COMMERCIAL METALS Co Q2 FY2023 Earnings Call

Hello and welcome everyone to the Second Quarter Fiscal 2023 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. And after the company's prepared remarks, we will have a question-and-answer session and we'll have 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, effects of legislation, U.S. steel import levels, U.S. construction activity, demand for finished steel products, the expected capabilities, benefits and timeline for construction of new facilities, the company's future operations, the timeline for execution of the 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, but are subject to certain risks and uncertainties, including those that are described in the Risk Factors and forward-looking statements section of the company's latest filings with the Securities and Exchange Commission, including the company's latest annual report on Form 10-K. 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, changes 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.

Good morning, everyone, and thank you for joining CMC's second quarter earnings conference call. Before moving to our quarterly update, I would like to congratulate our current Director, Peter Matt, who has accepted the role of President of Commercial Metals Company. Peter has been an invaluable and insightful member of CMC's Board since June 2020. He is a seasoned executive well known in this industry with a strong reputation among many of you in the investment community who have interacted with him over the past six years, while he served as Chief Financial Officer of Constellium, the European based aluminum producer. I have every confidence Peter will make meaningful contributions to CMC's continued growth and shareholder value. I would also like to welcome our new CMC employees at Tendon Systems and Roane Metals Group. You have joined at an exciting time for our company and I'm confident that your contributions together with those of your talented colleagues will make CMC's future even brighter. Both of these tuck-in acquisitions align with our vertical integration strategy and our construction solutions capabilities. As we reported in our press release issued this morning, fiscal 2023's second quarter marked another period of historically strong performance. I'd like to thank CMC's approximately 12,500 employees for their commitment to safety and excellence in everything we set out to accomplish. Before diving into more details on the quarter, 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. As I noted, CMC's second quarter fiscal 2023 earnings were among the strongest in our company's 108-year history. We recorded net earnings of $179.8 million or $1.51 per diluted share on net sales of $2 billion. Excluding the impact of non-operational items, which Paul will discuss in more detail, adjusted earnings were $171.3 million or $1.44 per diluted share. CMC generated core EBITDA for the quarter of $302.8 million, a modest decrease of $20.3 million from a year ago, producing an annualized return on invested capital of 14%. I would now like to discuss current market conditions in both North America and Europe and provide our view on several powerful emerging structural trends that we believe will provide a positive backdrop for demand in our future order books. Turning first to North America, we expect a strong spring and summer construction season. This view is supported by both CMC's internal indicators and the key external measures we track. The value in our downstream backlog ended the second quarter at a record level for this time of year and was up roughly 20% from a year ago. Volume in our backlog also increased on a year-over-year basis. Conversations with customers indicate that other fabricators are similarly situated with healthy backlogs they expect to ship over the coming construction season. CMC's downstream bidding activity, which provides our best view of developments within the future project pipeline also remains robust, increasing more than 30% on a year-over-year basis during the quarter. Projects in the pipeline continue to represent a healthy blend of both private and public work. And activity is good across our geographies. Our near-term view is echoed by external indicators that have been historically reliable. First is the Dodge Momentum Index, which tracks projects entering the planning phase and generally leads on-the-ground activity by nine to 12 months. The February reading increased by 43% from a year ago, reaching its third highest level on record. Both the commercial and institutional components were likewise strong, growing by 55% and 22%, respectively. The American Road and Transportation Builders Association last month released its tally of new highway contract awards, which increased 24% in calendar 2022. The total value of all state and local transportation construction awards increased by 25%, the largest annual growth in the 25 years that the association has been tracking this data. Projects such as these tend to be multi-year in nature, meaning that awards in 2022 should translate into construction activity in 2023, 2024, and beyond. So to sum up, we continue to monitor a range of indicators such as inflation, interest rates, and unemployment, which are fueling recessionary concerns. However, on balance, we continue to see good current activity and positive future signals in our key market segments. Taking a longer view, for several quarters now, I have discussed powerful structural trends that we see developing in our nation's economy generally and in CMC's construction markets more specifically. Slide 7 of the supplemental slide deck illustrates the magnitude of the programs and projects that are intended to revitalize America's transportation infrastructure, harden U.S. manufacturing supply chains, redirect our nation's energy trade, and make our electrical grid greener. Each of these areas involve significant multi-year investment that we expect will drive significant demand for our broad range of construction solutions products and services. Looking first at Infrastructure. The Infrastructure Investment and Jobs Act signed into law in late 2021 substantially increased the amount of federal funding available to states and local governments to support highway construction. At the average run rate over the five-year program, we estimate that federal funding will increase by 65% compared to the FAST Act and create 1.5 million tons of incremental rebar demand. There are signs this work is moving through the pipeline and should show up in bid markets during calendar 2023. One such sign is the Dodge Analytics Infrastructure Design-Phase Index, which increased by 400% on a year-over-year basis in the three months ended in February. Beyond the federal level, state transportation budgets are well funded and growing. CMC's three largest states by steel volumes have drafted or approved multi-year highway construction budgets that on a combined basis represent an increase of 24% compared to the average