COMMERCIAL METALS Co Q4 FY2022 Earnings Call

Hello, and welcome everyone to the Fourth Quarter Fiscal 2022 Earnings Call for Commercial Metals Company. Today’s materials, including the press release and supplemental slides that accompany this call, can be found on CMC’s Investor Relations website. Today’s call is being recorded. After the company's remarks, we will have a question-and-answer session and we will 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 that provide information other than historical information and will include expectations regarding economic conditions, the effects of legislation, U.S. steel import levels, U.S. construction activity, demand for finished steel products, the expected capabilities and benefits of new facilities, the company’s future operations, the timeline for execution of company’s growth plan, the company’s future results of operations, financial measures and capital spending. These and other similar statements are considered forward-looking and may involve certain assumptions and 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 that are subject to certain risks and uncertainties, including those that are described in the risk factors and forward-looking statements sections of the company’s latest filings with the Securities and Exchange Commission, including 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 be correct, and actual results may vary 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, change in 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, supplemental slide presentation, or on the company’s website. 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 will turn the call over to the Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, Ms. Barbara Smith. Please go ahead.

Good morning, everyone, and thank you for joining CMC's fourth quarter earnings conference call. As reported in the press release, it was an outstanding quarter. And I'd like to thank CMC's roughly 12,000 employees for their continued hard work and focused efforts on behalf of our customers and stakeholders. You make these results possible. I would also like to thank our customers for their continued trust and partnership with CMC. I will start today's call with a few highlights on CMC's historic performance in fiscal 2022, then discuss our fourth quarter results before providing an update on the current market environment. Paul Lawrence will cover the quarter's financial information in more detail and I will then conclude with our outlook for the fiscal first quarter, after which we will open the call to questions. Before starting my prepared remarks, I would like to direct listeners to the supplemental slides that accompany this call. The presentation can be found on CMC's Investor Relations website. On behalf of CMC's entire team, I'm pleased to report that fiscal 2022 marked the best financial performance in our company's 107 year history. CMC generated its highest ever full year net earnings as well as EBITDA. At the segment level, both North America and Europe reported record results. This strong performance translated into an annual return on invested capital of 25.5%, up over 10 percentage points from the very healthy level achieved the prior year. During each of the last 14 quarters, a period that includes the global pandemic, widespread supply chain dislocations, labor force challenges and a war in Ukraine, CMC has generated annualized ROIC well above 10%. This indicator alone is a confirmation of the strength of our strategy, the consistency of our execution, which is delivering superior value to our shareholders. Overall, our fiscal 2022 results clearly demonstrate the impact of the thoughtful and decisive strategic actions we've taken over the last several years, as well as our team's ability to execute within the strong market conditions present throughout 2022, not to mention the flexibility in our operating model to respond to unforeseen changes and macro events. Our achievements extend beyond CMC's financial record. During fiscal 2022, we continued to deliver on our strategic growth plan, evolve our capital allocation framework and advance our sustainability efforts. All of the actions taken by CMC this fiscal 2022, I am extremely proud of the way our Polish team responded to the needs of Ukrainian refugees fleeing the war in their home country. We have discussed this before, but it's worth repeating. CMC employees opened their homes to refugees. They volunteered at the border on their own time and they helped transport Ukrainians across the border to safety. CMC's local management opened up company facilities to refugees and provided them with basic necessities. These selfless acts of kindness provided hundreds of people in need of food, shelter, comfort and security speaking to the character of our people and the culture of our company. I will add that our team in Poland did all this while navigating a volatile business environment and avoiding disruptions related to the war, the ongoing European energy crisis and supply chain challenges. On the strategic front, CMC took several actions that we expect will provide significant benefits in the years ahead and form the path of meaningful growth for our company. The acquisition of Tensar Corporation, which we completed in April, provides us with a significant new growth platform and enhances our ability to provide valuable solutions to construction customers across a wide variety of end use applications. Tensar was already on a strong growth trajectory as a leader in innovative geosynthetic and geotechnical construction solutions. In combination with CMC, we expect to accelerate Tensar's growth by leveraging CMC's strong commercial relationships and opening new doors for Tensar to demonstrate the value of their unique construction solutions expertise. Another major strategic growth initiative is CMC's Arizona 2 project, which remains on track for a spring 2023 start up. This new manufacturing site will once again be the first micro mill in the world capable of producing both rebar and merchant bar, while also pioneering the capability of directly connecting to renewable energy sources, while also providing additional production efficiencies. Arizona 2's commissioning looks to be well timed to support the Infrastructure Investment and Jobs Act, which should begin to increase public infrastructure construction activity next year. We intend to focus initially on ramping up rebar production with the commissioning of merchant products to follow soon after. Currently, we expect to produce a