Commercial Metals Co

NYSE:CMC

Earnings Call Transcript 2019-Q1

[Operator]

Hello, and welcome, everyone, to the first quarter fiscal 2019 earnings call for Commercial Metals Company. Today's call is being recorded.

After the company's remarks, we will have a question-and-answer session and we'll have a few instructions at that time.

I would like to remind all participants that, during the course of this conference call, the company will make statements that provide information other than historical information and will include expectations regarding economic conditions, effects of legislation, US steel import levels, US construction activity, demand for finished steel products, the company's future operations, the company's future results of operations, the ability to realize the anticipated benefits of our acquisition of certain rebar assets from Gerdau S.A., the investment in our new micro mill in Durant, Oklahoma, and capital spending.

These and other similar statements are considered forward-looking and may involve speculation and are subject to risks and uncertainties that could cause actual results to differ materially from these expectations.

These statements reflect the company's beliefs based on current conditions, but are subject to certain risks and uncertainties, including those that are described in the Risk Factors section of the company's latest annual report on Form 10-K and subsequent quarterly reports on Form 10-Q.

Although these statements are based on management's current expectations and beliefs, CMC offers no assurance that these expectations or beliefs will prove to have been correct, and actual results may differ 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 or on the company's website.

Unless stated otherwise, all references made to year or quarter-end are references to the company's fiscal year or fiscal quarter.

And now, for opening remarks and introductions, I will turn the call over to the Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, Ms. Barbara Smith. Please go ahead.

[Barbara Smith, Chairman, President and Chief Executive Officer]

Thank you, Gary. Good morning and happy new year to everyone joining the call to review CMC’s results for the first quarter of fiscal 2019. I will begin the call with highlights for the first quarter. Mary Lindsey will then cover the quarter’s financial information in more detail and I will conclude our prepared remarks with a discussion of our outlook for the second quarter of fiscal 2019, after which we will open the call to questions.

Before discussing our results, I would like to take the moment to recognize and welcome the approximately 3,000 new employees who joined CMC as a part of the acquisition of the rebar assets of Gerdau that was completed at the beginning of November.

While it's only been a couple of months, our new employees have certainly shown great excitement to be working at CMC.

As announced in our earnings release this morning, we reported fiscal first quarter 2019 earnings from continuing operations of $19.4 million or $0.16 per diluted share on net sales of $1.3 billion.

The impact of the acquisition and the related accounting adjustments affected our results this quarter. However, the underlying results of our operations excluding these items were strong.

Excluding the impact of the non-operational costs such as certain acquisition, legal and integration costs, our adjusted earnings from continuing operations were $41.5 million or $0.35 per diluted share.

This represents approximately a 15% increase in comparison to the same period in fiscal 2018 despite the highest level of rainfall on record that occurred in many of our markets. We estimate that, in our Texas market, this rainfall reduced shipments by approximately 70,000 tons.

Further details of our first quarter and the full-year results will be described by Mary during the financial update.

Also, as noted in our press release on January 3, I'm pleased to report that the Board of Directors declared a quarterly cash dividend of $0.12 per share of CMC common stock for stockholders of record on January 15, 2019. The dividend will be paid on January 30, 2019. This represents CMC’s 217th consecutive quarterly dividend.

Now, I’ll cover some trends and conditions in the markets in which we operate. Despite the volatility that we've seen in the stock market, manufacturers continued to enjoy strong business conditions.

In November, for example, new orders rose at the fastest rate of the past six months, prompting manufacturers to continue to expand capacity to meet demand.

The pace of job creation also remains at the highest we have seen over the past decade, including Friday's announcement of over 300,000 jobs added in the US in December.

A tight labor market coupled with heightened public construction spending should continue to support solid growth in our important end markets.

Overall, the non-residential construction market, a key market for us, continues to perform well with spend increasing approximately 7.3% in comparison to the prior-year.

