Commercial Metals Co (CMC) 2018 Q4 法說會逐字稿

Hello, and welcome, everyone, to the Full Year and Fourth Quarter Fiscal 2018 Earnings Call for Commercial Metals Company.

Today's call is being recorded.

(Operator Instructions)

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, the company's future operations, the company's future results of operations, the ability to realize the anticipated benefits of our investment in our new micro mill in Durant, Oklahoma, and capital spending.

These and other similar statements are considered forward-looking and may involve speculation and are subject to risks and uncertainties that could cause actual results to differ materially from those expectations.

These statements reflect the company's beliefs based on current conditions but are subject to certain risks and uncertainties, including those that are described in the Risk Factor section of the company's latest annual report on Form 10-K.

Although these statements are based on management's current expectations and beliefs, CMC offers no assurance that these expectations or beliefs will prove to be correct, and actual results may vary materially.

All statements 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 or 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'll turn the conference call over to the Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, Ms. Barbara Smith.

Thank you.

Good morning, and welcome to everyone joining us to review CMC's results for the full year and fourth quarter of fiscal 2018.

I will begin the call with highlights for the fiscal year and fourth quarter.

Mary Lindsey will then cover the year and quarter financial information in more detail.

And I will conclude our prepared remarks with a discussion of our outlook for the first quarter of fiscal 2019, after which we will open the call to questions.

Before discussing our results, I would like to recognize the employees of Commercial Metals for their hard work and diligence in serving our customers.

We accomplished a lot during our fiscal 2018, not the least of which include the smooth startup of CMC Steel Oklahoma in Durant and record levels of profitability from our Polish operations.

Not only did the contributions of our team allow us to achieve a great year, but we did it safely, recording our best safety record in the history of CMC.

As announced in our earnings release this morning, we reported fiscal fourth quarter 2018 earnings from continuing operations of $51.3 million or $0.43 per diluted share on net sales of $1.3 billion.

This is our best quarterly performance since the Great Recession.

Excluding the impact of acquisition and integration planning costs related to our announced agreement to acquire the U.S. rebar assets of Gerdau S.A., our adjusted earnings from continuing operations were $59.9 million or $0.51 per diluted share.

This represents a sevenfold increase in comparison to the same period in 2017.

Further details of our fourth fiscal quarter and full year results will be described by Mary during the financial update.

Also as noted in our press release on October 23, I'm pleased to report that the Board of Directors declared a quarterly cash dividend of $0.12 per share of CMC common stock for stockholders of record on November 7, 2018.

The dividend will be paid on November 21, 2018.

This represents CMC's 216th consecutive quarterly dividend.

Now I'll cover some trends and conditions in the markets in which we operate.

The U.S. economy continues to prosper, supported by tax reform, regulatory improvements and synchronized global growth.

These have resulted in a confident outlook for business leaders and resulted in continued growth in private nonresidential fixed investment spending over the past 8 quarters and a forecast of continued growth through the coming years.

Construction markets continued to perform well in 2018.

Spending has increased almost 5% in comparison to the prior year.

Further contributing to long-term confidence in the positive trend is the positive trend in the Architectural Billings Index, which finished August at 54.

An ABI over 50 is generally indicative of demand for future construction projects.

Continued elevated levels of the ABI throughout the past 2 years gives us reason to believe that the amount of design work being done remains elevated.

The Polish economy also continues to grow, with GDP estimates for the calendar 2018 being revised upwards to approximately 4.5%.

Consumer confidence remains at record levels, and the apparent long product steel consumption has increased approximately 15% during the first 7 months of 2018 in comparison to the same period of 2017.

Now I'd like to provide an update on some of our recent strategic investments.

We started operating our new downstream nonferrous separation facility in South Carolina earlier this year.

This investment, which includes the latest technology of separation techniques, not only allows us to extract more nonferrous material from our shredder operation, but it also allows us to extract additional nonferrous and ferrous metals from previously landfilled auto shredder residue.

This investment delivers enhanced returns for our recycling segment and also supports our commitment to environmental stewardship.

As I've been sharing on our most recent conference calls, the construction and startup of our new micro mill in Durant, Oklahoma, has gone very well.

I'm happy to report that the operation generated positive EBITDA this quarter, and all commissioning activities have been completed.

In addition, the production of hot spooled rebar has been well received by our own fabrication facilities as well as third-party customers.

