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Hello, and welcome everyone to the Third Quarter Fiscal 2019 Earnings Call for Commercial Metals Company. Today's call is being recorded. After the company's remarks, we will have a question-and-answer session and we'll have a few instructions at that time.
I would like to remind all participants that during the course of this conference call, the company will make statements to 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 company's future operations, the company's future results of operations, the ability to realize the anticipated benefits of our acquisition of certain rebar assets from Gerdau S.A., the investment in our new micro mill in Durant, Oklahoma and capital spending.
These and other similar statements are considered forward-looking and may involve speculation and are subject to risks and uncertainties that could cause actual results to differ materially from these expectations. These statements reflect the company's beliefs based on current conditions but are subject to certain risks and uncertainties, including those that are described in the Risk Factors section of the company's latest annual report on Form 10-K and subsequent quarterly reports on Form 10-Q.
Although these statements are based on management's current expectations and beliefs, CMC offers no assurance that these expectations or beliefs will prove to have been correct, and actual results may differ 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 future events, changes and assumptions, the 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 or on the company's Web site. 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 would turn the call over to the Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, Ms. Barbara Smith.
Thank you, Jamie. Good afternoon and thank you for joining the call to review CMC's results for the third quarter of fiscal 2019.
I will begin the call with highlights for the third quarter. Mary Lindsey will then cover the quarter financial information in more detail and I will conclude our prepared remarks with a discussion of our outlook for the fourth quarter of fiscal 2019, after which we will open the call to questions.
As announced in our earnings release this morning, we reported fiscal third quarter 2019 earnings from continuing operations of $78.6 million or $0.66 per diluted share on net sales of $1.6 billion. Excluding the impact of certain integration costs, our adjusted earnings from continuing operations were $80.4 million or $0.67 per diluted share.
Also as noted in our press release from yesterday, the Board of Directors declared a quarterly cash dividend of $0.12 per share of CMC common stock for stockholders of record on July 5, 2019. The dividend will be paid on July 18, 2019. This represents CMC's 219th consecutive quarterly dividend.
I'm proud of the results that CMC team delivered this quarter. These results are a culmination of a series of transformative actions over the past several years involving all segments of our company. These actions have generated the best financial results for CMC since the Great Recession. These actions will also allow for continued growth in revenue and profits as well as attractive returns for our stakeholders.
It's worth reviewing key accomplishments this quarter and year-to-date through nine months of our fiscal year 2019. For the third quarter, revenue increased 33% to $1.6 billion. Adjusted earnings from continuing operations increased 64% to $0.67 per share. Through nine months of fiscal 2019, the ramp up of capacity at our newest micro mill in Durant, Oklahoma is complete and exceeding the original expectations of performance.
The introduction of a differentiated product, hot spooled rebar has gained widespread customer acceptance.
During the third fiscal quarter, we commissioned our second spooler at our Mesa, Arizona micro mill adding to the existing spooled rebar capability in Durant, Oklahoma. These two facilities are the first in the world to operate in a continuous-continuous fashion.
Our investments in Poland to lower cost as well as upgrade their capabilities to produce more value added products are yielding great results. Expanding our market offerings allows us to serve a broader industrial base and reduces volatility in our earnings. Poland is on pace to produce the second highest financial result in its history.
More recently we completed the acquisition of four rebar mills and 33 fabrication facilities in the U.S., increasing our U.S. mill capacity by 75%, expanding our geographic presence and improving our ability to serve our customers needs. We previously reported that the integration has been progressing well ahead of our original schedule with approximately 40 million in annual cost synergies expected.
I'm pleased to report that we have implemented actions that will achieve the estimated synergies on a run rate basis by fiscal year end. In addition, we can confirm additional commercial synergies taking the total annual run rate synergies to approximately $70 million under today's market conditions.
The third quarter financial results are now reflecting the expected benefits of this transformational acquisition. Following the acquisition, we stated our intent to repay a portion of the debt to finance the transaction in a timely fashion in order to improve leverage ratios. Subsequent to the quarter end on June 17, we made a $25 million payment to reduce the balance of our outstanding term loans. All of these steps taken over the past several years have resulted in an improvement in our return on invested capital. Our third quarter results if annualized would generate a 13% return on invested capital. We remain committed to providing attractive returns to our shareholders.
