Q1 2023 Commercial Metals Co Earnings Call
Hello, and welcome everyone to the first quarter fiscal 2023 earnings call for commercial metals company today's materials, including the press release and supplemental slides that accompanies this call can be found on the CMC investors relations website.
Today's call is being recorded and after the company's remarks, we will have a question and answer session and we'll have a few instructions at that time.
I would like to remind all participants that during the course of this conference call that the company may make statements that provide information other than historical information that will include expectations regarding economic conditions.
Effects of legislation U S steel import levels U S construction activity demand.
For finished steel products.
Betsy capabilities and benefits of new facility, the company's future operations the timeline for execution of the company's growth plan, the company's future results of operations financial measures and capital spending.
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.
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 security Exchange Commission, including the company's annual report on Form 10-K.
Although these statements are based on management's current expectations and beliefs CMC offers no assurance that these expectations or beliefs will prove to be correct and actual results may vary materially.
All statements made.
Except as required by law.
It does not assume any obligation to update and then or clarify these statements in connection with future events, they're interested in.
In assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances or otherwise.
As presented will be non-GAAP financial measures and reconciliations for such numbers can be found in the company's earnings release supplemental slide presentation.
Presentation or on the company's website.
Unless otherwise stated all references made to these two year or quarter end are references to the company's fiscal year or if it's a good quarter.
Now for opening remarks, and introductions I would now like to turn the call every chairman of the board President and Chief Executive Officer of commercial metals Company, It's Barbara Smith.
Good morning, everyone and thank you for joining P. M. Six first quarter earnings conference call I Hope each of you had a wonderful holiday season.
As we reported in our press release issued this morning fiscal 2023s first quarter was another outstanding period, marking the second best core EBITDA performance in our company's history.
I would like to thank C. M. C 12000 employees, who made these results possible. Your hard work and focused efforts are appreciated and are driving the driving force behind <unk> success.
I will start today's call with a few comments on CMT as first quarter performance, then discuss our key strategic growth investments.
State ability efforts before providing an update on the current market environment.
Paul Lawrence will cover the quarters financial information in more detail.
I will then conclude with our outlook for the second fiscal quarter after which we will open the call to questions.
Before starting night prepared remarks, I would like to direct listeners to the supplemental slides that accompany this call. The presentation can be found on C. N CS Investor Relations website.
As I noted Pmt's first quarter fiscal 2023 earnings were among the strongest in our company's 188 year history. We achieved net earnings of $261 8 million or $2.20 per diluted share on net sales of $2 2 billion.
Excluding the impact of no operational startup costs incurred at our Arizona to project adjusted earnings from continuing operations were $266 2 million or $2.24 per diluted share.
P. M C generated core EBITDAR for the quarter of 425 million, an increase of 30% from a year ago, which produced an annualized return on invested capital of 23%.
Results for our North Americas segment, where again exceptional as our team capitalized on strong demand.
Segment, adjusted EBITDA was within 1% of its record excluding the impact of our second quarter 2022, California land sale.
We continued to experience strong margins on sales of steel and downstream products during the quarter, which drove meaningful year over year earnings growth.
Our Europe segment performed well, despite a challenging economic backdrop generating adjusted EBITDA more than doubled the past 10 years quarterly average.
Facing well publicized economic headwinds associated with the ongoing energy crisis arching in Poland leveraged their excellent cost structure to profitably win share and maintained strong volume levels.
Reflecting on the quarter as a whole CMC encountered sharply different market environments within those two segments.
With tailwind in North America and headwinds in Europe .
And demonstrated that we are capable of performing well in both environments.
Our business model and well aligned strategies have provided us the ability to fully capitalize on opportunities when they are available or adapt and adjust quickly when challenges arise.
I would now like to discuss Cmc's strategic growth investments, specifically, our exciting Greenfield no projects.
Our Arizona Micro Mill project is on track for startup later this spring.
As I mentioned previously we incurred startup costs during the first quarter as we train and build our crews and begin to commission the new equipment.
We are excited to begin commissioning and look forward to providing updates as the process evolves.
Once they see too is ramped up CMC will be upgrading one of the most unique steelmaking complex is anywhere in the world not only will we achieve another industry first by producing merchant bar on micro mills, but we will also have co located two of our micro mills and a <unk>.
Need configuration.
We expect this arrangement of the two steel plants will provide synergies, including shared staff support production optimization improved production scheduling and shared site infrastructure.
Arizona choose commissioning looks to be well timed with the infrastructure investment and jobs Act, which should begin to increase public infrastructure. Construction later this calendar year.
We intend to focus initially on ramping up rebar production with the commission commissioning of merchant products to follow soon after.
Currently we expect to produce a mix of approximately two thirds rebar and one third merchant bar on an annual run rate basis.
Of course, we are as we have mentioned previously Arizona two will have the operational flexibility to seamlessly adjust its production mix based on market demand.