The Polish economy also continues to grow with GDP estimates for the calendar 2018 being revised upwards to approximately 4.5%, with estimates of approximately 3.5% growth in 2019. Third quarter 2018 GDP growth was the highest in the past 10 years.

With strong market outlook, our strategic growth initiatives have been well-timed and I'm confident, and expect, they will generate attractive returns to our investors.

As I mentioned earlier, on November 5, we closed on the acquisition of certain Gerdau rebar assets, including many mills in California, Florida, Tennessee and New Jersey, as well as 33 fabrication facilities across the US.

This is a transformational acquisition for CMC as it adds approximately 2.5 million tons of melting capacity, as well as approximately 800,000 tons of fabricated rebar shipments based on recent annual shipment volumes.

The acquisition provides us a broader platform of mills to more efficiently serve customers in markets such as the West Coast, the Northeast and the southeast.

In addition, the fabrication facilities provide the pull-through demand which fits our proven vertically-integrated business model.

We expect that this acquisition in time will provide attractive returns for our shareholders through many facets of the transaction. The underlying transaction price being attractive, the long-term financing that was arranged prior to the recent increase in rates and the synergies that we are confident will come.

Over the coming months, we expect to realize synergies from a number of different sources including operational and logistics optimization, commercial excellence practices, procurement cost opportunities, as well as general and administrative expense reduction that will exceed our initial annual run rate estimate of $40 million.

We've already migrated some of the operations to our CMC operating systems and anticipate migrating most of the other operations to our systems during the second quarter.

This progress is much faster than originally anticipated due to the advanced work we were able to do to prepare for the systems integration and will allow for a quicker realization of the synergies.

The second key growth initiative is our Durant, Oklahoma Mill. The ramp-up of production volumes at this new micro mill has gone very well. We shipped almost 60,000 tons, generating approximately $8.3 million of EBITDA in the quarter from this facility. We have now completed the hiring of a fourth crew, which, once properly trained, will lead to increased production at the facility.

This strategic growth initiative is also generating returns higher than originally anticipated due to the strong rebar demand and elevated metal margins.

The production of hot spooled rebar where CMC is once again the first to offer this unique product to the US market and the first in the world to produce it in a continuous, continuous process has been well received by our own fabrication facilities as well as third-party customers.

We also continue to invest for the future. Construction is progressing well at our Arizona micro mill where we are investing in our second spooler to produce hot spooled rebar. Construction is ongoing and we expect to start producing spooled material at this facility during our fourth fiscal quarter of 2019.

In addition, we've begun initial construction activities related to expanding the finished goods production capacity at our Polish facility by approximately 400,000 metric tons.

The investment will allow the facility to fully utilize its existing melt capacity and continue its expansion into higher-margin wire rod and merchant product. We expect the project to be completed by the end of our fiscal 2020.

With that as an overview, I will now turn the discussion over to Mary Lindsey, Senior Vice President and Chief Financial Officer.

[Mary Lindsey]

Thank you, Barbara. And good morning to everyone joining us on the call. As Barbara mentioned, for the first quarter, we reported earnings from continuing operations of $19.4 million or $0.16 per diluted share in comparison to earnings from continuing operations of $31.9 million or $0.27 per diluted share in the first quarter of 2018.

Included in the first quarter 2019 results are after-tax costs of $22.1 million related to the acquisition and other non-operational items. Excluding these costs, adjusted earnings from continuing operations were $41.5 million or $0.35 per diluted share.

Our adjusted earnings from continuing operations for our first quarter of 2019 were approximately 15% greater than the first quarter of 2018.

Now, I will spend some time discussing the purchase accounting for the acquisition. Technical purchase accounting requirements related to the acquisition will primarily affect acquired fabrication operations. In summary, these rules revalue all assets and liabilities acquired including fabrication contracts entered into by Gerdau before the closing date using mark-to-market principles at the time of the closing.

The large majority of these contracts, a backlog of 635,000 tons, acquired by CMC will cost more to complete at November 5 market cost than the contract revenue CMC will receive which was negotiated and fixed by the seller.

