Commercial Metals Company - Q2 2023

Transcript

Operator (participant)

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 Q&A 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. It 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 statement sections 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. 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 (Chairman of the Board, President, and CEO)

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 in 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-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.

To sum up, we continue to monitor a range of indicators such as inflation, interest rates, and unemployment, which are fueling recessionary concerns. 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 seven 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 involves significant multi-year investments 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 state 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 consumes 5 to 6 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. Just 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 plastics 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. A 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. The outlook is promising. Industrial activity in Central Europe continues to be impacted by the ongoing energy concerns and weak economic sentiment. 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. 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 cost and operational flexibility, will allow us to maintain volumes above historical levels. Our natural gas contract pricing resets in early April, which should meaningfully benefit our cost of production. 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 the U.S. and European markets. Current reconstruction plan would require approximately 5.5 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. Project is on track for a startup 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 AZ 2 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 target. 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.

Paul Lawrence (SVP and CFO)

Thank you, Barbara. 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's 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 with of $215 per ton remained well above the historical averages 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, constrained second quarter volumes by a low- to mid-single-digit percentage when compared to a year-over-year level. 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. 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. 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. The 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 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 28th, 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 flow 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.

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. Earlier this week, CMC announced the acquisition of Tendon Systems, a leading producer of post-tensioning solutions in the Southeast United States. 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.

Barbara Smith (Chairman of the Board, President, and CEO)

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 volumes. The recent price increases across our long steel products in North America are expected to stabilize metal margins. Roll 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.

Operator (participant)

At this time, we will now open the call to questions. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw a question, please press star then two. We ask that you please limit yourself to one question and one follow-up. If you have further questions, you may re-enter the question queue. At this time, we will pause just momentarily to assemble our roster. Our first question here will come from Emily Chieng with Goldman Sachs. Please go ahead.

Emily Chieng (Head of Metals and Mining Equity Research)

Good morning, Barbara and Paul. 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 are perhaps some of the impacts from this volatility more broad-based in nature?

Barbara Smith (Chairman of the Board, President, and CEO)

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

Emily Chieng (Head of Metals and Mining Equity Research)

Okay, understood. 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? If I could take that one step further, how do you think about what that backlog extends into, in terms of timelines for the rest of the year?

Barbara Smith (Chairman of the Board, President, and CEO)

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

Emily Chieng (Head of Metals and Mining Equity Research)

Great. Thank you.

Barbara Smith (Chairman of the Board, President, and CEO)

Thank you, Emily.

Operator (participant)

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

Timna Tanners (Managing Director)

Yeah. Hey, good morning. Thanks for all the updates. Wanted to ask a high-level question and then drill down a little. Starting out with the. I know the comments on Turkey in the context of the market, really helpful. Are you seeing Turkey export less or fewer imports into the U.S. market already? In the same vein, can you comment at all on the expected impact of Buy America, perhaps also on the threat of imports into the country?

Barbara Smith (Chairman of the Board, President, and CEO)

Thanks, Timna. you know, Turkey, Jason Brosius, who you know, has done a lot of great analytical work around that, and I think we're providing that in our investor relation materials that we're putting out on the website. I guess I would say at this point, no doubt it's gonna have impacts, both, more immediate impacts and then longer term impacts. I think it's still a little bit early to know how that's going to effectively play out. What we do know, of course, is that it had a huge impact on the steel producing region, that post earthquake, the industry has had difficulty restarting because so many of the workers have been displaced.

Then we know longer term, there's going to be those, the rebuilding activity, which is going to require a lot of the demand for increased rebar that you wouldn't necessarily see on an ongoing basis in that, in that market. You know, we've experienced different but other disaster situations here in the U.S., hurricanes and the like. You know, generally the rebuilding phase takes a little bit period of a longer period of time. While I think the government there will be moving in great speed to try to recover from the travesty, it just practically speaking, you know, will take some time to, you know, remove the debris and then rebuild. At this point, I can't point to, you know, hard evidence of major impacts.

