Q4 2022 Commercial Metals Co Earnings Call
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Speaker 2: Hello and welcome everyone to the fourth quarter fiscal 2022 earnings call for Commercial Metals Company.
Speaker 2: Today's materials, including the press release and supplemental slides that accompany this call, can be found on CMC's Investor Relations website.
Speaker 2: Today's call is being recorded. After the company's remarks, we will have a question and answer session, and we will have a few instructions at that time.
Speaker 2: 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, effects of legislation, U.S. steel import levels
Speaker 2: US construction activity, demand for finished steel products,
Speaker 2: 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,
Speaker 2: financial measures, and capital spending.
Speaker 2: This and other similar statements are considered forward-looking and may involve certain assumptions and speculation and are subject to risks and uncertainties that could cause actual results to differ materially from these expectations.
Speaker 2: The 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 statement sections of the company's latest research.
Speaker 2: filings with the Securities and Exchange Commission, including the company's latest annual report on Form 10-K and subsequent quarterly reports on Form 10-Q .
Speaker 2: Although these statements are based on management's current expectations and beliefs,
Speaker 2: CMC offers no assurance that these expectations or beliefs will prove to be correct.
Speaker 2: and actual results may vary materially.
Speaker 2: These statements are made only as of this date.
Speaker 2: Except as required by law, CMC does not assume any obligation to update, amend, or clarify the statements in connection with future events.
Speaker 2: Change in assumptions. The occurrence of anticipated or unanticipated events.
Speaker 2: information or circumstances or otherwise.
Speaker 2: Some numbers presented will be non-GAAP financial measures.
Speaker 2: and reconciliations for such numbers can be found in the company's earnings relief.
Speaker 2: supplemental slide presentation, or on the company's website.
Speaker 2: Unless stated otherwise, all references made to year or quarter end
Speaker 2: are references to the company's fiscal year or fiscal quarter.
Speaker 2: And now for opening remarks and introductions, I will turn the call over to the Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, Ms. Barbara Smith. Please go ahead. All right.
Speaker 3: Good morning everyone and thank you for joining CMC's fourth quarter earnings conference call.
Speaker 3: As reported in the press release, it was an outstanding quarter, and I'd like to thank CMC's roughly 12,000 employees for their continued hard work and focused efforts on behalf of our customers and stakeholders.
Speaker 3: You make these results possible.
Speaker 3: I would also like to thank our customers for their continued trust and partnership with CNC.
Speaker 3: I will start today's call with a few highlights from CMC's historic performance in Fiscal
Speaker 3: Then discuss our fourth quarter results before providing an update on the current market environment.
Speaker 3: Paul Lawrence will cover the quarter's financial information in more detail, and I will then conclude with our outlook for the fiscal first quarter, after which we will open the call to questions.
Speaker 3: 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.
Speaker 3: On behalf of CMC's entire team, I'm pleased to report that Fiscal 2022 marked the best financial performance in our company's 107-year history.
Speaker 3: CMC generated its highest ever full year net earnings as well as EBITDA.
Speaker 3: At the segment level, both North America and Europe reported record results.
Speaker 3: This strong performance translated into an annual return on invested capital of 25.5%, up over 10 percentage points from the very healthy level achieved the prior year.
Speaker 3: During each of the last 14 quarters, a period that includes the global pandemic, widespread supply chain dislocations,
Speaker 3: labor force challenges, and a war in Ukraine, CMC has generated annualized ROIC well above 10%.
Speaker 3: This indicator alone is a confirmation of the strength of our strategy, the consistency of our execution, which is delivering superior value to our shareholders.
Speaker 3: Overall, our fiscal 2022 results clearly demonstrate the impact of the thoughtful and decisive strategic actions we've taken over the last several years, as well as our team's ability to execute within the strong market conditions present throughout 2022, not to mention the flexibility in our operating model to respond to unforeseen changes and macro events.
Speaker 3: Our achievements extend beyond CMC's financial record.
Speaker 3: During Fiscal 2022, we continue to deliver on our Strategic Growth Plan, evolve our capital allocation framework, and advance our sustainability efforts.
Speaker 3: With all of the actions taken by CMC in Fiscal 2022, I am extremely proud of the way our Polish team responded to the needs of Ukrainian refugees fleeing the war in their home country.
Speaker 3: We have discussed this before, but it's worth repeating.
Speaker 3: CNC employees opened their homes to refugees, they volunteered at the border on their own time and they helped transport Ukrainians across the border to safety.
Speaker 3: CMC's local management opened up company facilities to refugees.
Speaker 3: provided them with basic necessities.
Speaker 3: These selfless acts of kindness provided hundreds of people in need of food, shelter, comfort, and security.
Speaker 3: speaking to the character of our people and the culture of our company.
Speaker 3: I will add that our team in Poland did all this while navigating a volatile business environment and avoiding disruptions related to the war, the ongoing European energy crisis, and supply chain challenges.
