Q1 2021 Commercial Metals Co Earnings Call
[music].
Hello, and welcome everyone to the first quarter fiscal 2021, and you called the commercial metals company.
Today's call is being recorded after the company's remarks, we will cause 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 impact of Carbonite team.
Texas legislation.
You import levels you on construction activity demand for finished steel products the company's future operations, the company's future results of operations in capital spending.
These and other similar statements are considered forward looking statements and Nate.
In both for cash interest.
The 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 balance that are described in the risk factors and forward looking statement disclaimer section on the company's later on in more report on form 10-K, and subsequent quarterly reports on form 10-Q.
Although these statements are based on management's current expectations and beliefs.
You see offers no assurance that these expectations or beliefs will prove to be cash and actual results may vary materially.
All statements made on me on the state except as required by law.
He does not assume any obligation to update amend or clarify these statements in connection with feature on bad.
And just on assumption be true.
As anticipated or unanticipated events you.
New information or circumstances or otherwise.
Numbers presented our historical non-GAAP financial measures and reconciliations for such numbers can be found on the company's earnings release or on the company's website.
Some numbers presented our forward looking non-GAAP financial measures and reconciliations are not provided due to the unavailability of forward looking NEP inside information on.
Unless stated otherwise all references made to year or quarter and or roughly that's true to compete for school year or fiscal quarter.
And now from the opening remarks, and introduction I will turn the call over to the chairman of the Board President and Chief Executive Officer on commercial metals Company Ms. Barbara.
Good morning, and welcome to our first quarter earnings conference call I'd like to wish everyone on the line a happy new year and extend my thanks to CMC is 11500 employees for another great quarter.
I'll begin the call with brief comments on our first quarter results before providing some color regarding the current market environment and how CMC is positioned to succeed.
I will also give an update on CMC strategic growth initiatives.
Oh, 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 second quarter fiscal 2021.
After which we will open the call to questions.
As announced in our earnings release. This morning, we reported fiscal first quarter 2021 earnings from continuing operations 63.9 million or 53 cents per diluted share on net sales of 1.4 billion.
Excluding the impact of certain charges, which Paul will cover in more detail.
Our adjusted earnings from continuing operations were 69.8 million or 58 cents per diluted share.
C N C generated core EBITDA of 156.6 million, marking the seventh consecutive quarter near or above the 150 million level.
This record underscores not only our company's enhanced earnings capability compared to past periods, but also the stability provided by our integrated value chain.
Activity levels and CMC is core end markets remained strong during the first quarter, leading to an increase in the company's finished steel shipments compared to a year ago.
In North America demand for rebar from our mills was driven by resilient construction activity as contractors continue to work off the healthy backlog that carried into the pandemic.
The man from merchant products benefited from the ongoing recovery of domestic industrial production.
As well as a lean supply chain following heavy service center de stocking in April and May.
Demand for CMC is long products in Europe also remained strong during the first quarter.
Residential construction in Poland continued to be strong and grew by seven per cent compared to a year ago.
Like rebar consumption.
Meanwhile, demand from merchant and wire Rod products was supported by recovering automotive and industrial production in Poland and Germany.
Manufacturing PMI indices for both countries.
I've consistently indicated growth since July.
I would like to now spend a few moments discussing the current and near term market environment.
On our earnings call on October we highlighted.
Good day did levels of uncertainty.
Market uncertainty continues to persist.
The prospect of future co bid related locked down and their potential impact on the economy.
Let your hesitation I'm on project owners to award new work.
However in recent weeks, we see more willingness to move projects forward.
We've also seen a rapid increase in global prices for steel and steel, making raw materials semester.
Domestic scrap has been particularly impacted increasing significantly since the end of our fiscal fourth quarter.
Current elevation in scrap pricing appears to be driven primarily by increased global demand.
Particularly China.
And by near term shortages of underutilized steel plants increased production levels.
The extension duration is rally it's difficult to predict it will certainly pressure margins in the near term on both our steel and downstream products.
As we outlined during our Investor day, CMC is built to weather turbulence is structured to endure periods of volatility or vertical value chain integration provides CMC with sources of strength.
Any point in the economic and steel price cycle.
Our approach to operational excellence and optimization ensures that CMC is lean and efficient and our team is always looking for further improvement.
Let me give you a few examples of how CMC has responded to the current environment.
In order to maintain metals spreads we have responded to rapidly rising scrap costs with several rounds of announced price increases on each of our mill products.
In addition, there.
Synergies, we achieved following our fiscal 2019 rebar asset acquisition as well as our ongoing network optimization efforts have reduced fantasies cost structure meaningfully.
