Commercial Metals Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 12, 2023

Key Takeaways

  • Fiscal 2023 financial performance: Core EBITDA of $1.46 billion and annual ROIC of 18% reflected historically strong results, only modestly below fiscal 2022’s record levels.
  • Q4 results and segment performance: Net earnings of $184 million ($1.56/share) on $2.2 billion in sales, with North America EBITDA up 1% year-over-year while Europe EBITDA turned negative due to lower prices, volumes, and higher energy costs.
  • Robust balance sheet and cash flow: Generated $242 million of free cash flow in Q4, ended the year with nearly $1.6 billion of total liquidity, and reduced leverage to 0.4× net debt/EBITDA, supporting growth investments and shareholder returns.
  • Strategic growth projects: Began ramp-up of the new Arizona 2 micromill targeting 500 kt capacity, achieved record EBITDA at Tensar, acquired EBSCO for rebar anchor cages, broke ground on Steel West Virginia, and refreshed the brand to “CMC.”
  • Positive long-term outlook: Expect U.S. infrastructure, reshoring, and energy transition investments to drive future rebar demand, with Q1 seasonally softer but backed by €60 million in European rebates and a healthy North American bid pipeline.
AI Generated. May Contain Errors.
Earnings Conference Call
Commercial Metals Q4 2023
00:00 / 00:00

There are 7 speakers on the call.

Operator

Hello, and welcome everyone to the Q4 fiscal 2023 earnings call for CMC. Today's materials, including the press release and supplemental slides that accompany this call, can be found on CMC's Investor Relations website. Today's call is being recorded. After the company's remarks, we will have a question and answer and will have a few instructions at that time. I would like to remind all participants that during the course of this conference call, the company will make statements that provide information other than historical information and will include expectations regarding economic conditions, effects of legislation, U.

Operator

S. Steel import levels, construction activity, demand for finished steel products, the expected capabilities, benefits and time lines for construction of new facilities, the company's future operations, the time line for construction of new facilities, the company's future operations, the timeline for execution of the company's growth plans, the company's future results of operations, financial measures and capital spending. 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. These statements reflect the company's beliefs based on current conditions that 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, including the company's latest annual report on Form 10 ks and quarterly report on Form 10 Q. 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 differ materially.

Operator

All statements are made only as of this date. Except as required by law, CMC does not assume any obligation to update, amend or clarify these statements in connection with future events, changes in assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances or otherwise. Some numbers presented will be non GAAP financial measures and reconciliations for such numbers can be found in the company's earnings release, supplemental slide presentation, are on the company's website. Unless stated otherwise, all references made to year or quarter end are references to the company's fiscal year or fiscal quarter. And now for opening remarks and introductions, I will turn the call over to the Executive Chairman of the Board of CMC, sheet, Ms.

Operator

Barbara Smith.

Speaker 1

Thank you. Good morning, everyone. Thank you for attending CMC's 4th quarter earnings conference call. As we reported in our press release this morning, it was another period of historically strong financial results. I would like to thank CMC's 13,000 employees who made these results possible.

Speaker 1

Your hard work and focused efforts are driving our success. I'm joined this morning's call by CMC's President and Chief Executive Officer, Peter Mett and our Senior Vice President and Chief Financial are subject to

Speaker 2

the financial results.

Speaker 1

We will start today's discussion with comments on CNC's fiscal 2023 results and accomplishments during the year. Peter will then discuss Q4 performance, provide commentary on current market conditions and offer an update on CMC's strategic growth projects. Paul will cover the 4th quarter's financial information in more detail and Peter will conclude with our outlook for the Q1 of fiscal 2024, after which we will open the call to questions. Fiscal 2023 was another exceptional year for CNC, one that included record employee safety performance, historically strong financial results and solid progress on our announced growth initiatives, including several strategic bolt on acquisitions. As you know, the company and its Board of Directors began implementing a CEO succession plan this year.