mix of approximately two-thirds rebar and one-third merchant bar on a run rate annual basis. But the beauty of Arizona 2 is the flexibility to seamlessly change that mix based on market demand. An important part of building for the future is CMC's intent to construct a fourth micro mill to be located in the Eastern U.S. We view this as a major strategic step towards strengthening our position in this key market, enhancing our ability to optimize production and logistics across our network of mills and improving customer service capabilities. We will work through the final site selection process. While we work through the final site selection process, we remain committed to the project and confident in its financial and strategic merits. We look forward to sharing more details once a site selection is finalized. To give you a sense of the scale of these three strategic initiatives, I just outlined, we expect the combined effect will be to increase CMC through the cycle EBITDA by more than $200 million, not including future commercial synergies related to the Tensar acquisition. During last year's fourth quarter earnings call, we indicated that CMC was evolving its capital allocation framework to enhance distributions to shareholders. The intent was to continue emphasizing value accretive growth while increasing cash returns to shareholders in the form of dividends and share repurchases. In light of the strategic actions just outlined and a 300% increase to cash distributions, we are certainly making good progress on both goals. During the fourth quarter alone, CMC repurchased approximately $106 million of common stock equal to approximately 3 million shares. Our financial strength provides us with the ability to continue executing against our current program and we intend to do so. In addition to share buybacks, we are also utilizing CMC's dividend policy to return more cash to shareholders. This week, our Board of Directors approved a $0.02 increase to CMC's quarterly dividend. This represents a 14% increase to July's level and a 33% increase to the amount paid in July of last year. Before I turn to our fourth quarter results, I would also like to take a moment to emphasize the advancement of CMC's sustainability efforts. Since our inception as a single recycling location over 100 years ago, environmental stewardship has been central to our purpose and culture. We continued that legacy in fiscal 2022 with the launch of our RebarZero line of carbon neutral long steel products. By combining CMC's steel, which already has among the lowest Scope 1 and 2 greenhouse gas emissions in the industry with renewable energy credits and high quality carbon offsets. We are now able to provide customers with solutions that are net zero from the mill gate to the job site. RebarZero neutralizes Scope 1, 2 and 3 emissions at both our mills and fabrication shops and ensures our environmentally focused customers can remain at the leading edge of sustainable construction. Reporting on CMC's sustainability programs and providing meaningful disclosures on a timely basis remains a high priority for our company. To that end, we will be issuing our enhanced annual sustainability report in December. Turning now to our fourth quarter ‘22 performance. CMC generated net earnings of $288.6 million or $2.40 per diluted share on net sales of $2.4 billion. Excluding the impact of non-operational items that Paul will discuss, adjusted earnings were $294.9 million or $2.45 per diluted share. The second best quarterly result in our company's history. CMC generated core EBITDA of $419 million, an increase of 64% from a year ago. With this quarter's strong performance, CMC achieved an annualized return on invested capital of 24%. Our past and current strategic actions have clearly created consistent and substantial value for shareholders and we are poised to continue doing so. I would now like to turn to CMC's market environment starting with North America. We are well aware of the recessionary concerns that are growing in the investment community and being reported in the financial press. And we are monitoring these conditions closely. However, looking at our business, we see no meaningful signs of a slowdown. Demand in the fourth quarter was strong across our product lines in major geographies, with the exception of some inventory destocking that resulted from customers carrying higher inventory than historical norms in order to manage ongoing supply chain constraints. The key indicators that lead rebar consumption by nine to 12 months remain strong. These indicators in both external and internal metrics that have been historically reliable in our indices we often reference in our market commentary. Let me review several of the key external indicators we monitor. The Architectural Billings Index has been in expansionary territory for over a year, signaling future growth in private non-residential spending. Additionally, readings have been consistently positive for each of the project types tracked, commercial and industrial, institutional and residential. Strength in residential is being driven by increased activity in multifamily developments. In August, multifamily housing starts reached the highest monthly level in 37 years. The Dodge Momentum Index, and other measures of non-residential projects entering the planning phase, hit a 14 year high in September. The reading was published just last week and highlighted strong growth in both the commercial and institutional components of the index. Data centers, education, healthcare and recreation were reported as areas of particular strength. CMC's own internal view mirrors the picture provided by these external sources. Our downstream bidding activity remained at historically high levels during the fourth quarter, driven by a broad basket of project types in both the public and private sectors. So to sum up our near term view, while we certainly don't discount the economic concerns making headlines, the best indicators of future construction activity continue to point towards strong go-forward demand. Beyond the near term, we believe there are structural trends underway that will bolster domestic construction activity. The first is a federal infrastructure package signed into law last November. At full run rate this plan is expected to increase federal funding for core rebar consuming projects such as highways, bridges and related structures by 65% compared to the FAST Act that it replaced. We estimate the impact will be roughly 1.5 million tons of incremental annual rebar demand within a