Now, I'd like to cover some trends and conditions in the markets in which we operate. U.S. non-residential construction spend has increased approximately 4% in comparison to last year. We have confidence that the strength of the construction market will continue as we monitor certain leading indicators. Our best leading indicator is [building][ph] activity in our fabrication business. We did a record number of projects during our fiscal third quarter, which gives us confidence that construction activity will continue to be strong.
Through ongoing dialogue with our customers, they also convey a positive outlook supported by their respective backlogs is supported by the continued strength and indicators such as the Architectural Billing Index. The ABI was at 50.2 in May indicating continued growth in construction activity.
On a macro level, a good barometer of the U.S. economy and small business activity, the U.S. Small Business Optimism Index was 105 in May with 30% of these businesses indicating now is a good time to expand. This is the highest level recorded since before 1990. In addition the U.S. unemployment remains at historically low levels and inflation rates continue to be relatively low.
Turning to our outlook for Europe, Poland's GDP grew 1.5% in the first quarter of 2019 compared to the previous quarter and has grown 4.7% over the past 12 months. We remain confident in the continued strength of the Polish economy. Financial allocations from the EU's European Structural and Investment Funds aiming to help tackle infrastructure development includes 86 billion euro funding for Poland in the current EU multi-year budget for the period of 2014 to 2020. This stimulus is now expected to impact spend activity through 2023.
With that as an overview, I'll now turn the discussion over to Mary Lindsey, Senior Vice President and Chief Financial Officer to provide some more comments on the results for the quarter.
Thank you, Barbara and good afternoon to everyone joining us on the call.
As Barbara mentioned for the third quarter, we reported earnings from continuing operations of $78.6 million or $0.66 per diluted share compared to earnings from continuing operations of $42.3 million or $0.36 per diluted share in the third quarter of 2018. Third quarter 2019 results include after tax costs of $1.8 million related to the Gerdau acquisition. Excluding these costs, adjusted earnings from continuing operations were $80.4 million or $0.67 per diluted share. This is the second full quarter we have owned the assets we acquired from Gerdau and further integration of these assets into our operations produced improved EBITDA this quarter.
In the acquired mills, lower conversion costs from increased productivity and improved metal margins contributed to $53.6 million of EBITDA on shipments of 469,000 tons. The acquired fabrication facilities had an EBITDA loss of $13.9 million on 184,000-ton shipped. This loss does not include the amortization of unfavorable contracts of $23.4 million. We believe that a better reflection of through the cycle earnings would take the unfavorable contract amortization into account as it reflects contracts entered into prior to the closing date of November 5, 2018. This current business generated $10.1 million of operating income in the quarter.
The remaining balance of the purchase accounting liability established for acquired fabrication contracts is $52 million. This is anticipated to be amortized over the coming six to nine months. The integration effort is proceeding more quickly than we had planned reducing integration costs to $2.3 million this quarter. We expect the majority of the integration cost to be completed by the end of the fiscal year. Overall, the acquisition has been accretive to our results to-date.
Now turning to our overall results. As reflected in the earnings release issued earlier today, core EBITDA from continuing operations was $153.6 million for the third quarter of 2019 in comparison to $109.9 million for the third quarter of 2018. However, as mentioned earlier, this does not include the $23.4 million benefit from the amortization of the liability established for the acquired fabrication contracts.
As the spring construction season commenced resulting demand increased our fabrication segment shipments by 18% from the previous quarter. Our mill segment rebar shipments increased by a similar percentage. As Barbara mentioned, the market conditions remained very positive supported by continued growth in construction spend and strong metal margins.
Turning to segment results for the third quarter of 2019. The Americas recycling segment reported adjusted EBITDA of $12.3 million for the third quarter of 2019 compared to adjusted EBITDA of $19.5 million in the same period last year. Ferrous prices increased in the beginning of the third quarter but declined in the following two months.
Overall prices declined $14 per ton compared to the previous quarter. Ferrous to non-ferrous prices have declined 8% and 11% respectively from this time last year, while volume has remained relatively stable. Importantly, despite the price declines, we continue to generate solid EBITDA in the segment as a result of disciplined buying practices, rapid inventory turnover and recent investment in separation technology that better refines our non-ferrous purity levels allowing us to achieve higher margins.