Turning to CMC as other organic growth projects, we announced in early December that our fourth micro mill would be located in Berkeley County West Virginia.
Site selection process took longer than anticipated, but we are confident that CMC has chosen an excellent location within a state.
That is supportive of manufacturing innovation I'd.
I'd like to thank Governor, Jim Justice and the entire West, Virginia, Economic development team and a dedicated Berkeley County staff for their support during the site selection process and their ongoing assistance as we become an important member of the community.
During the planning phase we have been referring to this growth initiative is and then for.
I'm happy to say that after formalizing our site choice, we will know rebrand our mill at CMC Steel West Virginia.
The mill is expected to have an annual capacity of approximately 500000 tonnes and will be capable of producing both straight length and spooled rebar.
The new plant will feature the latest productivity enhancing technologies for micro Mills steelmaking.
<unk> Daniela is Q1 power system that we first deployed in Arizona.
Making CMC steel West, Virginia, one of the cleanest and most energy efficient mills in the world.
The planned site location on West Virginia's Eastern Panhandle will provide excellent access to the dense rebar consuming markets.
North East and mid Atlantic.
Nearly 60 million people live within a standard shipping radius of this site, providing a variety of commercial opportunities across a number of major metropolitan areas.
As can be seen on slide six of the supplemental presentation.
<unk> is also ideal for optimization of CMC as existing operational network in the eastern United States.
We expect to generate synergies through reduced logistics cost optimize production mix across mills lower levels of safety stock and improved customer service capabilities.
The project is budgeted to have a net cost of approximately $450 million.
Based on anticipated timelines for permitting and construction plant is scheduled to begin operation in late calendar 2025.
These two projects strongly advanced CMC strategy of leadership in early phase construction reinforcement.
We also believe they will provide meaningful value accretive earnings and cash flow growth for our investors.
In addition to our organic growth projects, we continue to be very encouraged with the integration process of our <unk> acquisition.
And Paul will discuss the financial contributions a little later.
During the quarter, we acquired two scrap recycling facilities and we are happy to welcome these employees to CMC.
Both acquisitions support our captive scrap strategy to provide an economic supply of metallics for our mills.
Before I turn to market commentary I would also like to take a moment to emphasize the advancement of CMC and sustainability efforts.
Our fiscal 2022 sustainability report published last month.
Illustrated Cnc's leadership position and environmental performance and our ongoing commitment for continued improvement.
In fiscal 2022, CMC scope, one and two greenhouse gas emissions stood at just point 403 tons of Cotwo per ton of steel produced representing a 14% reduction from 2019 baseline and it's gone.
And of 7% from fiscal 2021 level.
These scope one and two emissions.
Tensity levels are nearly 80% below the global industry average.
It may surprise come to learn that despite the heightened focus on ESG the global steel industry emissions per ton have actually increased steadily over the last several years.
However, CMC is going in the opposite direction using innovation process improvements and energy sourcing.
To make greener steel with less impact on the environment.
Cmc's micro mill projects will further improve our environmental footprint.
This technology consumes, 32% less energy and he meant 30% less greenhouse gas compared to standard mini mills.
Once phase two and steel West Virginia are fully ramped up roughly one third of our products will be produced using the world's cleanest steelmaking technology.
These investments are yet. Another example of how at CMC good business decisions and good environmental stewardship go hand in hand.
As you can also read in our 2022 sustainability report.
CMC is poised to meet it.
Or exceed its 2030 environmental goals related to scope, one and two greenhouse gas emissions intensity water usage and energy consumption intensity and renewable energy sourcing.
Soon we will be reevaluating these goals and setting new targets.
I would now like to turn to Cmc's market environment, starting with North America.
Hopefully it will be encouraging that my comments sound very similar to our recent updates as we continue to experience strong market conditions and see signs that strength strength will remain.
We are well aware that recessionary concerns are growing and the investment community.
And being reported in the financial press and we are monitoring conditions closely.
However, looking at our business, we've seen no meaningful signs of a slowdown.
And in the first quarter was stable at strong levels across our product lines and major geographies.
Most key indicators that lead rebar consumption by nine to 12 months.
To growth ahead.
These indicators include both external and internal metrics that have been historically reliable and our indices, we've referenced in past market commentaries.
Let me review several of these key external indicators.
The Dodge momentum index, which measures the value of nonresidential projects entering the planning phase reached a record high in November .
The reading highlighted strong growth in both the commercial and institutional components of the index rising, 28% and 21% respectively from the prior year.
We recently began monitoring a separate Dodge indicator the tracks the value of infrastructure projects entering the pre design and design phases.
The value of these projects is up significantly from the prior year likely signaling that federal funding is working through the pipeline and will soon begin to impact on the ground construction activity.
To give a sense of magnitude the value of projects tracks by Dodge is designed phase index over the last three months was double the prior year.
And was 12 times higher than two years ago.
Cmc's own internal view also gives us confidence going forward.
