Earnings Call Transcript - CMC Q1 2022

Operator, Operator

Good day, and welcome everyone to the First 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. 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 and benefits of new facilities, the Company’s future operations, the time line 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 the 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 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 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 the future events, changes in assumptions, 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 and 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.

Barbara Smith, CEO

Good morning, everyone, and thank you for joining CMC’s first quarter earnings conference call. I hope you all had a wonderful holiday season. As stated in our press release issued this morning, the first quarter of fiscal 2022 was another outstanding period with record consolidated and segment results. I want to express my gratitude to CMC’s 11,000 employees for their hard work and dedication to our customers and stakeholders, and we appreciate our customers for their ongoing trust and partnership with CMC. I will start today’s call with highlights from the quarter and some commentary on CMC’s strategic growth projects. Paul Lawrence will then provide more detailed financial information from the quarter, and I will wrap up with a discussion of the current market environment and our outlook for the second quarter of fiscal 2022, followed by a Q&A session. Before I begin with my prepared remarks, I would like to direct listeners to the supplemental slides that accompany this call, available on CMC’s Investor Relations website. I’m pleased to report that CMC’s first quarter fiscal 2022 earnings were the best in our Company’s 106-year history. Earnings from continuing operations were $232.9 million or $1.90 per diluted share on net sales of $2 billion. Excluding the effect of a tax benefit related to an international reorganization, adjusted earnings from continuing operations were $199.2 million or $1.62 per diluted share. CMC generated core EBITDA of $326.8 million, an increase of 109% from the same period last year and a 28% improvement from the previous quarter. This marks the third consecutive quarter in which our Company has reported record bottom line earnings, core EBITDA, and segment-level EBITDA. These accomplishments are the result of the execution of our strategic plans presented to shareholders during our virtual Investor Day in August 2020. As noted in the press release, this very strong first quarter performance brings CMC’s trailing 12-month core EBITDA to nearly $1 billion and return on invested capital to 18.3%. Favorable market conditions and strong margins across several product lines certainly contributed to these exceptional results. To provide context, during fiscal 2014 and 2015, we experienced similar robust market conditions, and our 12-month EBITDA was between $375 million and $400 million with return on invested capital in the mid-single digits. This significant improvement over the past six years underscores the enhanced earnings power of CMC today, and our objective is to achieve better returns with higher highs and lower lows throughout the economic cycle. To support this, CMC achieved an annualized return on invested capital of 25.1% in the first quarter and an annualized return on equity of 35.6%. Our team continues to effectively manage controllable costs, reflecting better cost changes on a per unit basis than most industry and macro benchmarks we follow. We take pride in CMC’s record financial results delivered through strong execution of our strategic initiatives and solid market fundamentals. While we are proud of our performance so far, I want to highlight why I believe CMC’s best days are yet to come. I’ll start with sustainability. Before discussing growth, we must ensure that what we are growing is sustainable. CMC was founded 106 years ago as a metals recycler, and we continue this legacy today by operating possibly the cleanest portfolio of steel mills worldwide. We are also committed to improving as we make significant strides toward our 2030 environmental goals. CMC’s Scope 1 and 2 emissions are already well below the 2040 Paris Accord target, and our emissions have improved by 6.2% per ton of steel produced compared to our fiscal 2019 baseline. This two-year improvement is in stark contrast to the global industry, which increased its emissions intensity over the same time frame. Since fiscal 2019, we’ve enhanced our energy efficiency by 7.8%, while the global industry’s performance has worsened by nearly 