domestic market of roughly 9 million tons, representing an approximately 17% increase in consumption. Spending is expected to ramp up over five years and assuming typical time frames for project approval, bidding and awarding we should begin to see the impact on construction activity in calendar 2023. Supporting this view, third-party data that tracks projects in predesign and design phases indicates a large volume of work is now moving through the pipeline. These projects should translate into healthy future flow of CMC bidding bookings to backlog activity in the coming quarters. Another meaningful structural trend is the reshoring of critical industries. We have previously mentioned the massive scale and pace of construction of new semiconductor facilities. Since our last earnings call in June, there have been at least three new major announcements, including a $100 billion multi-phase development in Upstate New York, a $15 billion memory chip plant in Idaho and a $5 billion silicon wafer plant in Texas. CMC is well situated geographically to participate in each of these projects. These recent announcements are in addition to five large projects that are already underway in the U.S. CMC will participate in all of these projects with two each in Arizona and Texas and one in Ohio. These plants are massive consumers of rebar given the precision needed on the work floor, which necessitates rigidity and foundations and building structure. Each plant announced or under construction is planned in multiple phases, meaning that its consumption of rebar will carry well into the future. Semiconductor chip and wafer plants are the highest profile examples of reshoring, but other industries are also experiencing increased activity or project planning, including LNG facilities for the export of natural gas as well as the automotive supply chain with a particular focus on electric vehicles and battery production. The last three years have exposed the vulnerabilities of concentrated global supply chains, structures to operate under stable conditions and cooperative political regimes. Pandemic and geopolitical events have reminded us of the need for a more distributed set of sourcing options, ensuring reliability and flexibility in securing critical materials and equipment. Eventually, we expect reshoring to extend well beyond the areas we just discussed. Turning to merchant bar. Underlying demand conditions in end use OEM markets are generally stable. The industry did experience a short-term destocking during July and August, which can be seen in our reported volume figures. The destocking was triggered by the expectation for the first downward price adjustment for merchant bar in over two years. That looks to have run its course as service centers appear to be purchasing in line with real demand levels. Based on conversations with OEMs and September's service center order rates, we anticipate merchant bar volumes to be strong in the first quarter. As you might expect, market conditions in Europe are more challenging. Overall, construction activity continued to grow on a year-over-year basis during the fourth quarter. However, residential activity, which has been strong for more than a year began to show signs of slowing during the quarter due to the impact of rising mortgage interest rates. In addition, as a result of the ongoing energy crisis, industrial activity in Central Europe is now contracting. This has impacted demand for merchant bar and some wire rod products. A turnaround in this activity likely depends on the success of the European Union's efforts to lower energy prices from their current historically high levels. General destocking among end users and intermediaries negatively impacted volumes for most products during the fourth quarter. This reflected the unwinding of the panic buying that took place in March and April and a portion in May following the outbreak of the war in Ukraine, as well as the uncertainty surrounding newly announced trade sanctions. Both the destocking was reflected in CMC shipments in the early part of the fourth quarter. Encouragingly, volumes rebounded nicely and we anticipate that this improved pace will carry into our first quarter. As illustrated on Slide 9 in the supplemental presentation, the energy crisis combined with trade sanctions has impacted historical trade flows in the region, which has benefited Poland on a relative basis. Poland's net rebar import position has declined significantly compared to a year ago, looking at trade flows with countries both inside and outside the European Union. Poland's trade with EU countries has benefited from a relatively advantageous energy cost position. Whereas the average spot price for electricity was up over 280% on a year-over-year basis across Germany, France and Italy, it was up a more modest 98% in Poland. With regards to rebar trade within countries outside the EU, little foreign material has entered the Polish market to offset the loss of Russian and Belarusian rebar. Imports have increased significantly into the broader EU but this material has gone to countries that are more logistically accessible and are experiencing higher energy costs. One last note on Europe. The tendency might be to view our fourth quarter performance as a large reduction from the historical heights of the third quarter. The third quarter was extraordinarily unusual and unlikely to be repeated. From a humanitarian perspective, I certainly hope it is never repeated. Looking at the fourth quarter in a broader historical context, however, reveals it was excellent results with adjusted EBITDA at 3 times the average rate of the past 10 fiscal years. This becomes even more impressive when you consider the difficulties being faced across the EU steel industry. Such a strong financial performance in an uncertain environment is one of the many reasons we are confident in CMC Europe's competitive position. Finally, as stated in our press release, our Board of Directors declared a quarterly cash dividend of $0.16 per share of CMC common stock for stockholders of record on October 27, 2022. The dividend will be paid on November 10, 2022. This represents CMC's 232nd consecutive quarterly dividend with an amount paid per share increasing 14% from quarter three of fiscal 2022 and represents, as I said earlier, a meaningful increase in our return of capital to shareholders. With that overview, I will now turn the discussion over to Paul Lawrence, Senior Vice President and Chief Financial Officer to provide some more comments on the results for the quarter.