Our downstream bidding activity remained at historically high levels during the first quarter drew.
Driven by a broad range of project types in both the public and private sectors.
As can be seen on slide nine our downstream backlog continues to grow on a year over year basis, when measured in terms of both value and quantity.
Beyond the near term, we believe there are structural trends underway that will support strong domestic construction activity.
The first which I've already mentioned is the federal infrastructure package signed into law a year ago.
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% comp.
Compared to the fast act that it replaced.
We estimate the impact will be a million and a half tons of incremental annual rebar demand within a domestic market of roughly 9 million tons, representing an approximately 17% increase in consumption.
Spending is expected to ramp up over five years, and assuming typical timeframe for project approvals bidding and awarding we should begin to see some impact on construction activity in calendar year 2023.
The Dodge data I discussed earlier supports this view.
Another meaningful structural trend is the re shoring of critical industries.
We have previously mentioned the massive scale and pace of construction of new semiconductor facilities.
Currently.
There are at least 11 facilities planned to be constructed.
With related total investment of over $275 billion.
She is already shipping to several of these projects, but most are yet to break ground and impact rebar consumption.
Semiconductor chip in wafer plants are the highest profile examples of re shoring, but other industries are also experiencing increased activity our project planning.
These include LNG facilities for the export of natural gas chemical and plastic plants as well as the automotive supply chain with a particular focus on electric vehicles and battery production.
The last three years have exposed the vulnerabilities of concentrated global supply chain structure to operate under stable conditions and cooperative political regimes.
The pandemic and geopolitical turmoil have reminded us of the need for a more distributed set of sourcing options, ensuring reliability and flexibility and securing critical materials and equipment.
Eventually we expect re shoring to extend well beyond the areas. We just discussed.
Turning briefly to merchant bar underlying demand conditions and end use OEM markets are generally stable.
Following the Destocking event that occurred during our fiscal fourth quarter shipments to service centers stabilized at improved levels during the first quarter.
We would expect real underlying demand to continue at a steady rate in the quarters ahead.
As I indicated market conditions in Europe are more challenging.
Overall construction activity continued to grow on a year over year basis during the first quarter.
However, residential activity, which has been strong for more than a year is now showing signs of a slowdown due to the impact of rising mortgage interest rates.
New mortgage origination has declined meaningfully over the last several months. However programs are being developed to support first time homebuyers.
Which should attract more market activity by mid calendar 2023.
In addition, as a result of the ongoing energy crisis industrial activity in Central Europe has been in contraction since the summer of 2022.
This has impacted demand for merchant bar and some wire rod products.
On the other hand energy prices have moderated somewhat from recent market peaks and the current mild temperatures should also provide some relief.
As illustrated on slide 10 of the supplemental presentation.
European Energy crisis, combined with trade sanctions has impacted historical trade flows in the region.
Which has benefited Poland on a relative basis.
Poland has recently moved into a net rebar export position.
Compared to a fairly large net import position a year ago.
Electricity price volatility relative to the broader EU has tended to be less extreme in Poland over the last year due to a variety of factors, which has created a favorable cost dynamic for Polish producers.
Energy costs have been both lower and more stable, providing some protection from imported materials.
Originating from other European Union countries.
With regard to rebar trade with countries outside the EU little foreign material has entered the Polish market to offset the loss of Russian and Belarusian rebar.
Imports have increased into the broader EU, but this material has gone to countries that are more logistically accessible and are experiencing higher energy costs.
So all European demand is challenging at the moment the supply side of the economic equation is helping to offset much of the detrimental impact.
With this within this environment CMC has leveraged its strong relative cost position and operational flexibility to profitably win market share.
Shipments of rebar merchant bar and wire Rod in the first quarter were all well above the long term quarterly average despite a lackluster demand backdrop.
We would expect these advantages to continue to favor CMC.
Finally as stated in our press release, our board of Directors declared a quarterly cash dividend of <unk> 16 per share of CMC common stock for stockholders of record on January 19th 2023.
The dividend will be paid on February <unk> 2023.
This represents cmc's 230, <unk> consecutive quarterly dividend.
With the amount paid per share increasing 14% from Q1 of fiscal 2022.
With that as an overview I will now turn the discussion over to Paul Lawrence Senior Vice President and Chief Financial Officer to provide some more comments on our results for the quarter Paul.
Thank you Barbara and happy new year to everyone on the call.
As Barbara noted, we reported fiscal first quarter 2023, net earnings of $261 8 million or $2 20 per diluted share compared to prior year levels of $232 9 million and $1 90, respectively.
Results. This quarter include a net after tax charge of $4 4 million, which was related to startup activities at CMC, Arizona.
Project, we expect to continue to incur startup costs for the balance of fiscal 2023.
Excluding the impact of this item adjusted earnings were $266 2 million or $2.24 per diluted share.
Core EBITDA was $425 million for the first quarter of 2023, representing a 30% increase from the $326 8 million generated during the prior year period.