6%. We are sourcing more renewable energy than ever before, and the share of green energy within our overall consumption has increased by roughly 3 percentage points in the last two years. We are fully committed to increasing this figure. Our commitment to renewable sourcing is showcased by the design of our upcoming Arizona 2 micro mill, now under construction in Mesa. This new plant will be capable of directly connecting to an on-site solar field, making micro mill steelmaking the cleanest steelmaking technology in the world even cleaner. In our industry, sustainability also includes treating our workforce well and ensuring their safety on the job. CMC’s mission is that every day, all of our employees finish their shifts in the same condition they started. We’ve developed a unique safety culture that relies on innovative thinking, emphasizes shared accountability, and strives for a goal of zero incidents. Through this approach, CMC has seen several consecutive years of improvement in our incident rates, including substantial improvements at acquired facilities where we’ve implemented our culture. Across all lines of business, we focus extensively on keeping our workers safe and healthy. Not only is this the right thing to do, but over time, we believe that our commitment to our employees will lead to long-term retention, making CMC an employer of choice in our industry. I’ve touched on only a few key aspects of our ESG commitment, which is detailed in our sustainability report published in December 2021, and I encourage you to read it. In summary, I would say that CMC is not just sustainable; we are a leader in sustainability. Being a leader means continually striving for progress and never remaining stagnant. In the future, we will do just that. Clearly, our sustainably driven platform provides a solid foundation for growth. Now, I would like to discuss some of the exciting initiatives arising from the disciplined and deliberate execution of CMC’s strategic plan. These projects enhance and strengthen our organization’s core capabilities while extending CMC’s growth opportunities into familiar markets, customer groups, and applications. Recently, we announced a series of exciting growth initiatives, which have been under consideration for some time. I’d like to emphasize that we have been disciplined in knowing the strategic direction and goals that most benefit our shareholders, disciplined in taking the next step in identifying opportunities that move our organization towards these goals, and then acting decisively when these opportunities arise and the timing is right. Let me begin with an update on CMC’s third micro mill currently under construction in Mesa, Arizona. This plant will be the first micro mill in the world capable of producing merchant bar and, as I mentioned earlier, will be among the greenest in the world. Arizona 2, as we are calling it, provides significant strategic value to CMC. It will replace the much higher cost and inefficient rebar capacity of the former Steel California operations, the sale of which will fund over half the cost of our new plant. Arizona 2 will also give CMC a coast-to-coast merchant bar footprint and serve several customers we already know well through our MBQ operations in Alabama, South Carolina, and Texas. Importantly, Arizona 2 will help further optimize CMC’s operational network and enhance customer service. We are equally excited about CMC’s fourth micro mill announced this morning. The new mill MM4 will augment our operational footprint in the Eastern United States and enhance our ability to serve markets in the Northeast, Mid-Atlantic, and Midwest. We expect significant internal synergies from this investment, including enhanced production flexibility among our Eastern U.S. mill network, improved customer service capabilities as well as enhanced delivery times and logistical efficiencies in getting steel to its destination. MM4 is a project we have studied for several years and now feel the timing is right to execute. MM4 will be rebar-centric with additional capabilities under consideration. As stated in the press release, the competitive site selection process is now underway, and we will provide an update when the search is finalized. This investment further demonstrates our commitment to a sustainable future for CMC. Both mill projects stand to benefit directly from the largest infrastructure package to be enacted in the U.S. in several decades. The Infrastructure Investment and Jobs Act signed last November will provide $1.2 trillion in funding over five years and stimulate an estimated 1 million to 1.5 million tons of incremental annual rebar demand at full