The benefits of spooled rebar over straight and coiled rebar include improved yield results from fabrication facilities and the improved ease of use due to the absence of any twists in the material.

We are in the process of hiring a fourth crew for CMC Steel Oklahoma to support the strong demand that we've experienced for material from our newest micro mill investment.

At our Mesa, Arizona micro mill, as previously announced, we are investing in our second spooler to produce hot spooled rebar.

Construction is ongoing, and we expect to start producing spooled material at this facility during our fourth fiscal quarter of 2019.

In addition, I'm pleased to announce that our Board of Directors has approved an investment of approximately $80 million to increase the finished goods production capacity at our Polish facility by approximately 400,000 metric tons.

The investment will allow this facility to fully utilize its existing melt capacity and continue its expansion into higher-margin wire rod and merchant product.

We expect the project to be completed by the end of our fiscal 2020.

Finally, I would like to provide you with an update on the acquisition of the rebar assets of Gerdau S.A. We continue to be on track and expect to close the acquisition by the end of the calendar year, subject to the satisfaction of closing conditions, including regulatory approval.

We have invested significant time and effort to plan the integration and look forward to welcoming the new employees from these operations to our team upon the close of the transaction.

With that as an overview, I'll now turn the discussion over to Mary Lindsey, Senior Vice President and Chief Financial Officer.

Thank you, Barbara, and good morning to everyone joining us on the call this morning.

As Barbara mentioned, for the fourth quarter of 2018, we reported earnings from continuing operations of $51.3 million or $0.43 per diluted share in comparison to a loss of $10.1 million or a loss of $0.09 per diluted share in the fourth quarter of 2017.

Included in the fourth quarter 2018 results are after-tax costs of $8.6 million related to the Gerdau transaction.

Excluding these costs, adjusted earnings from continuing operations were $59.9 million or $0.51 per diluted share.

Our adjusted earnings from continuing operations for our fourth quarter of 2018 are over 7x greater than those from the fourth quarter of 2017, even when adding back the net $16.9 million of debt extinguishment and severance costs to that quarter.

For the full year of 2018, we reported earnings from continuing operations of $135.2 million or $1.14 per diluted share in comparison to $50.2 million or $0.43 per diluted share in 2017.

As outlined in more detail in our earnings release, included in the 2018 results are net after-tax costs of $40.8 million related to impairments, acquisition and integration planning costs, mill operational startup costs, certain incentives and tax reform, whereas the 2017 results included the net debt extinguishment and severance costs that I previously mentioned.

Excluding these items, adjusted earnings from continuing operations for 2018 were

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slightly in comparison to our third quarter.

Our Americas Mills segment recorded adjusted EBITDA

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The returns generated from this project will be very positive for our stakeholders.

Our Americas Fabrication segment recorded an adjusted EBITDA loss of $24.6 million for the fourth quarter of 2018 compared to adjusted EBITDA of $1.2 million in the prior year's quarter.

As we have seen throughout 2018, margins on delivered jobs have remained compressed.

As you are aware, due to the fixed-price nature and long duration of our fab contracts, a timing difference exists between when we contract and ship material.

Selling prices on material that was shipped during the fourth quarter of 2018 were $70 per ton higher than during the fourth quarter of 2017.

However, the raw material rebar price increased by a greater amount during this period.

Current work being contracted today reflects current rebar costs and would be profitable when shipped at current rebar prices.

It's worth noting that as a result of the effective vertical integration model that we have, when combining the consolidated margin earned from the recycling operations to the mill operations and to the Fabrication segment, that fabricated ton that we ship -- the fabricated tons that we ship are profitable to CMC despite the segment loss.

Our International Mill segment recorded adjusted EBITDA of $36.7 million for the fourth quarter of 2018, an increase from $22.1 million from the same period of the prior year.

This result is a quarterly record and annual record of adjusted EBITDA for this operation, supported by an increase in higher-margin merchant products and a strong construction sector.

We anticipate that Poland's economic growth rate will continue to exceed that of the rest of Europe for the coming quarters.

Turning to our balance sheet and liquidity.

As of August 31, 2018, cash and cash equivalents totaled $622.5 million, and we had availability under our credit and accounts receivable facilities of approximately $617.8 million.

As you are aware, in anticipation of a rising interest rate environment, earlier this year we issued bonds to raise the majority of the funds needed for the Gerdau transaction.

We anticipate that prior to closing of the transaction, that we will borrow between $150 million to $200 million, depending on working capital levels, under our term loan facility to fund the remainder of the purchase price.