Thank you, Barbara, and good morning to everyone on the call today. As Barbara noted, we reported fiscal fourth quarter 2022 net earnings of $288.6 million or $2.40 per diluted share compared to prior year levels of $152.3 million and $1.24 respectively. Results this quarter include a net after-tax charge of $6.3 million, primarily related to CMC's acquisition of Tensar, which included acquisition expenses and purchase accounting adjustments for inventory write-ups. We also recorded a small asset impairment charge in North America. Excluding these items, adjusted earnings were $294.9 million or $2.45 per diluted share. Core EBITDA for the fourth quarter of 2022 was $419 million, a significant increase from the $255.9 million from the same period last year. Our North America segment drove the substantial year-over-year earnings growth, while Europe remained steady. Core EBITDA per ton of finished steel was $269 compared to $155 a year ago. In the fourth quarter of fiscal 2022, CMC's North American segment achieved adjusted EBITDA of $370.5 million, equating to $327 per ton of finished steel shipped. This represents a 75% increase year-over-year, driven by significantly improved margins on steel and downstream products over their underlying scrap costs. Conversely, higher controllable costs on a per ton basis were driven by increases in unit pricing for alloys, energy, and freight. Steel product selling prices from our mills rose by $204 per ton year-over-year, remaining flat compared to the prior quarter. The margin over scrap for steel products increased by $251 per ton compared to a year ago. In comparison to the third quarter, our metal margin saw a $79 per ton increase in the fourth quarter due to reduced scrap costs; however, this benefit wasn't fully realized in the quarter as we were still selling material produced with higher scrap costs from the previous quarter. The average selling price of downstream products rose by $334 per ton from the previous year, reaching a record $1,348. The spread of our downstream average selling price above our cost of scrap at the mill also reached a new record of $876 per ton, which measures the total margin available to CMC through our integrated production network. This trend is expected to continue into fiscal 2023 as our backlog continues to reprice higher. Shipments of finished products in the fourth quarter declined modestly from a year ago, following a typical seasonal pattern compared to the third quarter. Market demand for our mill products remained strong, but shipments were affected in the quarter by destocking in the merchant bar supply chain, which now seems to have stabilized. Additionally, construction progress in certain regions was slower than usual due to limited labor and material supplies, a situation we anticipate will improve as we move into the winter months. CMC's downstream shipments increased by approximately 4% from the previous year, driven by growth in our construction backlog, which offset the earlier mentioned slower job site performance. Our Europe segment generated adjusted EBITDA of $64.1 million for the fourth quarter of 2022, down from $67.7 million in the prior-year quarter. Margins over scrap increased by $138 per ton year-over-year, reaching $453 per ton as a result of a $125 per ton rise in average selling price and a $12 per ton reduction in scrap costs. This margin benefit was somewhat offset by higher energy and alloy costs as well as the impact of selling higher-cost inventory in a declining price market, further complicated by the weakening Polish Zloty against the U.S. dollar. CMC's energy hedge position once again delivered substantial benefits, as actual costs were significantly lower than if we had relied solely on spot purchasing. European volumes decreased by 7% compared to the previous year due to the supply chain destocking described earlier. Demand conditions in Central Europe were mixed; the Polish construction market continued to expand while industrial production faced contraction due to the ongoing energy crisis. We believe CMC is well-positioned for this current period of volatility in Europe, being a low-cost leader with the operational flexibility to adapt to changing market conditions. Tensar generated EBITDA of $10.2 million during the fourth quarter. Excluding a $6.5 million adjustment related to purchase accounting on inventory, EBITDA reached $16.7 million on net sales of $74.1 million, resulting in an EBITDA margin of 22.5%. It is important to note that Tensar's performance will be included within CMC's existing segments, but we intend to provide visibility into its business outcomes and developments. Out of the $16.7 million in EBITDA, excluding purchase accounting adjustments, $13.8 million was attributed to CMC's North American segment, and the remaining $2.9 million was reported in the Europe segment. We currently do not expect any further purchase accounting adjustments related to this acquisition. Looking at the balance sheet, as of August 31, 2022, cash and cash equivalents stood at $672.6 million. In addition, we had around $647 million available under our credit and accounts receivable facilities, bringing our total liquidity to slightly over $1.3 billion. The $330 million of 2023 notes are now classified as current maturities on our balance sheet. These notes do not have early call provisions, and we are evaluating refinancing options that align with our commitment to maintaining a solid balance sheet, financial flexibility, and a strong liquidity position while utilizing cash to reduce CMC's overall gross leverage. During the quarter, we generated $458.6 million in cash from operating activities, which included roughly $90 million released from working capital, mainly due to lower scrap costs. For the year, CMC produced $700 million in cash from operations even as we invested $573.2 million in working capital. Our free cash flow in fiscal 2022 was $250 million, calculated as our $700 million cash from operations minus $450 million in capital expenditures. This does not include the $315 million obtained from asset sales supporting our overall strategic vision. Our leverage metrics look attractive and have improved significantly over the past several fiscal years. Our net debt-to-EBITDA ratio now sits at just 0.5 times even after the acquisition of Tensar. We believe our strong balance sheet and financial strength give us the flexibility to finance strategic organic growth projects and pursue opportunistic M&A while continuing to return cash to shareholders. CMC's effective tax rate in the quarter was 14.8%, influenced by the timing of recognizing research and development as well as foreign tax credits. For fiscal 2023, we currently anticipate our full-year effective tax rate to be between 22% and 25%, with our cash tax rate slightly lower at around 20%. Regarding CMC's fiscal 2023 capital spending outlook, we expect to invest between $450 million and $500 million in total, about a third of which is attributed to Arizona 2. Our announced fourth micro mill project remains in the site selection phase. We assess projects like this based on their through-the-cycle cash flow generation potential. Although the site selection process has taken longer than expected, we remain optimistic about the strategic merits of this project. Lastly, CMC repurchased approximately 3 million shares in the fiscal fourth quarter at an average price of $35.48 per share. Since the launch of the buyback program, transactions have totaled about $161.9 million, leaving $188.1 million remaining under the program. This concludes my remarks, and I'll turn it back to Barbara for comments on our outlook.