This generated an opening balance sheet liability of $133 million. It’s important to understand, however, that this liability is determined as though the fabrication segment were unrelated to CMC and is purchasing rebar at November 5 market prices from a third party.

Of course, the fabrication segment is primarily purchasing rebar from our own mills. So, the large portion of this liability is offset by our mill segment profits and does not represent a cash cost to CMC.

As material is shipped over the coming months, this reserve will be amortized into fabrication segment income. Therefore, assuming rebar prices remain at November 5 levels, from an operating income perspective, we will essentially breakeven on the acquired fabrication business for much of fiscal 2019.

One final note is that, while this classified as amortization of a liability under GAAP, and we would normally expect it to be added back for EBITDA purposes, in this case, since the cost to perform these pre-November 5 contracts are real to the fabrication segment, they have not been included as amortization costs, and so do not improve EBITDA as you can see in our non-GAAP core EBITDA disclosure in our earnings release.

During the first quarter, approximately $11.3 million of the reserve was amortized into fabrication income, reducing the opening balance sheet liability for acquired unfavorable contract backlog from $103.5 million to $122.3 million on the November 30, 2018 balance sheet, as noted in today's earnings release.

In addition, technical purchase accounting guidelines require the reduction of operating income by $4.1 million to reflect the elimination of intercompany profit on shipments from CMC mills to the acquired fabrication facilities.

This effect appears in our corporate and other segments, increasing the apparent loss from this segment. Again, this is a technical GAAP non-cash item.

Overall, excluding the intercompany profit elimination adjustment noted previously, the results of the acquired assets generated operating income of approximately $12.5 million on shipments of 166,000 tons.

The EBITDA generated by the acquired operations was $3.6 million, which again does not include any benefit from the amortization of the unfavorable contract reserve or the intercompany profit elimination adjustment.

As reflected in the earnings release issued earlier today, core EBITDA from continuing operations was $97.7 million for the first quarter of 2019 in comparison to $92.9 million for the first quarter of 2018. However, as mentioned earlier, this does not include the $11.3 million benefit from the amortization of the unfavorable contract reserve loss and includes the intercompany profit elimination adjustment of $4.1 million.

Looking at our results by segment for the first quarter of fiscal 2019, the Americas Recycling segment recorded adjusted EBITDA of $15.4 million for the first quarter of 2019 compared to adjusted EBITDA of $15 million for the first quarter of 2018.

Volumes were relatively consistent with the prior year and both ferrous and non-ferrous prices remain relatively stable during the quarter, which led to the continued good results in this segment.

The Americas Mills segment recorded adjusted EBITDA of $113.9 million for the first quarter of 2019 compared to adjusted EBITDA of $55.2 million for the first quarter of 2018.

The increase in shipment volume from the first quarter of 2018 was primarily from 114,000 tons shipped from the acquired locations and the shipments from the new Durant, Oklahoma facility, which did not have any shipments in the prior-year period.

In comparison to our fourth quarter of fiscal 2018, excluding the shipments from the acquired mills, the volume decreased due to typical seasonal holidays and the historically wet weather that reduced shipment volumes as well.

In the first quarter of fiscal 2019, adjusted EBITDA from the Americas Mills segment, the four acquired mills contributed $11.6 million in the partial month of ownership. The remainder of the increase was primarily driven by an increase in metal margins, which has increased by approximately $80 per ton in comparison to the same period in the prior year and the incremental shipments from the Oklahoma mill, which had not started operations in the prior-year period.

At $375 per ton, this is the highest quarterly metal margin that this segment has earned since fiscal 2008.

We have seen cost increases compared to the first quarter of 2018, including increases in alloys, electrodes and labor costs, as well as maintenance outages, which increased manufacturing costs 13% period-over-period.

The Americas Fabrication segment recorded an adjusted EBITDA loss of $37 million for the first quarter of 2019 compared to adjusted EBITDA of $2 million in the prior-year quarter.

