Earnings Call Transcript - CMC Q2 2021

Operator, Operator

Hello, and welcome, everyone, to the Second Quarter Fiscal 2021 Earnings Conference 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 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 Company’s future operations, the Company’s future results of operations 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 that 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. 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 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 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.

Barbara Smith, CEO

Good morning, everyone. And thank you for joining CMC’s second quarter earnings conference call. As we reported in the press release issued this morning, it was another excellent quarter. And I’d like to thank CMC’s nearly 12,000 employees for their continued hard work and focused efforts on behalf of our customers and our stakeholders. I will begin the call with brief remarks regarding our second quarter performance before offering some perspective on the current market environment. I will also provide an update on CMC’s key strategic growth initiatives. Paul Lawrence will then cover our financial results in more detail. And I will conclude the prepared remarks with a discussion of the third quarter fiscal 2021 outlook, after which we will open the call to questions. Before covering my prepared remarks, I’d like to direct listeners to the supplemental slide deck of information that accompanies this call. The presentation can be found on CMC’s Investor Relations website. CMC reported fiscal second quarter 2021 earnings from continuing operations of $66.2 million or $0.54 per diluted share on net sales of $1.5 billion. Excluding the impact of certain charges, which Paul will cover in more detail, adjusted earnings from continuing operations were $79.8 million or $0.66 per diluted share. Core EBITDA of $171.1 million was the highest ever for a second quarter, which has historically been our seasonally weakest quarter. This record underscores CMC’s enhanced earnings capability following our multiyear strategic repositioning and the earnings stability provided by our integrated value chain. To put this in context, since the third quarter of fiscal 2019, CMC’s average quarterly core EBITDA level has nearly doubled compared to the preceding eight years. Over that same period, quarterly EBITDA volatility in percentage terms has declined by 75%. We have now posted eight consecutive quarters of core EBITDA at or above $150 million and seven straight quarters of annualized return on invested capital above 10%. These figures demonstrate the power of CMC’s strategic repositioning over the past several years and provide a baseline for our strategic growth initiatives, three of which I will cover in a moment. Activity levels in CMC’s core end markets remained strong during the second quarter. In North America, demand for rebar was driven by continued state and local infrastructure spending in our major geographies, as well as strong residential activity, which is a segment of the market where CMC has been growing its participation. Demand for merchant product benefited from the ongoing recovery of domestic industrial production and a lean service center supply chain. Demand for CMC’s long products in Europe also remained strong during the second quarter. Construction activity is healthy, while manufacturing in our core Central European markets continues to expand. The industrial recovery is driving strong demand for merchant and wire products, which we were able to capitalize on during the second quarter. The most recent PMI readings for both Poland and Germany are at their highest levels in roughly three years, indicating further expansion ahead. Now, I’d like to spend a few moments discussing the current and near-term market environment. During our previous calls in October and January, we noted heightened levels of near-term uncertainty within our markets. Uncertainty about state’s COVID-related policies kept project owners on the sidelines, which resulted in the delayed awarding of new work. The historic rise in scrap prices, which began in late 2020, also clouded our near-term view of the business. Today, those uncertainties are starting to clear. We’ve seen our backlog stabilize over the last quarter with a level of new awards increasing. This occurred even before several governors began taking meaningful steps to normalize state economies by eliminating or rolling back COVID-related restrictions. These state-level government actions as well as the positive impact of broader vaccine availability are giving developers and project owners added confidence to move forward with projects under consideration. The pipeline of potential work is robust, as reflected in the volume of bids within our downstream operations. Bid activity strengthened during the second quarter, growing on both a sequential and year-over-year basis. The key is turning bid activity into awarded contracts. As I previously indicated, this measure has improved recently as well. The rate of awards over the last several months has stabilized our construction backlog at a healthy level, which will support near-term shipping volumes. Conditions within the public construction sector are also encouraging. Key states have a strong funding position, and we expect to see good highway activity in calendar 2021. This