Q2 2022 Commercial Metals Co Earnings Call
[music] [music].
Hello, and welcome everyone to the second quarter fiscal 2022 earnings call for commercial metals company today's materials, including the press release and supplemental slides that accompany this call can be found on <unk> Investor Relations website.
Today's call is being recorded after the company's remarks, we will have a question and answer questions and.
And we will 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 the Russian invasion on Ukraine effects of legislation U S steel import levels U S. Construction.
Activity demand for finished steel products the expected.
Capabilities and benefits of new facilities.
The company's future operations, the timeline for execution of the company's growth plan, the company's future results of operations.
It's all measures and capital spending.
These and other similar statements are considered forward looking and may involve certain assumptions on 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 and forward looking statements section of the company's latest filings with the Securities and Exchange Commission, including the company's latest annual report on form.
10-K.
Although these statements are based on management's current expectations or beliefs CMT CMC offers no assurance that these expectations or beliefs will prove to be correct and results may vary materially.
All statements are made only as of this date, 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.
New information or circumstances stances or otherwise some numbers presented will be non-GAAP financial measures and reconciliations for such numbers can be found in the company's earnings release and supplemental slide presentation on the company's website.
Unless otherwise stated all references made to year or quarter at 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 chairman of the Board President and Chief Executive Officer of commercial Metals Company Ms. Barbara Smith.
Good morning, everyone and thank you for joining Cmc's second quarter earnings Conference call.
Before we begin I would like to again extend my appreciation and congratulations to CMT has 11000 employees for another outstanding quarterly performance.
Each day through your hard work you find innovative ways for our company to drive efficiencies across the business improved product quality deliver world class customer service and advance our strategic vision.
And behalf of the entire leadership team, we're extremely proud of your efforts and of the culture of teamwork and accountability that defines our organization and that you carry forward every day.
I'll start today's call with highlights from the quarter and a brief status update on CMT as strategic growth projects.
I'll also provide commentary regarding the impact of the war in Ukraine on CMC as people and business.
Paul Lawrence will then cover the quarters financial information in more detail and I will conclude with a discussion of the current market environment and our outlook for the third quarter of fiscal 2022, after which we will open the call to questions.
Before.
Starting my prepared remarks, I would like to direct listeners to the supplemental slides that accompany this call. The presentation can be found on Cmc's Investor Relations website.
Earnings from continuing operations were $383 3 million or $3 12 per diluted share on net sales of $2 billion.
Which is a record quarterly results for C. M C.
Excluding the impact of non operational items that Paul will discuss adjusted earnings from continuing operations were $187 6 million or $1 53 per diluted share. The second best in our company's history trailing only the prior quarter.
The AMC generated core EBITDA of $323 1 million, an increase of 89% from the year ago period, and virtually unchanged from the historically seasonally stronger first quarter results.
With this quarter's strong performance Cmc's trailing 12 months core EBITDA totaled more than $1 1 billion and our trailing 12 month return on invested capital was 21%.
This is a significant achievement during the last 12 consecutive quarters of time periods that includes the global pandemic and broad supply chain and Labor force challenges CMT has generated annualized return on invested capital well above 10%.
Our past and current strategic actions have clearly created consistent and substantial value for shareholders. We are poised to continue doing so.
CMT is excellent second quarter benefited from favorable demand conditions across virtually all end markets.
Strong margin environment for our major product lines.
Our performance also benefited from C N <unk> ability to capitalize on these conditions.
As one example, Europe's record quarterly EBITDA reflects the contributions of our third Rolling Line Commission last night.
This new line in our Polish mill can produce rebar and merchant bar and wire rod simultaneously and is generating volumes and profits well above our initial expectations, enabling our European commercial team to more fully serve.
They're very strong marketplace.
This example is like many of the strategic initiatives investments that are allowing CNC to turn strong market conditions and to record financial results.
Let me now provide a status update on CMC strategic growth projects, starting with our announced acquisition of 10 sorry.
We expect to close the tents are transaction during the third fiscal quarter. As a reminder, this acquisition will meaningfully extend cmc's growth runway, providing a platform for further expansion into high margin high customer service engineered solutions.
Sensors offerings provide best in class propositions to customers and are currently underpenetrated in the marketplace.
We believe this combination of attracting new customers and large potential market opportunity will support significant organic growth for tests are in the years ahead.
Our Arizona two micro mill project remains on track for early calendar 2023 startup.
This timing aligns up well with the expected ramp up in spending related to the infrastructure investment and jobs Act signed last November .
The new mill with will provide CNC with 400000 tons of rebar capacity to serve incremental infrastructure demand as well as about 150000 tons of merchant bar that will extend our sales reach to the west coast.
Lastly, CMC continues to study options regarding our announced fourth micro mill to be constructed in the eastern U S.
We are currently in the site selection process and expect to be able to share project details in the coming months.