These results include an $8 million EBITDA loss on shipments of 52,000 tons from the acquired facilities. As mentioned previously, this does not include the benefit of the amortization of the unfavorable contract loss reserve.

Volumes in this segment were impacted by the historically wet weather affecting construction activity, which slowed shipments during the first quarter.

Overall, volumes remain very strong on work being both bid and booked. Excluding the acquired backlog, the backlog from our legacy fabrication assets has increased approximately 13% in comparison to the prior-year giving good confidence in the rebar demand for the coming quarters.

As we saw throughout 2018 and in fiscal 2019, selling prices on materials shipped during the quarter continues to rise in this segment as we book work at higher selling prices.

Fabricated rebar contracts booked in the first quarter of 2019 were approximately $285 per ton higher than during the first fiscal quarter of 2018. However, rising costs continue to pressure margins.

Both rebar raw material costs and labor costs, primarily in the West Coast placing business, grew significantly. Construction activity in California is exceptionally busy. And this, together with very low unemployment, has put pressure on availability of experienced ironworkers, reducing placing efficiency.

Some of the more significant jobs that have been challenged are nearing completion and should be done in the coming months.

Assuming stable rebar pricing, we anticipate that our legacy fabrication business will earn positive EBITDA for the second half of our fiscal 2019, while – as mentioned earlier – including the amortization of the contract loss reserve, the acquired fabrication business will essentially breakeven in fiscal 2019.

Current work being contracted reflects current rebar costs and would be profitable if shipped at current rebar prices. It is worth noting that, as a result of the vertical integration model that we have, when combining the consolidated margin earned from recycling operations to the mill operations and to the fabrication segment, that fabricated tons that we ship are profitable to CMC despite the segment loss.

The International Mills segments recorded adjusted EBITDA of $32.8 million for the first quarter of 2019, an increase from $30.9 million from the same period in the prior year. This is the second highest quarterly adjusted EBITDA ever recorded by Poland, second only to the fourth fiscal quarter of 2018 despite a five-week planned maintenance outage in one of the rolling mills.

The strong results were supported by increased shipments of opportunistic billet orders, which lowered overall selling prices for the segment, but maintained the strong margins.

We estimate that the overall outage costs including the cost of the outage and loss margin to be approximately $3.5 million.

The construction market sector demand continues to be strong and we expect that the product mix will normalize during the second quarter.

I would also like to comment on the corporate and other segment, which includes intercompany elimination.

Cost in this segment increased by approximately $35.6 million. This includes the $28 million of net non-operational costs mentioned previously, as well as a $9.7 million increase in the elimination of intercompany profits.

As previously mentioned, approximately $4.1 million of that is related to elimination of intercompany profit on shipments from CMC mills to the acquired fabrication facilities. The remaining $5.6 million is due to the increase in inventory at our legacy fabrication facilities, resulting from low shipment levels due to the wet weather that hampered construction activity. We expect that this will normalize over the coming months.

Turning to our balance sheet and liquidity. As of November 30, 2018, cash and cash equivalents totaled $52.4 million and we had availability under our credit and accounts receivable facilities of approximately $626.8 million.

During the quarter, we drew a $108 million term loan on our credit facility, which together with funds raised by the bonds issued in May 2018 prior to the interest rates rising and cash on hand funded the acquisition.

It should be noted that the purchase price for the acquisition contains a working capital true-up which will be calculated and settled in the coming months.

For the first quarter, capital expenditures were $37.9 million. We estimate that our capital spending for fiscal 2019 will be in the range of $180 million to $200 million, which includes costs related to the acquired assets.

During the first quarter of fiscal 2019, as required by US GAAP, CMC adopted a new accounting standard which changed how the accounts receivable programs in both the US and Poland are reflected on the consolidated statement of cash flows.

The standard, which requires retrospective application to all periods presented, resulted in the collection of cash for certain accounts receivable sold into the program to be shown as cash generated by investing activities rather than operating activities where such activity was reported prior to the adoption of the new guidance.