should also be supported by the additional funds provided to state DOTs from the COVID Relief Bill passed in December. As we’ve shared in the past, the broadest and most historically accurate outlook for our construction markets comes from the Portland Cement Association. Their latest forecast provides two positive signals. First, growth expectations for 2021 were recently revised modestly upward to 1.2%. Second, consumption in 2020 was stronger than previously estimated, meaning 2021 will be growing off a higher baseline. Now, let me make some brief comments on the domestic scrap market. Conditions appear to have settled following a six-month rally. From August to January, scrap input costs increased rapidly month-to-month. Following our view of near-term profitability and creating uncertainty about the levels at which ferrous scrap and steel pricing would stabilize. As shared on our last earnings call, we expected margins on steel products would decline sequentially from the first quarter. However, despite the scrap price volatility, CMC was able to achieve margin stability during the second quarter. Looking further ahead, we see several positive long-term developments. The population migration into CMC’s key geographies appears to have accelerated over the last year. Although new residential construction has been strong across the U.S., growth has been particularly significant in the Sunbelt. New single-family housing permits in CMC’s core Southern and Western metro areas are up over 40% from the average level in 2017 compared to an increase of 18% in other metro areas. CMC is geographically well situated to benefit both in the immediate and long term. Of the five states identified by the truck rental company U-Haul, as having the highest net in-migration of residents during 2020, CMC operates rebar mills in four of them. Based on past experience, residential construction leads local infrastructure and nonresidential investment by 12 to 24 months. Additionally, although we do not have a view on ultimate timing and composition, the enactment of a long-term federal infrastructure package appears likely. Previous versions of potential legislation circulated in the Senate and House of Representatives last year would have added 1 million to 1.4 million tons of incremental annual rebar demand. Clearly, we see a number of favorable near-term and longer-term indicators for our business. However, the pandemic caused disturbances across the global economy, including a swift reduction in new U.S. construction starts during 2020. So, we have not seen this impact to date and do not see it in our current backlog. We continue to monitor economic indicators for signs of emerging air pockets and demand. I would now like to provide an update on three key strategic initiatives I referenced earlier. We are nearing the completion of the third rolling line in Poland. POD commissioning is scheduled to begin during the current quarter, with commercial production to ramp up shortly thereafter. This project will come in meaningfully under budget and has hit all major timeline milestones, a testament to the strength of our Polish team. Project is starting up within a strong market environment and will give our operations improved flexibility to serve its multiple end markets across several products. As we previously indicated, once fully commissioned, this investment is expected to generate incremental annual EBITDA of $20 million and will utilize excess mill capacity to increase finished product output by roughly 200,000 tons. Moving to the second key initiative. We completed the closure of our Steel California operations in January and have fully transitioned our supply chain for the California market to lower-cost material produced in our Central and East regions. This was a major commercial, logistical, and operational undertaking that our team executed flawlessly. We expect the meaningful financial impact of the rolling mill closure to accrue further benefits to our results, beginning in the third quarter. With this action complete, CMC is nearing the halfway mark of achieving the annual network optimization benefit of $50 million that we shared during our Investor Day last August. Next, I’ll comment on the third major strategic initiative. Site work at our Arizona 2 micro mill project is progressing well, and we remain on target for start-up in early 2023. As a reminder, this will be our third micro mill and the first in the world capable of producing merchant bar product. Once fully operational, we expect this state-of-the-art mill to contribute roughly $50 million of annual EBITDA. We look forward to giving future updates as activity progresses. During our conference call in January, I discussed efforts that CMC is undertaking to expand our sustainability disclosures and reporting. Those efforts have progressed swiftly, and we will share the results in our latest corporate sustainability report this summer. Finally, as stated in our press release, the Board of Directors declared a quarterly cash dividend of $0.12 per share of CMC common stock for stockholders of record on March 31, 2021. The dividend will be paid on April 14, 2021. This represents CMC’s 226th consecutive quarterly dividend. And with that as an overview, I will now turn the discussion over to Paul Lawrence, Vice President and Chief Financial Officer, to provide some more comments on the results for the quarter.