Speaker 1

I announced my retirement as CEO in July and our Board unanimously voted to appoint Peter Mott as CMC's new Chief Executive effective September 1. My fellow directors and I are extremely confident in Peter's ability to lead CMC through this next chapter and I look forward to continuing to support the company as Executive Chairman of the Board.

Speaker 2

Are now open.

Speaker 1

Turning now to our financial results, CMC generated core EBITDA of $1,460,000,000 in fiscal 2023, down only modestly from the record of $1,550,000,000 set in fiscal 2022. Without proper context, it's easy to lose sight of just how impressive these figures are. During each of the last 2 years CMC's core EBITDA was nearly double that of any previous record year and was more than 4 times higher and the average annual EBITDA during the decade prior to the completion of our strategic transformation. Include the impact of the thoughtful and decisive strategic actions we took over the last several years, which have enabled us to significantly grow our company and set us on a path for continued success. Fiscal 2023's strong reported net income translated into an annual return on invested capital of 18%.

Speaker 1

This is well in excess of CMC's cost of capital and an unmistakable indication of the value we are creating for our shareholders. Of the accomplishments achieved in fiscal 2023, we are most proud of our record employee safety performance. Is CMC's mission that each employee leaves the work site at the end of each day in the same condition in which he or she arrived. CNC's safety culture of proactive awareness, accountability and innovation continues to move us forward to our goal of 0 incidents. Last year's incident rate was tied for the lowest on record and the number of OSHA recordables declined from the prior year despite having more employees at more sites and enduring unusually hot weather across most of our operational footprint.

Speaker 1

Additionally, 114 of our facilities were incident free. While we are pleased with our continued improvement, CMC continued to make solid progress on our strategic growth initiatives during fiscal 2023. Peter will provide more details in his remarks, execution and the execution of several strategic bolt on acquisitions. As I enter my retirement and evaluate CMC today, I could will not be more pleased with where we stand. The company has a very strong foundation comprising of an excellent culture, I know with Peter's leadership and the support of all 13,000 employees, the future of CMC is as bright as it's ever been.

Speaker 1

Before I turn the call over to Peter, I would like to express my deep gratitude to the many people on this call that have shown me so much support over the years. It's been my privilege to work with you and to call many of you my friends. Peter, over to you.

Speaker 2

Thank you, Barbara. It's an are honored to take the helm of a company you'd so masterfully led for much of the last decade, and good morning to everyone on the call. CMC's 4th quarter financial results were among the strongest in our company's history, though down slightly from recent record levels. CMC generated net earnings of $184,200,000 or $1.56 per diluted share on net sales of 2,200,000,000 Excluding the impact of non operational items, which Paul will cover in detail, adjusted earnings were $200,000,000 or $1.69 per diluted share. AMC generated consolidated core EBITDA for the quarter of of the company's 3 $40,000,000 producing an annualized return on invested capital of 15.2%.

Speaker 2

Once again, excluding the gain on the sale of land recognized during the Q2 of fiscal 'twenty two. Even more impressive, excluding the land sale, our North American segment has increased EBITDA on a year over year basis in 21 of the last 22 quarters. Turning now to CMC's markets in North America. Rebar shipments remained healthy during the Q4 and total finished steel volumes increased on a year over year basis. Activity levels across our geographies and into our various customer groups were consistent with the prior quarter.

Speaker 2

Overall, the seasonal volume pattern was very normal. The data we track that annualized the data we track indicates that annualized rebar consumption remained between 9,000,000 9,500,000 signs during the 3rd and 4th quarters. This level is consistent with the rate that has prevailed since early calendar 2021, have started to diverge from the weaker global environment and growth within the U. S. Construction sector similarly stands in contrast to most other global regions.

Speaker 2

This robust relative demand has attracted rebar imports from non traditional flyers, who have put pressure on domestic pricing in recent months. Despite these more challenging conditions, we expect CMC's North American business to continue generating margins well in excess of historical average levels, but down from the record size of recent quarters. Turning to key forward indicators, CMC's new downstream bid volumes continued to grow by a solid double digit percentage during the Q4, signaling a large and expanding pipeline of potential future construction projects. Our internal view is directionally consistent with the Dodge Momentum Index, which measures the value of non residential projects entering the planning phase and tends to lead on the ground activity by approximately 12 months. Index registered an average year over year increase of 15% during the 3 months of CMC's fiscal 4th quarter, with both institutional and commercial components improving from the prior year.