The war in Ukraine has dominated the news cycle for several weeks and we are monitoring the situation closely for our team in Poland. The war is very close to home and only the last few weeks and estimated one for me.
One 4 million Ukrainian refugees have crossed into Poland.
I'd like to give you a sense of the quality and unselfish kindness of the CNC.
Team members in Poland. Local leadership has acted swiftly to assist those fleeing for safety by coordinating with a well known humanitarian aid group in Poland that specializes in helping victims of armed conflicts the national disasters natural disasters.
Leadership has also made cmc's accommodations available to refugee families. Many.
Many employees are traveling to the Ukrainian border on their own time to transport refugees refugees to safe areas.
Many have also opened their homes to refugees and provided food comfort and shelter.
The response by Cmc's Polish team members to the human tragedy and need is inspiring and we thank them for everything they are doing.
To date CMC has not experienced any disruptions to our operations.
Currently market demand has continued unabated with N cmc's core Polish and German markets.
Barring an expansion to the conflict, we did not anticipate any significant interruptions to business functions.
You use sanctions placed on imported materials from Russia, and Belarus, combined with the disruption of the flow of Ukrainian material.
Our expected to meaningfully tighten the supply of long steel products.
For reference in calendar 'twenty, 'twenty, one, Russia, Belarus, and Ukraine accounted for 46% of the rebar imported into the E U.
And a higher percentage of the imports into central and Eastern Europe .
These countries also make up roughly 25% to 30% of imported merchant bar and wire rod into the EU.
Looking at the impact on steelmaking raw materials, we are confident in our Polish supply chain.
Scrap for our mill is domestically sourced much of it coming from Cmc's own facilities.
Likewise CMC has a strong procurement team in place to ensure access to alloys electrodes and other key inputs.
These comments extend to our North American operations as well and just as a reminder, CMC does not require pig iron or prime scrap.
Many of our steel mill.
Finally as stated in our press release, our board of Directors declared a quarterly cash dividend of <unk> 14 cents per share of CMC common stock for stockholders of record on March 30th 2022 .
The dividend will be paid on April 13th 2022. This represents cmc's 230th consecutive quarterly dividend with the amount paid per share increasing 17%.
From second quarter of fiscal 2021 .
With that overview I will now turn the discussion over to Paul Lawrence Vice President and Chief Financial Officer to provide senior 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 as Barbara noted, we reported record fiscal second quarter 2022 earnings from continuing operations of $383 3 million or $3 12 per diluted share compared to prior year levels of 60.
$6 2 million or <unk> 54, respectively.
Results this.
This quarter include a net after tax benefit of $195 $8 million.
The benefit was related to a large gain recognized on the sale of the California real estate, which was partially offset by debt extinguishment costs associated with the opportunistic refinancing completed during the quarter.
Excluding the impact of these items adjusted earnings from continuing operations were $187 6 million or $1 53 per diluted share.
Core EBITDA from continuing operations was $323 1 million for the second quarter of 2020 to nearly double the $171 1 million generated during the prior year period.
Slide nine of the supplemental presentation illustrates the strength of Cmc's quarterly results.
Both our North American and Europe segments contributed significantly to year over year earnings growth, while core EBITDA per ton of finished steel reached a record level of $226 per ton.
Now I will review the results by segment for the second quarter of fiscal 2022.
Excluding the gain realized on the California land sale CMC as North American segment generated adjusted EBITDA of $262 1 million for the first for the quarter just $6 million below the record level achieved in the first quarter.
Adjusted EBITDA per ton of finished steel shipped hit a new all time high of $268.
Segment, adjusted EBITDA improved 53% on a year over year basis, driven by significant increases in margins on steel products and raw materials.
Partially offsetting this benefit for higher controllable costs on a per ton of finished steel basis, due primarily to major maintenance programs and increase unit pricing for freight energy and alloys.
Selling prices for steel products from our mills increased $346 per ton on a year over year basis and $65 per ton sequentially.
Margin over scrap on steel products increased $254 per ton from a year ago and $57 per ton sequentially.
The average selling price of downstream products increased by $240 per ton from the prior year, reaching.
Reaching a new record of $101169.
This increase was more than double the rate of change in underlying scrap costs, leading to a significant expansion in profitability on volumes processed and ships through sample sees entire vertically value chain.
During our fourth quarter earnings call I indicated that CMC is downstream backlog was expected to reprice higher throughout fiscal 2022, as new higher priced work replaces older lower priced work.
We are seeing this scenario play out as demonstrated by the $155 per ton increase in downstream average selling price from CMC is fourth quarter of 2021 to the second quarter of 2022.
We continue to expect further upward movement in Cmc's average backlog price through the remainder of the fiscal year.
Particularly in light of the strong market demand and bid volumes that we are experiencing within our downstream geographies.