Speaker 3: On the strategic front, CMC took several actions that we expect will provide significant benefits in the years ahead and form the path of meaningful growth for our company.
Speaker 3: The acquisition of Tensor Corporation, which we completed in April , provides us with a significant new growth platform and enhances our ability to provide valuable solutions to construction customers across a wide variety of end-use applications.
Speaker 3: PENSAR was already on a strong growth trajectory as a leader in innovative geosynthetic and geotechnical construction solutions.
Speaker 3: In combination with CMC, we expect to accelerate TENSAR's growth by leveraging CMC's strong commercial relationships and opening new doors for TENSAR to demonstrate the value of their unique construction solutions expertise.
Speaker 3: Another major strategic growth initiative is CMC's Arizona 2 project, which remains on track for a spring 2023 startup.
Speaker 3: This new manufacturing site will once again be the first micro mill in the world capable of producing both rebar and merchant bar while also pioneering the Q1 power system's capability of directly connecting to renewable energy sources while also providing additional production efficiencies. garages of superhero earth-like batteries handcrafted in dub 2009 lasers lines
Speaker 3: Arizona 2's commissioning looks to be well timed to support the Infrastructure Investment and Jobs Act, which should begin to increase public infrastructure construction activity next year.
Speaker 3: We intend to focus initially on ramping up rebar production with the commissioning of merchant products to follow soon after.
Speaker 3: Currently, we expect to produce...
Speaker 3: A mix of approximately two-thirds rebar and one-third merchant bar on a run rate annual basis.
Speaker 3: But the beauty of Arizona, too, is the flexibility to seamlessly change that mix based on market demand.
Speaker 3: An important part of building for the future is CMC's intent to construct a fourth micromill to be located in the eastern US.
Speaker 3: We view this as a major strategic step toward strengthening our position in this key market.
Speaker 3: enhancing our ability to optimize production and logistics across our network of mills, and improving customer service capabilities.
Speaker 3: We will work through the final site selection process. While we work through the final site selection process, we remain committed to the project and confident in its financial and strategic merits.
Speaker 3: We look forward to sharing more details once a site selection is finalized.
Speaker 3: To give you a sense of the scale of these three strategic initiatives I just outlined, we expect the combined effect will be to increase CMCs through the cycle EBITDA by more than 200 million. Thank you for listening!
Speaker 3: not including future commercial synergies related to the TENSAR acquisition.
Speaker 3: During last year's fourth quarter earnings call, we indicated that CMC was evolving its capital allocation framework to enhance distributions to shareholders.
Speaker 3: The intent was to continue emphasizing value-accretive growth while increasing cash returns to shareholders in the form of dividends and share repurchases.
Speaker 3: In light of the strategic actions just outlined and a 300% increase to cash distributions, we are certainly making good progress on both goals.
Speaker 3: During the fourth quarter alone, CMC repurchased approximately 106 million of common stock equal to approximately 3 million shares.
Speaker 3: Our financial strength provides us with the ability to continue executing against our current program. Our financial strength provides us with the ability to continue executing against our current program.
Speaker 3: and we intend to do so.
Speaker 3: In addition to share buybacks, we are also utilizing CMC's dividend policy to return more cash to shareholders.
Speaker 3: This week, our Board of Directors approved a 2-cent increase to CMC's quarterly dividend.
Speaker 3: This represents a 14% increase to July's level and a 33% increase to the amount paid in July .
Speaker 4: of last year.
Speaker 3: Before I turn to our fourth quarter results.
Speaker 3: I would also like to take a moment to emphasize the advancement of CMC's sustainability efforts.
Speaker 3: Since our inception as a single recycling location over 100 years ago,
Speaker 3: Environmental stewardship has been central to our purpose and culture.
Speaker 3: We continue that legacy in fiscal 2022 with the launch of our Rebar Zero line of carbon-neutral long-steel products. We continue that legacy in fiscal 2022 with the launch of our Rebar Zero line of carbon-neutral
Speaker 3: By combining CMC Steel, which already has among the lowest scope one and two greenhouse gas emissions in the industry, with renewable energy credits and high quality carbon offsets, we are now able to provide customers with solutions that are net zero from the millgate to the job site.
Speaker 3: 3 Bar Zero neutralizes Scope 1, 2, and 3 emissions at both our mills and fabrication shops and ensures our environmentally focused customers can remain at the leading edge of sustainable construction.
Speaker 3: Reporting on CMC's sustainability programs and providing meaningful disclosures on a timely basis remains a high priority for our company.
Speaker 3: To that end, we will be issuing our Enhanced Annual Sustainability Report in December .
Speaker 3: Turning now to our fourth quarter 22 performance, CMC generated net earnings of $288.6 million or $2.40 per diluted share on net sales of $2.4 billion. CMC generated net earnings of $2.4 billion.
Speaker 3: Excluding the impact of non-operational items that Paul will discuss, adjusted earnings were $294.9 million or $2.45 per deluge share, the second best quarterly result in our company's history.