In the future, as a result of an amendment to the facilities, which has been disclosed in previous 8-K filings, accounts receivable collections covered by the programs will return to the cash flow statement as operating cash flows.

This concludes my remarks. Thank you very much. I’ll now turn it back over to Barbara for the outlook.

[Barbara Smith, Chairman, President and Chief Executive Officer]

Thank you, Mary. Our second quarter is typically our low shipment quarter due to the holidays and winter weather conditions slowing construction activity. However, we remain very confident with a strong outlook for demand in Poland and the US as supported by our fabrication backlogs, as well as the sentiment felt by most large construction companies which have been bullish on their outlook for 2019.

From the metal margin perspective, we anticipate relatively stable to slightly downward moving ferrous scrap costs and relatively stable finished goods pricing, which should result in continued strong metal margins.

From the manufacturing cost side, we do not anticipate significant inflationary pressures from the current levels seen during the first quarter.

We do have some planned outages during our second quarter, but not as significant as the planned outage in our Polish operation, which occurred during our first quarter.

We are confident and anticipate that we are about to turn the corner and working through the backlog in the fabrication business. As Mary mentioned, new fabrication contracts are being booked approximately $285 per ton higher during our first quarter of fiscal 2019 than during the same period of the prior year.

We have some challenging jobs in the West Coast that are nearing completion which will result in the second quarter continuing to be very challenging. However, based on current rebar prices, we see the legacy CMC fabrication segment returning to profitability during the second half of the year as the older, lower-priced work is shipped.

We expect similar seasonal effects at our newly acquired facilities for the second quarter. however, we anticipate that the acquired assets will provide accretive returns similar to the pace they did for their first month of ownership.

In addition to focusing on the transition of these operations to our systems, we are also committed to integrating the CMC culture at these facilities. Customer service excellence is at the center of this culture and we believe this commitment to our customers is critical to maximize returns from the investments we make.

We have a proven track record of delivering recognized market-leading customer service and believe that our new employees are eager to embrace this culture.

Before opening the call for questions, I’d like to take a moment to thank all the CMC employees for their tremendous efforts in closing the acquisition, the work done on the system migrations to date and the integration efforts which have taken place.

All of this has been done while providing the high level of customer service that has come to be expected from CMC.

Thank you. And at this time, we will now open the call to questions.

[Operator]

[Operator Instructions]. The first question comes from Martin Englert with Jefferies. Please go ahead.

[Martin Englert, Jefferies & Company]

Hi. Good morning, everyone.

[Barbara Smith, Chairman, President and Chief Executive Officer]

Good morning, Martin.

[Martin Englert, Jefferies & Company]

You touched on this several times in the release and then on the prepared remarks, but kind of circling back to Americas Mills conversion costs, and they did step up notably quarter-on-quarter. And you flagged some of the cost pressures of alloys, electrodes and some outage expense with overall conversion cost up above $13 per ton, I think, year-on-year. Would you expect any of this to be subsiding in coming quarters here? Do you see any of the costs coming down? And maybe if you could call out what the maintenance or outage costs were for the quarter there.

[Barbara Smith, Chairman, President and Chief Executive Officer]

Yeah. I’ll give it a shot. And if Mary wants to add any color, she can. About a third of that difference was due to the outages and the maintenance cost, and the remainder were the things that we’ve been signaling for a long time, which is frankly affecting all steel producers, and that’s the inflationary pressures around things like electrodes and alloys.

And in terms of subsiding going forward, with the exception to any other outages that may occur in future quarters, that portion of it should subside. And as per historical, we normally try to schedule our outages in the seasonally slower periods, which would be first quarter and second quarter.

[Martin Englert, Jefferies & Company]

And any other outages planned there for the coming quarter here?