Thank you, Paul. We are entering fiscal 2023 in a strong position with the downstream backlog and bidding activity at historically high levels, giving us confidence in the near-term outlook for volumes. Additionally, we look forward to the start-up of our newest micro mill, Arizona 2, in the spring of next calendar year, which will greatly enhance CMC's ability to capitalize on the strength we see in the construction market. We anticipate another strong financial performance in the first fiscal quarter. We expect good demand for our products to continue in North America, while conditions in Europe are more uncertain. However, as I discussed earlier, CMC's operations in Poland are very well positioned to compete given their cost leadership position and operational flexibility. Margins over scrap in both North America and Europe are likely to compress slightly from the fourth quarter levels in order to remain competitive with raw material price changes and increased long steel supply. Once again, I'd like to thank all of the CMC employees for delivering yet another outstanding quarter and year of performance.

Thank you. We will now start our question-and-answer session. Our first question comes from Emily Chieng from Goldman Sachs. Please go ahead, Emily.

Good morning, Barbara and Paul. Thank you for the update this morning. My first question is just around the North American construction markets and what you're seeing here. Could you perhaps provide some color as to how many months your order book length is now sitting at and how we should be triangulating the comment around customer destocking activity starting to ease and the expansion of backlog levels? Is that implication that we should be seeing shipments in the next couple of quarters trend higher?