Shipments of finished product in the second quarter decreased approximately 10% from a year ago due to a difficult comparison to unusually strong volumes in the prior year period, as well as well as weather challenges and much of the eastern U S.
End markets for our mill products remains robust, which we are seeing in both order rates and broader industry data we track.
Downstream product shipments decreased.
By roughly 5% as weather slowed construction activity in several geographies.
However, we have seen downstream backlog volumes increase providing good optimism of the strength of underlying demand.
Turning to slide 11 of the supplemental deck, our Europe segment generated record adjusted EBITDA of $81 1 million for the second quarter of 2022 compared to adjusted EBITDA of $16 1 million in the prior year quarter.
The improvement was driven by expanded margins over scrap and a significant increase in shipment volumes.
Higher costs for energy and mill consumables, partially offset these positive factors.
Margins over scrap increased $203 per ton on a year over year basis, reaching $407 per ton.
Robust market conditions provided the backdrop to achieve a $319 per ton increase in average selling price with solid year to year trends across each product we sell.
Europe volumes increased 27% compared to the prior year as a result of strong market fundamentals and the absence of major planned maintenance that occurred during the second quarter of fiscal 2021 .
Shipments excuse me shipments of merchant and other products were relatively unchanged as sales of higher margin finished product from our third rolling line replace sales of semi finished billets.
This positive shift in sales mix has provided a strong benefit to segment earnings and as Barbara mentioned, the recently commissioned Rolling line continues to materially outperform expectations.
Demand conditions within Central Europe remains strong the Polish construction market continues to grow while consumption of our merchant and wire rod products have been supported by expanding manufacturing activity.
Polish and German PMI readings have registered growth for 20 consecutive months.
Turning to the balance sheet liquidity and capital allocation.
As of February 28, 2022, cash and cash equivalents totaled $846 6 million or.
Our cash position was augmented by the successful $600 million senior note offering completed in January .
Which provided CMC with $300 million of new funding.
And advantageously, allowing us to redeem 300 million of Outstandings, five and three eighths interest.
Rate notes due in 2027.
The new senior notes due in 2030, and 2032 were re priced to yield four and one eight and four and three eighths, respectively, enabling us to cost effectively fund our business and extend our maturities.
Further in conjunction with the industrial development authority of the county of Maricopa CMC issued 25 year tax exempt bonds to fund a portion of our new Arizona two micro mill.
This offering was structured to yield three 5% for the $150 million of proceeds received.
We have regularly discussed our Arizona two projects since announcing it in August of 2020, we are proud not only of its first in the world merchant bar capabilities World class environmental footprint and strategic value of the CMC is positioned in the Western U S. But also from its fine.
Lansing the.
The vast majority of funding for AZ to was sourced by unlocking unlocking the significant real estate value gained in Cmc's 2018, rebar asset acquisition as well as now the long term financing at just three 5%.
So not only will AZ to have world class operating costs, but it will also have a world class capital structure as well.
As of February 28, 2022, we had approximately 685 million of availability under our credit and accounts receivable programs, bringing total liquidity to $1 5 billion.
A portion of this liquidity will be used to fund the <unk> acquisition on the close of the transaction.
During the quarter, we generated $29 million of cash from operating activities. Despite almost a 200 million dollar increase in working capital.
Rise in working capital was driven by the significant increase in average selling prices over.
Over the course of the past six quarters CMC has invested over $800 million in working capital, which will be converted to cash when prices retreat.
Our leverage metrics remain attractive and have improved significantly over the last three fiscal years.
As can be seen on slide 15, our net debt to EBITDA ratio now sits at just 0.5 times, while our net debt to capitalization is at 14%.
We believe our robust balance sheet and overall financial strength provides us the flexibility to finance, our strategic organic growth projects and complete the acquisition of tenths or while continuing to return cash to shareholders.
<unk> effective tax rate was 24, 8% for the second quarter, and we forecast the full year rate to be between 24 and 25%.
Turning to Cmc's fiscal 2022 the capital.
Bend outlook, we continue to expect to invest between 475 and $525 million in this year for a total.
Roughly half of which will be attributable to a arizona too.
Lastly, CMC repurchased 335500 shares during the fiscal second quarter at an average price of $34.85. These transactions amounted to approximately $11 7 million, leaving $333 million remaining under our current authorization.
We plan to increase the pace of repurchases activity during the second half of fiscal 2022.
This concludes my remarks, and I'll turn it back to Barbara for an outlook of the current market environment.
Thank you Paul turning now to market conditions first in North America, we continue to see strong demand at the mill level for each of our major product groups.
Rebar and wire rod are being supported by healthy construction markets with many.
Customers, indicating that their own order books are at multiyear or even all time highs.
It's anecdotal view is consistent with the current rate of growth in overall U S. Construction spending as measured by the census Bureau, which is growing at a high single digit year over year rate income.