Paul Lawrence, CFO

Thank you, Barbara, and good morning to everyone on the call today. I’m pleased to discuss with you our results for the second fiscal quarter of 2021, in which we reported earnings from continuing operations of $66.2 million or $0.54 per diluted share compared to earnings from continuing operations of $63.6 million or $0.53 per diluted share in the second quarter of fiscal 2020. Results in the quarter included net after-tax charges of $13.5 million related to costs for debt extinguishment and decommissioning of CMC Steel California operations, which were partially offset by a gain on the sale of certain facilities. We expect both the debt extinguishment and closure of Steel California to provide meaningful cost and cash flow benefits going forward. Our January refinancing will reduce annual pretax debt service costs by roughly $8.5 million, while ceasing rolling activity at Steel California is estimated to provide a go-forward annual EBITDA benefit of approximately $10 million, in addition to the similar level of savings already realized as we ended melting operations at the facility last year. Excluding the charges taken in the quarter, adjusted earnings from continuing operations were $79.8 million or $0.66 per diluted share. Our core EBITDA from continuing operations was $171.1 million for the second quarter of 2021, an increase of 18% from a year ago. Slide 5 of the supplemental earnings call package illustrates the stability of our core EBITDA per ton of finished steel shipped over a period of time that included not only a global pandemic but also a steep rise in ferrous scrap costs. CMC has managed core EBITDA per ton of finished steel within a range of plus or minus 10% for eight consecutive quarters and nine of the last ten. Now, I will review our results by segment for the second quarter of fiscal 2021. The North America segment recorded adjusted EBITDA of $171.6 million for the quarter compared to adjusted EBITDA of $152.8 million in the same period last year. The largest drivers of the improvement were a meaningful reduction in controllable costs, the benefit of selling lower-cost inventory into a rising price environment and expanded margins on raw material sales. These factors more than offset the impact of lower margin over scrap on shipments of steel and downstream products. Selling prices for steel products from our mills increased by $70 per ton on a year-over-year basis and were up $83 per ton sequentially due to announced price increases adjustments taking effect during the second quarter. Margin over scrap increased $5 per ton on a sequential quarter basis, increasing each month during the quarter. The average selling price of downstream products declined by $5 per ton from our first quarter. However, I would like to note that over the last several months, we have seen higher mill rebar sales prices translate into higher bidding and booking prices for our downstream operations. In a period of rise in scrap costs, we realized higher margins on sales of raw materials, which, as a result of the vertically integrated network of operations, helped provide the earnings stability to our consolidated results that I previously mentioned. Operational performance was a meaningful driver of improved results in North America. Compared to the second quarter of fiscal 2020, controllable costs per ton of finished steel shipped declined by 9% with improvements throughout our vertical footprint. The most significant benefit was the lower mill conversion costs, which is our largest cost outside of scrap. We are benefiting from our efforts to optimize the mill network with additional cost reductions to come in future quarters. Mill costs in the second quarter also benefited from lower prices for consumables such as electrodes and alloys. Shipments of finished product in the second quarter increased 2% from the pre-pandemic volume of a year ago, with growth in steel products, partially offset by a decline in downstream products. Rebar volumes out of our mills have been supported by resilient construction