Our backlog extends well into 2023, putting us in an excellent position with strong confidence about the first quarter of fiscal 2023. When raw material prices change, especially when they decline, customers often reduce their orders temporarily to manage their existing inventory and avoid holding onto expensive stock. We've experienced various supply chain disruptions over the past three years due to the pandemic, macroeconomic factors, and the war in Ukraine. While some supply chain challenges will continue, the initial impact has largely passed, which is another reason customers are adjusting their inventory levels. Early indications this quarter give us confidence that the destocking phase is over, allowing market fundamentals to take effect. We anticipate a solid first quarter ahead. Seasonality will always play a role during the holiday season, but we expect a strong increase in our shipments overall.

Great. I appreciate the color, Barbara. A follow-up question, if I may, just around the controllable costs. And I think you flagged some pressures along the freight, alloying, and energy cost side of the equation there. But perhaps if you could talk to a direction of travel for each of those three components, both in the U.S. and Europe, that would be helpful. Thank you.

Sure. If we look, Emily, at the U.S., I think we had a combination in the energy market of an extremely hot summer as well as the global challenges with natural gas and other energy costs. And so, if we look at our cost profile in the U.S. market, certainly, energy was the leading area of inflation. But also, as we cited increases in consumables and alloys and freight, I think where we're at today is really we can see our go-forward controllable costs being somewhat in line with what we experienced in the fourth quarter with relatively minor puts and takes in the components of the overall cost structure, but see that as being the environment in which we'll operate in 2023. In Europe, it is strictly a story of energy costs. And as we outlined, specifically, I think Barbara mentioned Slide 9 of the supplemental slides, we're fortunate to operate in Poland despite the overall inflationary environment in energy in Europe; Poland is much more advantageous in relation to other countries given its domestic source for much of its energy needs. And so combining the lower cost of energy in Poland with the hedges that we have in place, which are at least a good portion of our hedges are of a long-term nature, position us well to really be competitively in a strong position in relation to competitors for a long time to come. But in Europe, it is principally energy, the same alloy inflation that we're seeing, but it's relatively small in comparison to the energy.

Right. Thanks, Paul.

And our next question is coming from Timna Tanners from Wolfe Research. Please go ahead, Timna.

Good morning. Thanks very much for all the detail. Two things I wanted to explore a bit more with you. If you could characterize more of the import pressure you talked about in both markets. I know in the U.S., definitely a 25% tariff still has a pretty big impact on many countries with Section 232. And it seems that Turkey is pretty hobbled with Europe, also hobbled from energy prices. So I'm just wondering, if you could talk a little bit more about how much pressure you're seeing and if that's pervasive in both markets? Second question is you talked about housing in Europe, but I was wondering if you could talk a little bit about what you're seeing on the housing side in the U.S.?

Yeah. Thank you, Timna. Yeah. I don't think we want to overemphasize import pressure and all that data is very public, as you know. But they're, year-on-year, if you look at '21 versus '22, there has been more foreign product available here in the U.S. market, and a good bit of that coming on the wire rod side. And there were a number of production issues that various competitors over the past year that made it necessary for some customers to avail themselves of those imports. And so, as you know, you've been around this industry for a long time. We deal with that on an ongoing basis. And as you point out, we're still in a really strong trade environment that deters the illegal and dumped sources of material coming from foreign, and you rightly point out the struggles that are going on in Turkey, which is the primary offender as it relates to our products. So we monitor it all the time, and we respond accordingly. But again, we think we're still going to enjoy a good trade environment. In terms of housing in the U.S., it's an interesting one because housing has been incredibly strong for a long period of time here. But now you have a rising interest rate environment and interest rates that folks haven't seen in quite a period of time, unlike myself, where my first mortgage rate was close to 12%. At any rate, I think we're seeing a shift potentially from single-family to multifamily and that is evident in some of the external data that we track. There is still the need for housing formation. And so if interest rates are a deterrent to single-family, then you tend to see an increase in multifamily, which is actually a higher intensity of rebar and structural in the multifamily. So we certainly think that overall, that is not going to have a meaningful impact on our business because, as I pointed out, we still have the infrastructure that is not even really kicking in at this point.

Okay. Great. And if I could sneak in one more, just to ask about the European first quarter, if you're expecting to see that $15 million carbon credit you've seen those last several years again?