[Barbara Smith, Chairman, President and Chief Executive Officer]

We do. We have a couple of outages. Nothing quite as major as what we had in Poland. And we had some other outages. A reheat furnacing reline in Alabama and some outage work in South Carolina this first quarter. In the second quarter, we have several outages. But I will also want to point out that the systems conversion, we will have to take time down in preparation for that conversion. So, there will be some effect there.

[Martin Englert, Jefferies & Company]

Okay. And no other estimates as far as the impact from that outage on the system conversion as far as maybe lost tons or anything like that?

[Barbara Smith, Chairman, President and Chief Executive Officer]

I don't have a good estimate. I think just the seasonal adjustments. We’ll probably take that into account, Martin.

[Martin Englert, Jefferies & Company]

Sure. That’s very helpful. One last one if I could. On the synergy targets, I believe you noted that you would likely now exceed – was it $40 million? What would be your revised, I guess, goal post there?

[Barbara Smith, Chairman, President and Chief Executive Officer]

I think we’d like a little more time of ownership of the assets, as you can fully appreciate. First priority was to come up and be operational on the carveout system day one and not have a disruption to our customers and also to be able to pay all our new employees and get them on to our benefits and then we moved quickly into the holidays. It’s just really early. But, certainly, in the coming quarters, we will be revising that as we have more specifics. But in the early days, we definitely are finding plenty of opportunities for synergies even beyond what our initial estimates were.

[Martin Englert, Jefferies & Company]

Okay, thanks for the added color there.

[Barbara Smith, Chairman, President and Chief Executive Officer]

Thank you, Martin.

[Operator]

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

[Christopher Terry, Deutsche Bank]

Hi, Barbara and Mary. And happy new year. I had a couple of questions. Just thinking conceptually about the Gerdau acquisitions, I think calculating on the one month of performance, we get around 55% utilization and about $100 per ton EBITDA margin versus CMC’s own $140 per ton. How do we think about the opportunity on the utilization and the EBITDA per ton maybe on a one to two-year view? I know it’s going to take some time to get there, but just trying to work out where you see the potential in those assets? Thanks.

[Barbara Smith, Chairman, President and Chief Executive Officer]

Yeah. Thank you, Chris. And I did see your note with an estimate of a 55% utilization, and that's really, really understated in terms of where they're currently operating. And let me try to walk you through why.

First of all, it was a partial month of ownership. Second, we had to come up and be operational on November 5 on a carveout system. And needless to say, it went extremely, extremely well, but there is always things that you find. And so, that impacted shipments to a certain degree for this past quarter and that partial month of ownership.

The other thing I would add is that Gerdau accelerated shipments prior to the close in order to protect customers to make sure that we didn't have any disruption to the customer base.

And then, finally, there was an outage, I believe a reheat outage, in Jacksonville, which was planned, in the month of November.

So, by our estimates, and we don't generally disclose utilization rates, but it was closer to the industry average than that 55%.

And, I guess, one final point. I don't know if you're using rolling mill capacity or melt capacity, but there is significant excess melt capacity at a couple of the acquired facilities.

[Christopher Terry, Deutsche Bank]

Okay, thanks. Thanks. That's helpful. And just maybe – I guess there’s a lot of commentary on scrap falling in the next month or so. And you talked about that. What’s your expectations, I guess, a little bit further out, for the next couple of quarters on the scrap market? And just if you can touch a little bit more on specifics around different end markets on the demand side. Thanks.

[Barbara Smith, Chairman, President and Chief Executive Officer]

Yeah. I think that it's really difficult to predict where scrap prices are going. There are so many factors that play into that. Certainly, there are seasonal effects and we’ll see how winter weather evolves. Sometimes that forces prices up because it’s harder for scrap to find its way to the market. Obviously, as the busy season, construction season evolves, busy production season, that has some effect on scrap prices. But I wouldn't want to make predictions past what the experts are already predicting in the market.

And forgive me, was there a second part to your question, Chris?

[Christopher Terry, Deutsche Bank]

Just if you’d give any comments on the demand picture on specific end markets, how you see it playing out? I know you said you were broadly constructive on the overall end markets, but if you could just dig into some of the specifics, that would be great.