activity. CMC has grown its presence in residential construction, which added meaningfully to the year-over-year growth in rebar shipments. Volumes of merchant and other products also grew during the quarter. Downstream product shipments were impacted by lower backlog in certain geographies as well as the extreme weather experienced within the Texas and Gulf regions during February. We estimate that the weather disruption accounted for roughly half of the 6% decline in downstream shipments compared to the second quarter of 2020. Recent trends in North America margins, volume, and cost performance can be seen on slide 6. Our Europe segment recorded adjusted EBITDA of $16.1 million for the second quarter of 2021 compared to adjusted EBITDA of $13.5 million in the prior year quarter. Improvement was driven largely by expanded margins over scrap and the benefit of selling lower-cost inventory. Margins over scrap increased $6 per ton on a year-over-year basis and were up $5 per ton from the prior quarter. Import flows remain a negative factor, but have eased compared to levels experienced at times during the last two years. Average selling prices of $532 per ton reached their highest mark since the second quarter of fiscal 2019. Similar to North America, average pricing and margins improved sequentially each month throughout the quarter. Europe volumes decreased compared to the prior year, down 7%, due primarily to the unusually strong level of rebar shipments achieved in the second quarter of 2020. Volumes of merchants and other products increased on a year-over-year basis, driven by good demand for industrial customers in Central Europe as well as some opportunistic billet sales. The decline in rebar sales effects reflects a return to more seasonally normal level compared to a year ago, as well as an intentional commercial decision to capitalize on the strength in industrial markets during the quarter. Turning to our balance sheet and liquidity. As of February 28, 2021, cash and cash equivalents totaled $367 million. In addition, we had availability under our credit and accounts receivable programs of approximately $693 million. In January, we opportunistically refinanced the $350 million of outstanding notes maturing in 2026 with an issuance of $300 million of notes due 2031. This action had the beneficial effect of deleveraging CMC’s balance sheet by $50 million, lowering our weighted average coupon by 63 basis points, thereby reducing annual interest expense by approximately $8.5 million, and extending our weighted average maturity by slightly over 1.5 years. The new 2031 notes were sold to yield just 3.875%, a level that demonstrates the confidence that the fixed income market has in CMC’s cash flows and creditworthiness. During the quarter, we generated $13 million of cash from operating activities, despite a $98 million increase in working capital. The rise in working capital has been driven by the significant increase in both scrap input costs and average selling prices. We would expect working capital balances to stabilize, heading into the back half of fiscal 2021. Our leverage metrics remain attractive and have improved significantly over the last two fiscal years. As can be seen on slide 10, our net debt to EBITDA ratio now sits at 1.2, while our net debt to capitalization is just 22%. Our robust balance sheet and overall financial strength provides us the flexibility to fund strategic projects, navigate the uncertainties of the current economic environment, and pursue opportunistic M&A. CMC’s effective tax rate for the quarter was 24.0%, which was slightly below our full year effective rate forecast to be between 25% and 26%. Lastly, I would like to provide our current outlook for capital expenditures in fiscal 2021 is between $200 million and $225 million with roughly $85 million earmarked for our new micro mill. For comparison purposes, we have previously stated that our typical capital spend is approximately $150 million annually. This concludes my remarks. I’ll now turn the call back to Barbara for the outlook.

