Release Date: June 20, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Commercial Metals Co (CMC, Financial) reported strong financial performance with net earnings of $119.4 million and a core EBITDA of $256.1 million.
- The company has been named to the 2024-2025 list of Best Companies to Work for by US News & World Report, reflecting high employee satisfaction and safety standards.
- CMC's North America Steel Group saw healthy shipment levels and modest margin expansion for steel products.
- The Europe Steel Group showed signs of improvement, nearing breakeven on an adjusted EBITDA basis.
- CMC's emerging businesses group generated strong results, with an adjusted EBITDA margin returning to representative levels.
Negative Points
- Net earnings and core EBITDA declined compared to the prior year, indicating some financial pressure.
- The Europe Steel Group continues to face challenging market conditions, with significant supply reductions and increased imports impacting performance.
- Interest rate-sensitive construction markets, such as warehousing, office, and multifamily residential, remain softer, affecting overall demand.
- The company incurred $17.2 million in mill operational commissioning costs, impacting net earnings.
- CapEx guidance for fiscal 2024 has been reduced due to timing of equipment payments, potentially affecting project timelines.
Q & A Highlights
Q: Can you talk about the pricing and margin outlook for North American downstream products through the end of the year and into next year?
A: We expect margins to stay relatively stable over the coming quarter and into next year. While there may be a downward trend in pricing, margins should hold relatively stable.
Q: With CapEx spending related to the West Virginia mill now pushed into 2025, how should we think about the total CapEx for next year?
A: Our CapEx expenditures next year will be far greater than this year. Initial guidance suggests an increase to around $600 million to $650 million for 2025.
Q: Why does the current construction season appear weaker than usual despite a healthy start?
A: While bidding and booking levels remain strong, margins have stayed stable due to both sales price and scrap price erosion. We believe scrap prices are nearing a bottom, and demand is resuming, which should stabilize or strengthen scrap prices.
Q: Why shouldn't we see some modest improvement in EBITDA quarter on quarter given the expected improvements in Europe and the Emerging Business Group?
A: While there is potential for improvement, we are cautious due to risks in Europe and interest rate-sensitive segments in North America. We aim to maintain stable margins and are cautious about moving margins higher until we see an inflection in rates.
Q: How should we think about the ramp-up of the Arizona 2 mill in fiscal year '25?
A: We anticipate a good ramp-up of activity in the fourth quarter and into next year, with an average capacity utilization of around 75% for the year. Initially, it will be more rebar-focused, with a gradual increase in merchant bar quality products.
Q: What would be a more normalized CapEx level once the current project pipeline is completed?
A: Our ongoing CapEx level, combining smaller projects and maintenance, should be around $250 million annually.
Q: How much of your shipments are in the interest rate-sensitive construction component, and how could they benefit from rate cuts?
A: About half of our portfolio has some exposure to interest rates. Infrastructure is not interest rate-sensitive, while non-residential and residential segments have varying degrees of sensitivity. An inflection in rates could unlock pent-up demand, particularly in multifamily residential.
Q: How does the margin profile of your backlog look relative to past or recent quarters?
A: The backlog margins have returned to more normalized levels, above historic levels but not at the highs seen previously. The fabrication business is priced at a margin over rebar, and as rebar pricing has come down, it has helped solidify margins in the backlog.
Q: What is the EBITDA per tonne uplift from shifting production to the new Arizona mill?
A: The Arizona facility offers significant cost reductions compared to the previous California location. As we ramp up production, we expect a margin pickup in line with our traditional rebar margins.
Q: Is the Emerging Business Group, particularly Tensor, still expected to be a growth business?
A: Yes, we expect Tensor to grow. Despite some operational challenges and economic conditions in the rest of the world, we are investing in new capacity to meet demand. We believe Tensor has strong long-term growth potential.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