Slide 13 of the supplemental presentation illustrates the strength of Cmc's quarterly results.
Our North America segment drove the significant year over year earnings growth, while Europe experienced some pullback.
Core EBITDA per ton of finished steel reached its second highest rate ever coming in at $273 <unk>.
Compared to $223 per ton a year ago.
Now I will review the results by segment.
CMC as North American segment generated adjusted EBITDA of $378 million for the quarter.
Equal to $348 per ton of finished steel shipped.
Segment, adjusted EBITDA improved 41% on a year over year basis, driven significantly by increased margins on downstream steel products over their underlying scrap costs.
Downstream products were a particularly impactful contributor on a year over year basis as the average selling price improved by 300 over $300 per ton compared to the first quarter of fiscal 2022.
Partially offsetting these benefits were lower margins on sales of raw materials as well as higher controllable costs on a per ton of finished steel basis, due primarily to increase unit pricing for alloys energy and freight.
On a sequential quarter basis controllable costs per ton were relatively unchanged with fines up pricing on some key consumable puts have peaked and could begin declining in the quarters ahead.
As we look forward, we have a number of planned maintenance outages that will not impact shipment volumes, but will result in higher controllable cost income in quarters.
Selling prices for steel products from our mills increased by $44 per ton on year over year basis, but declined $84 per ton from the prior quarter.
Margin over scrap on steel products increased $147 per ton from a year ago.
In comparison to our fourth quarter metal margin decreased by $22 per ton as the decline in average pricing outpaced the reduction in scrap costs.
Shipments of finished product in the first quarter were virtually unchanged from a year ago, and followed a typical seasonal pattern compared to the fourth quarter.
End market demand for our mill products remained healthy.
Rebar consumption is tracked by the steel manufacturers Association is growing on a year over year basis.
The likely still moderated by constrained supply of labor and material in certain geographies.
Demand for merchant bar is stable at good levels.
Turning to slide 15 of the supplemental deck, our Europe segment generated adjusted EBITDA of $64 5 million for the first quarter of 2023, which included the receipt of an annual energy credits that totaled approximately $9 5 million.
The first quarter results compared to adjusted EBITDA of $79 8 million in the prior year period.
The decline was driven by higher cost for energy.
The negative P&L impact of selling higher cost inventory into a contracting price environment.
Our reduced energy credit, which was over $15 million last year as well as the weakening of the Polish zloty relative to the U S dollar.
<unk> 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 the spot basis.
Europe volume increased 30% compared to the prior year due to the market share gains Mark mentioned by Barbara as well as the impact of a planned major maintenance outage taken during the comparative period of the first quarter of fiscal 2022.
Demand conditions within Central Europe are challenging however, the Polish construction market continued to grow by mid single digit percentages, while industrial production has entered into a contractionary phase as a result of the ongoing energy crisis.
We believe CMC is well positioned for this current period of volatility in Europe .
We are a low cost industry leader with the operational flexibility to adjust to and serve changing market conditions.
Hence our generated $11 4 million during the first quarter, yielding an EBITDA margin of 18, 9%.
Margins were temporarily hampered by production issues encountered at R. Morrow, Georgia Geo grid plant.
These issues have been addressed with equipment upgrades. However, during the first quarter, we incurred increased logistics costs and slower delivery times as a result of bringing product from our overseas operations.
As a reminder, hence our performance is included within Cmc's existing segments.
Of our 11 $4 million of EBITDA $8 1 million was included in Cmc's North American segment with the remaining $3 3 million recorded in our Europe segment.
Turning to the balance sheet.
Moving.
As of November 30.
2022, cash and cash equivalents totaled $582 million.
In addition to cash and equivalents, we had approximately $915 million of availability under our credit term loan and accounts receivable facility, bringing total liquidity of one 5 billion.
During the quarter CMC took a few financing actions worth noting.
<unk>.
We repurchased $115 9 million of Cmc's 2023, senior notes through a tender offer process, leaving $214 1 million outstanding which will mature in may.
Second our revolver was upsized to $600 million and concurrently we canceled our U S accounts receivable program, which resulted in a net $50 million increase in availability.
And lastly, CMC established a $200 million term loan facility that can be utilized to refinance the maturing notes if we so choose.
During the quarter, we generated $372 4 million of cash from operating activities with working capital being relatively neutral factor.
Our free cash flow amounted to $239 3 million defined as our cash from operations less of 133 million of capital expenditures.
Our leverage metrics remain attractive and have improved significantly over the last several fiscal years as can be seen on slide 19, our net debt to EBITDA ratio now sits at just 0.4 times.
While we believe our robust balance sheet and overall financial strength provides us flexibility to finance, our strategic organic growth projects and pursue opportunistic M&A and while continuing to return cash to shareholders.
AMC is effective tax rate was 22, 7% in the first quarter.
Looking ahead to fiscal 2023, we currently expect a full year effective tax rate of between 23 and 25%.
