Commercial Metals Co (CMC) 2022 Q1 法說會逐字稿

Good day, and welcome, everyone, to the First Quarter Fiscal 2022 Earnings Call for Commercial Metals Company. 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.

(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 expected capabilities and benefits of new facilities, the company's future operations, the time line for execution of company's growth plan, 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 the 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 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 the future events, changes in assumptions, 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 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 will turn the call over to the Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, Ms. Barbara Smith. Please go ahead.

Good morning, everyone, and thank you for joining CMC's first quarter earnings conference call. Hopefully, each of you had a wonderful holiday season. As we reported in our press release issued this morning, the first quarter of fiscal 2022 was another outstanding period with record consolidated and segment results. I'd like to thank CMC's 11,000 employees for their continued hard work and focused efforts on behalf of our customers and stakeholders, and we thank our customers for their continued trust in and partnership with CMC.

I will begin today's call with a few highlights from the quarter and commentary on CMC's strategic growth projects. Paul Lawrence will then cover the quarter's financial information in more detail, and I will conclude with a discussion of the current market environment and our outlook for the second quarter of fiscal 2022, after which we will open the call to questions.

Before starting my prepared remarks, I'd like to direct listeners to the supplemental slides that accompany this call. The presentation can be found on CMC's Investor Relations website.

I'm pleased to report that CMC's first quarter fiscal 2022 earnings were the best in our company's 106-year history. Earnings from continuing operations were $232.9 million or $1.90 per diluted share on net sales of $2 billion. Excluding the impact of a tax benefit related to an international reorganization, adjusted earnings from continuing operations were $199.2 million or $1.62 per diluted share. CMC generated core EBITDA of $326.8 million, an increase of 109% from the year ago period and an improvement of 28% from the prior quarter. This was the third consecutive quarter in which our company has reported record bottom line earnings, core EBITDA and segment-level EBITDA. These achievements are a result of the execution of our strategic plans presented to shareholders during our virtual Investor Day in August of 2020.

As noted in the press release, this very strong first quarter performance brings CMC's trailing 12-month core EBITDA to nearly $1 billion and return on invested capital to 18.3%. Strong market conditions and strong margins across several product lines certainly contributed to these exceptional results. However, to put this performance into context, during the fiscal 2014 and 2015 time period, we experienced similar robust market conditions to what we enjoy today, and our 12-month EBITDA was between $375 million and $400 million with return on invested capital in the mid-single digits. This significant improvement over the past 6 years underscores the enhanced earnings power of CMC today, and it is our objective to produce better returns with higher highs and lower lows through the economic cycle.

To back up this statement, CMC achieved an annualized return on invested capital of 25.1% during the first quarter and an annualized return on equity of 35.6%. Our team members continue to tightly manage controllable costs, reflecting changes to costs on a per unit basis, better than most industry and macro benchmarks we track.

We are certainly proud of CMC's record financial results delivered by strong execution of our strategic initiatives as well as solid market fundamentals. While we are proud of the performance to date, let me take a moment to explain why I believe CMC's best days are still ahead of us. I'll start with sustainability.

Before we can responsibly talk about growth, we need to be certain that what we are growing is sustainable. CMC was founded 106 years ago as a metals recycler, and we carry on that legacy today, operating possibly the cleanest portfolio of steel mills in the world. We're also committed to further improvement as we make significant progress towards our 2030 environmental goals. CMC's Scope 1 and 2 emissions are already well under the 2040 Paris Accord target, and our emissions have improved by 6.2% per ton of steel produced compared to our fiscal 2019 baseline. This 2-year improvement stands in stark contrast to the global industry, which increased its emissions intensity over the same time frame.

Since fiscal 2019, we've also improved our energy efficiency by 7.8%, while the global industry's performance has deteriorated by nearly 6%. We are sourcing more renewable energy than ever before and the proportion of green energy within our overall consumption has risen by roughly 3 percentage points over the last 2 years, and we continue to work every angle to move this figure higher.