During the first quarter, our controllable cost per ton of finished steel were 10% below the levels immediately following the transaction.
This represents the cost incurred throughout CMC is vertical value chain from the skills that our recycling yards although.
All the way to the shipment of downstream products from our fabrication facilities.
These cost reductions are significant and fall directly to our bottom line.
In Europe, our team reduced per ton controllable costs by roughly 10 per cent compared to the prior year, which is a remarkable feat given our belief that this was already one of the lowest cost mills in the world.
Even at the recent depressed metal margin level of $200 per ton our European operations is generating segment adjusted EBITDA at an annualized rate.
A $55 million to $60 million.
Back at CMC Europe is succeeding in the current challenging environment gives us confidence that it will thrive in better times.
The first quarter margin over scrap was nearly an eight year low it was $25 per ton below the long term average rich.
<unk> returned to mid cycle levels would add 30 to 35 million of annualized segment adjusted EBITDA.
Factors driving uncertainty in our markets have led to some erosion in the volume of work within Ccs downstream backlog.
As previously mentioned customers have delayed on boarding projects. However in recent weeks bookings have picked up and the backlog is starting to stabilize.
Looking beyond the near term uncertainty longer term indicators remain encouraging <unk>.
The amount of potential work the downstream customers are asking us to quote remains strong, indicating a robust project pipeline.
Our commercial teams continue to report that project owners. So currently hesitant to book work are optimistic about future conditions.
External indicators also point to reasons for confidence.
Residential construction, which generally leads non residential and local infrastructure by 12 to 24 months is very strong.
Regional population shift into CMC score geographical markets has accelerated during the last year boding well for medium to long term activity.
Additionally, the Portland Cement Association recently revised their 2021, and 2022 estimates for cement consumption growth upward.
Roughly 1% and 2% respectively.
You see a is a forecast provider we have highlighted in the past as having the highest correlation to domestic rebar shipments.
I'll now like to provide a quick update on recent strategic announcement.
In conjunction with our announcement last August of construction of our third technologically advanced micro mill, we announced that we would eventually curtail all operations at our Rancho Cucamonga site.
At the end of December we cease production at the mill, while maintaining full service to our customers operational changes and logistics were carefully plan.
We have experienced a seamless transition thus far.
I would like to acknowledge and thank all of the CMC employees at the ranch a site for their service.
And professionalism through this difficult decision to cease operations.
During the quarter, we made significant progress on the construction of our third rolling on Poland.
The equipment and support utilities are now being installed.
We expect to begin testing equipment on a few months and continue to target commercial production later this fiscal year.
As indicated during our last earnings call total project costs should be under our original budget of 80 million.
Once operational the third rolling mindful of our facility to utilize 200000 tons of current excess mill capacity.
Converting it to higher value add finished product.
This will further increase our production flexibility and leverage fixed melt shop costs.
Construction of our new Nvq capable micro mill.
And our third rolling line in Poland in conjunction with our ongoing network optimization efforts.
Other smaller organic projects is expected to add approximately 135 million a through the cycle EBITDA over the next few years.
Before turning the call over to Paul I'll briefly mention efforts CMC is undertaking regardless regarding sustainability.
So you haven't really is core to CMC and has.
Then since our founding as a recycling company on hundred and five years ago.
Good business, good environmental stewardship per fully aligned at our company.
It's been demonstrated our adoption of the cleanest steelmaking technologies.
And our recent announcements of increased sourcing of renewable energy.
In addition to better communicate CNC strong U.S.G. performance, we are planning to offer new disclosures over the course of calendar 2021.
Finally as stated in our press release, the board of Directors declared a quarterly cash dividend of 12 cents per share a CMC common stock for stockholders of record on January 21st 2021.
Dividend will be paid on February 4th 2021. This represents cmcs 225th consecutive quarterly dividends.
That as an overview I will now turn the discussion over to Paul Lawrence Vice President and Chief Financial Officer to provide more comments on the results for the quarter.
Well.
Thank you Barbara and good morning to everyone joining on the call today.
Today, we reported earnings from continuing operations of 63.9 million or 53 cents per diluted share compared to earnings from continuing operations of 82.8 million or 69 cents per diluted share in the first quarter of fiscal Twentytwenty.
Oh from the quarter include net after tax charges of 5.9 million related primarily to facility closure and asset impairment expenses on a Rancho Cucamonga steel, California operations.
As Barbara mentioned production ended in late December.
Including these and other one time expenses adjusted earnings from continuing operations were 69.8 million or 58 cents per diluted share.
Our core EBITDA from continuing operations was 156.6 million for the first quarter of 2021.
