Q2 2023 Commercial Metals Co Earnings Call
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Speaker 2: Hello and welcome everyone to the second quarter fiscal 2023 earnings call for commercial metals company.
Speaker 2: Today's materials, including the press release and supplemental slides that accompany this all can be found on CMC's investor relations website.
Speaker 2: Today's call is being recorded and after the company's prepared remarks, we will have a question and answer session and we'll have 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, U.S. construction activity, demand for finished steel products, and other
Speaker 2: the expected capabilities, benefits, and timeline for construction 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, financial measures, and capital spending.
Speaker 2: These 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: 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 sections of the company's latest filings with the Securities and Exchange Commission. Additionally, we don't speak about any smartifying ends to their risks!
Speaker 2: including the company's latest annual report on Form 10-K .
Speaker 2: 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 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 these statements in connection with future events, changes in assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances, or otherwise.
Speaker 2: Some numbers presented will be non-GAAP financial measures, and reconciliations for such numbers can be found in the company's earnings release, supplemental slide presentation, or on the company's website.
Speaker 2: Unless stated otherwise, all references made to year or quarter end 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.
Speaker 3: Good morning, everyone, and thank you for joining CMC's second quarter earnings conference call.
Speaker 3: Before moving to our quarterly update, I would like to congratulate our current director, Peter Matt, who has accepted the role of President of Commercial Metals Company.
Speaker 3: He has been an invaluable and insightful member of CMC's board since June 2020. He is a seasoned executive well known in this industry with a strong reputation among many of you in the investment community who have interacted with him over the past six years while he served as Chief Financial Officer of Constellium.
Speaker 3: European-based aluminum producer.
Speaker 3: I have every confidence Peter will make meaningful contributions to CMC's continued growth in shareholder value.
Speaker 3: I would also like to welcome our new CMC employees at Tendon Systems and Rhone Metals Group.
Speaker 3: You have joined at an exciting time for our company.
Speaker 3: And I'm confident that your contributions together with those of your talented colleagues will make CMC's future even brighter.
Speaker 3: Both of these tuck-in acquisitions align with our vertical integration strategy and our construction solutions capabilities.
Speaker 3: As we reported in our press release issued this morning, fiscal 2023's second quarter marked another period of historically strong performance.
Speaker 3: I'd like to thank CMC's approximately 12,500 employees for their commitment to safety and excellence in everything we set out to accomplish.
Speaker 3: Before diving into more details on the quarter, I would like to direct listeners to the supplemental slides that accompany this call.
Speaker 3: The presentation can be found on CMC's investor relations website.
Speaker 3: As I noted,
Speaker 3: CMC's second quarter fiscal 2023 earnings were among the strongest in our company's 108 year history.
Speaker 3: We recorded net earnings of $179.8 million, or $1.51 per diluted share, on net sales of $2 billion.
Speaker 3: Excluding the impact of non-operational items, which Paul will discuss in more detail, adjusted earnings were $171.3 million or $1.44 per diluted share.
Speaker 3: CMC generated core EBITDA for the quarter of $302.8 million.
Speaker 3: CMC generated core EBITDA for the quarter of 302.8 million. A modest decrease.
Speaker 3: of $20.3 million from a year ago, producing an annualized return on invested capital of 14%. I would now like to discuss current market conditions in both North America and Europe .
Speaker 3: and provide our view on several powerful emerging structural trends that we believe will provide a positive backdrop for demand in our future order books.
Speaker 3: Turning first to North America, we expect a strong spring and summer construction season.
Speaker 3: This view is supported by both CNC's internal indicators and the key external measures we track.
Speaker 3: The value in our downstream backlog ended the second quarter at a record level for this time of year and was up roughly 20% from a year ago.
Speaker 3: Volume in our backlog also increased on a year-over-year basis.
Speaker 3: Conversations with customers indicate that other fabricators are similarly situated with healthy backlogs they expect to ship over the coming construction season.
Speaker 3: CMC's downstream bidding activity, which provides our best view of developments within the future project pipeline.
Speaker 3: downstream bidding activity, which provides our best view of developments within the future project pipeline, also remains robust.
Speaker 3: increasing more than 30 percent on a year-over-year basis during the quarter.
Speaker 3: Projects in the pipeline continue to represent a healthy blend of both private and public work.
Speaker 3: and activity is good across our geographies.
Speaker 3: Our near-term view is echoed by external indicators that have been historically reliable.
Speaker 3: First is the Dodge Momentum Index, which tracks projects entering the planning phase and generally
Speaker 3: on the ground activity by 9 to 12 months.