Encouragingly, we are also seeing signs in both our internal indicators and external measures that the nonresidential construction activity. We anticipated is beginning to follow the rapid new community build out that has occurred in our southern markets. During the last two years.
Historically nonresidential investment has followed residential construction by 12 to 24 months as local public and commercial infrastructure is constructed to support the inflow of new residents.
We see this demand firsthand in our downstream rebar fabrication operations.
Our best leading indicator of future activity as our level of construction did.
This measure continues to grow on a year over year basis and reached its highest ever second quarter rate.
New project quotes are well balanced between public and private sector work as well as across industries.
Activity has increased in traditional areas of private nonresidential like office mixed use commercial and industrial.
Additionally, the sectors that were hot during the pandemic warehousing datacenter in healthcare remains strong sources of demand.
Late in the quarter as a result of the current energy market turbulence, we even began to see previously delayed LNG projects re emerge.
Pricing on downstream bids are at historically attractive levels and should be nicely profitable when shipped in quarters ahead.
I would also like to note that the strong environment. Just described is yet to be impacted by the new infrastructure plan, which we estimate will add approximately a million and a half tons of incremental rebar demand to the market at full run rate.
As previously mentioned the timing of the startup of our Arizona, two micro mill will position CMC well to fully capitalize unexpected additional demand related to infrastructure.
The positive sign of our outlook is backed up by several key external construction forecast and indicators.
Portland Cement Association expects healthy growth of two 5% in cement consumption in 2022.
The architectural billing index continues to point towards expansion in the year ahead.
Particularly within our core southern U S footprint.
Additionally, the Dodge momentum index, which measures the value of nonresidential projects entering the planning phase remains at levels seen only a handful of times over the last 15 years and showed strength in both its commercial and institutional components.
Demand for merchant Bar also remains strong this product reaches numerous end markets and the majority of the largest consuming sectors are growing.
Including general industrial metal buildings, racking and conveyors for warehousing farm machinery and construction equipment.
The demand picture in Europe is equally positive, but because of the Ukrainian war more uncertain.
Demand is robust across sectors with construction activity is strong and new residential construction permits remaining near multi decade highs.
The central European industrial sector continues to grow as reflected solid in.
PMI readings for both current production and new orders.
With production from our new Rolling line, which allows our Polish operations to produce each of our three major product groups simultaneously.
CMC is now even better positioned to capitalize on market strength.
However, while business conditions are favorable at the moment and expected to remain so the future direction of the Ukrainian crisis is unknown.
Given the anticipated tightening of long products play in eastern and Central Europe , We do expect strong financial results in the near term, but a prolonged conflict will likely impact us.
So to reinforce our outlook for fiscal 2022 is very bullish based on our current view of the marketplace and our internal indicators. We anticipate continued strong financial performance science point to robust demand in our key end markets and we expect supply and demand conditions to remain favorable supporting healthy margin levels.
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More near term in the third quarter of fiscal 2022, we expect shipments to follow a typical seasonal trend, which has historically equated to a high single or low double digit increase sequentially.
Margins on steel products as well as controllable cost per ton should be generally consistent on a quarter over quarter basis.
Once again I'd like to thank all of the CMC employees for delivering yet another quarter of outstanding performance.
Thank you and at this time, we'll now open the call to questions.
Thank you.
We'll now begin the question and answer session.
I ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
Also please limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble our roster.
My first question comes from Michael Glick with Jpmorgan. Please go ahead.
Good morning.
Could you just re.
Remind us on how your power contracts and hedges in Poland are structured.
The implications for margins going forward and you know given those important stat you cited earlier.
Rebar prices can offset.
The incremental energy costs.
And then you know shorter term has there been any change in demand or customer behavior in the very recent terms since the invasion.
I'm going to take a couple of them and I'm going to pass it to Paul I mean, first and foremost we we do not.
See any concern relative to energy supply to our Polish operation, Poland is probably the least.
In that country on them.
The the affected geography.
And.
So Paul can talk more specifically about our our energy hedges, which will also provide some benefit to us in the near term, but as you know a number of steel operations have shuttered.
Due to the rise in energy prices in and I just want to emphasize that we don't we don't see any disruption in supply as it relates to demand we're not seeing any any.
Any negative effect to demand bear in mind that.
A very large portion of our output stays in the Polish market, we do ship into our second largest market would be Germany, but we're not seeing any changes in demand as a result of the the conflict.
Yeah, Mike and good morning, just a little bit.
Additional information on the Polish power arrangement as Barbara said, you know it is not dependent on natural gas as ace as a source of energy for the for the for the country as other countries within Europe are primarily it is a coal based generation of.
Of energy.
Not only are they spot prices lower in Poland, then what we see across much of the west of the much of the rest of Western Europe .