levels of the past year. The combination of increased federal funding and rising state budgets should support a strong highway market for several years to come. Transportation infrastructure is also the most rebar intensive segment of the construction market. As an example, a dollar invested in highway work consumed five to six times more rebar than traditional residential or non-residential structures. We also continue to see positive developments in the area of supply chain hardening and reshoring of critical manufacturing capability. Thus last month, another semiconductor plant was announced in Utah, bringing the total number of planned facilities to 12 and planned investment across the industry to $287 billion. All of these facilities include multiple phases, are massive in size and consume large amounts of rebar. They also require extreme structural rigidity and extensive site logistics development, which makes them attractive targets for our Tensar product line. The current investment phase will take several years to complete, providing a prolonged source of demand for CMC's products and services. Significant investments are also planned for electric vehicle and battery manufacturing, with at least 20 facilities in some phase of planning or construction at a capital cost exceeding $60 billion. Semiconductor and electric vehicle plants are the highest profile examples of supply chain hardening, but other industries are also experiencing increased activity or project planning. These include LNG facilities for the export of natural gas, as well as chemical and plastic plants. The last three years have exposed the vulnerabilities of a concentrated global supply chain. The pandemic and geopolitical turmoil have reminded us of the need for a more distributed set of sourcing options, ensuring reliability and flexibility in securing critical materials and equipment. The leadership of America's manufacturing companies agree. The survey conducted by Deloitte in late 2022 indicated that 68% expect to reshore a meaningful portion of their operations within the next several years. Turning now to Europe. Current market conditions there are more difficult to assess and the near-term outlook is less certain. Despite that, overall construction activity continued to grow on a year-over-year basis during the second quarter. However, residential activity which has been strong for more than a year is now showing signs of a slowdown due to the impact of rising mortgage interest rates as new mortgage origination contracted sharply on a year-over-year basis. To counteract this development, the government of Poland has advanced a plan to support first-time homebuyers by offsetting much of the increased mortgage interest costs. The plan as drafted is expected to provide significant support to the residential construction market and has reached the final stages of approval. As of today, the legislation is not yet law, but the outlook is promising. Industrial activity in Central Europe continues to be impacted by the ongoing energy concerns and weak economic sentiment. However, energy costs across the continent have moderated considerably from the peak levels, which should lead to a rebound in manufacturing activity. Our team in Poland has been able to maintain strong volumes despite this challenging backdrop by leveraging their operational flexibility. In fact, our shipments of finished goods during the second quarter were 33% above the long-term average and down only 3% from a year ago. Looking ahead, we believe that lower European energy prices and the potential stimulus of Polish home buying will provide support to our key end markets. We believe our strong competitive position, encompassing both costs and operational flexibility will allow us to maintain volumes above historical levels. Additionally, our natural gas contract pricing resets in early April, which should meaningfully benefit our cost of production. While on the topic of Europe, I would like to provide a few comments on the post-earthquake situation in Turkey. Thousands of lives lost and the millions of people displaced by the earthquake that occurred in early February is a great humanitarian crisis. Turkey's government is moving quickly to implement a large reconstruction effort, which will likely have impacts on global steel markets. Turkey is both the world's largest importer of scrap and exporter of rebar and plays a significant role in U.S. and European markets. The current reconstruction plan would require approximately 5.5 million to 6 million short tons of steel. Depending on the time period over which this is consumed, the rebuilding plan could have a material effect on scrap or rebar pricing or both. I would now like to turn to the commissioning efforts of our Arizona 2 project. The project is on track for a start-up later this spring. We will begin cold commissioning both the melt shop and rolling mill shortly before moving into the hot commissioning phase. We expect to begin producing rebar for sale during our fourth fiscal quarter. Once AZ2 is fully operational, CMC will have one of the most advanced steelmaking complexes anywhere in the world. Not only will we achieve another industry first by producing merchant bar on a micro mill, but we will also have co-located two of our micro-mills in a unique configuration. We expect this arrangement of the two steel plants will provide meaningful operational efficiencies, including shared staff support, production optimization, improved production scheduling, and shared site infrastructure. We are excited to begin production at this world-class mill, which has been three years in the making. I would like to recognize CMC's highly skilled team of engineers, project managers and support staff for making it possible through your tireless efforts. Progress at Steel West Virginia, our latest major growth investment remains on track. We have applied for our air permit and expect to receive approval in the coming months. This timeline for permit approval has been made possible due to the support and cooperation of West Virginia's regulatory authorities. Once approval is received, we will move forward with site preparation later this year. With that as an overview, I'll now turn the discussion 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 second quarter 2023 net earnings of $179.8 million or $1.51 per diluted share compared to prior year levels of $383.3 million and $3.12, respectively. Results this quarter include a net after-tax benefit of $8.5 million. This benefit included the settlement of an incentive related to previous capital investment at CMC Steel Oklahoma micro mill, partially offset by costs associated with ongoing commissioning efforts at AZ2. Excluding the impact of the second quarter items, adjusted earnings were $171.3 million or $1.44 per diluted share in comparison to adjusted earnings of $187.4 million or $1.53 per diluted share during the prior year period. Core EBITDA was $302.8 million for the second quarter of 2023, representing