Our commitment to renewable sourcing is demonstrated by the design of our future Arizona 2 micro mill, now under construction in Mesa. This exciting new plant will be capable of directly connecting to an on-site solar field, making micro mill steelmaking the world's cleanest steelmaking technology even cleaner. In our industry, sustainability also means treating our people with the right way and keeping them safe on the job.

CMC's mission is that each day every one of our employees finishes their shift in the same condition they started. We have developed a unique safety culture that leans on innovative thinking, emphasizes shared accountability and aims toward an ultimate goal of 0 incidents. Through this approach, CMC has achieved several consecutive years of improvement in our incident rates, including dramatic improvements at acquired facilities where we have instilled our CMC culture.

Across each line of business, we focus extensively at keeping our people safe and healthy. Not only is this the right thing to do, but over the long term, we expect the care we have for our employees will lead to long-term retention of our exceptional workforce and make CMC an employer of choice within our industry.

I touched on only a few highlights of our ESG commitment, which is detailed in our sustainability report published in December 2021, and I encourage you to read the report.

To sum up, I would say that CMC is not just sustainable, but a sustainability leader. Being a leader means always pushing further and never standing still. In the years ahead, we will do just that. And clearly -- our clearly sustainable platform gives us a solid foundation on which to grow. I'd like to now discuss some of our exciting initiatives, which are a result of the disciplined and deliberate execution of CMC's strategic plan. These projects strengthen and reinforce our organization's core capabilities. While extending CMC's growth runway into markets, customer groups and applications, we already know well.

Recently, we announced a series of exciting growth initiatives, which have been under consideration for some time. I'd like to emphasize that we have been disciplined in knowing the strategic direction and goals that most benefit our shareholders, disciplined in taking the next step in identifying opportunities that move our organization towards these goals and then acting decisively when these opportunities arise and the timing is right.

Let me begin with an update on CMC's third micro mill currently under construction in Mesa, Arizona. This plant will be the first micro mill in the world capable of producing merchant bar and, as I mentioned earlier, will be among the greenest in the world. Arizona 2, as we are calling it, provides significant strategic value to CMC. It will replace the much higher cost and inefficient rebar capacity of the former Steel California operations. The sale of which will fund over half the cost of our new plant. Arizona 2 will also give CMC a coast-to-coast merchant bar footprint and serve several customers we already know well through our MBQ operations in Alabama, South Carolina and Texas.

Importantly, Arizona 2 will help further optimize CMC's operational network and enhance customer service. We are equally excited about CMC's fourth micro mill announced this morning. The new mill dubbed MM4 will augment our operational footprint in the Eastern United States and enhance our ability to serve markets in the Northeast, Mid-Atlantic and Midwest. We expect significant internal synergies from this investment, including enhanced production flexibility among our Eastern U.S. mill network, improved customer service capabilities as well as enhanced delivery times and logistical efficiencies and getting steel to its destination.

MM4 is a project we have studied for several years and now feel the time is right to execute. MM4 will be rebar-centric with additional capabilities under consideration. As stated in the press release, the competitive site selection process is now underway, and we will provide an update when the search is finalized. This investment further demonstrates our commitment to a sustainable future for CMC. Both mill projects stand to benefit directly from the largest infrastructure package to be enacted in the U.S. in several decades. The Infrastructure Investment and Jobs Act signed last November will provide $1.2 trillion in funding over 5 years and stimulate an estimated 1 million to 1.5 million tons of incremental annual rebar demand at full run rate. This would add roughly 15% to current domestic consumption of around 8.5 million tons.

We expect the time between the mills enactment and the commencement of significant construction activity to be in the range of 18 to 24 months, which lines up very well with the scheduled future commissioning of Arizona 2. We further anticipate a late calendar 2024, early 2025 start-up of MM4, and this would coincide with infrastructure-related demand nearing full run rate.

Stepping beyond mill investments, CMC's agreement to acquire Tensar Corporation announced last month will add additional products and capabilities, which will make CMC a unique provider of value-added reinforcement solutions for the domestic and international construction markets. This transaction represents CMC's entry into an adjacent and complementary product space through the purchase of a proven market and innovation leader.

