COMMERCIAL METALS Co Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Results Overview: CMC reported a net loss of $175.7 million for the first quarter, or $1.54 per diluted share, on sales of $1.9 billion. Excluding a $264 million litigation charge, adjusted earnings were $88.5 million. Consolidated core EBITDA was $210.7 million, with a 11% core EBITDA margin.
• Market Conditions: North America steel demand was strong but hampered by customer hesitancy to award new contracts. Europe Steel Group faced challenges from excess imports, while Emerging Businesses Group was affected by temporary factors like project delays.
• Strategic Initiatives: Launched TAG (Transform, Advance, Grow) initiative to improve margins, with initiatives like reducing alloy consumption and improving melt shop yields. Organic growth projects include progress at Arizona 2 mill and Steel West Virginia site. Inorganic growth focus on adjacent construction segments with higher margins.
• Litigation Update: Jury verdict in favor of Pacific Steel Group for $110 million plus treble, with CMC planning to appeal the decision.

Segment Performance

• North America Steel Group: Generated adjusted EBITDA of $188.2 million for the quarter, with finished steel shipments increasing 4.4% year-over-year and 2.3% sequentially. Controllable costs improved due to lower freight, better performance at Arizona 2 Micromill, and fixed cost leverage.
• Europe Steel Group: Reported adjusted EBITDA of $25.8 million, down from prior year due to lower energy rebates. Shipments decreased 9%, but strong cost management offset some of the decline. Excluding energy rebates, financial performance improved by $9.2 million.
• Emerging Businesses Group: Net sales were $169.4 million, down 4.4% year-over-year, and adjusted EBITDA was $22.7 million, down 26.6% due to lower margin product mix and project delays in Tensor division and reduced truck/trailer sales in Impact Metals division. Strong activity in Performance Reinforcing Steel and Construction Services offset some softness.

Guidance

• Second Quarter Outlook: Consolidated financial results expected to decline from first quarter. North American Steel Group shipments to follow seasonal trends, adjusted EBITDA margin to decrease. Europe Steel Group adjusted EBITDA expected to be in line with prior year. Emerging Businesses Group results to decline due to seasonality.
• Confidence in Future: Positive sentiment from customer conversations and market indicators suggests transient softness will subside, with structural trends in construction expected to drive growth in the long term.

Risks

• Litigation Risk: Ongoing litigation with Pacific Steel Group, with a jury verdict in favor of Pacific Steel Group and CMC appealing the decision.
• Market Uncertainties: Uncertainty in steel pricing and margins due to customer hesitancy to award new contracts and economic factors.
• Europe Steel Group Dependence: Dependence on economic recovery in Germany and rebuild in Ukraine for improvement in Europe Steel Group's financial performance.

Q: On the North American steel product shipments, how should we look at the state production shipments for Q2 compared to last year?

A: Peter Matt stated to expect a normal seasonal trend between Q1 and Q2 for 2025, generally about five to ten percent. Paul Lawrence added it's verging on the higher end given starting from a higher place.

Q: On the Emerging Business Group, can you provide more color on what's driving the delays and if the recovery will be meaningful?

A: Peter Matt said delays are broad-based, with earnings and revenue shifting from Q1 to Q3/Q4, expecting Tensor to grow nicely this year. Paul Lawrence explained projects pushed from fall start in spring, so recovery in Q3 and Q4.

Q: On the TAG initiatives, when will the combined $10-$15 million in annualized benefits be generated?

A: Peter Matt said they expect TAG benefits in fiscal 2025, but haven't quantified totality yet, emphasizing it's a meaningful effort to elevate margins over time.

Q: On rebar demand outlook, when do you expect highway projects and housing shortages to impact demand?

A: Peter Matt said highway demand is happening now and expected to grow over three to five years. Residential demand expected to shift positive in 2025 with a stronger uptick in 2026.

Q: On Europe Steel Group, what levers do you have if German demand doesn't bounce back?

A: Peter Matt said they could rightsize further from a manning perspective, but believe Germany will recover and Europe has a bright future with the Polish team's strong performance and cost position.