A decrease of 10% from the near record level of 174 point 774.4 million reported first quarter of 2020.
Slide five of the supplemental earnings call slides available on our web site shows the stability of our core EBITDA on a per ton of finished steel ship basis over the course of the pandemic.
Now I will review results of segments for the first quarter of fiscal 2021.
North American segment reported adjusted EBITDA of 155.6 million for the quarter compared to adjusted EBITDA of 174.7 million in the same period last year largely.
Largest driver of this reduction with lower margins over scrap costs on finished products.
Our genes for both steel products downstream products were impacted by lower average selling prices compared to a year ago against higher scrap input costs.
Selling prices for steel products from our mills decreased by $14 per ton on a year over year basis.
What did sequentially increase due to price increase announcements that became effective in the latter half of the quarter.
He's price increases, which Barbara mentioned earlier occurred largely in late November and have continued into January.
The impact of these increases will be realized by the end of the second quarter.
Average selling price of downstream products declined by $42 per ton from a year ago. As a result of the mix of work shipped as well as the impact of the high price projects booked in the immediate aftermath of section 232 rolling off our backlog.
Margins on our backlog remains strong and profitable relative to historical levels.
As Barbara noted exceptional operational performance helped offset the impact of lower margins.
Moving to the first quarter of fiscal 2020 controllable costs per ton of finished steel ship declined by roughly five per cent for.
The improvements throughout our vertical footprint.
Most significant benefit was lower mill conversion cost, which is our largest cost outside of scrap.
We continue to benefit from our decisions taken in early fiscal 2020 to curtail melting operations that steel, California and supply the facility with lower costs billets from other plants.
Additionally, low cost benefited from declining prices for consumables, such as electrodes and alloys.
Shipments of finished product in the first quarter were essentially equal to the pre pandemic volume of a year ago with growth and steel products offset by a decline in downstream products rebar.
Our volumes out of the mills have been SUS board it by sustained construction activity throughout the pandemic.
Non rebar volume, which is principally merchant bar and wire rod saw an increase in volumes against the backdrop of flat industry consumption.
Downstream product shipments were impacted by lower activity in certain geographies as well as multiple storms in the Gulf Coast region.
Recent trend in North American margins volumes and cost performance can be seen on slide six of the accompanying deck.
Our European operations segment recorded adjusted EBITDA of 14.5 million for the first quarter of 2021.
Fair to EBITDA of 11.4 million in the prior year quarter.
Largest contributors to the improved year over year performance with strong cost management higher shipment volumes and a 1.3 million coven related benefit from the Polish government.
Margins over scrap were down on a year over year basis, but virtually flat from the prior quarter impact.
Import flows continue to disrupt pricing on spreads in central Europe across all on product categories.
Our Europe segment has experienced four consecutive quarters of margins over scrap between 195 and $200 per tonne.
Which is well below the long term average as Barbara pointed out.
Based on pricing developments over the last several weeks, we believe margins have bottomed.
Europe volumes increased meaningfully compared to prior year, the prior year rising 17% due primarily the impact of improving industrial demand and central Europe as well as service on a restocking on merchant from wire Rod.
Rebar shipments were stable year over year, demonstrating the resilience of construction related demand in the domestic Polish market.
Now turning to our balance sheet and liquidity as of November Thirtyth, 2020, cash and cash equivalents totaled 465.2 million.
And in addition, we had availability under our credit and accounts receivable programs of approximately 679 million.
During the quarter, we used 12 million of cash to fund operating activities.
Usage resulted primarily from the timing of payments related to certain accrued expenses, including a $32 million of acquisition working capital settlement highlighted in the fourth quarter earnings release.
Looking ahead to the second quarter of fiscal 21, we believe the funding of working capital to be meaning to be a meaningful use of cash both.
Both our inventory and accounts receivable balances will be impacted by the generally higher price levels for scrap and finished steel.
Our leverage metrics remain attractive and have improved significantly over the last two fiscal years as.
As can be seen in slide 10, our trailing 12 month net debt to EBITDA ratio now sits at 1.1, while our net debt to capitalization is just 21%.
Our robust balance sheet and overall financial strength provides us the flexibility to fund strategic projects navigate the uncertainties of the current economic environment and still pursue opportunistic M&A.
Our effective tax rate for the quarter was 25.3% and inline with our full year effective tax rate forecast of between 25% to 26%.
Lastly, I would like to provide our current outlook for capital expenditures for fiscal 2021.
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 our typical capital spend averages around $150 million annually.
This concludes my remarks, I'll turn it back to fiber for the outlook.
Thank you Paul.