run rate. This would add roughly 15% to current domestic consumption of around 8.5 million tons. We expect the time between the mills enactment and the commencement of significant construction activity to be in the range of 18 to 24 months, which lines up very well with the scheduled future commissioning of Arizona 2. We further anticipate a late calendar 2024, early 2025 start-up of MM4, and this would coincide with infrastructure-related demand nearing full run rate. Stepping beyond mill investments, CMC’s agreement to acquire Tensar Corporation announced last month will add additional products and capabilities, which will make CMC a unique provider of value-added reinforcement solutions for the domestic and international construction markets. This transaction represents CMC’s entry into an adjacent and complementary product space through the purchase of a proven market and innovation leader. The acquisition meaningfully extends CMC’s growth runway and provides a platform for further expansion into high margin, high customer service engineered solutions. As we discussed in our call in December, Tensar’s offerings provide best-in-class value propositions to customers, particularly against competing traditional reinforcing solutions but are underpenetrated in the marketplace. We believe this combination of attractiveness to customers and large potential market opportunity will support significant organic growth at Tensar in the years ahead. Tensar is already very well managed with a strong reputation and proven innovation and operational capabilities. We believe these factors greatly reduce the execution risk of this transaction while providing CMC with solid commercial synergy opportunities out of the gate. Currently, we expect to close on the acquisition during the fiscal third quarter. The two U.S. mill expansions plus the Tensar acquisition, combined with our recently commissioned rolling line in Europe, should provide CMC with at least $200 million of sustainable through-the-cycle EBITDA once fully operational. My belief that CMC’s best days are ahead is based not just on our announced strategic investments but several other factors as well, including the quality of our people. We’ve not discussed this topic much in the past, but it’s vitally important to the future of CMC with a longer-term impact greater than any new capital project. As we sit here today, I’m very confident regarding the new generation of leaders that are developing at every level of our organization. Our bench strength has never been better. CMC’s transformational growth projects over the last several years have expanded our North American business by nearly 50%, necessitating organizational adjustment to accommodate such rapid growth. Employees were provided with opportunities to take on new responsibilities and new roles across the Company, giving each an expanded perspective of CMC’s business and valuable experience in managing through change. Additionally, the last two years have involved unprecedented challenges, first related to complications due to the pandemic, followed by high inflation, logistical issues, and labor shortages. Our team has responded exceptionally well to the series of challenges, and we have all seen the outcome, a stronger company generating record financial results. With hindsight, it’s clear the events of the last several years have created an innovative, adaptable, stress-tested roster of current and future key leaders at CMC. Lastly and while this is outside CMC’s control, I’m confident about the future of our core geographical markets. CMC has exposure to the most economically vibrant and rapidly growing regions in both the U.S. and Europe. For more than a decade, population growth within CMC’s key U.S. markets has outpaced the broader United States. This trend has picked up pace considerably since early 2020 and has been reflected in new community formation and relocation of businesses. Ultimately, population drives construction over the long term, and CMC is well-positioned to benefit. Finally, as stated in our press release, the Board of Directors declared a quarterly cash dividend of $0.14 per share of CMC common stock for stockholders of record on January 20, 2022. The dividend will be paid on February 3, 2022. This represents CMC’s 229th consecutive quarterly dividend with the amount paid per share increasing 17% from a year ago. As we announced last quarter, we are also committed to returning capital to shareholders through our share repurchase program, and Paul will give you an update on our activity this past quarter. With that as an overview, I’ll 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.