Speaker 3: The February reading increased by 43% from a year ago.
Speaker 3: reaching its third highest level on record. Both the commercial and institutional components were likewise strong, growing by 55% and 22% respectively.
Speaker 3: The American Road and Transportation Builders Association last month released its tally of new highway contract awards, which increased 24% in calendar 2022.
Speaker 3: The total value of all state and local transportation construction awards increased by 25 percent.
Speaker 3: the largest annual growth in the 25 years that the Association has been tracking this data.
Speaker 3: Projects such as these tend to be multi-year in nature, meaning that awards in 2022 should translate into construction activity in 2023, 2024, and beyond.
Speaker 3: So to sum up, we continue to monitor a range of indicators such as inflation, interest rates, and unemployment, which are fueling recessionary concerns. However, on balance, we continue to see good current activity and positive future signals in our key market segments.
Speaker 3: Taking a longer view, for several quarters now I have discussed powerful structural trends that we see developing in our nation's economy generally and in CMC's construction markets more specifically.
Speaker 3: Slide 7 of the supplemental slide deck illustrates the magnitude of the program and projects.
Speaker 3: that are intended to revitalize America's transportation infrastructure.
Speaker 3: intended to revitalize America's transportation infrastructure, harden U.S. manufacturing supply chains.
Speaker 3: Redirect our nation's energy trade and make our electrical grid greener.
Speaker 3: Each of these areas involves significant multi-year investments that we expect will drive significant demand for our broad range of construction solutions, products, and services.
Speaker 3: Looking first at infrastructure, the Infrastructure Investment and Jobs Act.
Speaker 3: signed into law in late 2021.
Speaker 3: substantially increase the amount of federal funding available to state and local governments to support highway construction.
Speaker 3: At the average run rate over the five-year program, we estimate that federal funding will increase by 65 percent compared to the FAST Act and create 1.5 million tons of incremental rebar demand.
Speaker 3: There are signs this work is moving through the pipeline and should show up in bid markets during calendar 2023.
Speaker 3: One such sign is the Dodge Analytics Infrastructure Design Phase Index.
Speaker 3: which increased by 400% on a year-over-year basis in the three months ended in February .
Speaker 3: Beyond the federal level, state transportation budgets are well funded and growing.
Speaker 3: CMC's three largest states by steel volumes have drafted or approved multi-year highway construction budget.
Speaker 3: that on a combined basis represent an increase of 24 percent compared to the average levels of the past year.
Speaker 3: The combination of increased federal funding and rising state budgets should support a strong highway market for several years to come.
Speaker 3: Transportation infrastructure is also the most rebar-intensive segment of the construction market.
Speaker 3: As an example.
Speaker 3: A dollar invested in highway work consumes five to six times more rebar than traditional residential or non-residential structures.
Speaker 3: We also continue to see positive developments in the area of supply chain hardening and reshoring of critical manufacturing capability.
Speaker 3: Just last month, another semiconductor plant was announced in Utah, bringing the total number of planned facilities to 12.
Speaker 3: and planned investment across the industry to $287 billion.
Speaker 3: All of these facilities include multiple phases, are massive in size, and consume large amounts of rebar.
Speaker 3: They also require extreme structural rigidity and extensive site logistics development.
Speaker 3: which makes them attractive targets for our Tensor product line.
Speaker 3: The current investment phase will take several years to complete, providing a prolonged source of demand for CMC's products and services.
Speaker 3: Significant investments are also planned for electric vehicle and battery manufacturing with at least 20 facilities in some phase of planning or construction at a capital cost exceeding $60 billion.
Speaker 3: Semiconductor and electric vehicle plant.
Speaker 3: are the highest profile examples of supply chain hardening, but other industries are also experiencing increased activity or project planning.
Speaker 3: These include LNG facilities for the export of natural gas.
Speaker 3: as well as chemical and plastics plants.
Speaker 3: The last three years have exposed the vulnerabilities of a concentrated global supply chain.
Speaker 3: The pandemic and geopolitical turmoil 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: The leadership of America's manufacturing companies agree.
Speaker 3: A survey conducted by Deloitte in late 2022 indicated that 68 percent expect to reshore a meaningful portion of their operations within the next several years.
Speaker 3: Turning now to Europe . Marking conditions there.
Speaker 3: are more difficult to assess, and the near-term outlook is less certain.
Speaker 3: Despite that, overall construction activity continued to grow on a year-over-year basis during the second quarter.
Speaker 3: However, residential activity, which has been strong for more than a year,
Speaker 3: is now showing signs of a slowdown due to the impact of rising mortgage interest rates as new mortgage origination contracted sharply on a year-over-year basis.