We expect finished steel shipments in the second quarter to follow typical seasonal trends in both North America and Europe. As a reminder, volumes tend to decline mid to high single digits from Q1 to Q2 as construction activity is slowed this time this year with the holidays and winter weather.
Shipments of steel and downstream products in North America should be supported by our construction backlog.
Manufacturing sectors of both the U.S. and central Europe appear to signal continued recovery.
We expect to benefit volumes of merchant bar in both markets as well as our wire rod product in Europe.
We anticipate margin pressure in North America during the quarter as a result of rapidly rising scrap costs and the timing lag on announced price increases.
CSC is well positioned to navigate market volatility and uncertainty this gives us confidence that over the long term. Our company is structured to earn average EBITDA of at least 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 believe we can grow our through the cycle EBITDA to 675 million over the next three to four years.
Once again I would like to thank all of the CMC employees for delivering another outstanding quarter of performance.
We will now open the call to questions.
We will now begin the question and answer session.
Question You May Press Star then one on your touched on so.
If you are using a speakerphone please pick up your handset before pressing.
To withdraw your question. Please press Star then too low.
Net limit yourself to one question and one follow up.
Further questions you may reenter the question queue.
At this time, we will pause momentarily to assemble the roster.
Our first question today comes from Chris Terry on Deutsche Bank. Please go ahead.
Hi, Barbara <unk> goal.
Gross well I wanted to ask a question just around the infrastructure Bill I think previously you talked about three ball on market potentially been sitting at one to 1.4 million tons per year in that not long.
Just wanted your thoughts if we ought to get an improvement in infrastructure Bill how long you know on your experience something like that might take to flow through the numbers and just just checking that that that one to 1.4 is the right range. Thank you.
Thank you, Chris and happy new year.
We're still cash.
Competition in that range of one to 1.4, I think we'll have to see what the priorities are as the new administration, but certainly infrastructure.
Seems to be one of the areas of focus on early on in the administration's term so.
So we would be you know highly encouraged is is that moving forward.
Okay, No I would.
Just in terms of the Tommy on how that might come through a shame to now now just on your experience on backlogs and is that sort of a 22, how long would something like that take to flow through the economy.
Yeah, I apologize I didnt.
To your second half of your question you know normally there's a.
You know a 12 to 18 months lag.
I would say even discussions with our customers Theres certainly.
Doozy as on to just start projects and.
You know so we're just really watching a number of things and hoping for the continued recovery in the economy and no setbacks with co that.
But I think yes the infrastructure.
Bill is approved in this first year, we would start to see things in the following fiscal year.
Realized.
Okay. Thanks from <unk> just to follow up on the.
The mechanics of the decent well key business I'm, just checking that the fabrication business still sort of the non to 12 month lag on pricing sort of how you think about the business and then scrap still flow through this was through on 30 to 45 day lag into the men's division.
Just wanted to think about some of the modeling.
Yeah, I think the the nine to 12 months is a is a good average more recently, we've seen more short duration in spot business and in some of our you know fab business, which is good because it turns a little bit a little bit faster you don't have as much raw material exposure, but those are good.
Averages for both.
GAAP turnover and scrap turned on.
Thank you that's it from us on the bus you Chris.
The next question comes from Curt Woodworth on credit you. Please go ahead.
Yeah, Hey, good morning, Barbara on Paul.
<unk>.
I know there has been a a flurry of price hikes in the last three months from.
Scrap price and continues to go up pretty dramatically. Just wondering you talked about how you expect to have all the price hikes fully in place by the end of Twoq, you got to see scrap cycles on the business recalls.
Quickly. So can you give us a sense on.
A what type of metal spread compression you could be facing this quarter and then when I look at spot rebar middle bolt on its about 755, so it's up roughly.
Roughly 160 over the past three months, which is somewhat equivalent to what the scrap market has done you know included about a $80 per ton rise. This month. So would you say that as it stands today the price hikes you've announced by.
By the end of two Q, assuming scrap stays where it is right now you would be roughly back to where you were on metal spread.
Kurt you know, we don't give any specific commentary on on pricing for obvious reasons, but.
Certainly there's good transparency on the changes in raw material price and there's been good transparency on announced price.
Moving on and you.
You know assuming that those.
Our accepted in the marketplace you know, we're we're encouraged by that and.
Sure.
Obviously the.
Moving to optimize margins as.
Yes, we can.
[noise] okay.
And then maybe said another way in terms of the.
The lag on the announced price hikes so.
What would a typical lag be between.
But your contract structure than the timing in terms of working through the inventory like if you announce a price hike today with that kind of start to flow through on on about a 60 day lag or how should we think about kind of the timing mismatch if you will between.