Speaker 2

While bid levels indicate an attractive future pipeline, we have experienced a slowdown in the rate at which contracts are awarded, which in turn has caused some reduction to the volume and the value of CMC's downstream backlog. Compared to the prior year, our quarter end backlog value declined by 8%. Based on our observations and conversations with customers, we believe there are a couple of factors driving the slowed pace of project awards. The first is tightness in the market for construction labor, particularly specialty trades that continues to constrain project scheduling. Rather than incur construction delays driven by a lack of labor availability, some owners may choose to wait to award and construct project.

Speaker 2

CMC and several other construction suppliers have discussed this dynamic in the past and we believe it is likely to extend the duration of current cycle. 2nd factor is a tighter credit market for many types of commercial contracts. Current lending conditions do not preclude projects from obtaining financing, but the higher but the economic hurdles are higher. This dynamic also lengthens the amount of time between project bidding and award. Given the backlog contraction discussed, volumes of downstream products are likely to decline modestly on a year over year basis during the next couple of quarters.

Speaker 2

Support healthy shipment levels going forward. Looking beyond these near term dynamics, we remain very confident in the long term outlook for our business, driven by powerful structural trends that are remaking much of our economy and should bolster construction activity for years to come. Enormous investments have been announced with some already underway to improve our nation's transportation infrastructure, reshore vital manufacturing, and upgrade the electric transmission grid to facilitate the transition to renewable energy. Each of these trends will benefit not just rebar consumption, but provide a meaningful have frequently discussed the Infrastructure Investment and Jobs Act, IIJA, and its anticipated benefit to rebar demand. There are clear signs that enormous amounts of work are moving through the pipeline as evidenced by data from Dodge Analytics, which tracks infrastructure projects in their predesign and design phases.

Speaker 2

According to this data, The value of early phase projects increased over sevenfold on a year over year basis during the 3 months ending in August. Once designed, those projects will move to budgeting, funding and letting phases. It is after the letting phase that contracts are awarded, Resources are scheduled and on the ground activity can begin. We have already seen the value of state transportation projects awarded year to date through July increased by 18% compared to the prior year is according to the American Road and Transportation Builders Association, ARTBA. This year to date figure represents a 43% increase from just 2 years ago.

Speaker 2

Also, according to the ARTBA, Total State Department of Transportation Highway budgets are set to increase by 13% in fiscal 2024, which for most states started in July. Several states in our core Sunbelt region are budgeting even larger increases. As an example, Texas, site, by far CMC's largest state by shipments, recently proposed a 17% expansion to its 10 year DOT budget. Based on these signals, we expect that by next year's construction season, The IIJA and increased state DOT budget should have a material impact on construction activity and rebar consumption. Apart from transportation, the announced investments in major reshoring and energy transition projects are staggering.

Speaker 2

The 50 2,000,000,000 chip sack has helped drive over $315,000,000,000 of announced projects to build semiconductor fabrication plants and supporting facilities over the coming decade. These massive installations are generally constructed in multiple phases spanning several years and require unparalleled amounts of rebar. Solutions. Additionally, the scale of the semiconductor plants and their workforces attract investments from suppliers, retail stores, restaurants, etcetera, and require expenditures for local infrastructure, all of which consume rebar. Approximately $150,000,000,000 of investments in electric vehicle and EV battery manufacturing have been announced since in 2021 according to the Environmental Defense Fund.