Speaker 3: To counteract this development, the government of Poland has advanced a plan to support first-time homebuyers by offsetting much of the increased mortgage interest costs.
Speaker 3: The plan, as drafted, is expected to provide significant support to the residential construction market.
Speaker 3: and has reached the final stages of approval.
Speaker 3: As of today, the legislation is not yet law, but the outlook is promising.
Speaker 3: Industrial activity in Central Europe continues to be impacted by the ongoing energy concerns.
Speaker 3: and weak economic sentiment. However, energy costs across the continent have moderated considerably from the peak levels, which should lead to a rebound in manufacturing activity.
Speaker 3: Our team in Poland has been able to maintain strong volumes despite this challenging backdrop by leveraging their operational flexibility. In fact, our shipments of finished goods during the second quarter were 33 percent above the long-term average and down only 3 percent from a year ago.
Speaker 3: Looking ahead, we believe that lower European energy prices
and the potential stimulus of Polish home buying will provide support to our key end markets.
We believe our strong competitive position encompassing both cost and operational flexibility will allow us to maintain volume above historical levels.
Additionally, our natural gas contract pricing resets in early April .
which should meaningfully benefit our cost of production.
meaningfully benefit our cost of production. All on the topic of Europe .
I would like to provide a few comments on the post-earthquake situation in Turkey.
Thousands of lives lost and the millions of people displaced by the earthquake that occurred in early February .
Thousands of lives lost and the millions of people displaced by the earthquake that occurred in early February is a great humanitarian crisis.
Turkey's government is moving quickly to implement a large reconstruction effort, which will likely have impacts on global steel markets.
Turkey is both the world's largest importer of scrap and exporter of rebar and plays a significant role in US and European markets.
Current reconstruction plan would require approximately five and a half to six million short tons of steel.
Depending on the time period over which this is consumed, the rebuilding plan could have a material effect on scrap or rebar pricing or both.
I would now like to turn to the commissioning efforts of our Arizona 2 project.
The project is on track for a startup later this spring.
We will begin cold commissioning both the melt shop and rolling mill shortly before moving into the hot commissioning phase.
We expect to begin producing rebar for sale during our fourth fiscal quarter.
Once AZ-2 is fully operational, CMC will have one of the most advanced steelmaking complexes anywhere in the world.
Not only will we achieve another industry first by producing merchant bar on a micromill, but we will also have co-located two of our micromills in a unique configuration.
We expect this arrangement of the two steel plants will provide meaningful operational efficiencies.
including shared staff support, production optimization, improved production scheduling, and shared site infrastructure.
We are excited to begin production at this world-class mill which has been three years in the making.
I would like to recognize CNC's highly skilled team of engineers, project managers, and support staff for making it possible through your tireless efforts.
Progress at Steel West Virginia, our latest major growth investment remains on target.
We have applied for our air permit and expect to receive approval in the coming months.
This timeline for permit approval has been made possible due to the support and cooperation of West Virginia's regulatory authorities.
Once approval is received, we will move forward with site preparation later this year.
With that as an overview, I will now turn the discussion to Paul Lawrence, Senior Vice President and Chief Financial Officer, to provide some more comments on the results for the quarter. Thank you, Barbara, and good morning to everyone on the call today.
As Barbara noted, we reported fiscal second quarter 2023 net earnings of $179.8 million, or $1.51 per diluted share, compared to prior year levels of $383.3 million and $3.12 respectively. Results this quarter include a net after-tax benefit of $1.
Excluding the impact of the second quarter items.
adjusted earnings were $171.3 million or $1.44 per diluted share in comparison to adjusted earnings of $187.4 million or $1.53 per diluted share during the prior year period.
For EBITDA, with 302.8 million for the second quarter of 2023, representing a modest decline from the 323.1 million generated during the prior year period.
Slide 12 of the supplemental presentation illustrates the year-to-year changes in CMC's quarterly results.
Our North American segment achieved earnings growth while Europe experienced a pullback.
It was validated, Corey, that the per ton of finished steel of $215 per ton remained well above the historical averages.
and compared to $226 per ton a year ago.
CMC's North American segment generated an adjusted EBITDA of $299.3 million for the quarter, equal to $308 per ton of finished steel shipped. Segment adjusted EBITDA improved 14% on a year-over-year basis.
excluding the large gain related to a land sale that was recognized in last year's second quarter.
The result was driven by higher margins on downstream and steel products over their underlying scrap costs.