Scrapping more fluid on price and taking a little bit longer to effectuate.
Yes, generally speaking and every announcement is different based on you know the conditions in the marketplace, but.
Generally speaking if there's an announcement today.
And customers are protected for two to four weeks.
And.
And then you have have scrap.
You know flowing through low.
That does that.
On.
Yes.
Those are guidelines.
A lot of factors and you know every action by everyone.
Every market participant is slightly different.
Okay.
And then just a follow up on you talked about the backlog has its picked up a little bit more.
More recently, maybe but certainly we are on the election or various things can you talk about what you.
What sectors of the backlog, where you're seeing activity is it more on the infrastructure side relative to non resin you mentioned residential it's doing better but I don't think you have that much exposure to residential could you just remind me on what that exposure is and that's it. Thank you.
Yes, thank you well.
On that.
Backlog as is everyone can appreciate when the pandemic literally shut the economy's down around the world that that took everything to a screeching halt and.
And so there was a pause and.
Voting in bidding as everyone's search to understand things.
Things that go from from there.
There and as time has gone on as we all know the our business as an essential business has been able to do.
To upgrade.
Free effectively throughout this and I think construction activity in general.
He has been able to move forward.
Oh without any.
Sure disruption.
It then comes back to a lot of other uncertainty factors and and people tend to be more hesitant to book.
When.
They don't have.
Sure.
No certainly policy matters going forward that's true.
Very short after some decline in backlog, we do believe that the backlog is stabilizing we are encouraged by.
Recent quoting and booking activity.
And we know from our customers there is good activity or good projects out there and and we've seen some some really interesting ones over the last you know.
[music].
Net or finally coming to market after some months of a hesitation or just paused to understand the.
On the fallout from service.
On our backlog.
It's around 60% private.
And public.
For was infrastructure bill at the magnitude of the house and Senate have talked about that could.
That to shift over time and be more heavily weighted towards infrastructure.
But I should remind folks there's been a lot of population movement throughout this past year, and that's where we do see some market strength is.
As a result of those trends.
And.
It's probably going to continue and and with that comes a lot of infrastructure.
Follow on from.
From the strength in residential.
To remind our listeners that we do now with the addition of the recent acquisitions, we do have wire rod exposure not only in Europe, but also here in the U.S. and.
There is.
Oh good.
Non of wire Rod that does go into into residential so we have a little more exposure there than maybe what you would think of historically.
But again with a strong residential follows on non residential and so that's a very encouraging sign for us going forward.
Great. Thanks, very much people.
Thank you you too.
Your next question comes from Seth Rosenfeld, I think BNP Paribas. Please go ahead.
Good afternoon, thanks for taking our questions today.
If I may I have first a follow up question on your recent comments on on NB Q and I wanted to come back on working capital. Please when it comes to N.B. Q can you [laughter] on on what's driving these particularly strong volumes and book could you exit than Europe to what extent you attribute this to market share gains versus some weaker competitors.
Others.
Inventory restocking after the summer fall by your creator customers on more from the more fundamental in real demand trends, if we can start there.
Okay. Thank you Seth.
Your.
No the Nvq, it's Dan as we've highlighted as an important product it's always been in our portfolio.
We very much appreciate our on her.
Merchant customers.
On a simple answer we have invested in providing a broader product range.
And so that opens up opportunities for us clearly there's been inventory restocking has a lot of the manufacturing sector was shut down for a period of time in the early stages of the pandemic.
And on and then you know I think service centers have been very judicious and very conservative in managing their working capital understandably. So.
And given the market volatility and uncertainty.
It's a combination of things I can also remind you that in the U.S. there was that one.
Mill that was shut down over the.
This period of time, and so certainly that opened up on.
Other opportunities for us as well.
Just to clarify is there anything with these volume numbers that you think is uniquely on.
Unsustainably boosted by restocking and this one right you should take moving forward from Q1.
Yes.
And I don't think so I think that.
On a believes the manufacturing sector is fully ramped up.
To normal operations I know, there's still shortages throughout the supply chain is.
Sure in the market buying anything you certainly will be aware of some of the shortages throughout the supply chain.
But.
So.
Yeah, maybe there are some.
Yes.
Short term settling out of it but I I still think there's.
And our data would indicate that there's.
Going to be continued.
Demand growth in 2021.
As all of the sectors of the economy recover.
Okay, that's very clear and if I can ask a follow up question. Please on the guidance for working capital. Please obviously, a big use of cash in Q1 on.
Guidance for significant investment in Q2 can you provide me framework for the scale of investment you would expect and then is there any reason to expect full year investment. This year, we're assuming some moderation of trends will be expect to release in the back on please.