a modest decline from the $323.1 million generated during the prior year period. Slide 12 of the supplemental presentation illustrates the year-to-year changes in CMC's quarterly results. Our North American segment achieved earnings growth, while Europe experienced a pullback. Consolidated core EBITDA per ton of finished steel was up $215 per ton remaining well above the historical average and compared to $226 per ton a year ago. CMC's North American segment generated adjusted EBITDA of $299.3 million for the quarter equal to $308 per ton of finished steel shipped. Segment adjusted EBITDA improved 14% on a year-over-year basis excluding the large gain related to a land sale that was recognized in last year's second quarter. The result was driven by higher margins on downstream and steel products over their underlying scrap costs. Downstream products were a particularly impactful contributor on a year-over-year basis as average selling prices improved by approximately $250 per ton compared to the second quarter of fiscal 2022. Though higher than a year ago, second quarter results were negatively impacted by a handful of factors that are worth calling out. First, we encountered several instances of disruptive weather within our core geographies. Freezing rain in Texas and Oklahoma, as well as extensive flooding in California have constrained second quarter volumes by a low to mid-single digit percentage when compared to a year-over-year level. Secondly, as we previously discussed we performed a major equipment upgrade at our largest U.S. steel mill during January and February, which had the effect of increasing controllable costs by roughly $15 million during the quarter. As planned, we pre-staged inventory to ensure our ability to meet customer expectations during this down period. Both capital and operating costs were in line with expectations. Finally, selling prices for steel products from our mills decreased by $56 per ton on a year-over-year basis and $35 per ton from the prior quarter. Margin over scrap on steel products increased by $34 per ton from a year ago. In comparison to our first quarter, metal margins decreased by $56 per ton. As you are aware, in early March, there have been several price increase announcements of $50 per ton across most long steel products. We are hopeful that these pricing adjustments will stabilize margins at historically strong levels heading into our busiest season. Turning to Slide 14 of the supplemental deck. Our Europe segment generated adjusted EBITDA of $12.9 million for the second quarter of 2023 compared to $81.1 million in the prior year period. The decline was primarily driven by lower margin over scrap, higher costs for energy, and a modest reduction in shipment volume. Our energy procurement remains competitively positioned relative to the broader European industry. However, higher contractual pricing for natural gas that has been in effect since October has increased our cost of production. As Barbara mentioned, pricing will again reset in April, which should lower our costs and benefit profitability. Europe volume decreased 3% compared to the prior year with higher rebar shipments offsetting much of the weakness in industrial steel, such as merchant bar and some wire rod grades. CMC's volume significantly outperformed the broader Polish and European steel sector as we were once again able to leverage our operational flexibility to address the best opportunities in the marketplace. Demand conditions within Central Europe are challenging. The Polish construction market continued to grow by low single digit percentages, while industrial production has contracted for nearly three quarters. We believe CMC is well positioned for this current period of volatility in Europe. We are a low-cost industry leader with operational flexibility to adjust to and serve changing market conditions. Tensar generated EBITDA of $8.9 million during the second quarter, which is generally its seasonally slowest period. EBITDA performance yielded a margin of 17.3%. Margins were temporarily impacted by several weather-related projects, as well as production issues in our Georgia facility. As a reminder, Tensar's performance is included within CMC's existing segments. Of the $8.9 million in EBITDA, $7.4 million was included within CMC's North American segment, while the remaining $1.5 million was reported within the Europe segment. Turning to the balance sheet, liquidity and capital allocation. As of February 28, cash and cash equivalents totaled $604 million. In addition to cash and cash equivalents, we had approximately $895 million in availability under our credit term loan and accounts receivable facilities, bringing total liquidity to approximately $1.5 billion. This liquidity provides us flexibility to address our upcoming maturity of our 2023 bonds. During the quarter, we generated $186.5 million of cash from operating activities, with working capital being a negative factor. Our free cash amounted to $30.3 million defined as our cash from operations less $156 million of capital expenditures. Our leverage metrics remain attractive and have improved significantly over the last several fiscal years. As can be seen on Slide 18, our net debt to EBITDA ratio now sits at 0.5 times. We believe our robust balance sheet and overall financial strength provide us the flexibility to finance our strategic growth projects and pursue opportunistic M&A, while continuing to return cash to shareholders. CMC's effective tax rate was 23.6% in the second quarter. Looking ahead to fiscal 2023, we currently expect the full-year effective tax rate to be between 23% and 25%. Turning to CMC's fiscal 2023 capital spend outlook, we expect to invest between $550 million and $600 million in total. Outside of normal sustaining investments, expenditures in fiscal 2023 are directed towards finalizing the construction in Arizona 2, funding major upgrade projects at two U.S. steel mills as well as initial investments related to Steel West Virginia. CMC continues to deploy capital to support our growth plan and reinforce our metallic sourcing strategy. In early March, we acquired Roane Metals Group in Tennessee. The transaction is intended to enhance the security of competitively priced inputs for our steelmaking operations in the state. We made two acquisitions during the first quarter with similar strategic intent. And earlier this week, CMC announced the acquisition of Tendon Systems, a leading producer of post-tensioning solutions in the Southeast United States. The transaction extends our existing capabilities in this product space and enhances the breadth of offering we can provide to the market. Lastly, CMC purchased 330,000 shares during the fiscal second quarter at an average price of $52.04 per share. Transactions since the initiation of the buyback through Q2 have amounted to approximately $228 million leaving $122 million remaining under the authorized program. This concludes my remarks and I'll turn it back to Barbara for comments on the outlook.