Speaker 2

The expected spending on energy transition is similarly impressive. According to the American Clean Power Association, roughly $150,000,000,000 of renewable energy projects have been announced during the 12 months ended in August with an additional $22,000,000,000 being invested in the construction of clean energy manufacturing facilities to produce utility scale batteries, wind turbines and solar panels. The $250,000,000,000 IRA is expected to support these projects and additional energy transition and manufacturing projects in the future, which presents a significant opportunity for CMC. Our rebar is used in the foundations and structure of the manufacturing facilities as well as the foundations of wind turbines. TENSAR's engineered solutions are used extensively for temporary and service roads to access wind farms and solar fields.

Speaker 2

Additionally, CMC's Anchor Cage business, systems, which was acquired through our purchase of EBSCO, provides foundation support to the transmission lines that will carry electricity from new energy projects to the grid. Taken together, the construction activity required to upgrade our nation's infrastructure, Hardening critical supply chains and transition to greener energy is expected to provide a meaningful tailwind to CMC's where market conditions are challenging. Sluggish demand and excess supply have combined to put pressure on pricing and compress margins. General economic uncertainty continues to negatively impact sentiment and activity levels across our key end markets. Additionally, We responded to the current market imbalances by reducing costs and rightsizing production and believe that others have done the same.

Speaker 2

These supply side adjustments should help stabilize the market. The environment in Europe is currently difficult, but will normalize. We remain committed to our strategic presence in Poland, which greatly out earns its cost of capital over the course of an economic cycle and provide CMC with valuable optionality for the future. We have an exceptional team in Poland as well as best in class cost structure that ensures our long term competitiveness. As noted in our slides release, CMC's Q1 results are expected to benefit from 2 large rebates totaling 60,000,000 which we will discuss more fully during our outlook commentary.

Speaker 2

Before turning the call over to Paul, I would like to provide an update on CMC's key strategic growth projects where we have made significant progress during the quarter. 1st, we successfully started operations at our new state of the art Arizona 2 Micromill, and we are now in the process of ramping up output. This is an exciting milestone and the culmination of years of effort by our team on-site and support staff across the company. As a reminder, we are targeting 500,000 tons of output at full run rate comprised of 350,000 tons of rebar and 150,000 tons of merchant product. Initially, the mill will focus on increasing rebar production before commissioning merchant later in fiscal 2024.

Speaker 2

We anticipate fiscal 2024 production to approach 400,000 tons and expect to achieve EBITDA breakeven by the end of the first half of fiscal twenty twenty four. Beyond steel, we made meaningful progress on our TENSAR platform. The division achieved its highest quarterly EBITDA to date, driven by strong customer adoption of its latest proprietary offering, Interox. The new product is being recognized by customers for delivering strong value by reducing construction time, lowering project costs and increasing asset life. Our financial performance is also benefiting from improved manufacturing performance and the integration of the recently acquired geogrid production line in Oklahoma.

Speaker 2

CMC continued to expand its commercial portfolio in the Q4 with the acquisition of EBSCO, a manufacturer of rebar anchor cages for the electrical transmission and wind energy markets. The company is a leader in its space and poised to benefit from anticipated strong growth in U. S. Energy Markets. This transaction is an example of the type of value accretive bolt on acquisitions, we will continue to pursue, which deepen, broaden and diversify our construction reinforcement offering to customers and enhance our margin profile.

Speaker 2

In addition, we conducted the groundbreaking ceremony at Steel West One final note, earlier this month, CMC announced a refreshed brand and logo to better reflect our strategic direction. Commercial Metals Company now has become CMC, a name that both ties our organization to its strong legacy and broadens its horizon beyond metals to include an expanded array of engineered solutions. CMC strives to become the clear leader in early phase construction solutions, which requires offering our customers value options across a number of platforms and materials. The company's new brand reflects who we are today and our broader aspirations for the future. Will be available on our financial results.

Speaker 2

Paul?

Speaker 3

Thank you, Peter, and good morning to everyone on the call. As noted earlier, we reported fiscal Q4 2023 net earnings of 184,200,000 were $1.56 per diluted share compared to prior year levels of 288,600,000 and $2.40 respectively. Results this quarter include net after tax charges of $15,700,000 related to the ongoing commissioning efforts of Arizona 2 and the impairment of a downstream asset. Excluding and the financial results of these items. Adjusted earnings were $199,900,000 or $1.69 per diluted share in comparison to adjusted earnings of $294,900,000 or $2.45 per diluted share during the prior year period.