For fiscal 2018, capital expenditures were $174.7 million, with $54.7 million related to the completion of the new Oklahoma mill.

We estimate that our working capital spending for fiscal 2019 will be in the range of $150 million to $200 million, which includes costs related to the investment in the third rolling mill in Poland, as Barbara mentioned.

This concludes my remarks.

Thank you very much.

I'll now turn it back over to Barbara for the outlook.

Thank you, Mary.

Our first quarter is typically a slightly slower period as the seasonal construction work begins to wind down before the onset of winter months and the beginning of the holiday season.

In addition, we lost shipping days in certain markets from the effect of heavy rains in Texas and the impact of hurricanes Florence and Michael.

These are temporary factors out of our control, and we remain very confident with a strong outlook for demand in Poland and the U.S.

From a metal margin perspective, we anticipate the recent stability in ferrous scrap and finished goods pricing to continue as it is supported by the positive outlook for demand in both the U.S. and Poland.

We anticipate some inflationary pressures on our manufacturing costs due to a tight labor market, consumable raw material prices and an extended planned outage in our Polish operations, which will impact the quarter.

We anticipate the items to increase our manufacturing costs by between 3% and 5% from current levels.

We're proud of the commitments we make as a company and individuals to our customers, suppliers, shareholders, community and each other.

And we look forward to continued success in fiscal 2019.

Thank you again for joining the call, and at this time, we will now open the call to questions.

(Operator Instructions) And our first question today comes from Chris Terry from Deutsche Bank.

This is Sathish covering for Chris.

My first question is regarding the International Mill operations.

There's been a strong increase and sequential increase in shipments.

Some of this could be related to the implementation of European safeguard measures.

But was there any change in product mix because the metal margin was slightly down sequentially?

Yes, thank you.

I think we did see a slightly heavier mix of rebar in the quarter in Poland.

And again, as I mentioned in my remarks, overall demand in Poland has been quite strong, and we would anticipate that to remain strong.

We also, in Poland, had pretty strong quarter in terms of shipment of billets, and that tends to be opportunistic business that comes and goes.

But that was really the only thing in the quarter that was a little higher than normal.

Okay.

My second question is regarding the Fabrication margins.

Last quarter, you mentioned that the margins could turn positive by the mid of fiscal year 2019.

So is that still the case?

Or could you provide any further color on that?

Yes.

Thanks, Sathish.

So we're still -- as we mentioned, I mean, we're still absorbing a significant amount of low-priced backlog.

But as we look at the makeup of the backlog and, in particular, the increase in the selling prices and bidding prices that we're now enjoying, we expect another tough quarter, frankly, in the first quarter.

But beyond that, we do expect the fabrication business to turn over and become profitable by the end of the year.

By the end of the year, okay.

My final question is just a guidance question.

The 3% to 5% increase in costs that Barbara had mentioned, is it just related to the first quarter because of the maintenance outage?

Or is it for the full year?

Yes, thank you.

I'll start and if Mary wants to add any additional commentary.

Certainly, the outage will have an effect, probably the effect being: one, on volume; and two, related to just fixed cost absorption that they won't be able to absorb as much fixed costs during the outage.

But let me explain that phenomena with these other escalations.

If you look at 2018, all of these input costs were escalating, but we were enjoying lower-price inventory and the benefit of some of our long-term contracts.

But if you look at the fourth quarter of '18, it's probably more representative of the full impact of those escalations, whether you want to talk about electrodes or other alloys.

Certainly, I think everybody is familiar with the tightness of the labor market and labor escalations, but in particular, the input costs.

I think fourth quarter is kind of a good representation of run rate going forward.

Our next question comes from Curt Woodworth from Crédit Suisse.

Just wanted to get a little bit more clarity around, I guess, your confidence in the Gerdau deal closing for year-end.

I mean, we've got 2 months to go.

So I guess, where is that confidence coming from?

Do you feel that you'll be able to close the deal in current configuration?

And can you talk a little bit about, if it does close by year-end, sort of what the integration and time line and planning would be, like how quickly do you think you could kind of optimize production and get some of the synergies you discussed?

Yes, Curt, the time line that we outlined was -- has remained consistent with that closing by the end of the year.

And that's based upon -- you look at similar transactions, that's the average time to get through the closing conditions and the regulatory process.

And there is nothing, as it relates to that process, that is not going as expected or as planned.