Sure South and a good good morning.
You know as far as our working capital in the in the first quarter. As you indicated you saw a a a normal use of cash for us typically though the the first quarter.
Includes various a year end related payouts that oh occur in the a in the first quarter as well as some from accrued interest on and and other activities.
And so you know the normal flow is for US is an outflow in the a and the first quarter and then holding everything else constant we recover that working capital throughout the the balance of the of the year.
In the.
Current year, obviously in addition to the normal cycles, we have the impact of the inflationary pressures both on the inventory side and the receivable side.
And really that's.
Clearly a.
In a cyclical business, that's a temporary investment and really depends on your outlook for the the the the cycle of costs and where you are where you project the on the.
The scrap prices to to go and possibly a recovery but.
So that's a positive thing from our perspective, you know we've got a billion one off of liquidity through the judicious cash balance sheet management that we've got and so we view this as a as you know part of the normal management of the the the the business and we do see.
The overall that Oh, we continue to look to optimize the the business, which includes a long term having working capital reductions.
In days.
Days measure, but in today's environment as a result of the rising prices clearly we will see a a an investment in a in cash here in the second quarter.
Okay. Thank you.
Our next question comes from CMS on thank.
Oh, yes.
Yeah, Hey, good morning by <unk> happy new year.
The new years day right now.
I just wanted to clarify so on the comments about the scrap margin on scope the pressure on margins from scrap on you know if if we believe this could be the year of scrap and scrap is off to a sharp sharply higher start from <unk> the year on and here February quarter is your guidance more commentary on like the temp.
For a timing as passing on all true.
Or is there any reason to believe that this is a margin squeeze that we could see beyond like the short terms I'm, just really asking about sharply higher scrap prices. Maybe it's just a question of timing and how you think about that adjustment for your steel business and then want to ask something about steel fabrication on those lines is low.
Timna.
Be really think as I said, we're trying to signal that timing like very encouraged by.
The.
Ability of.
Oh, which has historically been the case.
Fair, our customers understand as raw material prices.
Mange that there there are adjustments to finished product pricing so right now it's.
It's really a question on the timing between.
Scrap movements and price changes and.
Imports are relatively at Bay and that's another factor as you know that plays into it and so that.
Just to us but.
We're going to be able to recover those raw material price.
Changes as they occur.
Okay that makes sense. So just be made because of the on usually sharp increase in and probably conservatism into February and unknowns, there and makes it makes sense to me that conservative but on those lines I'm trying to understand how to think about the fabricating fitness, so and if I understand correctly that inflates the rebar that goes into that as price on like a co.
Order lag and then that finished product is price on like nine to 12 months lag. So if we think about you know the rebar price inflation for now against what we know a year ago is that does that imply like a near term margin squeeze until any adjustments can be made on the selling price or can you just guide us how to think about that I believe you.
Talked about it Paul talked about it and cautioned on it but I just want to make sure I understood that that guidance.
Yes, so I'd make the following remarks and Paul can certainly add color if he'd like on.
Just as a reminder, first and foremost.
Generally higher prices or beneficial to the business overall sales to the lags that we spoke of.
So you know we were encouraged by the higher finished goods prices that we're seeing in the marketplace.
I also want to remind everyone that that on the raw material side, when when raw material prices move higher that creates a nice opportunity in our recycling side of the business.
To improve margins, which helps to offset and buffer the temporary impacts on the other side of the coin, which is the fab side that you alluded to.
On a and so yes, there is going to be some.
Temporary adjustments and sad.
As.
SAP contracts adjusted to the higher raw material prices.
But I haven't I'm encouraged that that not only as a fab backlog stabilized and started to build again, but also I think that.
You know, we're going to see Sop prices begin to adjust to to these changes and in raw material prices be.
We try to read the very judicious in.
Booking projects when you have this phenomenon going on and.
But you.
You know we.
We've been at this for a long time and there's those offsetting factors between recycling benefit and temporary fads.
Seth SAB in fact, the only thing I would add Tim as if you. If you look at you know where the margin is on our downstream products over scrapped here in this most recent quarter. It is it is still at in comparison to a historical.
Historical levels elevated margins and so while we will see a temporary squeezes as Barbara as outlined we're starting from a a place of elevated margins, which will mitigate the impact a somewhat in comparison to some prior cycles.
Oh, no doubt I, just want to make sure I understand so the the recycling business benefits on higher scrap prices that steel business. You know, we would hope to offset higher scrap with higher steel on and maintain a solid you know if not you know better margin and on the fab business is a bit of an offset and just wanted to clarify unless there was something that was missing on an ability to.
Past due price is differently than in the past.