Speaker 3

Core EBITDA was $340,000,000 for the Q4 of 2023, representing a decline from the $419,000,000 generated during the prior year period, but still among the are 5 most profitable quarters in CMC history. Slide 13 of the supplemental presentation illustrates the year to year changes in CMC's quarterly results. Our North America segment achieved earnings growth, while Europe experienced a significant reduction from the strong results posted in the prior year quarter. Consolidated core EBITDA per ton of finished steel was $2.21 which remained well above historical levels and compared to 2 $69 per ton a year ago. CMC's North American segment generated adjusted EBITDA of $375,300,000 for the quarter equal to $3.27 per ton of finished steel shipped.

Speaker 3

Segment adjusted EBITDA improved 1% on a year over year basis. Increase was primarily the result of an expansion in the margin of average downstream selling price over scrap costs as well as lower controllable costs per ton. Improvement in controllable costs occurred despite additional expenses related to the startup of Arizona 2 and a major planned upgrade outage at one of our merchant bar mills. Turning to Slide 15 of the supplemental deck, our Europe segment reported an adjusted EBITDA loss of were $25,700,000 for the Q4 of 2023 compared to positive EBITDA of $64,100,000 in the prior year period. Decline was primarily driven by lower average selling price, a reduction in shipment volumes and higher costs for energy.

Speaker 3

CMC's energy costs remain competitively positioned relative to the broader European industry but no longer provide us with the outsized advantage we enjoyed in fiscal 2022. Europe volumes decreased 9% compared to the prior year quarter driven by lower Polish construction activity and muted European industrial production. And the presentation. Sensaar generated EBITDA of $22,600,000 during the Q4 providing the largest earnings contribution yet as a division of CMC. EBITDA performance yielded a margin of 28%, up meaningfully from the prior year quarter.

Speaker 3

The increase was driven by strong customer acceptance of Tensar's latest proprietary geogrid solution, Interax, as as well as improved domestic manufacturing performance. As a reminder, TENSAR performance is included within CMC's existing segments. Of the $22,400,000 in EBITDA, dollars 18,200,000 was included within CMC's North American segment, while the remaining $4,400,000 was reported within the Europe segment. While CMC's consolidated financial results were historically strong. Earnings were lower than what we had anticipated when we discussed our results in June.

Speaker 3

Sequential decline in profitability was driven by 3 primary factors. The first and most significant factor was a deterioration in the market environment in Europe. During the quarter, as I mentioned, pricing and margins declined as slowing Polish construction, muted European industrial activity and customer destocking measures depressed steel consumption. We responded to these conditions by reducing production by roughly 25% to right size inventory levels and lower market supply. We believe many other producers have made similar cutbacks to output.

Speaker 3

2nd factor was the effect of an inventory cost lag at our North American mills. Although we reported very similar margins over scrap in the 4th quarter relative to the 3rd quarter, profitability was negatively impacted by selling higher cost inventory into the declining price market. Those who follow CMC will appreciate this is a temporary issue that will reverse once scrap costs stabilize or increase. The last factor of note was reduced scrap flows into our recycling yards as a result of the lower scrap pricing and the hot summer we experienced throughout the U. S.

Speaker 3

Diminished volumes have the effect are reducing fixed cost leverage and increasing price competition among recyclers in order to attract sheet. We view this overhang as likely to be short lived as volumes will rebound. Turning to the balance sheet, liquidity and capital allocation. As of August 31, cash and cash equivalents items totaled $592,300,000 In addition, we had approximately $990,000,000 of availability under our credit, term loan and accounts receivable facilities bring total liquidity to just under $1,600,000,000 During the quarter, we generated 409,000,000 of cash from operating activities which benefited from a working capital release of approximately $123,000,000 sheet. Free cash flow amounted to $242,500,000 defined as our cash from operations less $166,900,000 of capital expenditures.