Speaker 3: The EMC generated core EBITDA of $419 million, an increase of 64 percent from a year ago.
Speaker 3: With this quarter's strong performance, CMC achieved an annualized return on invested capital of 24%.
Speaker 3: Our past and current strategic actions have clearly created consistent and substantial value for shareholders, and we are poised to continue doing so.
Speaker 3: I would now like to turn to CMC's market environment starting with North America.
Speaker 3: We are well aware of the recessionary concerns that are growing in the investment community and being reported in the financial press.
Speaker 3: And we are monitoring these conditions closely.
Speaker 3: However, looking at our business, we see no meaningful signs of a slowdown.
Speaker 3: Demand in the fourth quarter was strong across our product lines and major geographies.
Speaker 3: with the exception of some inventory de-stocking that resulted from customers carrying higher inventory than historical norms in order to manage ongoing supply chain constraints.
Speaker 3: The key indicators that lead rebar consumption by 9 to 12 months remain strong.
Speaker 3: These indicators include both external and internal metrics that have been historically reliable in our indices we often reference in our market commentary.
Speaker 3: Let me review several of the key external indicators we monitor.
Speaker 3: The Architectural Billings Index has been in expansionary territory for over a year.
Speaker 3: signaling future growth in private non-residential spending.
Speaker 3: Additionally, readings have been consistently positive for each of the project types tracked commercial and industrial, institutional and residential.
Speaker 3: Strengthen residential is being driven by increased activity and multifamily development.
Speaker 3: In August , multifamily housing starts reached the highest monthly level in 37 years.
Speaker 3: The Dodge Momentum Index, another measure of non-residential projects entering the planning phase.
Speaker 3: hit a 14-year high in September .
Speaker 3: The reading was published just last week and highlighted strong growth in both the commercial and institutional components of the index.
Speaker 3: Data centers, education, healthcare, and recreation were reported as areas of particular strength.
Speaker 3: AMC's own internal view mirrors the picture provided by these external sources.
Speaker 3: Our downstream bidding activity remained at historically high levels during the fourth quarter.
Speaker 3: driven by a broad basket of project types in both the public and private sectors.
Speaker 3: So, to sum up our near-term view, while we certainly don't discount the economic concerns making headlines, the best indicators of future construction activity continue to point toward strong go-forward demand.
Speaker 3: Beyond the near term, we believe there are structural trends underway that will bolster domestic construction activity.
Speaker 3: The first is a federal infrastructure package signed into law last November .
Speaker 3: At full run rate, this plan is expected to increase federal funding for core, rebar-consuming projects such as highways, bridges, and related structures by 65% compared to the FAST Act that it replaced.
Speaker 3: We estimate the impact will be roughly 1.5 million tons of incremental annual rebar demand within a domestic market of roughly 9 million tons, representing
Speaker 3: and approximately 17 percent increase in consumption.
Speaker 3: Spending is expected to ramp up over five years and assuming typical timeframes for project approval, bidding, and awarding, we should begin to see the impact on construction activity in calendar 2023.
Speaker 3: Reporting this view, third party data that tracks projects in pre-design and design phases indicates a large volume of work is now moving through the pipeline.
Speaker 3: These projects should translate into healthy future flow of CMC bidding, booking, and backlog activity in the coming quarters.
Speaker 3: Another meaningful structural trend is the reshoring of critical industries.
Speaker 3: We have previously mentioned the massive scale and pace of construction of new semiconductor facilities.
Speaker 3: Since our last earnings call in June , there have been at least three new major announcements, including a 100 billion multiphase development in upstate New York, a 15 billion memory chip plant in Idaho, and a 5 billion silicon wafer plant in Texas.
Speaker 3: CMC is well situated geographically to participate in each of these projects.
Speaker 3: These recent announcements are in addition to five large projects that are already underway in the US.
Speaker 3: CMC will participate in all of these projects, with two each in Arizona and Texas and one in Ohio.
Speaker 3: These plants are massive consumers of rebar given the precision needed on the work floor, which necessitates rigidity in foundations and building structure.
Speaker 3: Each plant announced or under construction.
Speaker 3: is planned in multiple phases, meaning that its consumption of rebar will carry well into the future.
Speaker 3: Semiconductor chip and wafer plants are the highest profile examples of reshoring, but other industries are also experiencing increased activity or project planning.
Speaker 3: These would include LNG facilities for the export of natural gas, as well as the automotive supply chain with a particular focus on electric vehicles and battery production.
Speaker 3: The last three years have exposed the vulnerabilities of concentrated global supply chains.
Speaker 3: structured to operate under stable conditions and cooperative political regimes.
Speaker 3: Pandemic and geopolitical events have reminded us of the need for a more distributed set of sourcing options, ensuring reliability and flexibility in securing critical materials and equipment.
Speaker 3: Eventually, we expect re-shoring to extend well beyond the areas we just discussed.
Speaker 3: Turning to Merchant Bar, underlying demand conditions in in-use OEM markets are generally stable.