Turning to Cmc's fiscal 2023 capital spending outlook, we expect to invest between 500 and $550 million in total.
The $50 million increase to the range compared to prior guidance is driven by spending related to CMC steel West Virginia that we now view is likely to occur this year.
Lastly, CMC purchased roughly one 3 million shares during the fiscal first quarter at an average price of $38 53 per share.
Transactions since the initiation of the buyback program through Q1 have amounted to roughly 211 million, leaving $139 million remaining under the authorization.
This concludes my remarks, and I'll turn the discussion back to Barbara for comments on our outlook.
Thank you Paul.
We remain confident that fiscal 2023 will be another year of strong financial performance.
Downstream backlog and bidding activity are at historically high levels and should support volumes over the near term. Additionally.
Additionally, we look forward to the startup of our newest micro mill, Arizona too in the spring, which will greatly enhance <unk> ability to capitalize on this strength, we see in construction markets.
We anticipate good financial results in the second quarter compared to historical standards.
Those seasonally down from the first quarter.
We expect healthy demand for our products to continue in North America, while conditions in Europe are more challenging and could be impacted by customer pessimism and general uncertainty.
However, as I discussed earlier Cnc's operations in Poland are very well positioned to compete given their cost leadership position and operational flexibility.
We anticipate margins over scrap in both North America, and Europe to remain elevated in relation to historical levels.
They are likely to compress from the first quarter levels.
Once again I would like to thank all of our CMC employees for delivering yet another quarter of outstanding performance.
Thank you and at this time, we will now open the call for questions.
If you would like to ask a question. Please press Star then one on your telephone keypad.
You may need to pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily for the first question.
And our first question today will come from Emily Chang with Goldman Sachs. Please go ahead.
Good morning, Barbara and Paul and thank you for the update this morning.
I'd like to start off by asking around the Europe .
Segment.
Volumes will certainly much higher than anticipated, perhaps could you share how much of that is taking share of us is some of the still steady Polish construction market strength that you're seeing and then perhaps if you've got a sense of what volume expectations could look like that for the remainder of the year.
Yes, Thank you Emily happy new year.
So.
I would say the following if you if you look at our strategy in Europe , we've had.
A deliberate strategy over time to strengthen our Polish operations.
Bye.
Creating a situation, where we have tremendous operational flexibility and expanding the product range of products that we have to offer.
So if you go back 10, 15 years, we were highly dependent upon construction products rebar and wire rod and theres been into deliberate investment strategy to invest in merchant and even into some SD Q ranges.
And what that does for US is it gives us the flexibility as market conditions change to to shift the product mix to the markets with.
Good demand or better demand.
In addition, we've worked really hard to have a cost structure that is advantage relative to other options.
In the region.
And those two factors combined have really allowed us to.
To shift to the markets that have the strongest demand.
So I would I would say we are encouraged as I said earlier about the construction fundamentals in Poland going forward, albeit some.
Some reduction in residential.
But still good growth and good Gd Theres theres positive GDP in Poland as compared to other parts of the region.
There is.
As I indicated the trade flows has changed as a result of of the war that has created opportunity for CMC to step in and fill demand that was filled from.
Russia and Belarus.
So all those factors combined we're going to continue to take advantage of our low cost structure and take advantage of our operational flexibility to shift to where the.
The best market opportunities are and and that will allow us to.
You know to have good operational results going forward.
Great that's very clear Barbara.
As a follow up.
We would love to sort of dig deeper around the cost commentary that was provided it sounds like things may be peaking and you might be starting to see some early signs of.
Sutton costs coming down presumably some of the warmer weather might have brought down the energy cost structures, while but could you perhaps share what youre seeing in each of the different components.
And the controllable cost calculation and then maybe when we should be expecting that maintenance maintenance activity to hit this year I'll leave it at that thank you.
Let me make a couple of broad comments, and then I'm going to let Paul give give some more specifics.
If you if you look at and you go back and look at what happened when when Covid hit.
There was just a severe supply chain disruption and severe.
Economic reaction because there were so many unknowns.
If you fast forward to win the war broke out between Russia, and Ukraine, you saw a similar <unk>.
Situation, where.
In the example, I'll use energy energy just skyrocketed, because there was all this uncertainty around.
How Europe , which source their energy and what what would the price. The you also saw a massive increase in a number of raw materials.
Alloys and other things.
That were a result of of that disruption.
And much the same as we saw.
During COVID-19 after.
Supply chain started to readjust and things calm down there was there was an abatement in that supply chain disruption.
The Covid is probably not as good of an example to the war because it was just so far reaching and we had such concentrated.
Apply chain sourcing but.
But in the case of of the war as time has gone on we've seen the supply chain and begin to adjust and.
In particular alloy causes have continued have started to abate and prices have adjusted.
Downward.
As.
We've found other sourcing options and as the uncertainty is has started to.
Become clear.
No.
Inflation is still broadly an issue for around the world, but there's definitely abatement going on.