Thank you, Paul. For the reasons I've mentioned, we are confident in our ability to deliver strong financial performance in the second half of fiscal 2023 and expect to generate sequential improvement in core EBITDA during the third quarter. The signals we watch most closely, including our downstream backlog, bidding activity, customer conversations, and external indicators, all point to a generally positive outlook and robust upcoming construction season in North America. Due to normal seasonality, finished steel product shipments are expected to increase from second quarter levels in both North America and Europe with the added benefit in North America of recovering some weather delayed volume. The recent price increases across our long steel products in North America are expected to stabilize metal margins. However, costs in North America will also be impacted by a planned upgrade similar in scale to the outage taken during the second quarter. The outlook for metal margin in Europe is a bit more uncertain. However, our cost of production there should decrease from the second quarter as the price of natural gas purchases is reduced. We are excited to soon begin production at Arizona 2 and look forward to providing you with an update during our next earnings call along with an update on our fourth micro mill project in West Virginia. This world-class operation is ramping up at just the right time as CMC will be able to better capitalize on the multi-year strength we see in our construction markets. Once again, I'd like to thank our customers for their trust and confidence in CMC, as well as all of our CMC employees for delivering yet another quarter of outstanding performance.

At this time, we will open the call to questions. Our first question will come from Emily Chieng with Goldman Sachs. Please go ahead.