And as soon as we have a final resolution, we will certainly notify the market.

I would anticipate that once we close the transaction, our first order of business will be to develop that plan and be able to articulate to the market exactly what impact the -- whether it's the purchase accounting or what the impact will be to our ongoing operations.

And we'll be able to give a little bit more commentary around how we see the synergies dropping to the bottom line going forward.

Please remember that we're competitors, direct competitors today, and so in a transaction of this nature, there is a fair amount of information that has been redacted or cleaned.

And so we need some time to get in there and take a look at the commercial contracts, the supply contracts and refine our estimates.

Okay.

And then another question just on Americas Mills segment's price realizations, if we go back.

Looking at 2016 and 2017, your realized price typically was plus or minus $5, $10 relative to the kind of AMM rebar price.

But this year, I mean, more dislocation, where your price is selling at a larger discount to that price, which I assume is a function of potentially more like billet sales potentially going into CMOS.

But can you talk to that and kind of why you've seen that differential widen a lot this year relative to the past 2 years?

Well, we don't really rely on AMM pricing estimates.

I would -- I couldn't comment on how they develop those estimates.

Our business is contract by contract, customer by customer, order by order.

Our objective is to be fair and reasonable and competitive in the marketplace, and we think that we are.

The only other thing I would mention is that we don't disclose specifically rebar pricing, merchant pricing and billet pricing.

We disclose total pricing kind of coming off of all the different product mix.

And so, one, to Barbara's point, is I don't know where AMM gets their data, frankly, but some of that might be due to the mix, frankly, that we disclosed with all 3 of those products in the mix.

Has your mix changed at all this year versus last year?

As we've discussed, the trend, generally speaking, is that we're trying to increase the mix of merchant products.

I will say, during the fourth quarter, we did have a significant amount of billet sales.

And of course, as you can imagine, that margin on the billet sales is a little bit lower.

But overall, the trend is higher percentages of merchant product in the mix.

I think if you reference Page 6 in our press release, it does break down the tonnage.

Our next question comes from Michael Leshock from KeyBanc Capital Markets.

Just -- so looking at the fabrication business, do you expect that to increase in the first quarter in terms of either volumes or also total sales?

No.

I mean, going -- looking at the fourth quarter and then the first quarter, I think we're going to see very similar volumes and very similar, frankly, result in the first quarter.

And as we head into the second quarter and for the balance of the year, that's when we're going to see some real improvement in the metal margin there.

Okay.

And then lastly, just looking at the impact, are you seeing any impact from Vanadium in rebar, just considering that Vanadium is up from $0.04 a pound to $0.32 over the past 2 years or so and more sharply in recent months.

Are you seeing anything there?

That's captured in that 3% to 5%.

And so, of course, we would see some impact, but it's probably not as significant for us as it might be for some others.

Our next question comes from Seth Rosenfeld from Jefferies.

I kind of really apologize if you've already run through this.

On Poland, I think you mentioned earlier an extended outage plan for fiscal Q1.

Could you give us a sense of the duration and the potential cost impact that you expect to come through in Q1?

And then secondly, on cost pressures, the 3% to 5%, can you just talk -- is that specific to the first quarter exacerbated by the post outage?

Or is that a comment for full year fiscal '19?

And then lastly, pressing comment on outlook for graphite electrodes, any expectations?

Within that 3% to 5%, what level of cost pressure we should be expecting from electrodes?

So let me take a couple

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and I think Mary.

And Seth, I think you have 4 questions there, so if we missed one, please follow up.

As I indicated earlier, we were absorbing escalations throughout fiscal '18.

So we started the year with not a lot of the escalation being absorbed into our cost structure, but if you look at the fourth quarter, that's probably a good run rate heading into fiscal '19.

And the 3% to 5% includes everything.

In terms of -- so your question around Poland and the outage, the outage is 6 weeks.

It's on Danieli One.

It's a normal maintenance outage that doesn't occur very frequently.

And so unfortunately, because they've been running full out and they've been shipping at record rates, there hasn't been a tremendous amount of opportunity to build a lot of, I'll call it, buffer inventory ahead of that outage, so we are going to have to defer some tons.

And we estimate that to be 30,000 to 50,000 tons, and that will have about $5 million to $6 million of costs absorbed in the quarter for the outage.

But these types of outages, they occur on an infrequent basis, and it's been planned for a long period of time.

But there is nothing underlying in the market.