Due to that initial reaction and then every.
Everybody figuring out how to adjust their supply chain, but I'll, let Paul make some further comments.
I think I.
I think borrowers comments really hit the nail on the head as far as what we're seeing in North America on on the cost side really the only comment I would add to our cost generally is on the natural gas side and in Europe .
The natural gas contracts reset essentially twice a year in the October and May Timeframes and so through until October .
October we were we were operating on a on a natural gas prices that were pre war and then they reset thankfully.
Our natural gas is a is limited to the reheat furnace in so.
Not a not a major cost but.
<unk> cost increased around six X what it was previously and so that's the one area in which we've seen some some increase in costs and it's really specific to a to the to the European operations with.
With respect to your other question regarding the maintenance outages and we've got a couple major outages coming in the.
The back half of this year and in.
In fact, starting later this week, our Seguin, Texas facility will be down for a for a while as it replaces the furnace.
There will be.
Large period of time in which.
We will not be melting steel. However, we have a lot of of bullets on the ground and we will continue to roll product continued to serve customers throughout that period of time.
But coming out of the outage, we will have.
More efficient facility and get some benefits.
Coming out of the new technology that is being put in so excited about that it's a it's a.
Furnace that is has produced well in excess of the normal service life, just a testament to the.
The maintenance and ongoing operations that the team does down there.
Following that and they are in the third quarter, we have another outage and I just named that just simply because it's in our Alabama mill and again, it's it's a some some new.
Refurbishment to some of our roughing enrolling mill stands.
Which not only increases the reliability of those but also provides us to enhance our product mix and so we get benefits out of out of that going forward. So.
Those will be <unk>.
<unk>, but look.
Look forward to ensuring the ongoing reliability.
And provide us opportunities as we are as we move into the to the future.
Reliability of this equipment is critical we've been running hard as we've been enjoying these hard period. If these heart.
Market conditions. These good market conditions, and so we need to ensure that we continue to.
Do the necessary maintenance too.
Continued to ensure that the reliability is there.
And our next question will come from Timna Tanners with Wolfe Research. Please go ahead.
Yeah, Hey, good morning, guys I'm happy to hear them.
Wanted to ask a bit more if I could about slide nine and the trends that you're seeing in the downstream side just trying to reconcile the decline in bids in backlog with the comments about the upward price trend in downstream products is there like it.
Explanation of why it seems to be rolling over but also comments about higher prices I'm just trying to reconcile those comments.
Okay.
Happy new year.
Thank you for the question.
We have seasonality in.
The bidding activity in.
On the fabrication side of the business and normally as we move towards the end of the year.
Cuz theirs.
Lower construction activity through the winter months, we tend to see.
Some changes and.
Lower activity during that timeframe and then it ramps up when you get past the first of the year. The other thing I would say is we're seeing a little bit more lumpy activity in <unk>.
Adding in booking in fab because of these very large jobs that.
That I spoke of like the semiconductor and some of those.
They're they're out there and they.
They're in the pipeline.
But.
There can be.
A job that we anticipate booking and it just happens to Miss one quarter and fall over into the next quarter. So we've had some very large jobs that.
But just you know.
It's all about the timing overall.
We are monitoring it carefully because you know.
We're all familiar with all of the economic concerns.
And we continue to see a very very strong pipeline of.
Bidding.
And confidence in the owners of these projects that theyre going to move forward.
Industrial projects in particular balance sheets are really strong companies have the.
The cash they are not dependent upon financing to move those projects forward.
And in those types of projects once they get booked in there and they are funded they they will get completed so.
We are not seeing an increased activity in rebids, we are not seeing increased activity in cancellations.
And we remain.
Quite quite encouraged going forward.
Okay. That's helpful and makes sense I guess as a follow up if I could can you talk a little bit to that cadence of ramp up of Arizona. Two I know, it's supposed to ramp up in the calendar year, but just thinking about where we should be a year from now and in the cadence and then similarly any cadence comments on what you're seeing in terms of any infrastructure stimulus timing would be great. Thanks.
Yeah. Thank you.
The best I can point you to Timna on an AZ to is to to go back and look at the ramp in Oklahoma.
You know this is our third micro mill and while this one's more complex because we are adding merchant.
To the product mix.
Were by design, starting with rebar, because that's something that we're supremely familiar with <unk>.
So I would expect the ramp to be very similar to what we.
We experienced at Oklahoma.
I don't have that exact ramp in front of me, but it was quick within you know three four quarters. We were at three three crews and in building the fourth crew and I would anticipate a similar <unk>.
Tuition here in the merchant will.
We'll follow and.
Be layered in enhance.
The productive capability.
And so I would I would just point you back to.
To the trajectory that we saw for Oklahoma.
As it relates to the.
The infrastructure Bill.
It was it was very encouraging and eye opening to see the trend in the pre planning and design phase numbers that I believe I quoted Dodge.
Reports those.