Barbara Smith, CEO

Thank you, Paul. We are entering the summer construction season in a strong position. Our construction backlog in North America remains healthy and should support near-term volume levels, which we expect to be consistent with normal seasonal trends. Stable raw material costs should lead to flat or slightly increasing margins over scrap on steel products. We expect volumes in our Europe segment to remain strong, underpinned by growing activity in both the construction and industrial sectors. The Polish economy is recovering quickly from the global pandemic, and as of January had the lowest unemployment rate in Europe. Industrial production in that month increased at a rate of 5.6% from a year ago compared to the EU average below 1%. Similar to CMC’s North America segment, margins should also improve from the second quarter, depending on the course of scrap costs. Once again, I’d like to thank all CMC employees for delivering an outstanding quarter of performance. At this time, we will now open the call to questions.

Operator, Operator

The first question today comes from Chris Terry with Deutsche Bank. Please go ahead.

Chris Terry, Analyst

Hi, Barbara and Paul. Thank you for taking my questions. I wanted to ask about the backlog for fabrication, which you mentioned is strong. Can you quantify that on a year-on-year or quarter-on-quarter basis to provide insight into the trends? Additionally, you mentioned that mill margins are expected to improve heading into the next quarter. Could you also provide information on the fabrication margins? Thank you.

Barbara Smith, CEO

Okay. And I think I’ll take the backlog question. Maybe I’ll flip it to Paul to talk about the fab margins. Our backlog is really stable if you look at it on a year-over-year basis. We’re also very encouraged by the level of projects that are out there. And now, as I indicated in my remarks, coming to the market, and so, I would expect good support in terms of our backlog going forward.

Paul Lawrence, CFO

As far as the fab margins, we expect relative stability in the selling price on the fab side. And as scrap stabilizes, we also expect then that the margin of the fab business over scrap to be consistent and really follow the trends that occur in the scrap market.

Chris Terry, Analyst

Thank you. And just a follow-up, I just wanted to talk a little bit more about the end markets. Obviously, you’ve said there’s a little bit more clarity on where we’re at versus when you last reported. Can you just give a bit more detail on some of the regions, some of the stronger areas, some of the weaker areas of the market? Just trying to understand what specifically maybe CMC outperformance versus the market, and just some more detail across the picture?

Barbara Smith, CEO

Yes. Thank you, Chris. We recognize it’s been a little bit difficult to monitor things. I think, really, some areas that are stronger than probably a lot of people expected. The internet economy is fueling so much activity in terms of warehouse and distribution. That was strong going in, and it’s only strengthened throughout the last year. Infrastructure has been steady and consistent. And while there are some states that have different financial situations, I think, the infrastructure questions that were looming a year ago about loss of state revenues, I think, all of those questions have cleared. And there’s obviously been some government support to certain states that are maybe in a worse condition than others. I would remind the listeners that we’ve been on a multi-year strategy to increase our participation in the merchant market. And that generally follows industrial activity. And there’s clearly a recovery in the industrial sector that has been interesting for us in terms of our ability to sell into that market. And I think, residential is one that certainly I didn’t expect as much strength in residential this past 12 months is what we’re actually seeing. It’s not surprising if you follow the information around individuals making decisions to move away from the concentrated metropolitan areas. There has been a multi-year migration of population from certain areas of the country to certain other parts of the country. As I indicated in my remarks, there’s been strong growth in states like Texas and Florida and Arizona. Those trends continue and maybe one would say that they’ve accelerated. So, I think, there’s been probably a lot of focus on two indicators, ABI and construction starts. And really, I don’t think either one of those indicators take into account what we’re seeing on the residential side or the infrastructure side. And so, I’ll pause there. I think those are some of the main drivers. But, we’re quite encouraged by what we see.

Operator, Operator

The next question comes from David Gagliano with BMO Capital Markets. Please go ahead.

David Gagliano, Analyst

I have a couple of clarification questions. First, regarding the fab business, did you say you expect overall fab margins to remain fairly stable quarter-over-quarter in the upcoming quarter?

Paul Lawrence, CFO

David, what we see is from a backlog perspective on the top line, we see stability in terms of the projects that we will be shipping on over the coming quarters. And then, really, the margin will be determined based on your expectations around what happens to scrap costs.

Barbara Smith, CEO

I would further add to Paul’s remarks that the balance of our backlog is shorter-dated versus longer-dated than maybe what we would have seen in historical periods. And generally, that shorter-dated backlog turns faster and there’s less raw material exposure, which is a good trend for us.

David Gagliano, Analyst

Okay. That’s helpful. Thank you. And then, just switching gears a little bit, the commentary about the positive impact from selling lower-cost inventory in a rising steel price environment. Can you just quantify how much of a positive impact that was this quarter, and when do you expect that to reverse?

Paul Lawrence, CFO

Sure. Throughout our operations, we maintain between one month and one and a half months of metallic inventory. During the quarter, as scrap prices increased, we gained approximately $25 to $30 per ton by selling lower-cost materials. Looking ahead, as Barbara mentioned, we ended the quarter with metal margins that were higher than the average. Therefore, we anticipate that these two factors will balance each other out, leading to higher margins in the future which will counteract the inventory gain from the lower costs, resulting in minimal reversal going forward.

