CMC Earnings Defy Weather and Seasonality

The Americas Recycling segment’s adjusted EBITDA fell to $10.1 million compared to $17.2 million in Q2 2018, although shipment volumes were relatively consistent with the previous year. Ferrous scrap prices normally rise in the winter as availability of scrap decreases. “However, this year we saw an unusual $30 to $40 decrease in January driven primarily by a lack of export volumes,” said Mary Lindsey, Senior Vice President and CFO. She added that the export market returned in February and scrap prices have trended upwards in the last few weeks.

The American Mills Segment saw volumes increase due to shipments from acquired Gerdau locations. Weather-related issues impacted consolidated shipment volume by approximately 100,000 tons and, excluding the acquired assets, the metal margin improved by $98 per ton year-over-year. Margin improvement, however, was offset by a 28 percent increase in costs including higher alloy and electrode prices and labor costs.

Segment production was affected by several unplanned outages in the quarter, construction site holiday breaks, extreme weather and customers waiting for the impact of scrap decreases.

The American Fabrication segment suffered a $49.5 million EBITDA loss in the second quarter due to lower shipments and completion of orders contracted at lower prices before Section 232 tariffs took effect. Lower priced backlogs are finished and new work for the first half of 2019 is booked at an average of $1,000 per ton.

CMC recently announced a $20 per ton price increase and declined during the earnings call to say if the increase was sticking. Said Smith, “As all of you know, the hot roll side of the steel industry has seen some margin erosion in the more recent period. We’re frankly not seeing that as reflected in our metal margin quarter-to-quarter,” Smith said. “Even in the face of lighter shipments and declining scrap prices in January, we saw the margins hold firm. So, we think there are different dynamics between the flat roll markets and the long products markets. And we think that’s a really strong indicator going forward for the back half of the year.”

Smith was asked if there has been any purchasing hesitancy by customers waiting to see how the new NAFTA and Section 232 tariffs playout. “We don’t see the pattern changes from our customers; they tend to be more sensitive to looking at raw material price changes. So, we haven’t really seen anything in that regard,” said Smith. “I wouldn’t want to make a prediction on how this plays out or the timing. Obviously, we follow it carefully and we’re tangentially involved in providing input into the process, but it’s been going on a long time and I wouldn’t want to make any predictions.”

Lindsey added that the company is in favor of a quota system with Canada and Mexico, but finding a trade solution is complicated. “There are a number of different ways to solve this,” said Lindsey, “but we just want a fair and level playing field. We know we’re low cost and we can compete if we have a fair and level playing field. And I think that’s consistent with the objectives of the administration.”

CMC plans to invest about $200 million to $250 million into the Gerdau facilities over the next five years for small improvement projects and maintenance. “If you look at the amount of capacity we acquired, that level of investment is probably a good sustaining level,” said Smith.

Commercial Metals Company and its subsidiaries manufacture, recycle and market steel and metal products, and related materials and services, through a network of facilities that includes eight electric arc furnace minimills, two EAF micro mills, a rerolling mill, steel fabrication and processing plants, construction-related product warehouses, and metal recycling facilities in the U.S. and Poland.