Speaker 3

Fiscal 2023 cash flow from operations of $1,300,000,000 set a new record and was nearly double the prior year level. The strong performance was driven by solid earnings and a working capital release of roughly 149,000,000 Free cash flows of $737,400,000 was also a record for CMC. Form of dividends and share repurchases and the remainder was used to repay the senior notes that matured in 2023. We are pleased with our current debt levels and maturity profile and expect future capital allocations to have a prioritization towards growth and shareholder distributions. As I alluded to, our leverage metrics remain attractive and have improved significantly over the last several shows the full year.

Speaker 3

As can be seen on Slide 19, our net debt to EBITDA ratio now sits at 0.4 times. We believe our robust balance sheet and overall financial strength provide us great flexibility to finance our strategic growth, organic growth projects and pursue opportunistic M and A while continuing to return cash to shareholders. CMC's effective tax rate was 22.6% in the 4th quarter and looking ahead to the Q1 of 2024, we expect and effective tax rate between 24% 25%. Turning to CMC's fiscal 2024 capital spending outlook, we expect to invest between $550,000,000 $600,000,000 in total. Outside of normal sustaining investments, expenditures in fiscal 2024 include substantial capital dollars for the construction of Steele West Virginia.

Speaker 3

CMC continues to deploy capital to support growth plans and reinforce our core operations. During the year, we invested 234 point $7,000,000 for strategic bolt on acquisitions, which expanded our commercial portfolio and value proposition to customers, as well as increasing our internal captive scrap capabilities in certain key geographies. Slide deck. Lastly, CMC purchased 352,000 shares during the fiscal 4th quarter at an average price of $52.75 per share. Transactions since the initiation of the buyback program through Q4 have amounted to approximately $263,000,000 leaving $87,000,000 remaining under this authorization.

Speaker 2

And press release. With that, I will turn it back to Peter

Speaker 3

for outlook on for comments on CMC's outlook.

Speaker 2

Thank you, Paul. We expect Q1 financial performance to remain strong by historical standards, but declined from the Q4 as a result of seasonally slower shipments, steel product margin compression in North America and the continuation of challenging market conditions in Europe. During the Q1, we anticipate that our Europe operations will receive approximately $60,000,000 from 2 large government rebate programs. The first is an annual CO2 credit estimated at $25,000,000 up from $9,500,000 received last year. Discussion, is structured as a reimbursement by the Polish government for elevated energy costs incurred during the European energy crisis.

Speaker 2

Proceeds from this program are expected to be $35,000,000 and are calculated based on the magnitude of energy cost inflation in calendar year 2023 relative to the 2021 baseline. These rebates are expected to drive a sequential improvement in Europe segment adjusted EBITDA. Looking at the longer term, we remain very confident regarding the outlook for CMC in the markets we serve. The United States is in the early stages of massive investment trends that are intended to remake large portions of our economy by extensively upgrading infrastructure, are realigning global trade patterns and reorienting automotive production to electric vehicles and transition the electricity grid to greener sources of energy. Construction makes all this possible and we have positioned CMC to be both primary beneficiary of the expected growth and a key solution provider to our customers.

Speaker 2

Once again, I would like to thank remarks for their trust and confidence in CMC and to thank all the CMC employees for delivering yet another quarter of solid performance. And the presentation.

Operator

Thank you. And at this time, we will now open the call to questions. To ask a question, you may press star then 1 on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then 2.

Operator

We ask that you limit yourself to one question and one follow-up. The first question is from Tristan Gresser of Exane BNP. Please go ahead.

Speaker 4

Yes. Hi, good morning and thank you for taking my questions. The first one is on the Q1 guidance. I I wanted to ask you a little bit more about the moving pieces there. If I look at spot rebar metal spread in the U.

Speaker 4

S, they fall in about by $100 in Q3, is that the level of metal spread compression you expect to be reflected in Q1? Or is it something closer to $50 tonne maybe. Also in terms of timing, given the short lag for rebars, is it fair to assume that most of the weakness we have seen in rebar metal spread will flow into that Q1? Thank you. That's my first question.