Speaker 3: The industry did experience a short-term de-stocking during July and August , which can be seen in our reported volume figures.
Speaker 3: The destocking was triggered by the expectation for the first downward price adjustment for Merchant Bar in over two years.
Speaker 3: That looks to have run its course as service centers appear to be purchasing in line with real demand levels.
Speaker 3: Based on conversations with OEMs and September's Service Center order rates, we anticipate merchant bar volumes to be strong in the first quarter.
Speaker 3: As you might expect, market conditions in Europe are more challenging.
Speaker 3: Overall construction activity continued to grow on a year-over-year basis during the fourth quarter.
Speaker 3: However, residential activity, which has been strong for more than a year, began to show signs of slowing during the quarter due to the impact of rising mortgage interest rates.
Speaker 3: In addition, as a result of the ongoing energy crisis, industrial activity in Central Europe is now contracting.
Speaker 3: This has impacted demand for Merchant Bar and some wire rod products.
Speaker 3: The turnaround in this activity likely depends on the success of the European Union's efforts to lower energy prices from their current historically high level.
Speaker 3: General destocking among end users and intermediaries negatively impacted volumes for most products during the fourth quarter.
Speaker 3: This reflected the unwinding of the panic buying that took place in March and April and a portion in May following the outbreak of the war in Ukraine, as well as the uncertainty surrounding newly announced trade sanctions.
Speaker 3: The results of the destocking was reflected in CMC shipments in the early part of the fourth quarter.
Speaker 3: Encouragingly, volumes rebounded nicely and we anticipate that this improved pace will carry into our first quarter.
Speaker 3: As illustrated on slide 9 in the supplemental presentation, the energy crisis combined with trade sanctions have impacted historical trade flows in the region, which has benefited Poland on a relative basis. This is a list of the
Speaker 3: Poland's net rebar import position has declined significantly compared to a year ago.
Speaker 3: looking at trade flows with countries both inside and outside the European Union.
Speaker 3: Poland's trade with EU countries has benefited from a relatively advantageous energy cost position.
Speaker 3: Whereas the average spot price for electricity was up over 280 percent on a year-over-year basis across Germany, France, and Italy.
Speaker 3: It was up a more modest 98% in Poland.
Speaker 3: With regards to rebar trade within countries outside the EU,
Speaker 3: Little foreign material has entered the Polish market to offset the loss of Russian and Belarusian rebar.
Speaker 3: Imports have increased significantly into the broader EU, but this material has gone to countries that are more logistically accessible and are experiencing higher energy costs.
Speaker 3: One last note on Europe . The tendency might be to view our fourth quarter performance as a large reduction from the historical heights of the third quarter.
Speaker 3: The third quarter was extraordinarily unusual and unlikely to be repeated. From a humanitarian perspective, I certainly hope it is never repeated.
Speaker 3: Looking at the fourth quarter in a broader historical context, however, reveals it was an excellent result, with adjusted EBITDA at three times the average rate of the past.
Speaker 3: 10 fiscal years.
Speaker 3: This becomes even more impressive when you consider the difficulties being faced across the EU steel industry.
Speaker 3: Such a strong financial performance in an uncertain environment is one of the many reasons we are confident in CMC Europe's competitive position.
Speaker 3: Finally.
Speaker 3: As stated in our press release, our Board of Directors declared a quarterly cash dividend of 16 cents per share of CMC common stock for stockholders of record on October 27, 2022.
Speaker 3: The dividend will be paid on November 10, 2022.
Speaker 3: This represents CMC's 232nd consecutive quarterly dividend with an annual, with an amount paid per share increasing 14% from quarter three of fiscal 2022, and represents, as I said earlier, a meaningful increase in our return of capital to shareholders.
Speaker 3: With that overview, I will now turn the discussion over to Paul Lawrence, Senior Vice President and Chief Financial Officer to provide some more comments on the results for the quarter.
Speaker 5: Thank you Barbara and good morning to everyone on the call today.
Speaker 5: As Barbara noted, we reported fiscal fourth quarter 2022 net earnings of $288.6 million, or $2.40 per diluted share, compared to prior year levels of $152.3 million and $1.24 respectively.
Speaker 5: Results this quarter include a net after-tax charge of $6.3 million, the majority of which relates to CMC's acquisition of Tensor. These costs were in the form of acquisition expenses and purchase accounting adjustments related to inventory write-ups.
Speaker 5: The quarter also includes a small-acid impairment charge taken in North America.
Speaker 5: Excluding the impact of these items, adjusted earnings were $294.9 million or $2.45 per diluted share.
Speaker 5: Core EBITDA was $419 million for the fourth quarter of 2022, representing a sharp increase from the $255.9 million generated during the prior year period.
Speaker 5: Slide 11 of the supplemental presentation illustrates the strength of CMC's quarterly results.
Speaker 5: Our North America segment drove the significant year-over-year earnings growth, while Europe held steady at a strong level.