Paul Lawrence, CFO

Thank you, Barbara, and good morning to everyone on the call today. As Barbara noted, we reported record fiscal first quarter 2022 earnings from continuing operations of $232.9 million or $1.90 per diluted share, more than triple prior year levels of $63.9 million and $0.53, respectively. Results this quarter include a net after-tax benefit of $33.7 million, primarily related to a tax capital loss recognition on an international tax restructuring transaction, which took place in the quarter. Excluding the impact of this item, the adjusted earnings from continuing operations were $199.2 million or $1.62 per diluted share. Core EBITDA from continuing operations was $326.8 million for the first quarter of 2022, more than double the $156.6 million generated during the prior year period. Slide 9 of the supplemental presentation illustrates the strength of CMC’s quarterly results. Both our North America and Europe segments contributed significantly to year-over-year earnings growth, while core EBITDA per ton of finished steel reached a record level of $233 per ton. The first quarter marked the 11th consecutive quarter in which CMC generated an annualized return on invested capital at or above 10%, which is in excess of our cost of capital. Now, I will review our results by segment for the first quarter of fiscal ‘22. The North American segment recorded adjusted EBITDA of $268.5 million for the quarter, an all-time high. This compares to adjusted EBITDA of $155.6 million in the same period last year. The largest driver of this 73% improvement was a significant increase in margins on steel products and raw materials. Partially offsetting this benefit were higher controllable costs on a per ton of finished steel basis due primarily to increased unit pricing for freight, energy and alloys. Selling prices for steel products for our mills increased by $364 per ton on a year-over-year basis and $76 per ton sequentially. Margin over scrap on steel products increased $202 per ton from a year ago and $82 per ton sequentially. The average selling price of downstream products increased by $158 per ton from the prior year, reaching $1,092. This increase was consistent with the rise in underlying scrap costs, resulting in unchanged margins over scrap relative to the prior period. During our fourth-quarter earnings call, I indicated that CMC’s downstream backlog was expected to reprice higher throughout fiscal 2022 as new higher price work replaces older lower priced work. Through the first four months of the fiscal year, we are seeing the anticipated rate of repricing play out. We continue to expect further upward movement in CMC’s average backlog price through the remainder of the fiscal year, particularly in light of strong market demand and bid volume, which we are experiencing in our downstream geographies. Shipments of finished product in the first quarter were essentially flat from a year ago. End market demand for our mill products remained strong. This is supported by our own shipment volume and industry-wide data we track regarding consumption of rebar, merchant bar and wire rod. Downstream product shipments increased by nearly 8% from the prior period, driven by the beneficial impact of our growing construction backlog. Turning to slide 11 of the supplemental deck. Our Europe segment generated record adjusted EBITDA of $79.8 million for the first quarter of 2022 compared to adjusted EBITDA of $14.5 million in the prior year period. This improvement was driven by expanded margins over scrap, the receipt of a $15.5 million energy credit and strong profit contributions from our new rolling line. Higher costs for energy and mill consumables partially offset these positive factors. The energy credit received was for calendar 2020. Legislation is currently before the Polish Parliament to extend this credit further. Margins over scrap increased $236 per ton on a year-over-year basis and were up $120 per ton from the prior quarter. Tight market conditions provided the backdrop to achieve the segment’s highest average selling price in more than a decade, reaching $869 per ton during the first quarter. This level represented an increase of $408 per ton compared to a year ago and $106 per ton sequentially. Europe volumes climbed 8% compared to the prior year as a result of extensive planned maintenance performed at our rebar rolling line. Shipments of merchant and other products were relatively unchanged as sales of higher-margin finished products replaced sales of semi-finished billets. Demand conditions within Central Europe remain strong. The Polish construction market continues to grow at a robust rate, with particular strength in the residential and infrastructure sectors. Construction of our merchant and wire rod consumption of our merchant and wire rod products has been supported by expanding manufacturing activity as highlighted by several key macroeconomic indicators, including the Polish and German PMI readings and Polish new industrial orders. The combination of good demand and strong pricing has provided an ideal backdrop for the start of our third rolling line. This new asset is significantly outperforming the original investment case. Turning to capital allocation, balance sheet and liquidity. As of November 30, 2021, cash and cash equivalents totaled $415 million. In addition, we had approximately $650 million of availability under our credit and accounts receivable programs, bringing total liquidity to nearly $1.1 billion. In addition, as we announced last week, in late December, we closed on the sale of our Rancho Cucamonga California site and received gross proceeds of $313 million. Proceeds received represent approximately 45% of the entire purchase price of the rebar acquisition we completed in 2019. During the second quarter, we will record a pretax gain of approximately $275 million related to this transaction. During the quarter, we generated $26 million of cash from operating activities despite a $252 million increase in working capital. The rise in working capital was driven by the increase in average selling prices. Looking beyond price factors, our days of working capital have decreased from a year ago. Over the course of the past four quarters, CMC has invested roughly $500 million in working capital. Our leverage metrics remain attractive and have improved significantly over the last two fiscal years. As can be seen on slide 15, our net debt-to-EBITDA ratio now sits at just 0.7 times, while our net debt to capitalization is 18%. We believe our robust balance sheet and overall financial strength provide us the flexibility to finance our strategic organic growth projects and complete the acquisition of Tensar while continuing to return cash to shareholders. CMC’s effective tax rate was 11%, which was driven sharply below our typical statutory rates by the international reorganization performed during the quarter. Absent the enactment of any corporate tax legislation that would impact fiscal 2022, we forecast our tax rate to be approximately 25% to 26% for the balance of the year. With respect to CMC’s fiscal 2022 capital spending outlook, we currently expect to invest $475 million to $525 million this year, roughly half of which will be attributable to Arizona 2. Lastly, after approving the program in mid-October, CMC repurchased 159,500 shares during the first fiscal quarter of 2022 at an average price of $33.28 per share. These transactions amounted to approximately $5.3 million, leaving $344 million remaining under the current authorization. We expect share buyback activity to increase in the second half of the year. With that, this concludes my remarks, and I’ll turn it back to Barbara for her comments and the outlook for the balance of the year.