It's still a very, very strong market.

And we would anticipate coming up smoothly, and then enjoying a very, very strong year overall.

Just a follow-up on the outage, please.

The 30,000 to 50,000 tons of lost volume, is that included in the $5 million to $6 million of costs or kind of lost profits?

Or is that 30 million to 50 million -- 30,000 to 50,000 lost in terms of the top line plus an additional $5 million to $6 million of execution costs?

That's costs that will be absorbed, and then you'd have to factor in lower shipments.

(Operator Instructions) Our next question comes from Derek Hernandez from Seaport Global.

I want to touch on the fabricated business as well.

As you mentioned, you have higher price contracts that are beginning to roll through into 2019.

What kind of range are these contracts in terms of the ones that would be soonest to delivered sales versus later on, just for a sense?

Well, I mean, the backlog is a mix.

I don't have the specific detail of the percentage of backlog that's 1 year out, 2 years out, 3 years out or 1-month, 2-month, 3-month.

We have individuals deep in the organization that are monitoring that and tracking that on an ongoing basis.

But suffice it to say that it's a mix of short-duration and multiyear contracts.

Yes.

And the bidding prices are up about $150 a ton compared to the beginning of the year.

And so we're now seeing some real strength in bidding prices, and this is beginning to replace those other lower-value contracts.

And that gives us a fair amount of confidence that we're going to begin to see some significant improvement in the fab results in the second quarter and then for the balance of the year.

This all assumes, of course, that rebar pricing remains flat.

So if rebar pricing or scrap prices increase or result in an increased rebar pricing, then that causes the fab business to absorb those increases and pushes that return to profitability further out.

I see.

That's very helpful.

And if I may also -- apologies if I missed this earlier, but do we have a CapEx estimate for 2019?

Or is that still in the works?

Yes.

I think Mary included that in her commentary.

In the range of $150 million to $200 million is what we're projecting at this point in time.

One follow-on to Mary's commentary on the fab discussion.

If prices do not remain stable because you see raw material price increases, that provides an opportunity for a benefit in the Recycling segment, which is really a hedge against those fab contracts.

And our next question comes from Matthew Fields from Bank of America.

I just wanted to ask a follow-up about that CapEx estimate.

I think in the new bond marketing, in accordance with the -- in conjunction with the Gerdau acquisition, you talked about a much higher CapEx number than $150 million.

Was that because of some integration spend, some upgrade spend like -- I think it was in the order of like the mid-200s.

What's the delta between $150 million and $250 million essentially?

So in the bond marketing, we did include some anticipated capital spending associated with Gerdau in the initial year.

And that was about $40 million.

So the numbers that we're giving you, the $150 million to $200 million, are not -- we're not including any Gerdau effects in the discussion we're having today.

And we will update those when the transaction...

Are those Gerdau upgrades included in your $150 million estimate?

Or will that be more on top of that?

No, they are not.

So once the Gerdau transaction closes, a lot of things are going to get updated, obviously.

But it will -- what we have said about Gerdau is we anticipate roughly $40 million a year of increased capital spending over what we normally spend in our steel mills.

And so that $40 million is the difference between what we're talking about today of $200 million and $250 million to what you saw in the bond marketing documentation.

Okay.

So $150 million is the legacy CMC assets, and then there'll be the new Gerdau sort of sustaining capital and then the new Gerdau upgraded to capital?

No.

No.

The estimate of $150 million to $200 million is the base business excluding Gerdau.

And when we marketed the bond, we said we would estimate that our capital spending on an annual basis for the acquired facilities would be $40 million to $50 million.

So that bridges you to -- if you are saying, in the bond document, there was $200 million, $250 million, that includes that $40 million to $50 million of Gerdau.

Since the transaction will close midyear, we will refresh all these numbers and provide an outlook as soon as we can post-closing.

The ones that we gave you are just our basis.

And ladies and gentlemen, at this time, there appear to be no further questions.

Ms. Smith, I'd like to turn the conference call back over to you for any closing remarks.

Thank you, Jamie.

We appreciate everyone joining us today.

And I would just reiterate again that we're -- we see a very positive outlook going forward in both Poland and the U.S. from a demand perspective.

We look forward to Oklahoma making a full year contribution.

We're very pleased with the progress so far, and we look forward to speaking to everyone again for our first quarter results.

Ladies and gentlemen, that does conclude today's Commercial Metals Company Conference Call.

You may now disconnect your lines.