We are expecting the amount to be determined and fully approved by the EU next week. All indications are that the amount will be similar in Zloty to what we've received over the last couple of years. While the translation back to dollars is reduced, we anticipate the final approval of that program to happen next week.

Okay. Super. Thanks again.

Thanks, Timna.

And our next question is coming from Seth Rosenfeld from PNB Paribas. Please go ahead, Seth.

Good morning. Thanks for taking our questions today. Another question, please, on the European market. In your prepared remarks, you commented on destocking early in Q4, but perhaps a reversal of the amortization of the destocking pressure late in the quarter. Can you provide a bit more color on the scale of that downward pressure? And I guess to the degree of confidence that might have come to an end, your optimism would perhaps stand out with some other channel checks in Europe that are still seeing additional destocking pressure looking into the fourth calendar quarter. I'll stop there, please.

You're raising a lot of good points, Seth. I'm not sure I've captured everything, but I'll start, and Paul can add to my response if needed. We believe the destocking phase is over. A lot depends on the direction of the European economy, and everyone has their own opinions on that. We want to highlight that we maintain a strong position compared to other options and we're very dependable. Our cost and operational flexibility is significant, but we believe the destocking phase is mostly behind us.

I want to point out that there is a significant difference between the long product area and the flat rolled space. In flat rolled, we are still seeing a destocking trend, but on the long steel side, which is our area of focus, the market presents a different scenario. There is greater strength, and as Barbara mentioned, we observed a substantial rebound in volumes.

Thank you very much. And a second question, please, in Europe. Earlier in the year, your team spoke publicly about some interest in perhaps expanding your capacity within Europe, either organically or inorganically. Obviously, macro conditions have changed a great deal since then. I'd love to hear your thoughts on the attractiveness of investing in Europe in the current environment. Thank you.

Yeah, Seth. Thank you. We're always evaluating organic, inorganic, every opportunity to look at growth. And I would just say that we take a very long-term view on growth, and we also have a very disciplined process for evaluating any of those types of things. And we never use peak of cycle kinds of market conditions in which to evaluate projects like that. And so there's nothing specific that we have to talk about at this current moment, but we're always evaluating things with a very, very long-term view.

Okay. Thank you.

Thank you.

Our next question is from Phil Gibbs from KeyBanc Capital Markets. Phil, please proceed.

Hey. Good morning.

Hey, Phil.

Good morning, Phil.

First question is just on fabrication pricing. Nice step-up this quarter. I know the backlog pricing continued to move up over the last several months as rebar prices escalated and a lot of that tends to lag as we know. So how many quarters do we have looking ahead where pricing could actually continue to move up, or have we leveled out here?

Yeah, Phil. I'll start, Barbara can add. If we look at our current activity that Barbara alluded to, it is strong in the fourth quarter. And really, we continue to see good levels on the downstream work. And as a result, really, the backlog is made up of what's in there and new stuff. So, assuming no significant degradation in the pricing of new work going in, we would expect over the next two quarters or so for the backlog pricing to continue to catch up with the current price levels.

Okay. That's helpful. And I know you gave some color on CapEx for this year, $475 million or so at the midpoint. Is there anything baked in there for the new potential mill in the Northeast and whether it would be permitting or due diligence or is that going to be something that phases into the out years?

Yes, Phil. There will be some amount included. I don't have the exact figure readily available, but as you know, the first step is to go through the permitting process, which can take a while. We will also start the engineering phase and other activities. Most of it will likely occur in the following fiscal year.

Okay. And then my last question is just on net working capital. Assuming that you have scrap stay around current levels, plus or minus, and you've got, let's just say, broader pricing downstream and rebar stay around current levels, what do you expect net working capital to be a use or a source in fiscal '23? Thank you.

Yeah, Phil. If we hold all those things relatively constant to where they are today, we would really see working capital being relatively flat from where we are for the year. We'll have our seasonality throughout the year. But for the full year view, if we assume things are going to be pretty consistent, the level of working capital will also be consistent.

Thank you.

Thanks, Phil.

At this time, there appears to be no further questions. Ms. Smith, I will now turn the call back over to you.

Thank you. Thank you, everyone for joining us on today's conference call. We look forward to speaking with many of you during our investor calls in the coming days and weeks. Have a great rest of your day. Thank you.

Thank you for joining us today. This concludes today's Commercial Metals Company conference call. You may now disconnect.