We did try to speak broadly there, as you, as you know, in my opening remarks on some of the things that we're watching. You know, we're watching their procurement of scrap. We're watching and will continue to watch, you know, how those operations recover, and then how that's gonna impact trade flows. You know, I would think in the medium to longer term, most of that material is gonna stay domestic, which should, you know, tighten up markets in Europe and in the U.S. Buy America, as you know, is going to be supported and has always been, you know, supported in the U.S. for most of the infrastructure spending.

That is another reason why we remain bullish on this market that, you know, the ongoing investment that's been increasing related to the prior Infrastructure Bill, finally materializing in the market, has that Buy America component. The future spending will also take advantage of that and are really helpful to our business.

Timna Tanners (Managing Director)

Okay, great. That's helpful. Yeah, the Turkey cadence just seemed really quick. I'm just wondering if you were seeing it or maybe the reports we were hearing were a little early. Thank you for that. Just drilling down a little bit, I wanted to understand Tensar a little bit because I know on the last call you said that there were some unusual reasons for $11.4 million of EBITDA that production challenges. In this quarter, you're reporting, I don't know, just what? $8 million-$9 million overall and $7.5 million in U.S. Is that just seasonal or is there some continuing production challenges? If you could also comment on the higher CapEx number while we got you. Thank you.

Barbara Smith (Chairman of the Board, President, and CEO)

Thank you, Timna. Let me take a crack at Tensar and I'll let Paul comment on CapEx. We have two, you know, kinda I'll call it unrelated things going on. We did have a press failure in our Georgia facility some months ago and had been waiting because of supply chain issues for the replacement press. That press was installed last quarter and as you can appreciate, we, you know, have been debugging that and ramping that up. At this point, you know, the facility has largely recovered from that incident, but it did impact prior quarters and in this reporting period as well.

In terms of overall, you know, what are we seeing in terms of volume and activity level in Tensar has a greater seasonal effect within this quarter than even CMC. It is generally a more dramatic seasonal downturn than our traditional CMC business, this quarter was no different. You know, just as weather impacted us, it also weather impacted Tensar, but they typically see a more dramatic seasonal effect. If we look at other indicators, which we've been tracking in terms of. You know, this is a product that is an innovative product and a growth product in the market. If you look at their volume, you know, last year relative to this year, they are seeing the expected growth in volume.

You know, the innovative product is making inroads in the marketplace due to the unique characteristics and the construction problems that it solves. That is, you know, a very good sign for us. The second thing is, you know, they are constantly innovating and introducing new products into the market, they introduced a new product over the last number of quarters, and that product is receiving very strong customer acceptance in the marketplace, which is another real encouraging sign. you know, every time we introduce a new product, it has enhanced features and typically carries margin associated with those enhanced features. we're very, very encouraged and, you know, the team there fully expects to have a really interesting and an exciting construction season in the, in the coming quarters.

Paul Lawrence (SVP and CFO)

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 earth-moving costs. We're also taking the precautionary steps of, you know, 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. Those require some down payments to be placed, which has increased our spend.

Naturally, we are seeing some inflation in some of our CapEx projects that we have, and that's a portion of it as well.

Timna Tanners (Managing Director)

Great. Thanks for all the information.

Barbara Smith (Chairman of the Board, President, and CEO)

Thanks, Timna.

Operator (participant)

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

Tristan Gresser (Head of Steel Equity Research)

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, you know, the spending in billions for on the reshoring side that you also laid out, in terms of the steel intensity there for this 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 plants? If there also in terms of the timeline when you start building and you complete those type of facility, any kind of information that can help us out, you know, putting a number behind this kind of IRA reshoring trend that will help you out as well.

Barbara Smith (Chairman of the Board, President, and CEO)

Thanks, Tristan. A really great question. A couple of comments I would make, and staying with, you know, some of the examples that we laid out. Because we're involved in a number of chip facilities, I think we have a really good understanding of the steel intensity, you know, for those types of projects. Those projects, you know, are multibillion-dollar projects as you're well aware. There is a very significant steel intensity, for example, in a chip facility because of the structural integrity that you need. I would also say those projects are, generally constructed in phases, and so, you know, they will begin and complete phase one, and then they'll move on to phase two, et cetera.