Good morning, Barbara and Paul, and thank you for the update today. My first question is just around some of the challenges we've seen in the banking system over the last couple of weeks. Are you seeing any shifts around bidding activity levels or any impacts there within segments around the non-residential construction end markets, which could be more or less sensitive to some of the issues that we're seeing? Or perhaps some of the impacts from this volatility more broad-based in nature?

Thank you, Emily. I'll answer. And if Paul has any other perspectives he can certainly chime in. At this time, we are not seeing any impact from what's going on in the banking, which, I know is top of mind for everyone, myself included. But at this time, we're really not seeing any impact to that, but we'll certainly monitor it carefully as time goes forward.

Okay, understood. And then maybe just switching a little bit, but taking a look at the downstream backlog that you've talked about there. You've mentioned it's up 20% on a year-over-year basis in terms of value. To clarify, that’s a combination of both price and volume in the backlog, right? And if I could take that one step further, how do you think about what that backlog extends into in terms of timeline through the rest of the year?

Yes. Thanks, Emily. You're correct that the backlog is up both on a volume and a value basis. And as you can appreciate, the backlog is a wide range of projects with a variety of durations, but it is one of the strongest backlogs to carry us through the construction season. So that's why we're so encouraged by what we see in the coming quarters. And then if you add to that, the level of bidding activity, which also remains strong, as well as those structural long-term factors in the coming impact of the new Infrastructure and Jobs Act. We remain very encouraged and bullish in both medium and long term.

Great. Thank you.

And our next question will come from Timna Tanners with Wolfe. Please go ahead.

Yes, good morning. Thank you for the updates. I would like to ask a broad question and then get into some details. To start, I appreciate the insights regarding Turkey and the market context. Are you noticing any decrease in Turkey's exports or a reduction in imports to the U.S. market? Additionally, could you provide any thoughts on the anticipated effects of the Buy America policy and its implications for imports into the country?