David Gagliano, Analyst

Okay. That’s helpful. And then, just the last question. Can you quantify what you expect for the quarterly cost improvement beginning in the third quarter on a run rate, just on an ongoing basis?

Barbara Smith, CEO

Yes. I think, what we’re trying to indicate is, the rolling mill closure should result in $10 million of annualized savings going forward. We previously, of course, shuttered the melt shop, which had another roughly $10 million in addition to all the other network optimization efforts. So, we’re about halfway to our goal of $50 million.

Operator, Operator

The next question is from Timna Tanners with Bank of America. Please go ahead.

Timna Tanners, Analyst

I wanted to follow up on the comment about demand related to the potential infrastructure stimulus. I may have misheard, but I thought I heard about $1 million to $1.4 million in incremental demand. I want to clarify if that figure is on an annual basis, because I quickly calculated the size of the rebar market. If I'm correct, there are 5 million to 8 million tons of domestic shipments and 1 to 2 million tons of imports. This suggests, regardless of how you look at it, that there would be a significant impact if it is indeed annual. Can you provide more details on what that forecast includes and how you arrived at it? Thank you.

Barbara Smith, CEO

Yes, Timna, it really depends on the specifics of the final infrastructure bill and how much funding is allocated to concrete-related activities, along with some internet access initiatives for rural areas. We are monitoring the situation closely. Our best estimate, supported by industry analysis of the bills currently in the House and Senate, is that there will be an additional incremental demand of $1 million to $1.4 million. This is significant for the market. As you know from your experience in this space, the impact isn’t immediate; these projects are at different stages of engineering, and the volume will gradually enter the market. Typically, there is a 12-month lag before an infrastructure bill starts translating into steel orders. Additionally, we believe there has been engineering work done on projects that may have been paused during the pandemic due to uncertainty. Your estimate and ours may vary, but we will see what it ultimately amounts to. It could have a substantial effect on demand.

Timna Tanners, Analyst

And that’s incremental absolute or annual?

Barbara Smith, CEO

Annual.

Timna Tanners, Analyst

Okay. Helpful. Thank you. And just looking at other Biden administration initiatives, any entail on the upcoming review that’s expected of Section 232? And on higher tax rates, you are a pretty full taxpayer, so just wondering if you have any other insights onto those developments.

Barbara Smith, CEO

Yes. I like your language, full taxpayer. I would agree. And we very much appreciated the tax rate that we’ve been enjoying, and that’s allowed us to further invest in the business. Look, I’m not sure we have any better insights than you do, Timna. But, on the tax, I think that certainly, corporate tax rates are in the target and on the radar. And I think, whatever happens, the timing, we’ll deal with it at the time. And it’s not going to be detrimental to our plans going forward. As it relates to 232, we are quite involved through the consortium of companies and through our trade organizations to present the evidence that A, this industry is critical to the future of this country. It does have a strong national security purpose. And it also has a very strong purpose to having a strong economy, which economic security leads to national security. I think that we’re encouraged by the administration’s review and thoughtfulness that they’re putting into this to not just reverse something that the prior administration put in place. I think there is clear recognition that there have been economic benefits. I think there’s clear recognition that there’s massive overcapacity globally. I think, there’s a growing understanding of the ESG gap between the U.S. industry and the world. We are the cleanest steelmakers in the world. We at CMC, as you know, have invested in clean steelmaking technology, have the lowest greenhouse gas impact of any steelmaker in the country due to the nature of our electric arc furnaces and our micro mill technology, low energy consumption, on and on. And so, I’m quite encouraged that the conversation about the overcapacity and the ESG impacts of China in particular that has a lot of this excess capacity and very polluting capacity, but there are other countries. So, our hope is that those conversations, I think that the administration has demonstrated a willingness to engage with business on this topic, and certainly, we’ll be very involved in having our voice be heard. And so, I think we’ll see hopefully some changes to our existing trade regulations that can reinforce the positive benefits that were brought on by 232. But, I do think that the signs are pretty encouraging that it’s going to remain in place for a while longer. And then, other measures will be put in place to really put the pressure on the world of vendors.