Speaker 5: Cora Iba Dea per ton of finished steel reached its second highest rate ever, coming in at $269 per ton compared to $155 per ton a year ago.
Speaker 5: Reviewing our results by segment for the fourth quarter of fiscal 2022, CMC's North American segment generated justed EBITDA of $370.5 million for the quarter, equal to $327 per ton of finished steel shipped.
Speaker 5: Segment adjusted EBITDA improves 75% on a year-over-year basis driven by significantly increased margins on steel and downstream products over their underlying scrap costs.
Speaker 5: Partially offsetting this benefit were higher controllable costs on a per ton of finished steel bases due primarily to increases in unit pricing for alloys, energy, and freight.
Speaker 5: Selling prices for steel products from our mills increased by $204 per ton on a year-over-year basis and were essentially flat from the prior quarter.
Speaker 5: margin over scrap on steel products increased $251 per ton from a year ago. In comparison to our third quarter, metal margin increased $79 per ton in the fourth quarter due to reduced scrap costs. However, not all of this benefit was realized in the quarter as we were selling material produced with higher scrap costs from the prior quarter.
Speaker 5: The average selling price of downstream products increased by $334 per ton from the prior year, reaching a new record of $1,348.
Speaker 5: The spread of our downstream average selling price above our cost of scrap at the mill also reached a new record of $876 per ton.
Speaker 5: This is a good measure of the total margin available to CMC through our integrated production network.
Speaker 5: This trend should continue into fiscal 2023 as our backlog continues to reprice higher.
Speaker 5: Shipments of finished product in the fourth quarter were down modestly from a year ago and followed a typical seasonal pattern compared to the third quarter.
Speaker 5: and market demand for our mill products remained robust.
Speaker 5: However, as Barbara mentioned, shipments were impacted during the quarter by de-stocking in the merchant bar supply chain, which now appears to have abated.
Speaker 5: Additionally, progress on construction sites and certain geographies continued to be slower than normal due to constrained supply of labor and materials.
Speaker 5: We expect this situation to dissipate heading into the winter months.
Speaker 5: CMC's downstream shipments increased by roughly 4% from the prior year period driven by the growth in our construction backlog, which more than offset the impact of the slower jobsite performance just mentioned.
Speaker 5: Turning to slide 13 of the supplemental deck, our Europe segment generated adjusted EBITDA of $64.1 million for the fourth quarter of 2022, compared to adjusted EBITDA of $67.7 million in the prior year quarter.
Speaker 5: Margins over scrap increased $138 per tonne on a year-over-year basis, reaching $453 per tonne.
Speaker 5: This was the result of a $125 per ton increase in average selling price and a $12 per ton reduction in the cost of scrap utilized.
Speaker 5: This margin benefit was offset by higher costs for energy and alloys.
Speaker 5: and the negative P&L impact of selling higher cost inventory into a falling price environment, as well as a weakening Polish Zlody relative to the US dollar.
Speaker 5: CMC's energy hedge position once again paid significant dividends as actual costs were well below the levels that would have been paid had we purchased solely on a spot basis.
Speaker 5: Europe volumes decreased 7% compared to the prior year, as a result of supply chain de-stocking that Barbara outlined previously.
Speaker 5: Demand conditions within Central Europe were mixed.
Speaker 5: The Polish construction market continued to grow, while industrial production has entered a contractionary phase as a result of the ongoing energy crisis.
Speaker 5: We believe CMC is well positioned for this current period of volatility in Europe . We are a low-cost leader with operational flexibility to adjust and serve a changing market condition.
Speaker 5: TENSAR generated EVA-DOV 10.2 million during the fourth quarter.
Speaker 5: Excluding the $6.5 million adjustment related to purchase accounting effect on inventory, EBITDA amounted to $16.7 million on net sales of $74.1 million, yielding an EBITDA margin of 22.5%.
Speaker 5: As a reminder, TENSAR performance will be included within CMC's existing segments, but we intend to provide visibility into business results and developments.
Speaker 5: Of the $16.7 million in EBITDA, excluding purchase accounting adjustments, $13.8 million was included within CMC's North American segment, while the remaining $2.9 million was reported within the Europe segment.
Speaker 5: It should be noted that at this time we do not expect any further purchase accounting adjustments related to this acquisition.
Speaker 5: Moving to the balance sheet, as of August 31, 2022, cash and cash equivalents totaled $672.6 million.
Speaker 5: In addition to cash and equivalents, we had approximately $647 million of availability under our credit and accounts receivable facilities.
Speaker 5: bringing total liquidity to slightly over 1.3 billion.
Speaker 5: CMC's 330 million of 2023 notes have moved into current maturities on our balance sheet.
Speaker 5: These notes do not have any early call provisions and we are currently evaluating refinancing alternatives that are consistent with our commitment to maintaining a healthy balance sheet, financial flexibility and a strong liquidity position as well as utilizing cash to lower CMC's overall gross leverage.
Speaker 5: During the quarter, we generated $458.6 million of cash from operating activities.