And of course, given our breadth of capability and breadth of products, and size and scale and geography, you know, we're really well positioned to provide excellent customer support to these really large, real intensive projects. I'd also say in the other example of LNG, you know, again, this depending on the size and scale of the project, you know, we know from our experience of supporting these projects historically, you know, kind of what the level of steel content that goes into that. But I would further add on a LNG facility that requires some different types of structural steel, Cryobar, high-strength steel, as well as, you know, traditional black bar.

CMC is, you know, one of very few that can extend to our customer that full range of products that they need to support that. I'm not, I'm not prepared to tell you know, X number of tons per project because, you know, they all vary. They're all very, very different. I think that the message that we're trying to convey is, you know, that the activity is real. There are multitude of these projects. They are multi-year. They are funded before they begin. You know, corporates have very strong balance sheets, and so they're less affected by, you know, the earlier question around some of the banking challenges that are going on in the marketplace.

That, in our view, is going to provide significant support to business activity levels going forward, you know, unlike when we've been in tumultuous times in the past or unlike periods in the past.

Tristan Gresser (Head of Steel Equity Research)

That's, that's really helpful. If I may just follow up, just trying my luck there. Is it in terms of steel intensity, is it, is it fair to assume that we're closer to the steel intensity you provided for infrastructure rather than non-non-residential?

Barbara Smith (Chairman of the Board, President, and CEO)

I'm sorry, Tristan, can you repeat? 'Cause it was breaking up a little bit on my end.

Tristan Gresser (Head of Steel Equity Research)

Sorry. When you look at the steel intensity of those plants, semiconductor investment, all that, I know you're not prepared to share a number, but just wondering if, you know, in terms of steel intensity for rebar, is it closer to the infrastructure figure that you provided or closer to the non-resi figure you provided?

Paul Lawrence (SVP and CFO)

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

Tristan Gresser (Head of Steel Equity Research)

Okay. That's really helpful.

Barbara Smith (Chairman of the Board, President, and CEO)

Yeah. Tristan.I don't know if you have a follow-up, but, you know, one thing I failed to mention in our earlier conversation related to these projects. These projects also are great projects for the application of our products that Tensar makes. You know, that's another positive indicator for growth in that product line as well.

Tristan Gresser (Head of Steel Equity Research)

Got it. Maybe just a second question, 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. We've seen, you know, the U.S. really putting a lot of policies in place to support non-residential activity. 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 in both regions, are you able to compare the level of political support in both of those region, and how do you compare that?

Barbara Smith (Chairman of the Board, President, and CEO)

Yes, that's a great observation. As I indicated in my opening remarks, you know, we are very encouraged by the activity in Poland to support the residential market. In terms of this, you know, interest rate help that they're going to provide to first-time home buyers. I think that's a real, you know, positive sign. You know, I'm encouraged that other parts of Europe are looking at this issue and trying to find ways to lend support. I think, I think the EU is, of course, further behind than what we're seeing here in the U.S. because, for example, the CHIPS Act was approved last year and, you know, now we're starting to see the green shoots from that.

You know, we haven't even talked about wind and solar, which will be big beneficiaries of that. That is a, you know, a piece of the market that plays really well to our sweet spot. I would say this, in Europe, the energy transition, you know, there already has been a lot of talk about country and legislative support to assist with the transition, which is going to involve significant investment in existing facilities, in new technologies and, you know, green energy and all of that. I think it's coming over there. It's just there have been, you know, some obvious unexpected impacts that have been kind of overshadowing in Europe when the invasion occurred, you know, last year.

Tristan Gresser (Head of Steel Equity Research)

Okay. Thank you. Thank you very much.

Barbara Smith (Chairman of the Board, President, and CEO)

Thank you, Tristan.

Operator (participant)

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

Phil Gibbs (Managing Director)

Hey, good morning.

Barbara Smith (Chairman of the Board, President, and CEO)

Good morning, Phil.

Phil Gibbs (Managing Director)

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?