The acquisition meaningfully extends CMC's growth runway and provides a platform for further expansion into high-margin, high customer service engineered solutions. As we discussed in our call in December, Tensar's offerings provide best-in-class value propositions to customers, particularly against competing traditional reinforcing solutions but are underpenetrated in the marketplace. We believe this combination of attractiveness to customers and large potential market opportunity will support significant organic growth at Tensar in the years ahead.

Tensar is already very well managed with a strong reputation and proven innovation and operational capabilities. We believe these factors greatly reduce the execution risk of this transaction while providing CMC with solid commercial synergy opportunities out of the gate. Currently, we expect to close on the acquisition during the fiscal third quarter.

The 2 U.S. mill expansions plus the Tensar acquisition, combined with our recently commissioned rolling line in Europe, should provide CMC with at least $200 million of sustainable through-the-cycle EBITDA once fully operational. My belief that CMC's best days are ahead is based not just on our announced strategic investments but several other factors as well, including the quality of our people. We've not discussed this topic much in the past, but it's vitally important to the future of CMC with a longer-term impact greater than any new capital project.

As we sit here today, I'm very confident regarding the new generation of leaders that are developing at every level of our organization. Our bench strength has never been better. CMC's transformational growth projects over the last several years have expanded our North American business by nearly 50%, necessitating organizational adjustment to accommodate such rapid growth. Employees were provided with opportunities to take on new responsibilities and new roles across the company, giving each an expanded perspective of CMC's business and valuable experience in managing through change.

Additionally, the last 2 years have involved unprecedented challenges. First, related to complications due to the pandemic, followed by high inflation, logistical issues and labor shortages. Our team has responded exceptionally well to the series of challenges, and we have all seen the outcome, a stronger company generating record financial results. With hindsight, it's clear the events of the last several years has created an innovative, adaptable, stress-tested roster of current and future key leaders at CMC.

Lastly and while this is outside CMC's control, I'm confident about the future of our core geographical markets. CMC has exposure to the most economically vibrant and rapidly growing regions in both the U.S. and Europe. For more than a decade, population growth within CMC's key U.S. markets have outpaced the broader United States. This trend has picked up pace considerably since early 2020 and has been reflected in new community formation and relocation of businesses. Ultimately, population drives construction over the long term, and CMC is well positioned to benefit.

Finally, as stated in our press release, the Board of Directors declared a quarterly cash dividend of $0.14 per share of CMC common stock for stockholders of record on January 20, 2022]. The dividend will be paid on February 3, 2022. This represents CMC's 229th consecutive quarterly dividend with the amount paid per share increasing 17% from a year ago.

As we announced last quarter, we are also committed to returning capital to shareholders through our share repurchase program, and Paul will give you an update on our activity this past quarter.

With that as an overview, I'll now turn the discussion over 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 record fiscal first quarter 2022 earnings from continuing operations of $232.9 million or $1.90 per diluted share, more than triple prior year levels of $63.9 million and $0.53, respectively.

Results this quarter include a net after-tax benefit of $33.7 million, primarily related to a tax capital loss recognition on an international tax restructuring transaction, which took place in the quarter. Excluding the impact of this item, the adjusted earnings from continuing operations were $199.2 million or $1.62 per diluted share.

Core EBITDA from continuing operations was $326.8 million for the first quarter of 2022, more than double the $156.6 million generated during the prior year period. Slide 9 of the supplemental presentation illustrates the strength of CMC's quarterly results. Both our North America and Europe segments contributed significantly to year-over-year earnings growth, while core EBITDA per ton of finished steel reached a record level of $233 per ton.

The first quarter marked the 11th consecutive quarter in which CMC generated an annualized return on invested capital at or above 10%, which is in excess of our cost of capital.