Downstream products were a particularly impactful contributor on a year-over-year basis as average selling prices
improved by approximately $250 per ton compared to the second quarter of fiscal 2022.
So higher than a year ago, second quarter results were negatively impacted by a handful of factors that are worth calling out.
First, we encountered several instances of disruptive weather within our core geographies.
Freezing rain in Texas and Oklahoma, as well as extensive flooding in California, constrains second quarter volumes by a low to mid single digit percentage when compared to a year over year level.
Secondly, as we previously discussed, we performed a major equipment upgrade at our largest U.S. steel mill during January and February , which had the effect of increasing controllable costs by roughly $15 million during the quarter.
As planned, we pre-staged inventory to ensure our ability to meet customer expectations during this down period.
Both capital and operating costs were in line with expectations.
Finally, selling prices for steel products from our mills decreased by $56 per ton on a year over year basis.
and $35 per tonne from the prior quarter. Margin over scrap on steel products increased by $34 per tonne from a year ago.
In comparison to our first quarter, metal margins decreased by $56 per ton.
As you are aware, in early March there have been several price increase announcements of $50 per ton across most long steel products.
We are hopeful that these pricing adjustments will stabilize margins at historically strong levels heading into our busiest season.
Turning to slide 14 of the supplemental deck, our Europe segment generated just at EBITDA of 12.9 million for the second quarter of 2023, compared to 81.1 million in the prior year period.
Decline was primarily driven by lower margin over scrap, higher cost for energy, and a modest reduction in shipment volume.
Our energy procurement remains competitively positioned relative to the broader European industry. However, higher contractual pricing for natural gas...
that has been in effect since October has increased our cost of production.
As Barbara mentioned, pricing will again reset in April , which should lower our costs and benefit profitability.
Europe volume decreased 3% compared to the prior year, with higher rebar shipments offsetting much of the weakness in industrial steel, such as merchant bar and some wire rod grades.
CMC's volume significantly outperformed the broader Polish and European steel sector as we were once again able to leverage our operational flexibility to address the best opportunities in the marketplace.
Command conditions within Central Europe are challenging. The Polish construction market continued to grow by low single-digit percentages.
while industrial production has contracted for nearly three quarters.
We believe CMC is well positioned for this current period of volatility in Europe .
We believe CMC is well positioned for this current period of volatility in Europe . We are a low cost industry leader.
with operational flexibility to adjust to and serve changing market conditions.
Tensor generated EBITDA of 8.9 million during the second quarter, which is generally its seasonally slowest period.
The EBITDA performance yielded a margin of 17.3%. In dystopias, conditions were temporarily impacted by several weather-related projects...
as well as production issues in our Georgia facility.
As a reminder, TENSAR performance is included within CMC's existing segments.
Of the 8.9 million in EBITDA, 7.4 million was included within CMC's North American segment, while the remaining 1.5 million was reported within the Europe segment. Turning to the balance sheet, liquidity and capital allocation.
As of February 28th, cash and cash equivalents totaled $604 million. In addition to cash and cash equivalents averaging over $30 million after May 27th,Miss Nowak
and cash equivalents, we had approximately $895 million in availability under our credit, term loan and accounts receivable facilities, bringing total liquidity to approximately $1.5 billion.
This liquidity provides us flexibility to address our upcoming maturity of our 2023 bonds.
During the quarter, we generated $186.5 million of cash from operating activities.
with working capital being a negative factor.
Our free cash flow amounted to $30.3 million defined as our cash from operations less $156 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 18, our net depth EBITDA ratio now sits at 0.5.
We believe our robust balance sheet and overall financial strength provide us the flexibility to finance our strategic growth.
projects and pursue opportunistic M&A while continuing to return cash to shareholders.
CMC's effective tax rate was 23.6% in the second quarter. Looking ahead to fiscal 2023, we currently expect the full year effective tax rate to be between 23 and 25%.
Turning to CMC's Fiscal 23 Capital Spend Outlook, we expect to invest between $550M and $600M in total. Outside of normal sustaining investments, expenditures in Fiscal 23 are directed towards finalizing the construction in Arizona 2.
funding major upgrade projects at two U.S. steel mills, as well as initial investments related to steel West Virginia. DMC continues to deploy capital to support our growth plan and reinforce our metallic sourcing strategy.
In early March, we acquired Roan Metals Group in Tennessee.
The transaction is intended to enhance the security of competitively priced inputs for our steelmaking operations in the state. We made two acquisitions during the first quarter with similar strategic intent.
And earlier this week, CMC announced the acquisition of Tendon Systems, a leading producer of post-tensioning solutions in the Southeast United States.