We also have the the financial arrangement such that our exposure to spot prices is very reduced.
As we've talked about in the past.
We've got both financial hedges in place, which are have a significant portion of our overall power as well as we've got various arrangements with our power supplier, which includes a portion of fixed price power and so the increase as a result of of energy.
He has not been a material increase to the overall cost structure related to our Polish operations.
Got it and then.
I guess the main question I get so filled pose it to you. It's just I mean do you all have the view that rebar prices in both the U S and Europe .
We will increase.
More so than cost of scrap and you know.
You mentioned energy is a small piece, but curious to get your view there.
Yeah Michael.
We have to be careful what.
What we say relative to selling price, but what I would say is.
As you know.
There was a significant correction excuse me correction in scrap prices.
In the in the March by as a result of of the conflict both in the U S and around the world and.
The beauty of our business and our products is that.
Our customer base is is used to adjustments when we see those fluctuations in raw material prices.
Other thing I would point out is we do not require any pig iron.
For our melt need so the pressure for us is less significant.
<unk> and other players and we also don't require prime scrap in the prime and the pig is where.
There's significant impact.
Relative to the conflict in Ukraine.
So we feel good about you know the market absorbing the various inflationary pressures not only scrap but other inflationary pressures that we're all familiar with.
Okay got it thank you very much.
Thank you Michael.
Our next question comes from Seth Rosenfeld with <unk>.
BNP Paribas Exane. Please go ahead.
Hi, good afternoon, thanks for taking our questions today.
Another question on Europe . Please.
In your prepared remarks, you touched on the EU is high reliance on Russia, Ukraine, and Belarus for imports of long products can you remind us on the current effective capacity of your Polish mill, obviously with the third Rolling line recently wrapped up should we assume that any additional upside to output volumes. There was a performance represents.
The map potential output just thinking about potential for share gains.
Their place.
Yeah. Thank you Seth hope Youre doing well.
Okay.
With the sanctions, we do see that as a potential opportunity for us in in Poland not.
Only for the reasons, we just mentioned around the.
The ability to continue operations uninterrupted.
And due to available energy and we also don't see any major risks from an overall supply chain, but it could create a.
You know tightness in the market I think as you know the.
The sanctions included some language, suggesting that the quotas that are currently allocated to Russia, and Ukraine could be allocated to.
Other countries, but but our current view and it's early is that that could represent an opportunity for CMC and.
I'm not going to comment on.
Specific capacity numbers, because that that varies based on the product mix that you are running in <unk>.
And we do.
I have some ability to shift product mix around across the platform, but certainly.
The addition is that rolling line was was very effective.
And has been outperforming our expectations as Paul indicated.
And we see that that scenario continuing to be really favorable to generate just a very attractive return on that investment.
Thank you.
A separate question. Please with regards to conversion costs are controllable costs.
And I'm not quite sure. If your comments were reflective of a global cost base specific to the U S, but given that in the last quarter.
Outage costs, what scale of decrease or alleviates pressures, we expect into Q3.
But if you can quantify that please and then in the other direction are you expecting any incremental increase in freight our alloys going into Q3. Please.
Yes F as far as the.
The maintenance outages you know its been now over over a year and I would say probably closer to a year and a half that we've been.
Operating our facilities at a at a high rate of utilization and as a result, we are continuing to do.
If necessary preventative maintenance across our operations we did.
Get a lot of those are done within the second.
The second quarter, but some will continue into the third quarter as well, but most mostly the focus is on the continued.
Reliability of the equipment versus significant costs associated to the to the to the outages.
If we look at our overall outlook for for costs going forward.
To us it's really how do we position ourselves in comparison to other industrial activity, even outside the steel industry and we believe we are very very well positioned.
You know as you as you look at the innovation that we have brought with the micro mill as an example that is the lowest energy consumption form of producing steel in the world today and as a result, you know the impact that we have seen from rising energy costs, Yes, we are not immune to it but it.
It is lower than what has been incurred by by others.
We are not anticipating based on what we see today significant further increases in costs. However, you know it will depend on what happens to the general.
Inflation factors, but what we are confident our south has is really are our competitive position will remain very very strong and are.
And being able to be a low cost producer.
Okay, just to clarify on maintenance would that it would be down Q over Q it sounds like that'll be compensated for bike.
Inflation elsewhere, and I understand that correctly.
The maintenance itself is likely to to continue.
To be with us into end of the third quarter as we continue to go through our routine maintenance at other facilities.
Okay understood. Thank you.
Our next question comes from Curt Woodworth with Credit Suisse. Please go ahead.
Yeah. Thanks, good morning, everyone.
Good morning, Kurt Kurt.
You know Barbara I was wondering if you could comment on some of that kind of the current dynamics at play in Poland. Just from a supply demand perspective, you know I know that Europe foot.