Speaker 2

Yes. I think just in terms of the metal spread compression, the number that you are citing seems high to us. And in terms of timing, what we expect is that you will see the impact flow into Q1 as you indicated.

Speaker 4

All right. That's really helpful. So I guess my follow-up is I'm having a little bit of hard time getting to a lower EBITDA quarter on quarter, if I get metal spread compression there, some more stability on the fab business and you know, a $60,000,000 uplift on Europe, I guess, something close to something, yes, basically stable quarter on quarter. I'm just going to ask, what kind of volume decline do you expect in North America, Europe in Q1 and also without the €60,000,000 uplift in Europe, would you have

Speaker 2

expect there to be kind of normal seasonality. So we're talking about up to a 10% change. And I I think what you should assume in Poland is that absent these rebates, Q1 looks a lot like Q4. So we're not calling for a meaningful recovery in Poland in Q1.

Speaker 4

Okay. That's really helpful. And maybe a last one, and I know it's a little bit of tricky one, but On the timing on the infrastructure plan, I mean the rebar demand chart you show in your presentation looks flat year to date. Is that fair to imply that we have yet to see most of this kind of infra boost. And if you were to put a number, and I know it's difficult, how much of this 1,500,000 tonne Demand uplift, do you believe, is already out there being reflected in rebar prices?

Speaker 4

Is that 50%, 20% or even lower? And lastly, I think on your opening remarks, I think it feels to me that you basically saying the quarter to watch for any meaningful uptick there is potentially calendar Q2. Is that fair?

Speaker 2

Yes. So, okay, a lot of questions there, but we will try to cycle through them. So, First, in terms of the amount of infrastructure spend that we're seeing, so far it's been very limited. What we can see is that it's working through the design and the pre designed phases of the process, But we don't believe that we've seen much of the spend yet. And to your second question on rebar pricing, we do not believe that the kind of infrastructure spend bubble is baked into the current rebar prices, right.

Speaker 2

So once that demand starts to materialize, we expect we'll see more of that. And if you talk about when the inflection is going to occur. Again, it's hard for us to give too precise a number, but or too precise a date. But I guess what we do is if we think about North America, again, we do see the kind of bidding activity very high. We do see some short term constraints in terms of kind of getting projects, constraints in terms of kind of getting projects built out just given some of the labor constraints, but we expect this is is coming and we expect it's coming in 2024.

Speaker 2

And so that should give some help to 2024. The other thing that I would say we're seeing is 2 factors that I think are important here. One is, we've Scrap stabilized and usually that's a harbinger for kind of better pricing on the rebar side. And the other thing that I would say is that imports have remained at relatively manageable levels relative to kind of where they've been historically, and we believe that's because of the kind of the economics of bringing steel to the U. S.

Speaker 2

Are not as compelling and that's why we are not seeing the despite the fact that it's better than other markets, It's not so much better that people are going to bring higher levels of imports. So that also should be a positive for ultimately pricing. In Poland, if I can just comment on Poland a bit, So what we see in Poland is pricing has stabilized. We've seen a lot of capacity taken out of the market. There's an election on October 15, of the presentation, so just a couple of days from now.

Speaker 2

And we believe that coming out of that election, there's a very good chance that this $32,000,000,000 of recovery and resilience fund that's being held by the EU will come into the market. And so that's another potential positive for us in Poland. The government's program to buy down interest rates on first time buyer mortgages has been very well received. So that's potentially another green chute. So there are some reasons for optimism in Poland, but it's are to call the inflection point just given what we've seen.

Operator

The next question is from Timna Tanners of Wolfe Research. Please go ahead.

Speaker 5

Yes. Hey, good morning, everyone.

Speaker 2

Hi, Kimberly.