Thank you, Timna. We have been conducting thorough analysis regarding Turkey, and we are including this information in our Investor Relations materials available on our website. At this stage, it is clear that there will be impacts, both immediate and long-term, but it's still too early to determine how these will unfold. We do know that the steel-producing region has been significantly affected by the earthquake, and the industry is struggling to restart operations due to the displacement of many workers. In the long term, there's going to be substantial rebuilding activity that will require increased demand for rebar, which is not typically seen in that market. We have dealt with similar disaster scenarios in the U.S., like hurricanes, and the rebuilding process generally takes time. While the government is likely to act quickly to recover from this tragedy, practically, it will take a while to clear debris and rebuild. At the moment, I cannot provide specific evidence of major impacts, but we are monitoring several factors, such as their scrap procurement and how recovery operations will impact trade flows. In the medium to long term, I believe much of that material will remain domestic, which could tighten markets in Europe and the U.S. Additionally, the Buy America policy will continue to support infrastructure spending in the U.S., which is another reason for our optimism in this market. The ongoing investments related to the previous infrastructure bill are finally coming to fruition and include the Buy America component, which will also be beneficial for future spending and our business.

Okay, great. That's helpful. Yes, the Turkey cadences seemed really quick. And so I was just wondering if you were seeing it or maybe the reports we're hearing were a little early. So thank you for that. Just drilling down a little bit, I wanted to understand Tensar a little bit, because I know that last call you said that there were some unusual reasons for $11.4 million of EBITDA, the production challenges. And in this quarter, you are reporting, just about $8 million $9 million overall and $7.5 million in the U.S. Like is that just seasonal or is there some continuing production challenge? And then if you could also comment on the higher CapEx number.

Thank you, Timna. I’ll address Tensar and then Paul can discuss CapEx. We are currently dealing with two separate issues. A few months ago, we experienced a press failure at our Georgia facility, and due to supply chain challenges, we had to wait for a replacement press, which was installed last quarter. We have been working on getting it up and running. The facility has mostly recovered from that incident, but it did affect previous quarters and this reporting period. Regarding volume and activity at Tensar, there is a noticeable seasonal effect this quarter, even more so than with CMC. The seasonal downturn has been more pronounced than our traditional CMC business, and this quarter followed that trend. Weather has impacted us and Tensar, which typically experiences a more significant seasonal effect. Looking at other indicators, Tensar's volume this year compared to last shows the expected growth. The innovative product is making progress in the market because of its unique features and the construction issues it addresses, which is promising. Additionally, they are consistently innovating and have recently launched a new product that is gaining strong acceptance from customers, which is another positive indicator. New products usually come with enhanced features, leading to better margins, so we are very encouraged. The team anticipates an exciting construction season in the coming quarters.

Timna, with respect to your question on the increased capital spend, it's really twofold. Significantly, we are anticipating increased spend in this current year on Steel West Virginia, the announced facility. As Barbara outlined on her comments, we're expecting to receive the permit in the coming months and that will allow us to accelerate some of our site preparation and earthmoving costs. We're also taking the precautionary steps of pre-ordering a lot of equipment that has had very long lead times in today's environment. So we can ensure the project is maintained. So those require some down payments to be placed, which has increased our spend. And naturally, we are seeing some inflation in some of our CapEx projects that we have and that's a portion of it as well.

Great. Thanks for all the information.

And our next question will come from Tristan Gresser with BNP Paribas. Please go ahead.

Yes. Hi. Thank you for taking my questions. The first one, thank you for providing the steel intensity figures for residential infrastructure. When you look at the spending in billions for on the reshoring side that you also laid out in terms of the steel intensity there for those facility, I was wondering if you had a number in mind and maybe if you can share, is there any kind of difference by type of facility also in terms of the timeline, when you start building and you complete those type if facility, any kind of information that can help us out putting the number behind this kind of a higher rate reshoring trend that will help you out as well.