The Americas mill segment recorded adjusted EBITDA of $158.1 million for the third quarter of 2019 compared to adjusted EBITDA of $89.6 million for the third quarter of 2018. Shipment volumes increased compared to the third quarter of last year primarily driven by the 469,000 tons shipped from the acquired locations.
The selling prices in our mill long product range experienced less volatility than the broader steel market in the third quarter. As scrap prices decreased, metal margins increased $12 per ton compared to the second quarter. Current metal margins are $83 per ton higher than this time last year.
Conversion costs decreased by 4% compared to the second quarter as utilization rates improved across all of our mills. The Americas fabrication segment recorded an adjusted EBITDA loss of $23.3 million in the third quarter of 2019 compared to an adjusted EBITDA loss of $8.2 million in the prior year quarter. As mentioned earlier, these results include a $13.9 million EBITDA loss on shipments of 184,000 tons from the acquired facilities and does not include the benefit from amortization of the unfavorable contract loss reserve. Volumes in this segment were positively impacted as we entered the spring construction season.
Furthermore, with much of our lower price backlog behind us, we began shipping work booked in a more favorable pricing environment. This resulted in a substantial improvement in transactional selling prices in the third quarter. This price improvement and volume increase in the third quarter resulted in a $26.3 million EBITDA improvement compared to the previous quarter. We are further encouraged as new work booked in the first nine months of this year is averaging over $1000 per ton and is profitable at today's cost.
We expect our pre-acquisition fabrication businesses to generate positive results in our fourth quarter and are confident that the acquired locations will follow in the coming quarters based on today's rebar prices.
The International Mill segment recorded adjusted EBITDA of $24.1 million for the third quarter of 2019. Volume increased 72,000 tons or 24% compared to the prior year driven by increased rebar demand. Metal margin declined $8 per ton due to import pressures across the EU. Despite the steel safeguard measures that were put into place to protect the EU from a flood of imported steel. The majority of Turkish steel exports which had been entering the U.S. market were redirected to Europe. This resulted in slightly compressed margins in comparison to the prior year. However, year-to-date volume exceeds the previous year and Poland is on track to achieve its second highest full year profitability in history.
I would also like to comment on the Corporate and Other segment. Costs in this segment decreased by approximately $4.7 million from the same period of 2018. The results this quarter include $2.3 million of acquisition and integration related costs.
Turning to our balance sheet and liquidity. As of May 31, 2019, cash and cash equivalents totaled $120.3 million and we had availability under our credit and accounts receivable facilities of approximately $617.2 million.
During the quarter, we generated $134 million of cash from operating activities. We reduced the balance in our outstanding accounts receivable facilities by $34 million. We reduced working capital levels and expect strong cash flows will continue assuming a stable pricing environment.
In addition to the scheduled $4 million payment of our long-term debt made in the third quarter, since the quarter end we have continued to ease the balance sheet by repaying $25 million of debt. In the coming quarters, we plan to further reduce the debt level.
For the first nine months of this year, capital expenditures were $91.8 million. We estimate that our capital spending for fiscal 2019 will be in the range of $150 million to $175 million, which includes capital improvements related to the acquired assets. This concludes my remarks. Thank you very much.
I'll now turn it back over to Barbara for the outlook.
Thank you, Mary.
We expect a strong finish to our fiscal year with continued strength of the construction season in all our markets. As I mentioned earlier customer sentiment is very bullish in both Poland and the U.S., which is supported by our healthy internal backlog. We expect strong and relatively stable metal margins to remain in place for the balance of the fiscal year. As Mary mentioned we are also confident that we have cycled through much of our older fixed price fabrication backlog and anticipate the fabrication segment will show substantial improvement during the coming quarters.
Our team of employees have successfully executed many facets of our strategic plan. We believe our leading customer service approach coupled with our strong market position and investments to bring innovative solutions to our business and our customers have positioned the company for continued success.
At this time, we will now open the call to questions.
[Operator Instructions] And our first question today comes from Matthew Korn from Goldman Sachs. Please go ahead with your question.
Hi. This is [Hunter] [ph] on for Matthew Korn. Can you elaborate on the new $70 million synergy target? How are you achieving the incremental synergies and what's the timeline to achieve the full $70 million?
Yes. As I indicated the additional is really what we would term commercial synergies as you can appreciate when we were doing our original estimate of synergies, it was based on our due diligence and we had very little access to supply agreements and commercial agreements. And so since the time of closing the transaction and after having that information available to us combined with putting our commercial organization in place and our commercial approach in place, we have been able to quantify and confirm those additional synergies.