No that's that's correct.
I think he thinks.
Thanks, Tim.
Our next question comes from on Jerry on open.
Yes. Please go ahead.
Thank you very much happy new year, everyone. Just a quick question on on on a <unk> older.
Auto book this year so.
Who do you want to stay on the back at all on.
You were mentioning all respects, what kinda because non.
So on both wouldn't.
When we look at some of the leading indicators like Nonres thoughts and the eight and so on which suggests that you could actually see there's no pressure on quick from steel demand this year.
Well from from what I'm, taking away from the cold is pretty.
Pretty comfortable with your with your new order book, So how should we kind of think about it overall on you effectively capturing market share is that kind of where the bulk of fuel volume growth is coming from this year.
You know potentially shrinking market or do you see that looking at the abiotic book.
Non-GAAP <unk> trucks or soft goods, just about good indicators on how the market is going to comp sales. This year, how should we think about that.
Yeah I'd.
I think.
We're managing a portfolio of products and while certainly rebar is very very key.
On into that we do have these other products that are.
No not not tied to a b on other things.
We'd like to look at Portland, cement and cement consumption because cement consumption is more core.
Correlated to rebar consumption than just a b. I or non Reds because there are a lot of the other uses of rebar outside of just nonres certainly non resin is.
On important and Portland cement also has a very very.
You know good track record of of course.
Forecast accuracy and Portland cement over this past year during the pandemic has.
Candidly continued to.
Improve or increase their projections going into 2021.
On factoring in all of the low or current economic data in Portland cement is is showing a modest increase in cement consumption year over year, so that that gives us encouragement.
Encouragement along with all the other factors that we're we're watching.
On one point I would add on dresses you know geographic spread as well you know you look at where were predominantly.
Predominately located in the in the Sunbelt areas and you know those are clearly the strongest markets from from a non res perspective clear the northeast is weak and has been weak now for a number of years on those.
Those often have some a weighted impacts to the overall numbers versus our our markets.
That's that's very clear it makes little sense and one follow up on scrap if I may obviously.
On the headlines about trying to kind of reopening the goals for imported scrap I'm sure you're short as well how do you kind of think about that is this do you think this is going to be a challenge in terms of your cost of trying to stop tightening the low scrap market. The east coast, you ascribe jost kind of exporting most grabbing to the world or or is this is there is an opportunity for you.
It's actually been on provincial you'll figure steel price at a higher level and then kind of protect your spreads if the global scrap markets Heights. So that's my follow up and that's all the questions I have.
Thank you Andrew.
As I said earlier generally speaking higher on raw material prices.
Higher finished good prices lead to much improved results in our business.
So we're not certainly not discouraged by that.
I think we on.
So have a business model that is designed to.
Flourish.
Because we know that raw materials also fluctuate fluctuate within it within a year and they can fluctuate you know certainly year to year.
So we have a very flexible business model. Unlike other products in the steel value chain that.
I have.
Longer lags in order to adjust for raw material pricing.
We have a relatively short lag in that regard and.
So we'll see a certainly we're studying the current phenomenon and I think.
Just like you have a number of mills that were down for a period of time.
Past year, and they're coming back on line as industrial activity.
On Emmys begin to heal I think you have a similar situation that's.
Occurring in China, and Asia, and other places around the world. So.
We'll we'll remain very nimble and flexible to adjusted to.
Ever happened snacks.
That's very clear. Thank you very much for taking my questions stay safe.
Thank you you too.
The next question comes from Phil Gibbs of Keybanc capital markets. Please go ahead.
Hi, good morning, happy new year.
Happy New year Phil.
Just first question from me Barbara I think you mentioned backlogs on the downstream side domestically are starting to stabilize.
Good day, it pulled back a little bit post election, where do you think we are on a year on year in terms of downstream U.S. backlogs.
I.
I don't think the pullback was low.
Election related so I think it was just really the pandemic.
So you know that's been slowly healing as time goes on and we'll see what happens in the coming months in terms of.
Now the more recent uptick in co that cases that I think everybody is learning to live within that environment and I.
I don't think that we'll see the pull back in.
Industrials and other activities like we saw back in.
In March of last year.
The backlogs down a little bit Phil single digits.
But just you know encouraged says.
You see it stabilizing and we do see no.
No much more positive economic activity today than four months ago six months ago.
I would also add I think I missed it earlier that in some parts of the business our backlog is shorter duration.
Which is a good thing for us because it cycles through quicker and.
Don't have.
Impact on that raw material.
Rebar price.
Not as exacerbated as when you fill up with a lot of long duration.
Projects.