Barbara Smith, CEO

Thank you, Paul. Turning now to market conditions, first, in North America. We are seeing strong activity within nearly all of our end markets. At the mill level, demand for rebar, merchant bar, and wire rods remains robust with total domestic consumption for each of these products growing on a year-over-year basis during CMC’s fiscal first quarter. Rebar and wire rod in particular are being supported by continued construction growth. During CMC’s first quarter, total domestic construction spending increased roughly 10% from the prior year, according to U.S. Census Bureau, driven by growth in both residential and private nonresidential categories. While national spending was largely unchanged for infrastructure, activity within CMC’s core geographies outperformed the national average during the first quarter, driven by healthier state-level budgets and the need to accommodate growing populations with expanded infrastructure networks. Strength in construction activity has also benefited our merchant bar product lines, which are used in various applications, including ceiling joists, industrial stairs and railings, and warehouse racking. The industrial markets served by CMC’s merchant products are healthy, and we are seeing particular strength among machinery and equipment manufacturers. As you know, construction is by far CMC’s largest end market, and our best leading indicator is our volume of downstream project bids. Activity levels have been very strong for the last three quarters, driven by a good blend of private and public sector work. Project owners are also awarding high volumes of new work, which has allowed CMC to grow our downstream backlog on a year-over-year basis for two consecutive quarters. Work is entering our backlog at very attractive average price levels, which we expect to drive profitability when shipped in future quarters. The picture is equally positive in Europe. Construction activity is strong, with new residential construction permits increasing by double-digit percentages on a year-over-year basis. The Central European industrial sector continues to grow as reflected in the current 18-month trend of expansionary PMI readings for both Poland and Germany. With production from our new rolling line, which allows our Polish operations to produce each of our three major product groups simultaneously, CMC is now even better positioned to capitalize on this growth. In addition, supply congestion in Central Europe has tightened, which has driven margins sharply upwards from the historical lows of fiscal 2020 and early fiscal 2021. Regarding our outlook for fiscal 2022, we remain confident. Based on our view of the marketplace and our internal indicators, we anticipate continued strong financial performance. Signs point to robust demand in our key end markets, and we expect supply and demand conditions to remain favorable, supporting healthy margin levels. The positive tone of our outlook is backed up by several key external construction forecasts and indicators. The Portland Cement Association once again increased its expectation for cement consumption growth in 2022 and now anticipates an increase of 2.5% on a year-over-year basis. The Architectural Billing Index continues to point toward expansion in the year ahead, particularly within our core Southern U.S. footprint. Additionally, the Dodge Momentum Index, which measures the value of nonresidential projects entering the planning phase, remains near a 14-year high and shows strength in both its commercial and institutional components. More near term, in the second quarter of fiscal 2022, we expect shipments to follow a typical seasonal trend, which has historically equated to a modest decline from Q1 levels. Margins on steel products as well as controllable costs per ton should be generally consistent on a quarter-over-quarter basis. Once again, I’d like to thank all of the CMC employees for delivering yet another quarter of outstanding performance. Thank you. And at this time, we will now open the call to questions.