Now I will review our results by segment for the first quarter of fiscal '22. The North American segment recorded adjusted EBITDA of $268.5 million for the quarter, an all-time high. This compares to adjusted EBITDA of $155.6 million in the same period last year. Largest driver of this 73% improvement was a significant increase in margins on steel products and raw materials. Partially offsetting this benefit were higher controllable costs on a per ton of finished steel basis due primarily to increased unit pricing for freight, energy and alloys.

Selling prices for steel products for our mills increased by $364 per ton on a year-over-year basis and $76 per ton sequentially. Margin over scrap on steel products increased $202 per ton from a year ago and $82 per ton sequentially. The average selling price of downstream products increased by $158 per ton from the prior year, reaching $1,092. This increase was consistent with the rise in underlying scrap costs, resulting in unchanged margins over scrap relative to the prior period.

During our fourth quarter earnings call, I indicated that CMC's downstream backlog was expected to reprice higher throughout fiscal 2022 as new higher price work replaces older lower-priced work. Through the first 4 months of the fiscal year, we are seeing the anticipated rate of repricing play out. We continue to expect forward -- further upward movement in CMC's average backlog price through the remainder of the fiscal year, particularly in light of strong market demand and bid volume, which we are experiencing in our downstream geographies.

Shipments of finished product in the first quarter were essentially flat from a year ago. End market demand for our mill products remained strong. This is supported by our own shipment volume and industry-wide data we track regarding consumption of rebar, merchant bar and wire rod. Downstream product shipments increased by nearly 8% from the prior period, driven by the beneficial impact of our growing construction backlog.

Turning to Slide 11 of the supplemental deck. Our Europe segment generated record adjusted EBITDA of $79.8 million for the first quarter of 2022 compared to adjusted EBITDA of $14.5 million in the prior year period. This improvement was driven by expanded margins over scrap, the receipt of a $15.5 million energy credit and strong profit contributions from our new rolling line.

Higher costs for energy and mill consumables partially offset these positive factors. Energy credit received was for calendar 2020. Legislation is currently before the Polish Parliament to extend this credit further.

Margins over scrap increased $236 per ton on a year-over-year basis and were up $120 per ton from the prior quarter. Tight market conditions provided the backdrop to achieve the segment's highest average selling price in more than a decade, reaching $869 per ton during the first quarter. This level represented an increase of $408 per ton compared to a year ago and $106 per ton sequentially.

Europe volumes climbed 8% compared to the prior year as a result of extensive planned maintenance performed at our rebar rolling line. Shipments of merchant and other products were relatively unchanged. The sales of higher-margin finished products replace sales of semi-finished billets. Demand conditions within Central Europe remains strong. The Polish construction market continues to grow at a robust rate, with particular strength in the residential and infrastructure sectors.

Construction of our merchant and wire rod -- consumption of our merchant and wire rod products has been supported by expanding manufacturing activity as highlighted by several key macroeconomic indicators, including the Polish and German PMI readings and Polish new industrial orders. The combination of good demand and strong pricing has provided an ideal backdrop for the start of our third rolling line. This new asset is significantly outperforming the original investment case.

Turning to capital allocation, balance sheet and liquidity. As of November 30, 2021, cash and cash equivalents totaled $415 million. In addition, we had approximately $650 million of availability under our credit and accounts receivable programs, bringing total liquidity to nearly $1.1 billion. In addition, as we announced last week, in late December, we closed on the sale of our Rancho Cucamonga, California site and received gross proceeds of $313 million. Proceeds received represent approximately 45% of the entire purchase price of the rebar acquisition we completed in 2019.

During the second quarter, we will record a pretax gain of approximately $275 million related to this transaction. During the quarter, we generated $26 million of cash from operating activities despite a $252 million increase in working capital. The rise in working capital was driven by the increase in average selling prices.

Looking beyond price factors, our days of working capital have decreased from a year ago. Over the course of the past 4 quarters, CMC has invested roughly $500 million in working capital. Our leverage metrics remain attractive and have improved significantly over the last 2 fiscal years. As can be seen on Slide 15, our net debt-to-EBITDA ratio now sits at just 0.7x while our net debt to capitalization is 18%. We believe our robust balance sheet and overall financial strength provides us the flexibility to finance our strategic organic growth projects and complete the acquisition of Tensar while continuing to return cash to shareholders.