Transaction extends our existing capabilities in this product space.
and enhances the breadth of offering we can provide to the market. Lastly, CMC purchased 330,000 shares during the fiscal second quarter at an average price of $52.04 per share.
Transactions since the initiation of the buyback through Q2 have amounted to approximately 228 million, leaving 122 million remaining under the authorized program.
This concludes my remarks and I'll turn it back to Barbara for comments on the outlook. Thank you, Paul. For the reasons I've mentioned, we are confident in our ability to deliver strong financial performance in the second half of Fiscal 2023.
and expect to generate sequential improvement in Core EBITDA during the third quarter. The signals we watch most closely, including our downstream backlog, bidding activity, and the
customer conversations, and external indicators all point to a generally positive outlook and robust upcoming construction season in North America. Due to normal seasonality, finished steel product shipments are expected to increase from second quarter levels in both North America and Europe with the added benefit in North America and in the future.
of recovering some weather delayed volume. The recent price increases across our long steel products in North America are expected to stabilize metal margins.
The total cost in North America will also be impacted by a planned upgrade similar in scale to the outage taken during the second quarter.
The outlook for metal margin in Europe is a bit more uncertain. However, our cost of production there should decrease from the second quarter as the price of natural gas purchases is reduced. We are excited to soon begin production at Arizona 2 and look forward to providing you with an update during our next earnings call.
along with an update on our fourth micro-mill project in West Virginia.
This world-class operation is ramping up at just the right time as CMC will be able to better capitalize on the multi-year strength we see in our construction markets. Once again, I'd like to thank our customers for their trust and confidence in CMC as well as all of our CMC employees for delivering yet another quarter of outstanding performance.
At this time, we will now open the call to questions. To ask a question, you may press star then 1 on your telephone keypad.
If you are using a speakerphone, please pick up your handset before pressing the keys. And to withdraw a question, please press star and 2.
We ask that you please limit yourself to one question and one follow-up. If you have further questions, you may re-enter the question queue.
At this time, we will pause momentarily to assemble our roster. Our first question will come from Emily Shen with Goldman Sachs. Please go ahead.
Good morning Barbara and Paul and thank you for the update today. My first question is just around some of the challenges we've seen in the banking system over the last couple of weeks. Are you seeing any shifts around bidding activity levels or any impacts there within segments around the non-residential construction and markets which could be more or less sensitive to some of the issues?
At this time, we are not seeing any impact from...
you know, what's going on in the banking system, which I know is top of mind for everyone, myself included. But at this time, we're really not seeing any impacts at, but we'll certainly monitor it carefully as time goes forward.
Okay, understood. And then maybe just switching a little bit but taking a look at the downstream backlog that youíve talked about there. Youíve mentioned itís up 20% on a year-over-year basis in terms of value. To clarify, thatís a combination of both price and volume in the backlog, right? And if I could take that one step further, how do you think about the
with a variety of duration, but it is one of the strongest backlogs to carry us through the construction season. So that's why we're so encouraged by what we see in the coming quarters.
And then if you add to that the level of bidding activity, which also remains strong, as well as those structural long-term factors and the coming impact of the new Infrastructure and Jobs Act, we remain very encouraged and bullish.
medium and long term.
Great, thank you. Thank you, Emily. And our next question will come from Kim Nattanas with Wolf. Please go ahead. Thanks, Kim.
Yeah, hey, good morning. Thanks for all the updates. Wanted to ask a high-level question and then drill down a little, but starting out with the... I know the comments on Turkey in the context of the market really helpful. Are you seeing Turkey export less or fewer imports into the US market already?
And in the same vein, can you comment at all on the expected impact of Buy America, perhaps also on the threat of imports into the country? Thanks, Gemma.
In the same vein, can you comment at all on the expected impact of Buy America, perhaps also on the threat of imports into the country? Thanks, Timna. Turkey …
Jason Brocius, who you know, has done a lot of great analytical work around that, and I think we're providing that in our investor relation materials that we're putting out on the website.
I guess I would say at this point, no doubt it's going to have impacts, both more immediate impacts and longer-term impacts. But I think it's still a little bit early.
to know how that's going to effectively play out. What we do know.
of course, is that it had a huge impact on the steel producing region. That post earthquake, the industry has had difficulty restarting because so many of the workers have been displaced.
And then we no longer turn, there's going to be the rebuilding activity, which is going to require a lot of the demand for increased
rebar that you wouldn't necessarily see on an ongoing basis in that market. And, you know, we've experienced a lot of
different but other disaster situations here in the US, hurricanes and the like.