Thank you for the question, Tristan. I appreciate it. I want to highlight a few points related to the examples we've discussed. Given our involvement in various chip facilities, we have a strong grasp of the steel intensity associated with these types of projects, which typically represent multibillion dollar investments. The steel intensity is particularly high in chip facilities due to the structural integrity required. These projects are usually built in phases, starting with Phase 1 and then advancing to Phase 2, and so forth. With our extensive capabilities in terms of products, scale, and geographical reach, we are well-equipped to support the customer needs for these large, steel-intensive projects. Additionally, in the context of LNG facilities, the steel content can vary based on the project's size and scope. From our historical experience, we understand the steel requirements for these projects, which may include various types of structural steel such as cryo bar, high-strength steel, and traditional black bar. CMC is among the few suppliers able to provide this full range of products to our customers. While I cannot provide a specific tonnage figure per project due to the variability among them, I want to emphasize that there is substantial activity taking place with numerous projects that have multi-year timelines and are funded prior to initiation. Corporations involved possess strong balance sheets, making them less susceptible to current banking challenges in the marketplace. We believe this will significantly bolster business activity levels moving forward, contrasting with previous cycles or past periods.

That's really helpful. If I could just follow up, is it reasonable to assume that we're closer to the steel intensity you provided for infrastructure rather than non-residential?

I'm sorry, Tristan. Could you repeat that? I was having some issues hearing on my end.

Sorry. When you look at the steel intensity of those planned semiconductor investments over there. I know you prefer to share a number, but just wondering if in terms of steel intensity for rebar, is it closer to the infrastructure figure that you provided or closer to the non-residential figure you provided?

Yes, Tristan, we would say that it's likely somewhere in the middle. It's not going to be quite as intensive as the infrastructure, but I think as Barbara was alluding to. It is more intensive than the traditional non-res component.

Okay. That's really helpful.

Yes. Tristan, before you ask a follow-up, I want to mention that these projects are excellent opportunities for the application of our products made by Tensar. This is another positive sign for growth in that product line as well.

Got it. And maybe just a second question, a general question, a bit more bigger picture. You kind of have a unique position by being involved in the construction market in the U.S. but also in Europe. And we've seen the U.S. really putting a lot of policies in place to support non-residential activity. And now we're starting to see a little bit of a response on the European side as well with pieces of legislation that came out over the past two weeks. Having this footprint in both regions, are you able to convert the level of political support in both of those regions? And how do you compare that?

Yes, that's an excellent observation. As I mentioned in my opening remarks, we are very hopeful about the developments in Poland aimed at helping the residential market, particularly the interest rate assistance for first-time homebuyers. I see this as a positive indication. Additionally, I am glad to see other parts of Europe addressing this issue and looking for ways to provide support. The EU is somewhat lagging behind the U.S.; for instance, the Chips Act was approved last year, and we are beginning to see positive effects from that, including significant opportunities in wind and solar energy, which align well with our focus. In Europe, there has been considerable discussion about governmental and legislative backing for the energy transition, which will necessitate substantial investment in current facilities, new technologies, and green energy. I believe this support is on the horizon despite some unexpected challenges in Europe following last year's invasion.

Okay. Thank you very much.

Thank you, Tristan.

And our next question will come from Phil Gibbs with KeyBanc Capital Markets. Please go ahead.

Hey, good morning.

Good morning, Phil.

As it relates to Mesa, clearly very exciting and groundbreaking and ramping. What are the expectations over the next few quarters for volume? And how should we be thinking about the evolution of that facility in the next year?

Thanks, Phil. Yes, we are really excited as you follow this industry and there have been a number of greenfield projects and no surprise the supply chain challenges that have affected any business. So we are so proud to be really completing and commissioning according to our original schedule. And I need to make a shout out again to the team out there because they have just moved heaven and earth to overcome all the various challenges in the supply chain, et cetera. In terms of the commissioning and the ramp, I'd like to say the following. We as you know have a lot of experience since this is our third micro mill. And so, we would expect for rebar that the ramp-up cycle will follow a similar sort of curve to our other facilities. And as I indicated, we believe we will be producing commercial grade products within the fourth quarter. But I'll add a slight caveat to that and say that, first, we're going to be commissioning rebar, but then we will follow that with the commissioning of merchant product. And so, while we're ramping our rebar output, we will have to take time on the mill to commission the merchant products. And that will be going on simultaneously. And so, I think once we get through the next couple of months with the cold and the hot commissioning, then I think we can give you a better update on specifics in terms of our volume expectations. And so, I think that it will have some impact in this fiscal year, we'll see some commercial volume flow out of that facility, but it will be a much greater impact into 2024.