CMC's effective tax rate was 11%, which was driven sharply below our typical statutory rates by the international reorganization performed during the quarter. Absent the enactment of any corporate tax legislation that would impact fiscal 2022, we forecast our tax rate to be approximately 25% to 26% for the balance of the year.

With respect to CMC's fiscal 2022 capital spending outlook, we currently expect to invest $475 million to $525 million this year, roughly half of which will be attributable to Arizona 2. Lastly, after approving the program in mid-October, CMC repurchased 159,500 shares during the first fiscal quarter of 2022 at an average price of $33.28 per share. These transactions amounted to approximately $5.3 million leaving $344 million remaining under the current authorization. We expect share buyback activity to increase in the second half of the year.

With that, this concludes my remarks, and I'll turn it back to Barbara for her comments and the outlook for the balance of the year.

Thank you, Paul. Turning now to market conditions, first, in North America. We are seeing strong activity within nearly all of our end markets at the mill level, demand for rebar, merchant bar and wire rod remains robust with total domestic consumption for each of these products growing on a year-over-year basis during CMC's fiscal first quarter.

Rebar and wire rod, in particular, are being supported by continued construction growth. During CMC's first quarter, total domestic construction spending increased roughly 10% from the prior year, according to the U.S. Census Bureau, driven by growth in both residential and private nonresidential categories. While national spending was largely unchanged for infrastructure, activity within CMC's core geographies outperformed the national average during the first quarter, driven by healthier state-level budgets and the need to accommodate growing populations with expanded infrastructure networks.

Strength in construction activity has also benefited our merchant bar product lines which are used in various applications, including ceiling joists, industrial stairs and railings and warehouse racking. The industrial markets served by CMC's merchant products are healthy, and we are seeing particular strength among machinery and equipment manufacturers.

As you know, construction is by far CMC's largest end market, and our best leading indicator is our volume of downstream project bids. Activity levels have been very strong for the last 3 quarters driven by a good blend of private and public sector work. Project owners are also awarding high volumes of new work, which has allowed CMC to grow our downstream backlog on a year-over-year basis for 2 consecutive quarters. Work is entering our backlog at very attractive average price levels, which we expect to drive profitability when shipped in future quarters.

The picture is equally positive in Europe. Construction activity is strong with new residential construction permits increasing by double-digit percentages on a year-over-year basis. The Central European industrial sector continues to grow as reflected in the current 18-month trend of expansionary PMI readings for both Poland and Germany.

With production from our new rolling line, which allows our Polish operations to produce each of our 3 major product groups simultaneously, CMC is now even better positioned to capitalize on this growth. In addition, supply conditions in Central Europe are tight, which has given -- has driven margins sharply upwards from the historical lows of fiscal 2020 and early fiscal 2021.

Regarding our outlook for fiscal 2022, we remain confident. Based on our view of the marketplace and our internal indicators, we anticipate continued strong financial performance. Signs point to robust demand in our key end markets, and we expect supply and demand conditions to remain favorable, supporting healthy margin levels.

The positive tone of our outlook is backed up by several key external construction forecasts and indicators. The Portland Cement Association once again increased its expectation for cement consumption growth in 2022 and now anticipates an increase of 2.5% on a year-over-year basis.

The Architectural Billing Index continues to point toward expansion in the year ahead, particularly within our core Southern U.S. footprint. Additionally, the Dodge Momentum Index, which measures the value of nonresidential projects entering the planning phase, remains near a 14-year high and shows strength in both its commercial and institutional components. More near term, in the second quarter of fiscal 2022, we expect shipments to follow a typical seasonal trend, which has historically equated to a modest decline from Q1 levels. Margins on steel products as well as controllable cost per ton should be generally consistent on a quarter-over-quarter basis.