And, you know, generally the rebuilding phase takes a little bit of a longer period of time. So while I think the government there will be moving in great speed to try to recover from the travesty, it just practically speaking will take some time to...
remove the debris and then rebuild. So at this point I can't point to hard evidence of major impacts.
But we did try to speak broadly there, as you know, in my opening remarks on some of the things that we're watching. You know, we're watching their procurement of scrap, we're watching and will continue to watch, you know, how those operations recover and then how that's going to impact trade flows. You know, we're watching their procurement of scrap, we're watching and will continue to watch, you know, how those operations recover and then how that's going to impact trade flows.
So, you know, I would think in the medium to longer term, most of that material is going to stay domestic, which should, you know, tighten up markets in Europe and in the U.S. Buy America, as you know, is a very, very, very, very, very, very, very, very, very,
is going to be supported and has always been supported in the U.S. for most of the infrastructure spending. And so that is another reason why we remain bullish on this market that...
You know, the ongoing investment that's been increasing related to the prior infrastructure bill finally materializing in the market has that Buy America component. And then the future spending.
will also take advantage of that and be really helpful to our business. Okay, great. That's helpful. Yeah, the turkey cadence just seemed really quick, and so I was just wondering if you were seeing it or maybe the reports we were hearing were a little early. So thank you for that. Just drilling down a little bit, I wanted to understand Tensor a little bit because I know...
And also comment on the higher CAPEX number while we're, we got you. Thank you.
Let me take a crack at Ted Saar and I'll let Paul comment on CAPEX.
So we have two, you know, kind of I'll call it unrelated things going on. We did have a press failure in our Georgia facility some months ago and had been waiting because of supply chain issues for the replacement press.
And that press was installed last quarter and as you can appreciate we have been debugging that and ramping that up. And so at this point, you know, the facility has largely recovered and from that...
that incident, but it did impact prior quarters and this reporting period as well. In terms of overall, you know, what are we seeing in terms of volume and activity level in TENSAR, TENSAR has a greater seasonal effect within this quarter than even CMC.
it is generally a more dramatic seasonal downturn than our traditional CMC business. And this quarter was no different. And just as weather impacted us, it also weather impacted Tensor, but they typically see a more dramatic seasonal effect.
If we look at other indicators, which we've been tracking in terms of because you know, this is a
a product that is an innovative product and a growth product in the market, if you look at their volume, you know, last year relative to this year, they are seeing the expected growth in volume.
So, you know, the innovative product is making inroads in the marketplace due to the unique characteristics and the construction problems that it solves.
And so that is a very good sign for us. The second thing is they are constantly innovating and introducing new products into the market. And they introduced...
a new product over the last number of quarters. And that product is receiving very strong customer acceptance in the marketplace, which is another real encouraging sign. And every time we introduce a new product, it has a new product.
enhanced features and typically carries margin associated with those enhanced features. So we're very very encouraged and you know the team there fully expects to have a really interesting and exciting construction season in the coming quarters.
And with respect to your question on the increased capital spend, it's really twofold.
significantly we are anticipating increased spend in this current year on steel West Virginia the announced facility as Barbara outlined on her comments we're expecting to receive the permit in the in the coming months and that will allow us to to accelerate some of our site
is maintained, so those require some down payments to be placed, which has increased our spend. And naturally we are seeing some inflation in some of our capex projects that we have, and that's a portion of it as well.
Thanks for all the information. Thanks, Timna. Our next question will come from Tristan Gresser with BNP. Please go ahead. Yes, hi. Thank you for taking my questions. The first one, thank you for providing the still intensity figures.
for residential infrastructure. When you look at the spending in billions for on the reshoring side that you also laid out in terms of the skill intensity there for this facility, I was wondering if you had a number in mind that maybe she can share.
Is there any kind of difference by type of plans that there also in terms of the timeline when you you start building and you complete this type of facility any kind of information that can help us out you know putting the number behind it it's kind of IRA reshoring a trend that will help you out as well.
Thanks Tristan, a really great question. A couple comments I would make in staying with what make being k charade a living charged message of summoning it on the streets.
some of the examples that we laid out. Because we're involved in a number of CHIP facilities, I think we have a really good understanding of the steel intensity for those types of projects. Those projects are multi-billion dollar projects as you're well aware.
And there is a very significant steel intensity, for example, in a chip facility.
because of the structural integrity that you need.
I would also say those projects are generally constructed in phases and so they will begin and complete Phase I and then they'll move on to Phase II, et cetera. And of course, given our breadth of capability and breadth of products, we will continue
and size and scale and geography, you know, we're really well positioned to provide excellent customer support to these really large, real intensive projects.