Speaker 5: which included approximately a $90 million release of working capital, principally driven from the lower scrap costs.
Speaker 5: For the year, CMC generated $700 million of cash from operations despite investing $573.2 million in working capital.
Speaker 5: Our free cash flow in fiscal 2022 amounted to $250 million defined as our $700 million in cash from operations less $450 million of capital expenditures.
Speaker 5: That figure does not include the $315 million harvested from asset sales to support our overall strategic vision.
Speaker 5: Our leverage metrics remain attractive and have improved significantly over the last several fiscal years.
Speaker 5: As can be seen on slide 17, our net depth to EBITDA ratio now sits at just 0.5 times.
Speaker 5: even after the purchase of Tensor.
Speaker 5: We believe our robust balance sheet and overall financial strength provide us the flexibility to finance our strategic organic growth projects and pursue opportunistic M&A while continuing to return cash to shareholders.
Speaker 5: CMC's effective tax rate in the quarter was 14.8%, driven by the timing of recognition of research and development and foreign tax credits.
Speaker 5: Looking ahead to Fiscal 2023, we currently expect our full year effective tax rate to be between 22 and 25%.
Speaker 5: with our cash tax rate to be slightly lower at approximately 20%.
Speaker 5: Turning to CMC's fiscal 2023 capital spending outlook, we expect to invest $450 million to $500 million.
Speaker 5: in total, roughly a third of which can be attributable to Arizona too.
Speaker 5: As Barbara noted, our announced fourth micro-mill project remains in the site selection phase.
Speaker 5: As a reminder, we assess projects like this viewing...
Speaker 5: the three of the cycle cash flow generation of projects.
Speaker 5: So while the site selection has taken longer than anticipated, we remain very encouraged by the strategic merits of this project.
Speaker 5: Lastly, CMC purchased roughly 3 million shares during the fiscal fourth quarter at an average price of $35.48 per share.
Speaker 5: Transactions since the initiation of the buyback program have amounted to roughly $161.9 million, leaving $188.1 million remaining under the program.
Speaker 5: And this concludes my remarks, so I'll turn it back to Barbara for comments on our outlook.
Speaker 6: Thank you Paul.
Speaker 3: We are entering fiscal 2023 in a strong position with a downstream backlog and bidding activity at historically high levels, giving us confidence in the near-term outlook for volumes.
Speaker 3: Additionally, we look forward to the start-up of our newest micro mill, Arizona II, in the spring of next calendar year, which will greatly enhance CMC's ability to capitalize on the strengths we see in construction markets.
Speaker 3: We anticipate another strong financial performance in the first fiscal quarter. We expect good demand for our products to continue in North America, while conditions in Europe are more uncertain.
Speaker 3: However, as I discussed earlier, CMC's operations in Poland are very well positioned to compete given their cost leadership position and operational flexibility.
Speaker 3: margins over scrap in both North America and Europe .
Speaker 3: are likely to compress slightly from the fourth quarter levels in order to remain competitive with raw material price changes.
Speaker 3: and increase long-steal supply.
Speaker 3: Once again, I'd like to thank all of the CNC employees for delivering yet another outstanding quarter and year of performance.
Speaker 2: Thank you. At this time, we will...
Speaker 2: begin our question and answer session. To ask a question, you may press star, then 1.
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Speaker 2: At this time, we will pause momentarily to assemble our roster.
Speaker 2: Our first question comes from Emily Ching from Goldman Sachs.
Speaker 2: Please, go ahead, Emily. Good morning, Barbara and Paul. Thank you for the update this morning. My first question is just around the North American construction markets and what you're seeing here. Could you perhaps provide some color as to how many months your order book length is now sitting at and how we should be triangulating the comment around customer destocking activities starting to ease and the expansion of backlog levels? Is that implication there that we should be seeing shipments in the next couple of quarters trend higher?
Speaker 3: Thank you, Emily. Our backlog extends well into 2023. So we're, you know.
Speaker 3: sitting in an excellent condition and with a lot of confidence in terms of the comment I made around a really solid first quarter and fiscal 2023.
Speaker 3: Whenever there is a raw material price change, particularly a downward trend in raw materials, you will tend to see customers...
Speaker 3: go through a bit of de-stocking. They don't want to be saddled with high-priced inventory. So they'll adjust their order rate temporarily and
Speaker 3: and work through the inventory that they have on hand.
Speaker 3: And clearly we know there have been any number of supply chain disruptions over the last three years, you know, starting with the pandemic and.
Speaker 3: There have been any number of supply chain disruptions over the last three years, you know, starting with the pandemic and global.
Speaker 3: macro issues in the war in Ukraine. I think the supply chain issues, while they'll continue to persist to some degree, certainly the initial shock is behind us, and I think that's another reason why customers were adjusting inventory levels. But based on what we're seeing here early in the quarter, that gives us confidence to say that that de-stocking effort is behind us, and so the market fundamentals are going to be a big deal.