Once again, I'd like to thank all of the CMC employees for delivering yet another quarter of outstanding performance. Thank you. And at this time, we will now open the call to questions.

(Operator Instructions) Our first question comes from Sathish Kasinathan with Deutsche Bank.

My first question is on the announced new micro mill. You mentioned that it will be rebar centric and that you are looking to add MBQ capability. But can you provide any rough estimate on the size and CapEx for the mill?

Yes. Sathish, I think until we conclude our -- all of our analysis and our site selection, we're not prepared to give further specifics on that. But I think if you look at our track record with our other micro mills, we will be very disciplined in the way we look at the market and we'll come back to you as soon as we can with more specifics around the CapEx needs.

And my second question is on the funding for the Tensar acquisition. Now that you had a little more time to explore your options. Any initial thoughts on what the mix of debt or cash would be?

Yes. We benefit from the very strong balance sheet that we have. And so as we work towards closing, which Barbara outlined, will be likely in the third fiscal quarter, we will take stock and leverage that strength of the balance sheet to make sure we fund the growth project in an efficient manner. So at this stage, we have not determined exactly what that will be, but we have a lot of tools and toolbox to get that done well.

Next question comes from Timna Tanners with Wolfe Research.

I just want to ask 2 questions. One on the new mill. In the past, you've really flagged the importance of your Southern base and the specific growth in that region. So I just wanted a little more color on why the East Coast or Midwest and if you're concerned about any greater exposure to imports there? And the second question is just about volumes in the quarter. I thought they were a bit light. Just wanted to understand that. And if that still implies a decline into the Feb quarter as per traditional?

A couple of comments on the new mill. I think we have had a traditional southern -- primarily Southern exposure, but following the acquisition of a few years ago that really rounded out our footprint and opened us up to take advantage of a very, very high consuming rebar market in the Northeast. And as you know well, the infrastructure bill that was passed, something that has been talked about for probably the last 10 years that I've been here at CMC, is going to create an enormous amount of additional demand. And we think the timing of this is perfect to take advantage of that in addition to all the other benefits that come with upgrading the technology. We clearly have a commitment to green technology. This micro mill technology is the most efficient in the world and with it comes all kinds of quality and customer benefits. So this is very consistent with our long-term strategy to make sure that we have -- we employ the latest technology in the industry, which happens to also be the greenest technology in the world and the infrastructure build that's coming is going to fully support the offtake of this new investment.

And then you had the question around volume, you want to take that one, Paul?

Yes, sure. So Timna, with respect to volumes, I'll start with Europe. As I mentioned, Europe had a significant outage in 1 of its mills. That was a planned maintenance outage and that drove much of the reduction in volume. So we do expect that quarter-over-quarter, sequentially, we will not follow the normal seasonal trend of lowest shipments in the fiscal second quarter. But in fact, we'll probably see a modest uptick to volumes in the second quarter in Poland.

In North America, the total finished volumes, if we add both the steel product volumes as well as downstream products, we're essentially flat to a year ago period. There was a shift between mill steel product shipments to downstream as we enhanced our backlog and shipped more internally. But overall, the volume was essentially flat to where we were a year ago and somewhat impacted by the holiday -- the beginning of the holiday season as well as some maintenance outages that we had during the quarter. With respect to North America, we do expect a traditional seasonal downswing in volumes of the total steel products and downstream groupings into the second quarter aligned to normal, and that would be generally down around 5% from where we were in the first quarter and that's just primarily related to the extended holidays over the Christmas period.

Got you. And then I'm sorry, on the question on the Midwest and -- or the East Coast mill, I had snuck in a question about if that opens you up more to imports or if that's a concern, would you mind answering that part, please?

Yes. Timna, I mean, you're well aware of where the major importing locations are. And I think that we -- our assessment is we're going to enjoy a pretty favorable import environment even with the adjustments that have been made to the European situation. It's always a risk, but we monitor that carefully. And again, I point back to our track record of introducing the micro mill, the benefits of that technology and quality and cost every time we've built a new mill, it has started up and been full. So between the infrastructure plan and the benefits of the technology, we don't see a major factor there. And the fact that I think we're going to enjoy a favorable import environment foreseeable future.