I'd also say in the other example of LNG, again, depending on the size and scale of the project, we know from our experience of supporting these projects historically, that Pastor
you know, kind of what the level of steel content that goes into that. But I would further add on an LNG facility, that requires some different types of structural steel, cryobar, high strength steel.
as well as traditional black bar. And CMC is one of very few that can extend to our customer that full range of products that they need.
to support that. And so I'm not prepared to tell you X number of tons per project because
They all vary. They're all very, very different. I think that the message that we're trying to convey is that the activity is real. There are a multitude of these projects. They are keeping everybody healthy, keeps everybody healthy.
multi-year, they are funded before they begin. You know, corporates have very strong balance sheets, and so they're less affected by, you know, the earlier question around some of the banking challenges that are going on in the marketplace.
But that in our view is going to provide significant support to business activity levels going forward, unlike when we've been in tumultuous times in the past or unlike periods in the past.
I'm sorry Tristan, can you can you repeat because I was it was breaking up a little bit on my end.
Sorry, when you look at the steel intensity of those planned semiconductor investment all that, I know you're not prepared to share a number, but just wondering if in terms of steel intensity for rebar, is it closer to the infrastructure figure that you provided or closer to the non-rezi figure you provided?
Yeah, Trish, we would say that it's likely somewhere in the middle. It's not going to be quite as intensive as the infrastructure, but I think as Barbara was alluding to, it is more intensive than the traditional non-res component. Okay, that's really helpful.
Yeah, Tristan, I would, before, I don't know if you have a follow up, but you know, one thing I failed to mention in our earlier conversation related to these projects, but these projects also are great projects for the application of our products that Tensor makes.
And so, you know, that's another positive indicator for growth in that product line as well.
Got it. And maybe just a second question, general question, a bit more bigger picture. You cannot have a unique position by being involved in the construction market in the US, but also in Europe . And we've seen the US really putting a lot of policies in place to support numbers.
of political support in both of those regions and how do you compare that? Yes, that's a great observation and as I indicated in my opening remarks.
We were very encouraged by the activity in Poland to support the residential market.
in terms of this interest rate help that they're going to provide to first-time home buyers. And so I think that's a real positive sign. And I'm encouraged that other businesses are going to be able to provide that support.
parts of Europe are looking at this issue and trying to find ways to lend support. And I think the EU is, of course, further behind than what we're seeing here in the U.S., because, for example, the CHIPS Act was approved.
last year and now we're starting to see the green shoots from that and we haven't even talked about wind and solar which will be big beneficiaries of that and that is a piece of the market that plays really well to our sweet spot. But I would say this in Europe , the energy transition of solar is really huge and we intensively focus on at what level
You know, there already has been a lot of talk about country and legislative support to assist with the transition, which is going to...
involves significant investment in existing facilities, in new technologies, and
and green energy and all of that. So I think it's coming over there. It's just there have been some obvious unexpected impacts that have been kind of overshadowing in Europe when...
the invasion occurred last year. Okay, thank you. Thank you very much. Thank you, Tristan. And our next question will come from Phil Gibbs with Key Bank Capital Markets. Please go ahead. Hey, good morning. Good morning, Phil.
As it relates to Mesa, clearly very exciting and groundbreaking and ramping. What are the expectations over the next few quarters for volume and how should we be thinking about the evolution of that facility the next year? Thanks, Phil. We are really excited as...
You know you follow this industry and there have been a number of Greenfield projects, and you know no surprise the supply chain challenges that have affected any business.
So we are so proud to be really completing and commissioning according to our original schedule. And I need to make a shout out again to the team out there because they have just been with you all because more people are here.
moved heaven and earth to overcome all the various challenges in supply chain, etc. In terms of the commissioning and the ramp, I'd like to say the following.
We, as you know, have a lot of experience since this is our third micro mill. And so we would expect for Rebar that the ramp-up cycle will follow a similar pattern.
sort of curve to our other facilities. And as I indicated, we believe we will be producing commercial grade product within the fourth quarter.
But I'll add a slight caveat to that and say that, you know, first we're going to be commissioning REVAR, but then we will follow that with the commissioning of merchant product.
And so while we're, you know, ramping our rebar output, we will have to take time on the mill to commission the merchant products. And that will be going on simultaneously. And so I think...
Once we get through the next couple of months with the cold and the hot commissioning, then I think we can give you a better update on specifics in terms of our volume expectations. I think that it will have some impact in this fiscal year. We'll see some commercial volume flow out of that facility.
But it will be a much greater impact into 2024.