Thank you and as we look at your conversion costs you'd pointed to the quarter being very solid in terms of your execution any way to isolate.
How much that benefited you on an absolute basis year on year relative to the one Q 20 are we talking 5 million.
15, you know I'm, just trying to get a sense of.
Yes, how much you've been able to on to optimize the business just on the last 12 months [noise].
You know if you if you take a look at the the controllable.
Costs fill around which as you know sort of what we outlined is everything between what we receive from the scale through to to the fab locations outside of scrap we have seen a you know a significant a reduction and in those that are that that is.
Is meaningful.
You know, it's it's certainly in the you know.
Yes.
10, plus million range of what we've achieved over a overtime.
Thank you and on and then lastly, if I could.
On on your margins I think you had said on the U.S. business on the mill side margins were.
Starting to stabilize to improve later in the quarter as you you push through higher.
Pricing, obviously, you you've talked about several successive rounds of increases.
And then you are saying margins are bottoming and in Europe, and maybe you've got some fed pressures that you talked about so.
So so at the end of the day. It seems to me like seasonally speaking you you pointed to the volume is being down but it sounds like spreads good couldn't be.
Reasonably.
Reasonably stable given all the given all the puts and takes it just depends what type of business, we're talking about within your portfolio.
Fair.
I think.
<unk>.
Well see where things go it's early in the quarter, but I think that the margins.
They stabilize.
At the end of the quarter, but you still got to.
Still got us through.
On material and the lag effect of price changes sales so.
I think to recover back to a stable margin by the end of the quarter is probably.
Oh, a realistic expectation, but no doubt there's going to be.
On be some pressure on the margin within the quarter, but very encouraged by.
Marcus.
Uh huh.
These escalations in raw material prices.
For for we're going to make.
Make much money as we can and.
We sit here fairly encouraged for 2021 coming out of a period of time, where it's been very very difficult to get any.
Inside into where the markets were going.
Thank you very much good luck.
Thank you Phil.
Our next question comes from pilot, Kenya, Kelly. Please go ahead.
Thanks, very much good morning, and happy new year.
The new year Tyler Tyler.
Morning wondering if you could maybe provide us an update on on your progress and where you are on capturing that $50 million of projected EBITDA on enhancement just from network optimization that you laid out on your Investor Day I just.
Branch on now closed and.
A number of other initiatives underway, maybe if you could give us a sense as to how the cadence in realizing that 50 million over the next couple of years, and perhaps give us a sense as to what's been realized to date.
Sure Tyler you know as far as you know the the activities. There. It's it's it will be a a a long process to really reap all of the optimization benefits.
Clearly the low hanging fruit, which we've acted on is the oh, the closure of steel, California, and leveraging the lower cost facilities to a ship the material to that market and continued to to serve a the California market.
That's the as I said, the low hanging fruit you know as far as the other items you know, we're very confident but they require a lot of heavy lifting and you know we're in the early innings of the a a bit of the unleashing of of those optimization opportunities. So.
As we laid out on the the Investor Day, you know, it's a a two three year endeavor and that's our current outlook as well, we're seeing great benefits from the from the closure through the controllable costs.
Reduction, but there's still a good opportunities ahead that we continue to get more and more confident and as we as we go down this path.
So sounds like very little if any has been realized 52.
Good day.
I wouldn't I wouldn't characterize it as very little to any but.
Sir.
Hey, good over the four years.
On the back end weighted.
Got it okay. Thank you and then just with respect to the investment Poland sounds like that is expected to ramp by the end of this fiscal year on how quickly do you think you can get to.
Optimal utilization levels, and maintaining kind of that $20 million.
Right.
Thank you well, we have a really stellar team in Poland and.
They always execute well on their major capital expenditures and we would expect.
This to be no different.
And you know I think we can better update you as as time goes on because the commissioning activities are going to be late in this fiscal year.
But we would expect day smooth.
Commissioning and ramping up of that.
That equipment.
Having said that there's.
There's you know you have to look at the market conditions and in Europe and.
That'll be a factor that will flow monitor and that will affect whether the market and absorb all of that.
All you as quick as we would.
I would like and hope, but at this stage we think.
2021, you'll see a meaningful contribution office, the new mill and you'll see.
It is.
Commissioning and ramp up and you can probably give you a better that are good things later in this fiscal year we.
We have a better view into 2022 outlook.
Thanks, very much good luck.
Thanks.
Book includes our question and answer session net net I'll now turn the call back over to you.
Thank you Melissa. Thank you all for joining us on today's conference call. We look forward to speaking with many of you doing our investor calls in the coming weeks.
And happy new year and stay safe. Thank you.
[laughter] growth.
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