And Buy America probably helps also.

Yes. Absolutely.

(Operator Instructions) our next question comes from Seth Rosenfeld from BNP Paribas.

I got another question, please, with the new East Coast mill. You touched on earlier potential for some synergies and operating efficiencies. Are you able to give us any tangible examples of what you're looking at on the operating efficiency side, perhaps quantify any scale of synergies that would make this investment particularly attractive versus what we've seen on a stand-alone greenfield asset in the past, please? I'll stop there.

Yes. Happy New Year. Hope you are doing well. I think, again, I'd just point back to our track record and we're always evaluating the long-term capital needs of existing capacity balanced with upgrading to a more current and new technology. And if you look at -- when we did the analysis, it was economically more attractive to go ahead and invest in this new technology that's going to be a lot more efficient, cost-effective, higher quality, lower environmental impact than reinvesting in the older legacy technology.

The other factor we always evaluate is market demand. And as I indicated earlier, the demand today is very robust and the markets are, I will say, in a sold-out condition. And when you layer on the additional investment that's going to be made over the coming 5, 7, 10 years between the market analysis and that economic equation that makes this project very attractive.

Okay. I guess a separate question please with regards to fabrication pricing. I believe in your prepared remarks, you commented you expect backlog prices to increase through the coming fiscal year. Given that I think in the past that pricing is often been set kind of with reference to steel cost, is that comment a sign of confidence that spot rebar prices could continue increasing or rather call on the unique kind of supply-demand dynamics for fab itself improving the pricing for fabrication, please?

Seth, I'll start and then Barbara can add some comments. And as you are aware and know our business well, essentially, the fab pricing is based when the contract is awarded at a price over and above typical rebar pricing. And as we look throughout last year, rebar pricing increased north of $300 a ton. And while we saw a nice repricing of the backlog during the first quarter, we're still lagging the overall increase in what we're shipping because of the older contracts that remain in our backlog.

So we do anticipate that the -- based on the bid activity that we are seeing today, which is very strong that we'll continue to see strong rebar pricing and, as a result, continue to see new work going into our backlog that is reflective of these higher price contracts that we're seeing today.

Our next question comes from Andrea Bokkenheuser with UBS.

Just 2 quick questions for me. Can you just give us a little bit more clarity on how you look at the overall cost outlook for 2022? Obviously, on the scrap side, maybe also on the energy side. Obviously, there are always some voices in the market talking about higher scrap prices for longer. And obviously, there's a little bit of an energy crunch going on. So to what extent, if at all, you are impacted by any of this and how you're kind of looking at 2022 is my first question.

And my second question, assuming for a moment, it's going to be another stellar year for you guys on the margin side. Do you have a preference for buybacks over dividends. How should we think about that from a capital allocation point of view. Those are the 2 questions.

I'll begin, and then Paul can maybe give a little more guidance if you're looking for a modeling question. Clearly, there's all sorts of inflationary pressures out there. And what I would say is the market is absorbing those inflationary pressures. And at the same time, we're trying to manage our own cost structure to -- with an objective to have our inflation to be less than what you would look at in terms of an overall market inflation number. And I think our results would bear out that we've done a really good job of using productivity to offset some of those inflationary pressures. But the strong market is allowing those -- the inflation to be passed through and I would remind that the pressures that we're seeing are not any too different than everyone else in the marketplace.

If you get down to individual line items, and I'm going to probably turn this over to Paul to give specifics. There are some components of the cost structure where the inflation seems to be moderating and then there's other elements of the cost structure where we may see some continued pressure on inflation.

As it relates to scrap, scrap ebbs and flows throughout the year, and ebbs and flows based on market demand and tightness and whether or not scrap is moving offshore and not. Unlike a lot of other steel products other than our fab backlog, we really are in the market on a spot basis. And so our products are able to absorb those fluctuations, and we see just continued strength in demand as the primary factor that's going to help preserve our metal margins going forward. From my perspective, as it relates to capital allocation, I think we were fairly clear in October when we took action on increasing both the dividend and reinitiating our share repurchase program.