Thanks so much. And then just a follow-up on net working capital. What should we be expecting there in the back half of the year in terms of source or use certainly scraps moved up, but you might have some excess inventory with the outages, so trying to parse all that out? Thanks so much.

Yes, Phil, you're exactly right. What we had, typically we use working capital or working capital is a use of cash in the first quarter and it's usually a relief through the last three quarters of the year. This year with the increasing scrap environment, it resulted in the second quarter being a use of cash again. As we look forward and certainly at the moment seems scrap is looking relatively stable, we would expect that we'll revert back to the typical trend of working capital being a release. And as you mentioned, yes, we should have a release here in the coming quarter with respect to getting the outage and the pre-placed inventory that I spoke of liquidated into cash as we collect those receivables. So we should see elevated working capital releases for the coming two quarters.

Thank you.

Thanks, Phil.

And our next will come from Lawson Winder with Bank of America. Please go ahead.

Good morning, Barbara and Paul. Thank you for your time today and for fitting me in. Maybe just on Tensar. I believe the expectation is a run rate of about $65 million, could you maybe provide a little color on like the timeline and cadence to get to that level?

Yes, I would say we're on track for the $60 million range, likely closer to the lower end for this fiscal year. However, we haven't yet entered the busy season, and all the signs are very encouraging.

Excellent. And maybe just a market question, since the end of the quarter or more in the last month, have you detected any noticeable increase in rebar imports from regions other than Turkey to the U.S? Thanks.

Turkey is the largest factor, and there are fluctuations in imports from various countries. Algeria is one that stands out, and some of those mills are actually Turkish mills. Therefore, we tend to group them under the influence of Turkey. I would say Algeria is helping to fill some of the gap created by the earthquake disruptions in Turkey when possible, but we are not observing any significant impacts.

Okay. Thanks very much.

Yes. Thank you.

And our next question will come from Alex Hacking with Citi. Please go ahead.

Good morning, Barbara and Paul. Thanks for squeezing me in. I'll just ask one question. So the 1.5 million tons of rebar that you see coming from federal infrastructure program, I guess, what year do you forecast that we would get to that level? And do you have any estimate on what that number would be in 2024 given the bidding activity that you're seeing at the moment? And I would assume that that number is fairly close to zero for 2023? Thank you very much.

Thank you, Alex. The indicators suggest that progress is being made, particularly in pre-planning activities, and all the Dodge indices are signaling forward movement. However, we cannot point to significant bidding or booking activity directly connected to this yet. Similar to regular infrastructure bills, there is typically a 12 to 18-month lag between bill approval and visible activity. The infrastructure growth observed last year can be traced back to the FAST Act. It's important to note that state budgets are key indicators, as federal funds are allocated by state, requiring states to secure their own funding and project plans. Several key states we have monitored are either approving multi-year infrastructure budgets to prepare for incoming federal funds or are in the process of doing so, allocating substantial amounts of money in anticipation. Overall, the largest consuming states are maintaining healthy balance sheets and are proactive in planning infrastructure projects, especially in states like Texas and Florida, where we are witnessing significant activity along with established funding plans. While predicting how quickly this ramps up to the 1.5 million tons is a bit uncertain until we see more bidding and booking, I anticipate that by our next update, we might have clearer information regarding the transition from pre-planning to actual project bidding and booking.

Okay. Thanks for the color. And also thanks for the presentation. It's extremely helpful.

Thank you, Alex. We appreciate the feedback.

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

Thanks, Joe. Thank you 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. And I hope everyone has a great day. Thank you so much.

This concludes today's Commercial Metals Company conference call. You may now disconnect your lines, and have a great day.