Speaker 5

I wanted to dig down a little bit on Arizona 2. So, it's just a little bit tough to reconcile for me the guidance of lower sequential volumes November and then February seasonally a little lighter even, but yet Arizona is supposed to be ramping up. So is it displacing other tons or are there net additional tons to of that $400,000 I think that you guided to for fiscal year production. And then along those same lines, if I could, can you clarify, I think you had said in the past and a little earlier timeframe for breakeven maybe Q1 and now you're saying first half, but if you could just provide some color on that as well?

Speaker 3

I'll start with the EBITDA breakeven, Timna. In terms of our change in the guidance is simply reflecting the margin erosion that we've seen. The production start up started in June and has continued to improve each quarter, but simply the margin erosion that has occurred and we anticipate to occur in our Q1. We expect that the breakeven point will will take place

Speaker 2

in sometime during the Q2. And in terms of the tonnages, Tim, so we are it is the case that we have been supplying kind of tons to some of our customers in the West from some of our other mills, but as we bring up the Arizona plant, we will be not only replacing those tons, But we will be producing some incremental

Speaker 5

tons. Okay. But if you are in RCs, you wouldn't necessarily plug in additional 400,000 tons or You think the market can bear that I guess is the challenge?

Speaker 2

Yes. It's not an additional 400,000 tons. It's a little bit less than

Speaker 5

Okay. Thanks. And then if I could just one more, on that CapEx color, well, one is that you raised the CapEx scan $50,000,000 Sorry if I missed any explanation for that for 2024. And then I know it's a little farther out, but we see some pretty strong cash flows in 2025 if we reverse to kind of your more baseline CapEx or maintenance CapEx. I was just wondering if there's more on the come after that that we should be modeling as thanks.

Speaker 3

Timna, I think Steel West Virginia is likely to continue to have spend in 20 25. So our overall 25 will likely continue to be an elevated CapEx as we invest in that organic growth. I will remind you though that over the last 3 years despite the release side of the business of working capital that we saw in the Q4 of around $125,000,000 We've still invested over $700,000,000 in working capital. So We do anticipate that our cash flow will be very strong as we look forward certainly if there is any continued Softness on the pricing front.

Speaker 5

Okay. And then the $50,000,000 sorry of the additional CapEx guidance that you had for 2024, if you could just let us know what that was about?

Speaker 3

Yes. That's just simply as we get more evolved into timing of our planning process for the year and look at projects that can drive value to the organization. We now complete our planning process whereas before it was more of an estimate based on where we were.

Speaker 5

Okay, great. Thank you very much.

Speaker 2

Thank you, Timna.

Operator

The next question is from Alex Hacking of Citi. Please go ahead.

Speaker 6

Yes, thanks. Good morning, everyone. Let me take a time to Barbara for a tenure as CEO, truly transformational. Not many people can say that. In terms of questions, I guess the first question, just following up on the infrastructure bill.

Speaker 6

I think you highlighted there the big ramp up in design phase activity. How should we think about the lag there for steel going into the ground, right? That suggests to me probably we're still maybe 2 or 3 years away. But any color there would be helpful. Thanks.

Speaker 2

No, I think I don't think it's that long. I think we see we believe that by the middle of next calendar year, we should start to feel some of that infrastructure spending coming through.

Speaker 6

Okay. Thanks. And then I guess a follow-up on Merchant Bar, volumes down something like 10% year over year. Is that still decelerating in your view or has it kind of stabilized? And are there specific end markets within that are particularly weak?

Speaker 6

Thanks.

Speaker 3

Alex, no. If you'll recall in my comments, I made reference to a major planned outage that we had at one of our merchant mills. So we were within the quarter are constrained on production at our Alabama facility that is our flagship in terms of merchant bar. So it's simply our capacity during the quarter. Underlying market conditions continue to be relatively strong in the merchant bar space.

Operator

Are available. At this time, there appears to be no further questions. Mr. Matt, I'll now turn the

Speaker 2

call back over to you. Okay. Okay. Well, thank you everyone for joining our call today. CMC is a great platform to take advantage of the wave of construction spending that's coming our way.

Speaker 2

Integration and demonstrating that we can achieve them. CMC is well positioned to capitalize on this performance and to strengthen and grow our business.

Powered by Quartr