And as I said in my script $70 million is total including the original $40 million of synergies and we expect to be at that run rate by the end of this fiscal year.
Great. Thank you. Have you seen any changes in the market with the removal of the extra 25% tariffs in the Section 232 on Turkey? And how do you think that removal is going to impact the market going forward?
Well, we're monitoring it carefully. I would remind the callers that there is the 25% duty remaining in place as well as any existing CVD or anti-dumping duties. And I know in the case of [indiscernible] that's an additional 13% of duties on top of the 25%. So we think that that continues to be a good deterrent to the dumping that we had seen previously and continues to create a more level playing field, but we are monitoring as of today most of the import offers are really in line with where the U.S. pricing. So, we're not seeing a big influx of activity at this point in time.
Got it. Great. Thank you and congratulations on the quarter.
Thank you, Hunter.
Our next question comes from Chris Terry from Deutsche Bank. Please go ahead with your question.
Hi, Barbara and Mary. Thanks for taking my questions. First one is just around Gerdau and how things are going there. What are the further opportunities you still have? And I think in previous calls or when you've had analyst sessions you hinted at the fact that there's potentially opportunities down the track after Gerdau is finalized to potentially look at MBQ and rebar optimization across different sites. Is that still something that's on the radar? Thanks.
Yes. Thank you, Chris. I would say that as both Mary and I indicated in our remarks that the integration is going exceptionally well, well ahead of our original timelines and the fact that we were able to conclude the system integration within the first three months was key to getting after the synergies. And as I indicated earlier we're tracking very well on the synergy number I think originally we said within two years.
And so we're very pleased to confirm that in less than a year that we are on a run rate basis positioned to achieve those synergies by the end of this fiscal year.
In terms of going forward, we are now -- we do have full access to the information to do all that optimization planning that that you're referring to and that work is underway and it's beginning to yield results and as part of our expectation and the synergies. Going forward, yes, it does. Given our larger no footprint and fabrication footprint, it does give us opportunities to optimize our product mix across our geographies and across our mills and that work is ongoing.
So I think we're quite optimistic that 2020 presents obviously a full year impact of the acquisition with great results today on our synergy plans and as we can confirm other things in terms of product mix and optimization we'll certainly highlight those.
Great. Thanks Barbara. And then, my other question just relates to conversion costs. So I think you said they were down 4% in 3Q and previously you mentioned 5% to 8%, I believe, is it still further opportunities to reduce those costs? Thanks.
Looking at the balance for the year, Chris, we think conversion costs are going to remain relatively stable as we head into the fourth quarter. So I think we're -- I think we've achieved what we were planning to thus far with regard to conversion cost.
Okay. Thanks Mary. That's all for me.
Thank you.
Thank you, Chris.
Our next question comes from Curt Woodworth from Credit Suisse. Please go ahead with your question.
Thanks. Good afternoon and congrats on a good quarter.
Good oafternoon, Curt.
First question is on fab. So I think through cycle margins historically you've talked about $40 a ton of profitability, but the last I think eight to nine quarters even negative 70 to 80. So, it seems like there is an opportunity to get much better through cycle margins going forward just from 232 and the fact that we have a trade case underway, which I would hope would be supportive.
So, I'm just wondering, can you talk to expected profitability of that segment in terms of how your backlog looks today relative to maybe sort of prior variances?
Yes. I'll give a crack at that. And as you know we don't give specific forward guidance, but we have indicated in the past that $40 per ton of EBITDA to qualify EBITDA versus profitability, so not net income but $40 of EBITDA per ton is through cycle average. But as you can also appreciate fab has more volatility in their earnings. So, at the peak it would be higher than that. And we've been of course suffering through a really unusual period here the past year subsequent to the 232 actions.
So, I would say that in the coming quarters you're definitely going to see a lot more interesting results out of the fab business and a return to the historical norms and potentially above that. And I wouldn't know how to guess how much to attribute to 232 and other things such as a good economy et cetera.
And do you think the trade case could have meaningful implications for out years, are you seeing any changed import behavior from the start of that trade case on fab products?
So far as we're aware, the trade case on fab products does not relate to fabricated rebar, it is other types of steel fabricated products. So I don't think it's going to affect our particular segment really.