Speaker 2: pressures along the freight alloying and energy cost side of the equation there. But perhaps if you could talk to a direction of travel for each of those three components, both in the US and Europe , that would be helpful. Thank you.
Speaker 5: Sure. If we look, Emily, at the US, I think we had a combination in the energy market of an extremely hot summer as well as the global challenges with natural gas and other energy costs. If we look at our cost profile in the US market, certainly energy was the
Speaker 5: relatively minor puts and takes in the components of the overall cost structure, but see that as being the the environment in which we'll operate in 2023.
Speaker 5: In Europe , it is strictly a story of energy costs. As we outlined, and specifically I think Barbara mentioned, slide nine of the supplemental slides, we're fortunate to operate in Poland, despite the overall inflationary environment in energy in...
Speaker 5: In Europe , Poland is much more advantageous in relation to other countries, given its domestic source for much of its energy needs.
Speaker 5: And so combining the lower cost of energy in Poland with the hedges that we have in place, which are at least a good portion of our hedges are of a long-term nature, position us well to really be competitively in a strong position in relation to competitors for a long time to come. But.
Speaker 5: In Europe , it is principally energy, the same alloy inflation that we're seeing, but it's relatively small in comparison to the energy.
Speaker 2: Great, thanks, Paul.
Speaker 7: Thanks, Emily.
Speaker 2: And our next question is coming from Timna Tanners from Wolf Research.
Speaker 8: Please go ahead, Timna.
Speaker 2: Good morning. Thanks very much for all the detail. Two things I wanted to explore a bit more with you. If you could characterize more the import pressure you talk about in both markets. I know in the US, you know, definitely a 25% tariff still has a pretty big impact on many countries with the Section 232. And it seems that Turkey is pretty hobbled with Europe , also hobbled from energy prices. So I'm just wondering if you could talk a little bit more about how much pressure you're seeing and if that's pervasive in both markets.
Speaker 2: Second question is you talked about housing in Europe , but I was wondering if you could talk a little bit about what you're seeing on the housing side in the US.
Speaker 3: Yeah, thank you, Tim.
Speaker 3: Yeah, I don't think we want to overemphasize them for pressure, and all that data is very public, as you know. But they're year on year, if you look at 21 versus 22, there has been a lot of data that
Speaker 3: more foreign product available here in the US market and you know a good bit of that coming on the the wire rod side and there were a number of production issues at various competitors.
Speaker 3: over this past year that made it necessary for some customers to avail themselves of those.
Speaker 3: those imports. And so, as you know, you've been around this industry for a long time. We deal with that on an ongoing basis. And as you point out, we're still in a really strong trade environment.
Speaker 3: that deters the illegal and dumped sources of material.
Speaker 3: coming from foreign and you rightly point out the struggles that are going on in Turkey, which is the primary offender as it relates to our products.
Speaker 3: So we monitor it all the time and we respond accordingly. But again, we think we're still going to enjoy a good trade environment.
Speaker 3: In terms of housing in the U.S.
Speaker 3: You know, it's an interesting one because housing has been incredibly strong for a long period of time here, but now you have a rising interest rate environment and interest rates that folks haven't seen in quite a period of time, unlike myself where my first mortgage rate was close to 12 percent. Any rate, I think we're seeing a shift potentially from...
Speaker 3: single family to multifamily and that is evident in some of the external data that we track. There is still the need for housing formation and so if interest rates are a deterrent to single family then you tend to see an increase in multifamily which is actually a higher intensity of rebar and structural in the multifamily.
Speaker 3: We certainly think that overall that is not going to have a meaningful impact to our business because as I pointed out, we still have the infrastructure that is
Speaker 3: is not even really kicking in at this point.
Speaker 2: Okay, great. And if I could sneak in one more, just ask about the European first quarter, if you're expecting to see the 15 million carbon credit you've seen those last several years again.
Speaker 5: Tim, the amount is yet to be determined and fully approved by the EU. That's expected to occur next week, but all indications are that the amount will be similar in Zaladi than that we've received over the last couple of years. Obviously the translation back to dollars is reduced.
Speaker 5: But we do expect that the final approval of that program to take place next week.
Speaker 9: Okay, super. Thanks again. Thanks, Jenna.
Speaker 8: Our next question is coming from Seth Rosenfeld from PNB Parabas.
Speaker 8: Please go ahead, Seth.
Speaker 4: Good morning, thanks for taking our questions today. Another question please on the European market. In your prepared remarks you commented on destocking early in Q4 but perhaps reversal of that is a cessation of the destocking pressure late in the quarter. You've put a bit more color on the scale of that downward pressure and I guess the degree of confidence that might have come to an end. Your optimism would perhaps stand out from other channel checks in Europe that are still seeing additional destocking pressure looking into the fourth calendar quarter. I'll start there please.
Speaker 3: Yeah, you're popping a lot Alex, so I'm not sure I captured everything. But I'll start and Paul can excuse me. He can.