Operator, Operator

Next question comes from Tristan Gresser with Exane BNB Paribas. Please go ahead.

Tristan Gresser, Analyst

First one, please, North America EBITDA performance in Q2. Can you please confirm what was the contribution of raw material external sales in the quarter, and roughly versus on average versus prior quarters, please?

Paul Lawrence, CFO

That’s the benefit of our vertically integrated network of operations. You’re correct, we did experience elevated margins in that business. We don’t provide specific figures, but if you examine the entire value chain, the raw materials segment had expanded margins. This was one of the key factors contributing to our strong results for the quarter.

Tristan Gresser, Analyst

All right. Thank you. And second question, in Europe, I think, you mentioned imports having eased and being a bit more supportive. How do you see the risk to your business, knowing that safeguard measures will be removed this summer? I believe long imports in Europe have significantly declined over the past two years, notably with Turkey, Russia being blocked by quotas. So, do you see a risk there, a scenario where come June imports surge back again? Thank you.

Barbara Smith, CEO

Thank you, Tristan. Similar to our earlier discussion with Timna regarding 232, Europe is fully aware of the same situation we face, noting a buildup of excess capacity in certain countries that is inefficient, pollutes, and is produced without a living wage. Our production methods are much cleaner. As you know, the green movement in Europe is arguably more advanced than in the United States. When 232 was implemented, Europe established a comparable tariff structure, which they later transformed into a quota system. They have been adjusting this quota framework to address import surges at the beginning of the quarter, which significantly disrupts the supply chain. The current modifications have helped smooth out some of those disruptive periods caused by large influxes of imported products into the EU. The existing quota is set to expire, but the industry and Eurofer, the trade organization for European countries, are actively advocating for a two to three-year extension of the safeguard and quota measures to exert pressure on countries with inefficient, subsidized, and polluting excess capacity. We are closely monitoring these developments and are hopeful that Europe will recognize the benefits of these measures and choose to extend them.

Operator, Operator

Next question comes from Phil Gibbs with KeyBanc Capital Markets.

Phil Gibbs, Analyst

Hey, Barbara. Just I have a question on just general rebar use. I mean, a lot of the road building programs have been strong and growing for a number of years. Residential construction, to your point, is solid. Is there kind of a rule or a general way to think about the breakdown of rebar demand between road building, residential, and other?

Barbara Smith, CEO

I don't have a specific guideline to share at the moment, but I can follow up with you. Generally speaking, infrastructure projects tend to require heavier gauge rebar and have a higher content. In contrast, residential construction typically uses lighter gauge rebar, which is usually distributed and has been experiencing a supply shortage. This situation has been beneficial for us, and Gerdau mills have been more involved in this area compared to CMC, creating a good synergy from the acquisition. Industrial demand is also increasing, driven by efforts to adjust supply chains and reduce reliance on overseas sourcing for essential materials. You've likely heard about the semiconductor issues, but this trend began earlier in the pandemic with pharmaceuticals and healthcare supplies. Industrial is proving to be a strong sector, and I expect it to maintain that momentum. There are numerous significant projects in the pipeline that haven't even begun construction, which will drive demand to levels we haven't seen historically. Additionally, the internet economy, including the impact from companies like Amazon and the warehouse distribution sector, is experiencing notable growth. On a recent visit to our site in Houston, we learned about a five-floor Amazon facility, each floor covering 14 acres with a concrete design. Facilities like this are emerging nationwide as we've all adapted to online shopping during our time at home, and our outlook indicates that this trend will persist for a while.

Phil Gibbs, Analyst

I would like clarification on the fab shipments. It was mentioned that the vortex affected fab shipments, with around half of the year-on-year decline attributed to those delays. You mentioned that seasonally the mill is picking up as we enter the construction season. Should we expect to see similar trends in fab? Additionally, considering the seasonality and the catch-up from delayed shipments, what kind of sequential growth should we anticipate in the downstream segment? Thank you.