And there is just been a massive increase year over year.
In infrastructure.
Preplanning and then moving into the design phase and once it's into the design phase and of course it is too.
On active projects and bidding and and then orders for for steel.
The exact timing Timna I.
It's hard to predict but if you look at the magnitude of that increase.
And you use kind of those historical.
References of it takes 12 to 24 months for those projects to translate into to activity on the ground.
We think the back half of 2023, those are going to start moving into the backlog and starting to come to fruition and then build from there.
Okay excellent thanks, very much and thank you timna.
And our next question will come from Lawson Winder with Bank of America. Please go ahead.
Thank you operator, happy new year, and nice to hear from you all and thank you for the update.
I would like to ask about slide 16, you mentioned opportunistic.
M&A can you provide any color on the type of <unk>.
Target companies, you might be looking at where that might be downstream or.
Diversifying into other products or perhaps different geographies. Thank you.
Thank you <unk>.
Sure.
Hi, I appreciate the question. Unfortunately, you know historically, we haven't provided an enormous amount of color on specific targets.
If you go back to our Investor Day, a couple of years ago, we were pretty clear on.
What what we are and what we arent and I think you will whatever you see us do it'll build off of the base that we have today.
Clearly we're excited about.
Our foray into Geo synthetics with the <unk> acquisition.
Clearly that's a.
One that you can look toward but I would say, we see so much opportunity from an organic perspective with tens or <unk>.
We're highly focused on proper integration and really leveraging our.
Commercial organizations to grow that really superior product that they have and where.
Sure.
Encouraging every single day with what we're seeing on that front, but if you look at the base business that we have which as you know.
He has the full value chain.
Recycling and <unk>.
<unk> merchant and wire Rod and then downstream.
And we look across that full.
Gamut.
As it relates to geography, if we are strong as you know.
<unk> in North America and that is.
A key and core market to US we also feel very very strong in Europe with our Polish operations being.
Beachhead and so.
So we don't rule out opportunities there although.
Europe is a bit more complicated with all of those areas.
Countries and differences and.
Different growth and in different countries throughout Europe .
We do see Europe as.
Going through this whole energy transition, which is going to create massive change and opportunity.
In our industry.
And we're a leader in this area and so to the extent that we can leverage that leadership.
That's something that could be interesting to us.
Beyond that we can really get into specific targets.
Yes, no that was fantastic. Thank you very helpful.
You mentioned <unk> several times in your response, which.
Maybe think I actually wanted to ask a question about the production challenges you are having.
Would you be able to provide some color on the remediation plan for that and the timeframe to an improvement in performance.
Yeah. Thank you.
This is this is one where there is a great synergy and a synergy we didn't necessarily identified through our due diligence but.
Bottom line, we lost depressed and those things happen they happen all over.
Other operations and in our steelmaking operations from time to time.
They they already had a press on order because they knew that they needed to refresh those.
But then there were supply chain challenges, which delayed the delivery of that press and the installation of the press.
So that that was that was the challenge. The press is in its installed it's performing and so.
That that issue is behind us.
The synergy really comes in from.
Hence our is is it just.
Superb at innovation, and new product development and commercialization of new products.
But their core expertise is not necessarily on the manufacturing side.
We are super.
At manufacturing and.
So when we.
We saw some of the challenges that Moro was was under going.
Were able to dispatch a number of our technical experts.
To be on the ground and help them.
Muscle through it.
Find find other productivity improvements and <unk>.
Safety enhancements and all kinds of things that you.
You know just leverage our strength and and added to their capabilities. So the problems behind us and we would expect.
To see some fairly immediate abatement of the added cost that we had to incur to just move product differently around the world.
Fantastic now hopefully I'm not pressing my luck too much debt and maybe ask one more question, but I just wanted to follow up on that slide.
Nine the downstream backlog and bidding volumes. Thank you for providing that that's extremely helpful.
Could you maybe provide a little bit of detail on the makeup of that like for example, what proportion is warehousing and what proportion is reassuring. Thank you so much.
I don't think we're prepared to give that granularity what I would say is it's a strong balance between infrastructure and nonresidential.
And we would expect infrastructure to increase over time.
It's <unk>.
It's going to be.
Well balanced mix.
And I don't think it's heavy weighted towards any one.
Segment and <unk>.
The projects once they are in that backlog there, they're gonna get concluded and.
Completed I think the real.
Beauty our message in the material that we've provided is.
There is an enormous.
Margin opportunity in the backlog.
That is going to evolve and play out.
Going forward as we service that backlog.
Okay, great. Thanks, so much yes.
Thank you.
And our next question will come from Phil Gibbs with Keybanc capital markets. Please go ahead.
Hey, good morning good.
Good morning, Phil.
Yes.
Does that work basically already focused on what I was wanting to hit on but what's the what's the openness to further M&A as it relates to your strategic.
Longer term growth framework.
Phil I think.