That was a very healthy increase in the dividend and a meaningful repurchase program that was put in place. And our Board evaluates that on an ongoing basis. And right now, we'll execute on that. And I'm sure at the right moment, we'll reevaluate it and see where we go from here.

Andreas, I'll just add to your question with respect to energy specifically. In Europe, the latter half of December, we certainly saw energy levels come back down. And as a result, I think we're through the period of the peak that we saw throughout much of the fourth quarter of 2021 and there should be lower costs ahead. Now we were sheltered from much of that increase in the spot pricing due to, a, we -- operating in Poland had significantly lower cost energy than most other countries within Europe as well as a result of our hedging arrangements.

And I guess to add a little bit of color to Barbara's point, if you look at where costs have had the most impact to us, it's energy, it's freight and it's some of the long-term consumables that we use in our business. Energy, as we've seen in our Polish operations, the hedging and activity that we have there to mitigate some of these price spikes certainly have helped. We have a fairly significant fleet of our own rail and tractor trailers that help with respect to some of the challenges on the logistics front here in the U.S. And so that helps with some of the inflation that we're seeing there. And finally, with respect to some of the consumables, we've prided ourselves with contracts that we have in place with our suppliers, which, again, allow us to manage those costs and ultimately have greater visibility to those costs. And certainly, as some of the industry, principally the hot roll sort of slows down, it's production rates, we would expect to see some of those rates to dissipate in the alloy area. So overall, competitively speaking, I think we're in good shape with respect to the key areas that have seen inflation this year.

Our next question comes from Phil Gibbs with KeyBanc Capital Markets.

The Tensar acquisition expected to close in your third fiscal quarter, that's going to be I think the biggest acquisition after the Gerdau one and pretty sizable in terms of the platform. Is there more M&A that you have your eyes on as you grow the company?

Yes. Thank you, Phil. As you know, you've been around a long time. We're not going to give any specifics as it relates to potential targets, but we've worked hard to reposition the portfolio and to have a balance sheet that is impeccable and allows us a lot of flexibility. And clearly, we believe that the addition of Tensar opens up the opportunity to think about some other things. And so we would look at it as another avenue for growth. Our first objective is to get the acquisition closed and fully integrated and to reap the benefits of the acquisition. But already, we are -- to the extent we can interacting with the team as we await the regulatory approval, we are finding more and more situations where we both are working on the same job sites and where we have worked together in the past on projects. And so we're just really excited to get across the finish line and get it closed so we can really dig into those commercial opportunities that will no doubt exist and the timing will be really attractive, as I indicated earlier, with the infrastructure bill, we think that, that will be just a great time for us to be taking this on, and we really look forward to where we can go from there. But we're always screening things, and we see a lot of opportunity on the horizon.

I know the deal hasn't closed yet, but regarding Tensar, is there a likelihood that you're going to have to put more capital into that business as you grow it or as you see fit with infrastructure and new capacity, it's on top of the amount of capital that you're putting down by the business?

Yes. Interestingly enough, Phil. One of the things that was attractive about the Tensar business to us is the higher margins available because it is more of an engineered solution and there is a heavy technology R&D component to it. But secondarily, the lower capital intensity. We believe the footprint that exists within Tensar has sufficient ability to expand and increase the output to meet the demand in the foreseeable future. But if the demand exceeds even our expectations, the investment needed to add manufacturing is order of magnitude less on an initial investment than what you think of in our traditional steelmaking footprint.

At this time, there appears to be no further questions. Ms. Smith, I will now turn the call back over to you.

Thank you, everyone, for joining us on today's conference call. We look forward to speaking with many of you during our investor calls in the coming days and weeks. And once again, happy new year, and look forward to speaking with you sometime soon. Have a great day.

This concludes today's Commercial Metals Company conference call. You may now disconnect.