Metals

Commercial Metals Co. shows substantial growth in fourth quarter earnings report

Commercial Metals Co. (CMC), Irving, Texas, has released its financial results for its fiscal fourth quarter that ended Aug. 31. Net earnings were $288.6 million, or $2.40 per diluted share, compared with the 2021 net earnings of $152.3 million, or $1.24 per diluted share.  

CMC says during the Q4, the company recorded net after-tax costs of $6.3 million for purchase accounting adjustments related to the Tensar Corp. acquisition. Excluding these items, fourth-quarter adjusted earnings were $295 million, or $2.45 per diluted share, compared with adjusted earnings of $154.2 million, or $1.26 per diluted share, in Q4 2021.   

The company says it generated a record annual core earnings before interest, taxation and aromatization (EBITDA) of $1.6 billion. Fourth quarter core EBITDA of $419 million increased 64 percent year-over-year and was the second highest in company history. Core EBITDA per ton of finished steel shipped increased by $113 from the prior year quarter; favorable market conditions and operational execution more than offset inflationary pressures.   

“Fiscal 2022 was another year of exceptional performance for CMC, with record financial results, as well as meaningful advancement of our growth plan and our commitment to enhancing shareholder distributions,” says Barbara R. Smith, chairman of the board, president and CEO. “The financial benefits of past and ongoing strategic actions were demonstrated through record profitability and returns on invested capital.”   

Smith says the company expects its more-recent strategic initiatives, including the acquisition of Tensar, the construction of Arizona 2, and the announcement of a fourth micro mill to serve the Eastern U.S., will drive the next phase of its value accretive growth. Shareholder distributions remain a core focus of the company’s capital allocation strategy, with CMC repurchasing more than $100 million worth of shares during the quarter and raising our quarterly dividend by 14 percent.   

The company says its balance sheet and liquidity position remained strong as of Aug. 31. Cash and cash equivalents ended the quarter with a balance of $672.6 million, while available liquidity totaled over $1.3 billion. CMC repurchased about three million shares of common stock during the quarter, returning $106.3 million of cash to shareholders. As of Aug. 31, $188.1 million remained under the current share repurchase authorization.   

On Oct. 11, the board of directors declared a quarterly dividend of 16 cents per share of CMC common stock payable to stockholders of record on Oct. 27. The dividend to be paid on Nov. 10, marks the 232nd consecutive quarterly payment by the company, and represents a 14 percent increase from the dividend paid in July 2022.    

Demand for CMC’s finished steel products in North America was again robust during the quarter, with several key internal and external indicators pointing toward continued strength. Downstream bid volumes, a significant indicator of the construction project pipeline, increased meaningfully from a year ago, resulting in year-over-year expansion of contract backlog levels. Demand from industrial end markets was stable, with conditions in most end-use applications unchanged from the sequential quarter, but improved compared with the prior year period.   

The company’s North American segment reported adjusted EBITDA of $370.5 million for the fourth quarter of fiscal 2022, which was unchanged on a sequential basis, and up 75 percent compared with $212 million in the prior year period. The year-over-year improvement was driven by record margins on steel products and a significant increase in the margin over scrap on sales of downstream products. Steel products have now experienced six consecutive quarters of year-over-year margin expansion. Controllable costs per ton of finished steel shipped were up modestly compared with the third fiscal quarter and increased relative to the prior year period, as a result of higher per-unit purchase costs for energy, alloys and freight.    

Shipment volumes of finished steel, which include steel products and downstream products, followed typical seasonal patterns and were down slightly from the prior year period due to destocking activities by customers and the slower pace of construction on numerous job sites stemming from staffing challenges.    

The average selling price for steel products increased by $204 per ton compared with the fourth quarter of the fiscal year 2021, while the cost of scrap utilized declined by $47 per ton, resulting in a year-over-year increase of $251 per ton in steel product margin over scrap. Average pricing declined by $6 per ton from the previous quarter. The average selling price for downstream products increased by $334 per ton from the prior year period and $104 per ton on a sequential basis. Future pricing indicators on new work entering the backlog remain positive, as average price levels for bids and new awards climbed significantly from the 2021 period.    

The Europe segment reported adjusted EBITDA of $64.1 million for the fourth quarter of fiscal 2022, down 5 percent compared with adjusted EBITDA of $67.7 million for the prior year period. The average selling price increased by $125 per ton in the fourth quarter compared with the same 2021 period, while the cost of scrap utilized declined by $13 per ton.    

The result was a year-over-year increase in margin over a scrap of $138 per ton. The modest year-over-year decline in adjusted EBITDA occurred despite expanded margin over scrap, due to lower shipment volumes, higher costs for energy and alloys, the negative earnings impact of selling higher cost inventory, and the weakening Polish Zloty concerning the U.S. Dollar. Earnings levels remained historically strong, as the fourth quarter result was three times higher than the quarterly average adjusted EBITDA of the prior ten fiscal years.    

The company says Europe end market demand was mixed during the quarter. Polish construction activity continued to grow on a annual basis, while industrial production across Central Europe has contracted for several months. Volumes during much of the fourth quarter were negatively impacted by a supply chain destocking cycle that occurred in the wake of widespread safety stock procurement by end users and intermediaries following the outbreak of war in Ukraine. The purchase of safety stock meaningfully benefited CMC’s shipments during the fiscal third quarter, but the fourth quarter experienced the opposite effect. This appears to have subsided late in the quarter, due to a strong rebound in shipment volumes on a sequential and year-over-year basis.    

“Market conditions in Europe are more uncertain, given the ongoing energy crisis and slowing industrial activity,” Smith says. “However, CMC is well situated to compete due to our cost leadership position and operational flexibility. Margins over scrap in both North America and Europe are likely to compress from fourth quarter levels to remain competitive with raw material price changes and increased long steel supply from imports.”   

The recent investment in a third rolling mill has positioned CMC’s Europe segment well to navigate current volatility. The asset provided improved operational and commercial flexibility and enhanced margins by eliminating billet sales to convert the material to a finished product.    

The company’s new Tensar business generated an EBITDA of $10.2 million during the fourth quarter. Excluding a $6.5 million charge to reflect the purchase accounting effect on inventory, EBITDA amounted to $16.7 million on net sales of $74.1 million, yielding a margin of 22.5 percent. Tensar’s financial performance is included within CMC’s existing operating segments, with North American results incorporated into CMC’s North America segment and all other operations included in the Europe segment.   

“We are entering fiscal 2023 from a position of strength,” Smith says. “Our North America contract backlog volumes and average pricing are at historically high levels.”   

Smith says downstream bidding activity remains good, indicating a strong pipeline of projects entering the market, and this is before any meaningful benefit from the Infrastructure Investment and Jobs Act (IIJA) was signed into law last November. The company believes the expected commissioning of CMC’s Arizona 2 micro mill next spring, as well as the addition of Tensar’s engineered solutions capabilities, will provide it with greater flexibility to capitalize on these favorable demand conditions.    

“Looking ahead, we anticipate strong financial performance in the first fiscal quarter,” Smith says. “Robust demand in North America for each of CMC’s major product lines is expected to persist. Finished steel volumes are expected to follow typical seasonal patterns, which have historically declined modestly from our fourth quarter levels.” 

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