Sanctions on the inability to import steel from Russia, and Belarus, and historically I believe Belarus had been a pretty big.
Export or into your region in Poland.
And some of the price hikes, we've seen recently coming out of North and South Europe have rebar in any way.
We're from 1200 up to $13 50, a metric ton so pretty dramatic increases.
So what is your ability to kind of capitalize on that situation or are you evaluating ways to maybe change or.
Customer flow path to be able to migrate more material potentially.
Northern Europe to capture those prices and then can you comment at all about.
How what's going on in Europe from a pricing standpoint.
I know the Turkish pricings up to probably going higher how that's kind of feeding into your thinking around.
U S pricing and in terms of the arbitrage and kind of how customers are thinking about.
Imports, maybe today versus where they were a month ago.
Okay, there's a lot there and youre, absolutely right Curt that Belarus, and Russia are significant importers into the E U.
We said the account for about 40% 46% of the.
Long steel imports into the EU.
So.
By those.
Flows being cut off.
I think.
We're going to wait and see how those quotas are allocated elsewhere, but.
We were enjoying an extremely strong demand.
Situation.
When that that flow was.
Was coming into the EU now that that's disrupted I think that just creates additional opportunity for us to capitalize on.
Not only our high quality product and service our low cost position I think it will continue to support a favorable.
You know margin environment.
And we.
We have.
The greatest flexibility we've ever had in the ownership of the Polish assets in terms of optimizing.
Our product mix and optimizing our margin.
So it's it's it's early in the understanding of how.
The supply chain is going to be impacted by this but we.
We do definitely see it as a market opportunity and we do see it as something that is going to continue.
Continue to support a really strong margin environment.
And as I said earlier.
Sure.
At this point demand is is still extremely strong.
I liked it harken back to the Covid, which was an unexpected crisis and there was.
Huge concern about disruption.
Activity and demand.
We saw the exact opposite that construction activity was had the ability to continue on throughout that pandemic and we had some of our strongest.
Quarterly results and you know at.
At this stage of the situation, we don't see anything that is going to disrupt.
That strong environment that we were experiencing before and in fact, there could be an opportunity or two that that presents itself.
As it relates to the U S clearly.
Scrap has traded globally.
The rise in raw material prices and the disruption of.
Prime grades and pig iron and all of that is wreaking havoc on some not on us but it is also affecting them.
The typical importers of steel into the U S market and.
And currently there are concerns among our customers about taking commitments for imported product there's concerns about.
Logistics and <unk>.
Timing of of delivery of imported product.
So we are seeing an increase in inquiries.
From customers that would be typically looking at those.
Import offers.
Okay.
And then on fabrication you know if I go back back when you used to report it as a separate segment I mean, it seems like EBITDA per ton to kind of.
Range from 35 to 75 to 80, and then it seems like right now it's materially above kind of historical levels on your peers commented that they are fabrication EBITDA was almost doubled sequentially ended this quarter.
Calendar <unk> so can.
Can you provide any context on on.
On how profitability looks I know you don't typically disclose that but could you give us any sense for.
Maybe how profitability looks today versus through cycle and then your comment that.
Backlog and pricing is getting better would infer that margins should continue to expand.
Going forward.
Yet your guidance you kind of said the margins would be flat sequentially.
So with that kind of imply you would expect margins in the.
The rebar Mills segment, and maybe the decline, which would offset fabrication expansion or.
Any more granularity you can provide around that or in New York.
That would be appreciated thank you very much.
Hey, Curt with respect to.
<unk>.
The.
Value above.
Scrap costs.
For the downstream business, yes, there is no doubt that there's a tremendous amount of of activity that is going on in the U S marketplace, which.
Consistent with.
The supply demand balances is providing a an opportunity too.
Exceed those current those historical levels of margin over and above.
Over and above of scrap in the in the downstream business, we've seen that that margin expansion in the mills.
The fab business just has the lag effect before it is fully captured fully.
Catches up however.
It is in a position where overall, we should continue to see.
An expansion of those numbers as we work through the remainder of the lower cost backlog.
With respect to the overall margins going forward as Barbara said scrap costs were up substantially and in in March and as a result, it's difficult to.
Precisely forecast, how that will flow through into the third quarter.
Given the.
The significance of that and so more or less that's where we're directing that margins will remain relatively consistent but.
There's a lot of water to flow under that bridge before we can give much more specific guidance.
Understood Thanks very much.
Our next question comes from Emily Chang with Goldman Sachs. Please go ahead.
Good morning, Barbara and Paul and Thanks for taking my questions.
The first one I have for you guys is just around your comment earlier around shipments in the third quarter being up sequentially in the high single to low double digit range. Just wanted to confirm if that was an overall company comment and maybe if we could get some glenn granularity around what that would mean for the U S side as well.
Because it still looks like if we would've imply a low double digit increase sequentially that that could be still lower than what we'd seen in the past quarter.