Operator, Operator

Our first question comes from Sathish Kasinathan with Deutsche Bank. Please go ahead.

Sathish Kasinathan, Analyst

Yes. Hi. Happy New Year, and thanks for taking my questions. My first question is on the announced new micro mill. You mentioned that it will be rebar-centric and that you are looking to add MBQ capability. But can you provide any rough estimate on the size and CapEx for the mill?

Barbara Smith, CEO

Yes. Sathish, until we finish our analysis and site selection, we’re not ready to provide more details on that. However, if you consider our track record with other micro mills, we will approach the market with discipline and will update you as soon as we can with more information regarding the CapEx requirements.

Sathish Kasinathan, Analyst

And my second question is on the funding for the Tensar acquisition. Now that you had a little more time to explore your options, any initial thoughts on what the mix of debt or cash would be?

Paul Lawrence, CFO

We benefit from the very strong balance sheet that we have. And so as we work towards closing, which Barbara outlined, will be likely in the third fiscal quarter, we will take stock and leverage that strength of the balance sheet to make sure we fund the growth project in an efficient manner. So, at this stage, we have not determined exactly what that will be, but we have a lot of tools in the toolbox to get that done well.

Operator, Operator

Our next question comes from Timna Tanners with Wolfe Research. Please go ahead.

Timna Tanners, Analyst

I just want to ask two questions. One on the new mill, in the past, you’ve really flagged the importance of your Southern base and the specific growth in that region. I just wanted a little more color on why the East Coast or Midwest, and if you’re concerned about any greater exposure to imports there? And the second question is just about volumes in the quarter. I thought they were a bit light, just wanted to understand that and if that still implies a decline into the Feb quarter as per traditional? Thanks.

Barbara Smith, CEO

I would like to share some insights about the new mill. Historically, we have had a strong presence in the Southern market. However, after our acquisition a few years back, we expanded our reach to capture the high demand for rebar in the Northeast. The recently passed infrastructure bill, long anticipated during my time at CMC, is expected to drive significant demand. The timing of our investment aligns perfectly with this opportunity, along with the benefits of enhanced technology. We are committed to green technology, and this micro mill technology represents the highest efficiency available, offering numerous quality and customer advantages. This aligns with our long-term strategy to utilize the most advanced and environmentally friendly technology. The forthcoming infrastructure bill will support the demand generated by this investment. Now, regarding the question on volume, Paul, would you like to address that?

Paul Lawrence, CFO

Yes, absolutely. Regarding volumes, let's start with Europe. There was a significant planned maintenance outage at one of our mills, which contributed significantly to the reduction in volume. Therefore, we anticipate that, quarter-over-quarter, we won't follow the typical seasonal trend of lowest shipments in the fiscal second quarter. Instead, we expect a slight increase in volumes in Poland during the second quarter. In North America, if we look at total finished volumes, which includes both steel product volumes and downstream products, it’s essentially flat compared to the same period last year. There was a shift in shipments from mill steel products to downstream as we worked to improve our backlog and focus on internal shipments. Overall, the volume remains flat compared to last year, but it was somewhat affected by the start of the holiday season and some maintenance outages during the quarter. In North America, we do expect a typical seasonal decline in total steel products and downstream categories moving into the second quarter, which usually results in approximately a 5% decrease from the first quarter, primarily due to the extended holidays around Christmas.

Timna Tanners, Analyst

Got you. I apologize for the question about the Midwest and the East Coast mill. I wanted to know if that would increase your exposure to imports or if that raises any concerns. Would you please address that part?

Barbara Smith, CEO

Yes, Timna, you know the major importing locations well. Our assessment indicates that we will benefit from a favorable import environment, despite the adjustments in Europe. While there are always risks, we monitor them closely. I want to highlight our track record with the micro mill technology, which has consistently proven to be beneficial in terms of quality and cost. Every new mill we've built has started up successfully and has been fully operational. Given our infrastructure plans and the advantages of this technology, we don’t anticipate significant issues. We expect to continue enjoying a favorable import environment in the near future.