You have followed us through the good the bad and the ugly and our balance sheet has never been in.
A condition that it is extremely strong.
It gives us the flexibility to do a lot of things.
As you know of late we've been returning more to shareholders through the share repurchase and the increase in the dividend. We think about that in terms of just a balanced capital allocation strategy and we have complete confidence.
So that we can continue to do that as well as.
Look at and fund the organic growth that we've talked about.
And.
Leave the opening and the flexibility.
To consider M&A, if the right thing comes along and I think you've also followed us long enough to know that we're very disciplined.
In terms of our capital allocation and we're very disciplined acquirers to ensure that it's the right strategic fit.
And that we have.
Sure.
Something to offer when when we do combine and when we do acquire so we remain open and I think the balance sheet can support that kind of activity while.
Still having a pretty balanced capital allocation strategy.
Yeah.
Thank you and then just a follow up you had mentioned something about a 13.
Accuse me of 12, 12 X increase in something.
As it relates to perhaps infrastructure, quoting or or something like that I missed exactly what you what you said around that.
That was around the infrastructure I believe so that.
The massive increase in the preplanning and then the design phase versus two years ago versus two years ago for infrastructure projects.
Which is really the leading indicator.
For the new <unk>.
Infrastructure Bill.
To begin to translate into.
New orders and backlog for us so that's a.
Encouraging sign.
Indeed.
We are going to see that.
That coming to the market here in the near term.
Thanks, so much I appreciate it yeah. Thank you Phil.
And our next question will come from Tristan <unk> with BNP Paribas. Please go ahead.
Yes, hi, thanks for taking my questions.
I'll start off with a follow up regarding the supply and demand outlook for rebar consumption U S.
You look at the medium term picture Theres been a number of projects.
Now domestically, maybe around 3 million tonne capacity.
Potentially wrapping up by 2026.
You flagged the one 5 million tonnes <unk> impacts from the infrastructure Bill.
There'll be a scenario where this is not enough.
Just wanted to have your thoughts on how do you feel about the medium term balance there for the U S repo market.
Are you worried that there is maybe too much capacity being built.
Yeah. Thank you Tristan.
I don't know that our numbers would be quite as high as three because I think.
Some of that has already been absorbed in the market. If you go back to the Oklahoma investment that we made there was there was a very heightened concern at the time that we were introducing new capacity that couldn't be absorbed by the market and.
It was fully absorbs and.
Far as I can say and see and I think what you observed was it was not disruptive to the market.
I acknowledge nucor's made some investments and.
Certainly we have.
Arizona with.
Really is.
It's an offset to the difficult decision that we made during COVID-19 too.
Two to shutter the California facility.
And so I'm not I'm not overly concerned.
At this time, I think what what I've seen and what our numbers would tell us that.
Youre not going to see a significant overbuilding of capacity.
Unlike maybe some other products, where theres been substantially more new capacity brought online.
Not necessarily.
<unk>.
The same demand increase for that that capacity.
But.
We always monitor it and I think.
The other point I would make is mini mill micro mill capacity is very flexible.
And can adjust.
When demand changes.
We have a very low fixed cost portion.
To that to that model.
Unlike.
Blast furnace capacity, which does not flex as easily.
Many of you know our micro mill capacity.
Alright.
That's very clear and helpful. Thank you for that.
My second question is more on the spot market development.
Do you think the structural adjustment <unk> seen in the U S market.
We are impressed with just the one you mentioned.
In your presentation currently being fully reflected in spot you bought in metal spread.
At a premium to that products, meaning that we should know he returned to a more normal cost price relationship moves.
Moving forward for Usu board prices and costs compared to what we've seen over the past two years.
So just wanted to ask your thoughts on the current development. Thank you.
Yes. Thank you Tristan it's a complicated question Theres, many factors, but I think the consolidation of the.
The long side of the market, particularly the rebar space has.
Has provided a lot of stability I do think that there is a.
Structural shift.
Upward in la.
Long medium term margins.
Margins through a cycle.
I would I would also highlight that you really should look at.
And compare metal margin between long products and flat products.
Long products have had much more stable margin structure over.
It fluctuates, but over a much tighter band.
Then the peak to trough that you tend to see four flat and plate products.
And I don't I don't see anything that would suggest that that stability.
Will will be disrupted so we've known for a long period of time that even before consolidation.
Var and long products metal margin was much more stable.
And what you see on the flat side of the equation.
Alright, great. Thank you very much thank you Tristan.
And this will conclude our question and answer session I'd like to turn the conference back over to Barbara Smith for any closing remarks.
Thank you cole.
And 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 day. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Yeah.
[music].
Yeah.
Yes.
Yeah.
Yeah.
Okay.
[music].
Yes.
[music].
Okay.
[music].
Yeah.
Yes.
[music].
Yeah.
Yeah.
Yes.
Yes.
Uh huh.
Okay.
Okay.
[music].
Yes.
[music].
Yeah.
Yes.
[music].