Barbara Smith (Chairman of the Board, President, and CEO)

Thanks, Phil. We are really excited as, you know, you follow this industry, and there have been a number of greenfield projects, and it's, you know, no surprise, the supply chain challenges that have affected any business. We are so proud to be really completing and commissioning according to our original schedule. 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 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. As I indicated, we believe we'll be producing commercial grade product within the fourth quarter. I'll add a slight caveat to that and say that, you know, first we're gonna be commissioning rebar, but then we will follow that with the commissioning of merchant product. While we're, you know, ramping our rebar output, we will have to take time on the mill to commission the merchant products. That will be going on simultaneously.

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, you know, specifics in terms of our volume expectations. 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.

Phil Gibbs (Managing Director)

Thanks so much. Just to 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, scrap's moved up, but, you know, you might have some, you know, excess inventory with the outages, so trying to parse all that out. Thanks so much.

Paul Lawrence (SVP and CFO)

Yeah, Phil, you're exactly right. You know what, typically, we use working capital, or working capital is a use of cash in the first quarter, and it's usually a release 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. You know, 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.

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. We should see elevated working capital releases for the coming two quarters.

Phil Gibbs (Managing Director)

Thank you.

Paul Lawrence (SVP and CFO)

Thanks, Phil.

Barbara Smith (Chairman of the Board, President, and CEO)

Thanks, Phil.

Operator (participant)

Our next question will come from Lawson Winder with Bank of America. Please go ahead.

Lawson Winder (Equity Research Analyst)

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?

Barbara Smith (Chairman of the Board, President, and CEO)

Yeah. I mean, I would say we're on track for the 60 range. Probably the lower end than the higher end of that for this fiscal year. You know, we haven't entered that busy season yet. All the signs are really, really encouraging there.

Lawson Winder (Equity Research Analyst)

Excellent. 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 US? Thanks.

Barbara Smith (Chairman of the Board, President, and CEO)

You know, Turkey is the largest factor. There are ebbs and flows from the various importing countries from time to time. Algeria is one that I would note. Those mills, some of those are Turkish mills. They're really we kind of lump them into Turkey impact. I would say Algeria is making, taking up some of the slack with the earthquake disruption that took mills down in Turkey, where they can, of course. There's not any meaningful impacts that we're seeing.

Lawson Winder (Equity Research Analyst)

Okay. Thanks very much.

Barbara Smith (Chairman of the Board, President, and CEO)

Yeah. Thank you.

Operator (participant)

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

Alex Hacking (Equity Research Analyst)

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

Barbara Smith (Chairman of the Board, President, and CEO)

Yeah. Thank you, Alex. What I would say is, you know, the signs are there that the activity is moving forward, the pre-planning activity, all of the Dodge indices are pointing towards movement forward. As you point out, you know, there's not a, we can't point to a large set of bidding or booking activity that is specifically tied to that. These are, you know, just like regular infrastructure bills. We always say there's a 12-18 month lag between when a bill is approved and when you see the activity. So, you know, the growth in infrastructure last year was really related back to the FAST Act. Couple things I would note.

The state budgets are one of our best indicators because first you know, the federal allocated it by state, and then the states have to put their funding in place and their project plans. A number of key states that we've looked at have either authorized multi-year infrastructure budgets to support what's coming from the federal funding, or they are, you know, in the process of approving those budgets. There's, you know, significant amounts of money that is being allocated in anticipation of that. I would say in general, the largest consuming states are healthy in terms of their balance sheets, and they are being very proactive in planning for those infrastructure projects like Texas and Florida.

I mean, we are seeing significant activity in both of those states. Both of those states have funding plans. It's coming. How fast it ramps up to the, you know, to the million and a half tons at this stage is a little more difficult to predict until we get to the bidding and booking. I would expect, you know, by our next update, you know, maybe we're gonna have something more concrete to share in terms of how that's flowing from pre-planning to the actual project and bidding and booking.

Alex Hacking (Equity Research Analyst)

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

Barbara Smith (Chairman of the Board, President, and CEO)

Oh, thank you, Alex. We appreciate the feedback.

Operator (participant)

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

Barbara Smith (Chairman of the Board, President, and CEO)

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. I hope everyone has a great day. Thank you so much.

Operator (participant)

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