Speaker 3: If he or we ask your question, we think that the stocking is behind us. Clearly, you know, a lot depends upon just where does the economy in Europe go and, you know, everybody has their own view of that. I think we just try to emphasize that we have a strong position relative to, you know, other alternatives and we're very reliable. Our cost and operational flexibility is...
Speaker 5: is really a strategic advantage for us, but we think the de-stocking is largely behind us. Yeah, and Seth, I would just note that I think there's a big dichotomy between the long product area and the flat rolled space. I think in flat rolled, it's continuing to de-stock, but on the long steel side, in which, as you know, that's where we play, it's a different market, the underlying...
Speaker 5: there is more strength and we certainly did see the volumes bounce back significantly as Barbara said.
Speaker 4: Thank you very much. And the second question, please, in Europe . Earlier on in the year, your team spoke publicly about some interest in perhaps expanding your capacity within Europe , either organically or inorganically. Obviously, the macro condition has changed a great deal since, and we'd love to hear your thoughts on the attractiveness of investing in Europe and the current environment.
Speaker 3: Thank you. Yeah, Alex, thank you. We're always evaluating.
Speaker 3: organic and organic every opportunity to
Speaker 3: to look at growth. And I would just say that we take a very long-term view on growth and we also have a very disciplined process for evaluating any of those types of things. And we never use peak of cycle kinds of market conditions in which to evaluate projects like that. And so there's nothing specific that we have to talk about that as.
Speaker 3: in this current moment, but we're always evaluating things.
Speaker 3: with a very, very long-term view.
Speaker 7: Okay, thank you. Thank you.
Speaker 7: Thank you. Thank you. Thanks. For that.
Speaker 8: Let me remind everyone that you may press star then one to join with a question.
Speaker 8: And our next question is coming from Phil Gibbs from KeyBank Capital Markets.
Speaker 8: Phil, please go ahead.
Speaker 4: Hey, good morning.
Speaker 10: first question is just on fabrication pricing nice step up this quarter
Speaker 10: I know the
Speaker 10: backlog pricing continued to move up over the last several months as rebar prices escalated and a lot of that tends to lag as we know. So how many quarters do we have looking ahead where pricing could actually continue to move up or have we leveled out here?
Speaker 5: Phil, I'll start and Barbara can add. If we look at our current activity that Barbara alluded to is strong in the fourth quarter and really continue to see good levels on the downstream work. As a result, really...
Speaker 5: the backlog is made up of what's in there and new stuff. So assuming the, you know, no significant degradation in the pricing of new work going in, we would expect, you know, over the next two quarters or so for the backlog pricing to continue to catch up with the current price levels.
Speaker 10: Okay, that's helpful. And I know you gave some color on capex for this year, 475 million or so at the midpoint. Is there anything baked in there for the new potential mill in the Northeast, and whether it be permitting or due diligence, or is that gonna be something that phases into the out years?
Speaker 3: Yeah, Phil, there will be a little, there's a little bit in there. You know, I don't know the hard number off the top of my head, but as you wrote, as you can appreciate, the first step is to go through the permitting process, which, which can have some, you know, long duration to it. And, but we will do, we will begin. I am religiousRaylin stroke watC
Speaker 3: Yeah, Phil, there's a little bit in there. You know, I don't know the hard number off the top of my head, but as you can appreciate, the first step is to go through the permitting process, which can have some, you know, long duration to it. What we will do, we will begin, you know, the engineering phase and other things.
Speaker 3: And so the bulk of it would probably come in the following fiscal year.
Speaker 10: Okay, and then my last question is just on that working capital. Assuming that you have scraps stay around current levels plus or minus and you've got, let's just say broader pricing downstream and rebar stay around current levels.
Speaker 10: would you expect networking capital to be a use or a source in Fiscal 23? Thank you.
Speaker 5: Yeah, Phil, if we hold all those things relatively constant to where they are today, we would really see working capital being relatively flat from where we are for the year. We'll have our seasonality throughout the year, but for the full year view, if we assume things are going to be pretty consistent, the level of working capital will also be consistent.
Speaker 5: Yeah, Phil, if we hold all those things relatively constant to where they are today, we would really see working capital being relatively flat from where we are for the year. We'll have our seasonality throughout the year, but for the full year view, if we assume things are going to be pretty consistent, the level of working capital will also be consistent. We look forward to that.
Speaker 5: If we hold all those things relatively constant to where they are today, we would really see working capital being relatively flat from where we are for the year. We will have our seasonality throughout the year, but for the full year view, if we assume things are going to be pretty consistent, the level of working capital will also be consistent. Thank you. Thanks Phil.
Speaker 8: At this time, there appears to be no further questions. Ms. Smith, I will now turn the call back over to you.
Speaker 3: Thank you. Thank you, everyone, for joining us on today's conference call. We look forward to speaking with many of you during our investor calls in the coming days and weeks. Have a great rest of your day. Thank you.
Speaker 8: Thank you for joining us today. This concludes today's Commercial Metals Company Conference call. You may now disconnect.