Emily I'll start and Barbara can add any any any color, but essentially it will be relatively consistent.
Two to both obviously North America represents the majority of our overall volume so that will be in line with.
In line with the increase in and have have more <unk>.
Significance, we've seen a big increase in volumes this past.
Quarter in Poland.
There still was a seasonal factor, but wasn't as significant in the European segment, but really what we'll see is that as North America.
Bound is that represents the majority of our overall volumes.
Understood.
And then my second question is just around I think it was the $1 5 million tons of incremental <unk> demand.
When we see the impacts of the infrastructure bills reach a full run rate.
How we should be thinking about that number as it relates to any sort of sensitivities you may have run with respect to higher energy cost labor and other raw material costs, and whether or not that one 5 million tons is still the right number given.
Shifted higher all along the cost cut off a lot of those other items.
Yeah, well Emily good morning.
I think we're pretty confident in the $1 5 million or others, I know that a forecast number that's a bit higher than that in.
The other thing I would say is that we anticipate seeing the benefit of that start to occur in 2023, and that's just the normal time period that.
That you typically see when.
You know a an infrastructure.
Plan like this has put in place it takes time for the projects to come.
Come to market.
This.
This bill is funded and we do believe the activity will move forward.
I would also remind you that the steel component of most projects is a small percentage of the overall cost of the project and.
See the we'll see how it evolves going forward.
By 2023 could see Sun.
Abatement of some of these near term inflationary pressures that are a result of the dislocation thats going on there and in.
In Russia and Ukraine.
We think is a pretty solid view.
Understood. Thanks Barbara.
Thank you Emily.
Our next question comes from Timna Tanners with Wolfe Research. Please go ahead.
Yeah, Hey, good morning.
Good morning.
I wanted to follow up on kind of that the scrap and the dynamic in the U S.
And I think I understood you, saying that I mean, do you expect to be able to pass through the increase in prices, but it's all happened really quickly in your it sounds like I'm, playing somewhat conservative in terms of the guidance and I guess just to ask it a different way I know that you don't have to buy pig and you don't have to buy pipe Scott, but everyone you guys.
Scrambling for obsolete it sounds like there could be continued inflation in that grade where you'd be traffic.
Just a follow up question is do you see anything that can be different in terms of your historical ability to pass through.
Scrap prices.
Been pretty nicely and consistent for a while now and long products.
That is really that that's the first question.
And are you are you concerned at all about your ability to pass it through and seeing a scramble.
Even the obsolete grades.
Yeah.
Thank you Timna I'll give it a crack and then Paul can can add anything if I'm.
Oh missed something but.
We were able to make complete our buying in March in typically.
There's there's a plentiful supply of scrap and the grades that we need to.
To utilize in our operation.
Yes.
Maybe a bit more competition for it in the dust.
The rise in raw material price, but theres still plentiful supply.
We're in a better position than other parts of the world that debt.
Don't have the same reservoir scrap as we do in our our key markets.
We're really sensitive to our customers and what they've had.
<unk> had to absorb already in raw material price changes over the last period of time, but.
The two key things in unit well, what's the overall demand.
<unk>.
The supply side and as I indicated earlier, we're seeing.
Certainly not seeing a difference in terms of import in fact.
Import levels.
Probably.
Lower than current license period end customers do have concerns so.
I would say that we're actually have more customer inquiries looking for us to cover their needs.
'cause they have less confidence in.
That alternative supply.
Coming in through imports so.
You put all that together and.
<unk>.
Is construction season and weather is beautiful here today in Dallas and.
Folks want to blow and go on these projects and particularly with.
Some of the weather that we've seen here in other parts of the country now is the time where.
Customers want to really.
Advance their projects so I think it's a.
Yes.
Gonna be.
And environment, whereas certainly customers will understand the raw material price changes there'll be ebbs and flows as you know we.
When when price changes announced.
There is always a future date when that goes into effect and so sometimes we see folks try to accelerate some shipments.
But and then there is also the lag.
Raw material that was purchased in prior periods.
At lower values.
But net net I think it's going to be still a really strong environment.
Okay, and then if I can ask the second follow up the follow up is that you talked about the European market, particularly tight and I think that has to reflect the absence of the Russia, Ukraine material and some closures of capacity was signed in Spain, but yes, chucky, it's shifting it scares to export too.
European market so they.
Did that also and also the U S tennis that has historically imported from Russia, Ukraine and other European markets and is there also potential for the U S market to further tighten them. If this continues if this conflict continues.
I take that possibility exists that was certainly what I was trying to convey as it relates to.
Our Polish operations.
Given that Belarus, and Russia now are under sanctions and that supply has been cut off.
There is still the quota in place both in Poland and in the U S, which is going to limit supply from other countries and.