Thanks so much. And then just to follow up on networking capital, what should we be expecting there in the back half of the year in terms of source or use? Certainly scraps moved up, but you might have some excess inventory with the outages, so trying to parse all that out. Thanks so much.
Yeah, Phil, you're exactly right. What we had typically we use working capital or working capital is the use of CAF in the first quarter and it's usually a release through the last three quarters of the year.
This year with the increasing scrap environment, it resulted in the second quarter being a use of cash again. As we look forward, and certainly at the moment it seems scrap is looking relatively stable, we would expect that we'll revert back to the typical trend.
of working capital being a release. And as you mentioned, yes, we should have a release here in the coming quarter with respect to getting the outage and the pre placed inventory that I spoke of.
liquidated into cash as we collect those receivables. So we should see elevated working capital releases for the coming two quarters.
Thank you. Thanks, Phil. Thanks, Phil. And our next question will come from Lawson Winder with Bank of America. Please go ahead. Thanks, Phil.
Good morning, Barbara and Paul. Thank you for your time today and for fitting me in. Maybe just on TENSAR, I believe the expectation is a run rate of about $65 million. Could you maybe provide a little color on the timeline and cadence to get to that level?
Yeah, I mean, I would say we're on track for the 60 range.
probably the lower end and the higher end of that for this fiscal year, but
We haven't entered that busy season yet, but all the signs are really, really encouraging there. Excellent. Maybe just a market question since the end of the quarter, or more in the last month. Have you...
detected any noticeable increase in rebar imports from regions other than Turkey to the US? Thanks. You know, Turkey is the largest factor and there are ebbs and flows.
from the various importing countries from time to time. Algeria is one that I would note, and those mills, some of those are Turkish mills, and so they're really, we kind of lump them into Turkey Impact.
So I would say Algeria is making, taking up some of the slack with the earthquake disruption that took mills down in Turkey, where they can of course, but there's not any.
So, I would say Algeria is making, taking up some of the slack with the earthquake disruption that took mills down in Turkey, where they can, of course. But there's not any meaningful impacts that we're seeing.
Okay, thanks very much. Yeah, thank you. And our next question will come from Alex Hacking with Citi. Please go ahead. Morning, Barbara and Paul. Thanks for squeezing me in. I'll just ask one question. So the million and a half tons of rebar had received cruMap at the number of situ
that you see coming from federal infrastructure program. I guess, you know, what year do you forecast that we would get to that level?
And do you have any estimate on what that number would be in 2024, given the bidding activity that you're seeing at the moment? And I would assume that that number is fairly close to zero for 2023. Thank you very much.
estimate on what that number would be in 2024 given the bidding activity that you're seeing at the moment and I would assume that that number is fairly close to zero for 2023. Thank you very much. Thank you Alex.
What I would say is, you know, the signs are there that the activity is moving forward, the pre-planning. You know, the signs are there that the activity is moving forward, the pre-planning.
activity, all of the Dodge indices are pointing towards movement forward.
And as you point out, you know, there's not a, we can't point to a large set of bidding or booking activity that is specifically tied to that. But these are, you know, just like regular infrastructure bills. We always say there's a 12 to 18 month lag between when a bill is...
is approved and when you see the activity. And so the growth in infrastructure last year was really related back to the FAST Act. But a couple of things I would note. The state budgets are one of our best indicators. Because first, the federal allocated it by state, and then the states have to pass it through the federal man?
are in the process of approving those budgets.
And there's significant amounts of money that is being allocated in anticipation of that. I would say in general, the largest consuming states are healthy in terms of
of their balance sheets and they are being very proactive in planning for those infrastructure projects like Texas and Florida. We are seeing significant activity in both of those states and both of those states have did
have funding plans. So it's coming and how fast it ramps up to the, you know, to the million and a half tons at this stage is a little more difficult to predict until we get to the bidding and booking.
But I would expect, you know, by our next update, you know, maybe we're going to have something more concrete to share in terms of how that's flowing from pre-planning to actual project and bidding and booking.
Okay, thanks for the color. And also thanks for the presentation. That's extremely helpful. Oh, thank you, Alex. We appreciate the feedback. Can all you hold on a second?
At this time, there appears to be no further questions. Ms. Smith, I'll now turn the call back over to you.
At this time there appears to be no further questions. Ms. Smith, I'll now turn the call back over to you. Thanks, Joe.
Thank you 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. And I hope everyone has a great day. Thank you so much.
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. And I hope everyone has a great day. Thank you so much.
This concludes today's Commercial Metals Company conference call. You may now disconnect your lines and have a great day.