Timna Tanners, Analyst

Thanks. And Buy America probably helps also.

Barbara Smith, CEO

Yes, absolutely.

Operator, Operator

Our next question comes from Seth Rosenfeld with Exane BNP Paribas.

Seth Rosenfeld, Analyst

I got another question, please, with the new East Coast mill. You touched on earlier potential for some synergies and operating efficiencies. Are you able to give us any tangible examples of what you’re looking at on the operating efficiency side, perhaps quantify any scale of synergies that would make this investment particularly attractive versus what we’ve seen on a standalone greenfield asset in the past, please? I’ll stop there.

Barbara Smith, CEO

Yes. Happy New Year, Seth. I hope you are doing well. I want to highlight our track record. We are continuously assessing the long-term capital requirements of our current operations while also considering upgrades to more modern technology. Our analysis indicated that investing in this new technology is more economically advantageous as it will be significantly more efficient, cost-effective, and of higher quality, while also having a lower environmental impact compared to investing in older legacy technology. Additionally, we always take market demand into account. As I mentioned earlier, current demand is very strong, and the markets are essentially sold out. When we consider the additional investments planned over the next 5, 7, and 10 years alongside market analysis, this makes the project quite appealing.

Seth Rosenfeld, Analyst

Okay. I guess a separate question with regards to fabrication pricing. I believe in your prepared remarks, you commented you expect backlog prices to increase throughout the coming fiscal year. Given that I think in the past that pricing is often been set kind of with reference to steel cost, is that comment a sign of confidence that spot rebar prices continue increasing or rather call on the unique kind of supply-demand dynamics for fab itself improving the pricing for fabrication, please?

Barbara Smith, CEO

Seth, I'll start and then Paul can add some comments. As you know our business well, the fab pricing is set when the contract is awarded at a price above typical rebar pricing. Last year, rebar prices rose by over $300 a ton. Although we experienced a positive repricing of our backlog in the first quarter, we are still behind the overall increase in what we are shipping due to older contracts remaining in our backlog. However, based on the strong bid activity we are seeing today, we expect to continue to see robust rebar pricing and, consequently, more new work entering our backlog that reflects these higher priced contracts we are encountering today.

Operator, Operator

Our next question comes from Andreas Bokkenheuser with UBS.

Andreas Bokkenheuser, Analyst

Just two quick questions for me. Can you just give us a little bit more clarity on how you look at the overall cost outlook for 2022? Obviously, on the scrap side, maybe also on the energy side, obviously, there are always some voices in the market talking about higher scrap prices for longer. And obviously, there’s a little bit of an energy crunch going on. So to what extent, if at all, you are impacted by any of this and how you’re kind of looking at 2022 is my first question. And my second question, assuming for a moment, it’s going to be another stellar year for you guys on the margin side, do you have a preference for buybacks over dividends? How should we think about that from a capital allocation point of view? Thank you very much. Those are the two questions.

Barbara Smith, CEO

Thank you. I’ll start, and then Paul can provide more guidance if you have a modeling question. There are various inflationary pressures in the market, but we believe the market is managing to absorb them. We are also working on our cost structure with the aim of keeping our inflation lower than the overall market inflation rates. Our results indicate that we have effectively used productivity to counteract some of these inflationary challenges. The strong market conditions allow for these inflation pressures to be passed through, and it's important to note that what we are experiencing is similar to what others in the market are facing. When we examine specific line items, I will hand this over to Paul for more details. Some areas of our cost structure show signs of moderating inflation, while others may continue to face inflation pressure. In terms of scrap, it fluctuates throughout the year based on market demand and whether scrap is being moved offshore. Unlike many other steel products aside from our fabrication backlog, we operate on a spot basis. Consequently, our products can adapt to these fluctuations, and we continue to see strong demand, which is pivotal in maintaining our metal margins moving forward. Regarding capital allocation, we made it clear in October that we increased the dividend and restarted our share repurchase program. This was a significant increase to the dividend and a noteworthy repurchase initiative. Our Board reviews this continuously, and we will proceed with the current plan, reassessing at the appropriate time to determine future actions.