Barbara Smith, CEO

Yes, thank you. I’ll begin, and then Paul can provide more specific guidance for your modeling, Phil. Clearly, our operations were affected as we rely on interruptible supply arrangements and had to halt operations. The cold temperatures and ice prevented any construction activities during those conditions. In regions like Texas and the Gulf states, we experienced a loss of shipment days, ranging from 5 to 9, due to the severe weather event. Although all projects will be serviced and shipped, there is a limitation to how quickly we can place the steel. It's not possible to simply double the amount placed in a short timeframe to compensate. Everyone will certainly be putting in long hours to make up for the lost time, but it won't be a direct one-to-one recovery. I can say that the shipping rate so far in March is quite strong, which is a positive sign for the beginning of the busy season. We expect that fab shipments will align with what we’re observing in the mills and anticipate a successful construction season.

Operator, Operator

The next question is a follow-up from Chris Terry with Deutsche Bank. Please go ahead.

Chris Terry, Analyst

Thanks, Barbara and Paul. Just a little bit more detail on the demand. You talked a lot about the internet economy. I just wondered if you could talk more specifically about commercial office, medical, education, some of the other areas of non-res construction. Thank you.

Barbara Smith, CEO

I think it’s a little early to identify any clear trend. From my discussions with people in the commercial office sector, there is not a rush for companies to give up their existing office space. As the pandemic has progressed, many companies have come to realize that problem-solving and collaboration are more challenging in a virtual environment. While we've done an excellent job adapting to remote work, humans still thrive on interaction, and problem-solving typically happens more effectively that way. Initially, there were claims that companies would move to a fully virtual model, but as time has passed, most organizations are now planning to return to the office in some capacity, possibly with more flexible arrangements while not completely abandoning their office spaces. It's important to monitor population migration trends, as they are often linked to business decisions about relocating or establishing new offices in favorable regions. The hotel industry may experience the most distress, but many people are choosing to travel domestically rather than internationally due to current restrictions. Therefore, I believe that domestic occupancy and activity could really pick up, especially with the vaccine rollout, potentially making it a great season for travel and hotels in the U.S.

Operator, Operator

The next question is from Sean Wondrack with Deutsche Bank. Please go ahead.

Sean Wondrack, Analyst

Hi. Good morning and great quarter. So, just looking back at your acquisition of the Gerdau assets. It’s extremely opportunistic in retrospect. And now you’re generating high levels of free cash flow at the company, with EBITDA sort of in the mid 500, 600, somewhere in there. You’re not going to have as many sort of cash uses going forward based on kind of the CapEx levels you laid out. So, I guess, my question is, what would be your plan for sort of capital allocation? Do you think it’s more likely you’ll build cash and continue to seek attractive organic or M&A opportunities, or do you think you’re going to potentially take that level down lower, or how do you think about that, please?

Barbara Smith, CEO

Yes. I think, to start the debt levels, I think, we’re pretty comfortable with the debt levels where they are. And so, I don’t know that it makes a lot of sense to look at that, unless there’s just some unforeseen macro event that causes a massive economic collapse or something, which we’re not anticipating. But, so, I think, we’ve worked hard over the years to have a strong balance sheet, which gives us the maximum flexibility. And we will examine all avenues to return value to shareholders. We have a very attractive dividend. It gets examined every quarter by our Board. We have a small position left on our share repurchase program. Today, that doesn’t seem like with where we’re trading, the best use of cash to return value to shareholders. So, we continue to look at really good organic and inorganic growth opportunities. And I think there’s certainly a number of exciting opportunities for us to consider going forward.

Operator, Operator

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

Barbara Smith, CEO

Thank you. And 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. And hopefully, we look forward to seeing you in person sometime soon. Take care.

Operator, Operator

This concludes today’s Commercial Metals Company conference call. You may now disconnect your line.