Interesting. Okay. And then, a follow up question just on conversion costs, if you look at year-on-year increases in conversion or say all other apart from scrap, they rub pretty dramatically 70, I think on my numbers roughly 70 ton, is that -- can you talk about what's driving that? Is it mix-related? I know we've seen some cost increase on the electrode side, but any more color on kind of what's driving the year-on-year increase would be helpful?
Yes. So first of all, we do have now integrated into the total conversion cost number the Gerdau mills which certainly we're not running as efficiently as our own. But then, also, if you remember back to last year, we did have a period of rapidly rising electro prices as well as alloys and we did have some labor increases and we were very pleased frankly to be able to finally match some of our wages to more appropriate levels. So those were all the things that kind of contributed to increasing conversion costs that you've seen. But we're now seeing them level out with improved utilization rates and all the mills as well as kind of a plateau of electro pricing, alloy pricing and other input cost into the process.
Great. Thank you very much.
Welcome.
[Operator Instructions] And our next question comes from Michael Leshock from KeyBanc. Please go with your question.
Hey. Good afternoon.
Good afternoon.
So, first question here just looking at CapEx it was a little lighter in the quarter and you guided 250 million to [175 million] [ph] for fiscal '19, which was lower than expected. Is there anything that you could call out that led to that being lighter than prior quarters?
Yes. I don't think there's any one project in particular that we would call out. We're typically very prudent with our capital and sometimes projects just don't get started soon enough in a year to get completed. So it's nothing unusual just...
Okay. And then, you mentioned that demand was impacted by wet weather in the first half of the year as you called out in the past. Did you see pent up demand there in the quarter that drove the strong shipments in the mills segment? And do you expect shipments to continue at that pace given the fallout in scrap?
We're expecting fourth quarter shipments to be equally strong to third. I would highlight that we -- everyone on this call has probably experienced there continues to be weather across the country maybe not as problematic as we saw in the first and second quarter. Certainly there's more sunny days and than what we were seeing and when the days are sunny a lot of work is going on.
But weather has continued to impact construction even in the third quarter, it's just been a little more manageable. So, at this point as I said, we would expect a good strong shipping quarter in the fourth quarter.
Okay. And then, lastly, just any impact either positive or negative that you're seeing from Arcelor idling its assets in Poland despite your outlook for the solid economic environment in that region?
Yes. Their decision hasn't really affected us. And the products and markets that we serve, I think overall that there is excess capacity in Europe and certainly Europe has seen an increase in import penetration. So, it was probably a prudent move on their part. But as we reported in our results in Poland, I mean we had a really strong shipping quarter and good backlogs, good economic growth in Poland. And so, we again other than say normal vacation holiday that you tend to see the month of August, we expect Poland to finish the year strong as well.
All right. Thanks.
And our next question comes from Sean Wondrack from Deutsche Bank. Please go ahead with your question.
Hi, there. A nice quarter.
Thank you, Sean.
Couple of quick questions about Poland, I think you mentioned that there's basically an infrastructure plan in place through 2020. Do you have any idea exactly how much of that money has actually been spent to-date? And what the plan is kind of going forward in 2020 onward if they're going to reset the plan, or if it goes away if you could talk about that a little I'd appreciate it. Thank you.
Yes. I don't have the particular numbers of what's been spent to-day. If it's like here in the U.S. it gets spent evenly over the period of time that it's been allocated. And as I also said the current funding we would expect that activity to trickle out over 2023 or be completed over 2023 and always those plans are up for renewal and review. And at this stage I wouldn't have any particular guidance on what direction that might head but certainly I know just having been in Poland recently they certainly are in need of continuing programs to build out their infrastructure.
Okay. And then, since it's sort of expiring, do you know if they're going to sort of come back to the table and reconsider that or how that works?
Yes. As I said I think I don't know when the renewal period -- the timing of the renewal period is exactly. But I do know there is a review and renewal period coming up where they'll reassess it and there could be future allocation.
Okay, great. Thank you.
And ladies and gentlemen, at this time, showing no further comments. I'd like to turn the conference call back over to management for any closing remarks.
Thank you, Jamie. Thank you all for joining us on today's conference call. We look forward to speaking with many of you during our Investor visits in the coming weeks. Have a great afternoon.
Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.