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CMC earnings dip in Q1 from same period in 2020

During the company’s first-quarter earnings report presentation, it announced plans to break ground on its micromill this year in Mesa, Arizona.

January 11, 2021

Commercial Metals Co., Irving, Texas, has announced that earnings for its first quarter of 2021, which ended Nov. 30, 2020, are down slightly compared with its first quarter of 2020. First-quarter earnings from continuing operations were $63.9 million, or 53 cents per diluted share, on net sales of $1.4 billion compared with prior-year period earnings from continuing operations of $82.8 million, or 69 cents per diluted share, on net sales of $1.4 billion.

During the first quarter of fiscal 2021, CMC reports that it incurred net after-tax charges of $5.9 million for facility closure expenses and asset impairments primarily related to the decommissioning of the company’s Steel California operations. CMC reports that the closure of these operations advances CMC’s ongoing network optimization efforts and is expected to provide cost benefits in future periods. Excluding these expenses, adjusted earnings from continuing operations for the three months ended Nov. 30, 2020, were $69.8 million, or 58 cents per diluted share, as detailed in the non-GAAP reconciliation that follows, compared to adjusted earnings from continuing operations of $0.73 per diluted share for the three months ended November 30, 2019.

“CMC delivered another quarter of solid performance, marking the seventh consecutive quarter of Core [earnings before interest, taxes, depreciation and amortization, or EBITDA] near or above the $150 million mark,” says Barbara R. Smith, chairman of the board and president and CEO of CMC. “Our team achieved these strong results while navigating the unique challenges presented by the COVID-19 pandemic and also continuing to execute CMC’s key strategic growth initiatives, which are already yielding significant benefits.

She adds, “While we faced margin headwinds from rising raw material costs during the first quarter, we were able to offset much of the impact through operational execution that brought our controllable cost levels to multiyear lows. This performance is a testament to CMC’s drive to tightly manage factors within our control and to continue to realize earnings enhancement opportunities from our network optimization efforts.”

According to a news release from CMC, the company’s liquidity position as of Nov. 30 remained strong, with cash and cash equivalents of $465.2 million and availability under the company’s credit and accounts receivable facilities of $678.7 million.

Segment breakdown

CMC reports that its North America segment recorded adjusted EBITDA of $155.6 million for the first quarter of 2021 compared with adjusted EBITDA of $174.7 million for the prior-year first quarter. The reduction reflects lower margins over scrap cost for both steel and downstream products, the impact of which was partially offset by improved controllable costs at each stage of CMC’s vertically integrated value chain. The company says its cost performance at mills was “strong” in its first quarter of the year, achieving the lowest conversion cost per ton since before the early fiscal 2019 rebar asset acquisition.

According to CMC, shipments of finished goods, which include steel and downstream products, were flat in the first quarter of the year compared with the first quarter of 2020. Volumes of rebar from the mills increased 2 percent compared with one year ago, driven by continued resilience in construction activity. Shipments of merchant and other products increased 12 percent compared with the prior-year quarter as CMC says its mills focused on this market segment through expanded product offerings and service capabilities. Downstream product volumes declined year over year due to backlog contraction in some areas as well as weather-related disruptions in the Gulf Coast.

CMC says its margin over scrap cost within its vertical chain declined in the first quarter of 2021 compared with the first quarter of 2020, driven primarily by higher scrap costs. The average selling price for steel products decreased by $14 per ton from one year ago against an increase in the cost of ferrous scrap of $40 per ton. Downstream margins also declined on lower average pricing and scrap cost pressure but remained near high levels due to strong price levels in CMC’s committed backlog, the company states in its latest earnings report.

CMC’s European segment recorded an adjusted EBITDA of $14.5 million for the first quarter of fiscal 2021 compared with adjusted EBITDA of $11.4 million for the prior-year quarter. CMC says the improvement reflects “strong shipment levels and reduced controllable costs.”

“These factors more than offset an $18 per ton reduction in margin over scrap compared to the prior-year period,” CMC states in its earnings report. “Volumes increased 17 percent year over year, with demand growing for each major product category. Rebar volumes continue to be supported by a resilient Polish construction sector, while shipments of merchant bar and wire rod benefited from an upturn in central European manufacturing activity.”

Operational updates

During CMC’s conference call for its first-quarter earnings results Jan. 11, CMC provided several updates on several projects.

Regarding CMC’s micromill in Mesa, Arizona, the company said it plans to break ground in mid-2021 with a target startup date of fiscal year 2023. CMC plans to invest about $85 million on that particular micromill in fiscal year 2021. The micromill is replacing shuttered rebar capacity at its Steel California operations in Rancho Cucamonga, California. On the conference call, Smith said the Rancho Cucamonga site ceased all production as of December 2020.

Part of the funding for this new Arizona micromill will come from the sale of land CMC had owned in southern California for Steel California. According to CMC, the new micromill will optimize the company’s mill network and provide access to a large and underserved West Coast merchant bar quality market.

During CMC’s first quarter of 2021, the company stated that it also has made progress on its new rolling mill in Poland. On the conference call, Smith said the company expects to begin testing at that site in a few months with commercial production expected to commence later this fiscal year. The new site will provide CMC with more production flexibility. It will use current excess melt capacity, adding about 200,000 tons per year of finished steel output.

Concluding outlook

Looking ahead to the second quarter of the year, Smith projects that seasonality could impact operations. On the conference call, she said steel volumes tend to decline in the second quarter with slower construction activity this time of year due to winter weather; however, she said shipments of steel should be supported by construction backlogs.

Smith also said manufacturing in central Europe has been recovering since the onset of the COVID-19 pandemic. She added that the company is “well-positioned” to navigate uncertainty and expects to continue to grow its EBITDA.

“We expect finished steel volumes for our North America and Europe operations to follow typical seasonal trends in the second quarter, which is historically our slowest quarter for both segments,” Smith says in the company’s press release on its first-quarter earnings. “Shipments of steel and downstream products should be supported by our construction backlog in North America.  We are encouraged by recent trends in residential construction and industrial activity in both North America and Europe, which point toward continuing solid demand for merchant products. We anticipate margin headwinds will persist in North America during the second quarter in light of recent significant increases in domestic scrap costs. CMC has acted swiftly to commensurately adjust price levels on rebar and merchant mill products, but these increases have a timing lag relative to the changes in scrap cost levels.”