Paul Lawrence, CFO

Andreas, I’ll just add to your question with respect to energy specifically. In Europe, the latter half of December, we certainly saw energy levels come back down. And as a result, I think we’re through the period of the peak that we saw throughout much of the fourth quarter of 2021 and there should be lower costs ahead. Now, we were sheltered from much of that increase in the spot pricing due to, A, we operating in Poland had significantly lower cost energy than most other countries within Europe as well as a result of our hedging arrangements. And I guess to add a little bit of color to Barbara’s point, if you look at where costs have had the most impact to us, it’s energy, it’s freight, and it’s some of the long-term consumables that we use in our business. Energy, as we’ve seen in our Polish operations, the hedging and activity that we have there to mitigate some of these price spikes certainly have helped. We have a fairly significant fleet of our own rail and tractor trailers that help with respect to some of the challenges on the logistics front here in the U.S. And so, that helps with some of the inflation that we’re seeing there. And finally, with respect to some of the consumables, we’ve prided ourselves with contracts that we have in place with our suppliers, which again allow us to manage those costs and ultimately have greater visibility to those costs. And certainly, as some of the industry, principally the hot rolled sort of slows down its production rates, we would expect to see some of those rates to dissipate in the alloy area. So overall, competitively speaking, I think we’re in good shape with respect to the key areas that have seen inflation this year.

Operator, Operator

Our next question comes from Phil Gibbs with KeyBanc Capital Markets. Please go ahead.

Phil Gibbs, Analyst

The Tensar acquisition expected to close in your third fiscal quarter, that’s going to be I think the biggest acquisition after they grew down one and pretty sizable in terms of the platform. Is there more M&A that you have your eyes on as you grow the Company?

Barbara Smith, CEO

Yes. Thank you, Phil. As you know, you’ve been around a long time, we’re not going to give any specifics as it relates to potential targets, but we’ve worked hard to reposition the portfolio and to have a balance sheet that is impeccable and allows us a lot of flexibility. And clearly, we believe that the addition of Tensar opens up the opportunity to think about some other things. And so, we would look at it as another avenue for growth. Our first objective is to get the acquisition closed and fully integrated and to reap the benefits of the acquisition. But already, we are to the extent we can interacting with the team as we await the regulatory approval, we are finding more and more situations where we both are working on the same job sites and where we have worked together in the past on projects. And so, we’re just really excited to get across the finish line and get it closed so we can really dig into those commercial opportunities that will no doubt exist. And the timing will be really attractive, as I indicated earlier, with the infrastructure bill, we think that that will be just a great time for us to be taking this on, and we really look forward to where we can go from there. But we’re always screening things, and we see a lot of opportunity on the horizon.

Phil Gibbs, Analyst

I know the deal hasn’t closed yet, but regarding Tensar, is there a likelihood that you’re going to have to put more capital into that business as you grow it, or as you see fit with infrastructure and new capacity, it’s on top of the amount of capital that you’re putting down by the business?

Barbara Smith, CEO

Yes. Interestingly enough, Phil, one of the things that was attractive about the Tensar business to us is the higher margins available because it is more of an engineered solution and there is a heavy technology R&D component to it, but secondarily, the lower capital intensity. We believe the footprint that exists within Tensar has sufficient ability to expand and increase the output to meet the demand in the foreseeable future. But if the demand exceeds even our expectations, the investment needed to add manufacturing is order of magnitude less on an initial investment than what you think of in our traditional steelmaking footprint.

Operator, Operator

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

Barbara Smith, CEO

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 once again, happy New Year, and look forward to speaking with you sometime soon. Have a great day.

Operator, Operator

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