructure, which clearly.
We will we will be awaiting the outcome of the election and the.
Policy decisions that will potentially.
Create more demand from an infrastructure side I think that can be a positive avenue of growth.
I think that the.
Readjustment of supply chains, which became very evident during the pandemic that's already starting to emerge.
Recently spoke to someone that that's in that industrial market and and they are very busy and they see a lot of opportunity and.
And for example.
I think we learned a lesson in terms of having control over a medical P. P E over and the production of critical medicines and antibiotics and therapies and.
No I think that you all see that all of the pharmaceutical companies are hearing.
Gearing up for.
Bringing back some of that production capability to the U.S.. So we don't find ourselves in the situation in the future. So I am actually to in the medium to long term very optimistic for a lot of industrial activity.
You know how quickly all of that comes at what pace is is you know, we'll we'll monitor it and factored in when we see it.
I mentioned the population migration do you know the residential statistics have been very good and the U.S. and following residential construction activity come.
Coms nonresidential construction activity.
Household formation and millennials are starting to settle down and have families and move to the suburbs.
I think all of that can create some interesting.
Production trends going forward.
And we see similar positives in in Poland, where we have our large operation there.
In terms of.
Our merchant products, which a lot of that goes into general industrial activity General.
All all types of products like.
Again, I think a readjustment of the supply chain is going to increase the demand for March.
Merchant products and we can certainly take advantage of that and you know our strategies are continuing to improve our capabilities there.
So I think we've got to get through the next period of time and.
See you.
You know.
Where the the virus goes and and how we finally get past it but I'm.
But I'm I'm I think there are a number of positive.
That we can capitalize on going forward.
Excellent. Thank you very much.
Thank you.
At this time there appear to be no further questions Ms. Smith I'll now turn the conference back to you.
Thank you.
Thank you all for joining us on today's conference call and we certainly look forward to speaking with many of you during our investor calls in the coming days and weeks and hope you all stay stay safe. Thank you again.
This concludes today's commercial metals Company conference call you may now disconnect.
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