CMC Q1 earnings lower year over year

Electric arc furnace steelmaker CMC, which also operates a network of scrap yards, has reported net earnings of $176.3 million, or $1.49 per diluted share, on net sales of $2 billion for the first quarter of its 2024 fiscal year, which ended Nov. 30, 2023.

Compared with prior-year period net earnings of $261.8 million, or $2.20 per diluted share, on net sales of $2.2 billion, CMC’s earnings declined by nearly 33 percent for the recently completed quarter, while its net sales declined by almost 10 percent.

The company saw its steel product margins compressed as scrap costs increased in the U.S. and decreased only slightly in Europe, though it predicts the margin-compression trend will stop or reverse as its fiscal year progresses.

In the first quarter of fiscal 2024, CMC recorded a net after-tax charge of $16.4 million related to commissioning at its Arizona 2 micromill. Excluding this item, first-quarter adjusted earnings were $192.7 million, or $1.63 per diluted share, compared with adjusted earnings of $266.2 million, or $2.24 per diluted share, in the prior-year period.

In remarks accompanying the company's earnings, Peter Matt, CMC president and CEO, mentions the investments the company is making, including the summer startup of its Arizona 2 micromill, production levels for which improved throughout the quarter.

“Site improvements for our Steel West Virginia project should be completed shortly, clearing the way to begin pouring foundations," he says. "We have successfully integrated a number of our recent acquisitions, which extend our operational and commercial capabilities and further our strategic position. All of these initiatives broaden our exposure to the favorable structural trends powering domestic construction and are expected to drive strong future growth in earnings, cash flow and shareholder value.”

He adds that CMC generated “very strong financial results” in its first quarter, pointing to core earnings before interest, taxes, depreciation and amortization (EBITDA), core EBITDA margin and cash flows remaining at “historically strong levels.”

“Performance in our North America Steel Group was supported by sustained healthy construction activity and near-record margins on our downstream products. While steel product margins experienced compression in the quarter, market developments indicate this trend should halt or reverse in the coming months. Our Europe Steel Group performed well against a market environment challenged by weaker demand and lower product margins. Encouragingly, selling prices and metal margins on long products began to improve midway through the quarter, and several green shoots have emerged that could bolster the Polish market in the quarters ahead.”

CMC changed its organizational structure and segment reporting to support its strategic priorities of driving higher through-the-cycle margins and growth, Matt says, adding, “The decision to break out the Emerging Businesses Group was motivated by the desire to provide additional attention to this unique portfolio of solutions, which we believe have the potential to maintain higher, more stable margins and an elevated rate of growth relative to our steel business.”

Business segments

CMC says North American demand for its finished steel products continued to be healthy during the quarter.

Construction activity supported a 3 percent year-over-year increase in total North America Steel Group rebar shipments, a measure that includes rebar sold directly from mills as well as fabricated product shipped from CMC's downstream facilities. The construction pipeline remained historically strong with high volumes of potential projects. However, lower new contract awards have driven a year-over-year reduction in the volume and value of CMC's downstream backlog from the peak experienced last year. Demand from industrial end markets, which is important for merchant products, was mixed, with certain applications experiencing slower activity compared with the prior-year quarter, according to the company.

Adjusted EBITDA for the North America Steel Group decreased to $266.8 million in the first quarter of fiscal 2024 from $349.8 million in the prior-year period, driven by lower margins over scrap costs on steel products and higher costs related to the operational startup of the Company's Arizona 2 micromill. These factors more than offset benefits from increased steel product shipments and CMC's ongoing cost reduction efforts. The adjusted EBITDA margin for the North America Steel Group of 16.8 percent compares with 21 percent in the prior-year period.

North America Steel Group shipment volumes of finished steel, which include steel products and downstream products, increased 1.1 percent year over year, though the average selling price for steel products decreased $128 per ton compared with the first quarter of fiscal 2023, while the cost of scrap used increased $18 per ton, resulting in a year-over-year decrease in steel products margin over scrap of $146 per ton. The average selling price for downstream products declined by $10 per ton from the prior-year period.

Europe end market conditions remained challenging during the quarter, as Polish construction activity decelerated and industrial production across Central Europe remained muted, CMC says. The Europe Steel Group reported adjusted EBITDA of $38.9 million for the quarter compared with adjusted EBITDA of $61.2 million in the prior-year period.

First quarter 2024 results include two energy cost rebates totaling approximately $66 million. Of these rebates, $27.7 million is related to an annual CO₂ credit under a government program that extends to 2030, and the remaining $38.6 million is structured as a reimbursement by the Polish government for elevated energy costs incurred during the European energy crisis. Adjusted EBITDA for the prior-year period included $9.5 million related to the annual CO₂ program. The adjusted EBITDA margin for the Europe Steel Group of 17.3 percent compares with 15.8 percent in the prior-year period.

CMC’s Europe Steel Group's average selling price decreased $159 per ton from the first quarter of the prior year, while scrap costs decreased by only $1 per ton, leading to metal margin compression. The decline in profitability, excluding energy rebates, also was affected by a 27 percent decrease in shipment volumes compared with the first quarter of fiscal 2023, which reduced fixed cost leverage.

Emerging Businesses Group first-quarter net sales of $177.2 million increased by 3.9 percent from the prior-year period, driven largely by the addition of CMC Anchoring Systems. Demand conditions were generally positive during the quarter, with relative strength in North America and a weaker environment elsewhere, CMC says. U.S. construction activity drove demand for geogrid solutions, construction services, CMC Anchoring Systems and performance reinforcing steels.

Adjusted EBITDA for the Emerging Businesses Group of $30.9 million during the first quarter was relatively flat compared with the prior-year period. The adjusted EBITDA margin of 17.4 percent represents a decline of 100 basis points as the positive impact from the addition of CMC Anchoring Systems and the benefit of improved adoption rates for proprietary geogrid solutions in North America was offset by weather delays in the Central U.S. and lower construction activity in Europe and the Middle East.

Looking ahead

“Margins on steel products are likely to experience some further compression during the second quarter, however, recent price announcements should support an inflection and improved margins going forward,” Matt says. “Downstream product margins should exhibit good sequential stability. Conditions in Europe are expected to remain challenging, but adjusted EBITDA excluding energy rebates should improve from the levels of the past two quarters. Financial results for our Emerging Businesses Group are anticipated to follow a typical seasonal pattern."

Beyond the second quarter of its 2024 fiscal year, he says CMC expects “robust” construction activity this spring and summer, driven by increased infrastructure investments. “Regarding the Europe Steel Group, we expect that supply side adjustments and the impact of increasing levels of residential and infrastructure construction should drive sequential improvements in financial results beginning in the spring construction season," Matt says.