As I also I indicated the EU language around sanctions was they were going to consider reallocating some of the.
The Russia, and Belarus quotas to other countries, but we haven't seen the details on that end.
You know.
Given the overall strong demand in most of the major markets.
Who knows if if the.
The countries they allocated to have the ability to take advantage of that so.
We do see the potential opportunities for further tightened this tightening of supply.
Yes.
Thank you Timna.
Our next question comes from Alex Hacking with Citi. Please go ahead.
Oh, Yeah, hey, thanks.
Strong bid volumes that you're seeing in the U S is there any part of that that you can link to the infrastructure bill or it's still way too soon for that when those tons are still to come. Thanks.
So the beauty of it Alex is that we aren't seeing that yet and that's that's on the com. So the activity that we're seeing.
Is.
It's anything its normal normal transportation Bill there is I don't want to convey that theres not infrastructure contained in that but it's really been fun.
Funding by as a.
<unk> existing transportation Bill it's not the the.
The increase to that we think that that that demand will start to see in 2023, which will be.
Perfect timing with the startup of Arizona too.
So.
Despite the despite the volatility we are still quite bullish for the.
Short medium and long term.
Okay. Thanks.
On Poland, but first let me.
Commend the team there on the humanitarian efforts.
On the supply side, you know you mentioned.
Obviously lack of supply coming from you know, Russia, Ukraine and Belarus.
We were hearing a lot about you know very high power costs put in some yes.
Yes and in Europe .
Temporarily out of commission.
That's something you're seeing that's further tightening up the market there.
It's so early.
Alex but you know.
It's inevitable right.
I think.
Probably speculators were driving some of the.
Spike in energy prices.
I think there's been certainly an abatement in oil prices.
So, we'll see where it settles out.
As it relates to the conflict, but I do think any steel.
Steel operation in Europe that does not have their energy covered both from a supply.
And a price perspective, even if it's partially covered from a price perspective as as we are we have a good portion of that.
It's covered.
And there are many steel mills that that don't have certainty of supply.
Or they and and they are purchasing their energy.
Lately on a spot basis, so that will become an economic decision for those operations.
And.
That will.
It depend upon a lot of factors, but just the ones that we have seen thus far that have announced.
Curtailment shutdowns temporary shutdowns whatever you want to call it.
You lose a week's worth of output across a number of mills that is definitely going to a tightened supply and we are confident in Poland in not only our energy supply as we indicated earlier, but also that our energy cost relative to the competition is going.
To be.
At an advantageous value.
So all all of these factors.
We believe support really strong results out of our Polish opportunity.
Our our Polish operations and.
Could could represent a market opportunity for us but.
We just need to see see how all this plays out over time.
Okay, great. Thank you.
Thank you Alex.
And our final question comes from Phil Gibbs with Keybanc capital markets. Please go ahead.
Yeah, Thanks, very much good morning.
Good morning, Phil.
What's the outlook.
Outlook points for working capital.
We have built up.
Over the last two to four quarters.
But one does.
Hello Hello.
Phil.
Your your audio wasn't great but.
If your question was what's our view towards working capital from this point forward.
And had it been not for this service.
The scrap increase that we've seen here in March I would have said, we would expect it to be a pretty pretty level at this point, however, with the with the.
Further increase self.
Potential increased close to $100 a ton that we've seen in scrap costs, we will continue to see investment.
Into the into the third quarter.
As a as a rough magnitude it will probably be.
Close to $100 million that we would look if these prices continue at that higher level to invest in the in the coming quarters.
Okay.
And we do see a seasonal release and in the fall as construction activity slows down due to holidays and.
And weather so we generally see a nice release in the fall, but I mean, it's all going to depend on.
Yes.
<unk> raw material prices go but.
As Paul articulated in his.
In his comments, we have significant financial flexibility on our balance sheet too to fund that additional working capital based upon where raw material prices go.
Okay, and then on the Capex this year. Thank you.
Circling around $500 million.
How much how much of that again is the gross growth related portion of that cash.
Capital and should we be expecting there to be.
Some investment in 2023 and the.
And the new micro mill as you as you get past the site selection process.
Phil if as this is obviously the big year for investment in and AZ too and so yes. It represents over half of the of the $500 million.
It will come off significantly as we are as we enter into 2023.
Given the permitting process that would be required from the new mill, probably won't see a heavy lift of spend for the new micro mill. So as we look to.
2023, it will come down from from these levels pretty substantially.
Thanks very much.
Thanks, Phil Thank you Phil.
This concludes our question and answer session Ms. Smith, I'd now like to turn the call back over to you.
Thank you everyone for joining us on today's conference call and we look forward to speaking with many of you during our investor calls in the coming days and weeks Hope you all have a wonderful day, thank you and.
And happy to say okay.
Yes.
This concludes today's commercial metals Company conference call you may now disconnect.