[Barbara Smith, Chairman, President and Chief Executive Officer]

Yeah, thank you. Well, I noted a number of things in my remarks in terms of – you know the unemployment rate and the job creation in December is certainly a positive indicator. I know that there is a lot of nervousness around trade effects and oil prices and residential housing, et cetera, et cetera. And we’re really just not seeing that in terms of the amount of work that’s coming to us to be bid and the amount of work that we’re booking. And our fabrication backlog is our best indication of forward demand and it’s very strong. Our backlog is very high and the amount of bidding that's going on is still quite robust irrespective of seasonal fluctuations. I can also say that – especially with the closing of the acquisition, we have had a number of outreach efforts to our customers, new customers and existing customers. And generally speaking, they see good demand going forward.

[Christopher Terry, Deutsche Bank]

Okay, great. Thank you.

[Operator]

The next question comes from Matthew Korn with Goldman Sachs. Please go ahead.

[Matthew Korn, Goldman Sachs]

Hi. Good morning, Barbara. Good morning, Mary.

[Barbara Smith, Chairman, President and Chief Executive Officer]

Hi, Matthew.

[Matthew Korn, Goldman Sachs]

I had one quick operational question, then I want to ask Mary a little bit more on some of the accounting details. Poland looked very good. Seemed that was up – outperformed given all the work that you had going on for the quarter. What’s your thoughts on a year-over-year basis for the next quarter now that these updates are done? And then, there's the expansion work that you're working on. Does that limit your ability to ship from this mill in any meaningful way?

[Barbara Smith, Chairman, President and Chief Executive Officer]

We expect Poland to have another – I would call it – exceptional year. If you look at last year, it was a record year from financial perspective. And as I've indicated on past calls, that was really a long-term strategy of repositioning that, now moving up the value chain into higher value-add products. And Poland, as the US, is experiencing good market demand, good GDP growth and we expect that to continue. So, quarter over quarter, Poland will have normal seasonal effects.

And I would say one thing that was unique about this December is, as compared to prior Decembers, the way the holidays fell, with Christmas falling on Tuesday, a lot of our customers took extended downtime through the holidays. And what might have been a 7 to 10-day period down in prior years was more like 14 days. And, of course, winter weather is beginning to be a factor in Poland. And it's difficult to predict snow levels and how that might affect their shipments. But, normally, we have a significant seasonal effect in Poland.

In terms of the expansion, it's not going to impact operations. As in many situations like this, we make provisions to accumulate inventory where necessary if there have to be some down periods. But we do not expect this to be disruptive to operations. And we’re in the very early stages. And so, as the project moves forward, we’ll provide further update.

[Matthew Korn, Goldman Sachs]

Hi. Thanks. Let’s hope we never reach the point where seasonality in Texas is the same as it is in Poland.

[Barbara Smith, Chairman, President and Chief Executive Officer]

We certainly didn't forget 100-year record rain levels.

[Matthew Korn, Goldman Sachs]

True. Let me then ask on the fabrication side. I just want to make sure I'm understanding this correctly and the way that you laid out the rest of the year. This past quarter, adjusted EBITDA, negative $37 million. Legacy, if I exclude the $8 million that came in from the acquired assets, legacy [indiscernible], the $29 million kind of flat quarter to quarter, I think, as you had guided.

Hearing you and your prepared remarks, it sounds as though if I think about the legacy piece only, we should see the second half then move to above breakeven. And if I think about what you’re going to report for the full year, for the entire complex, all the fabrication, if I'm going to add back the purchase accounting benefits, $11.3 million this quarter and whatever it is for the remaining part of the year that that – if I add that, you're actually going to see like around a breakeven level. Is that a correct interpretation?

[Barbara Smith, Chairman, President and Chief Executive Officer]

So, let's talk legacy first. I would expect that number to be, as you indicated, similar in the second quarter. Then it will step down and it will take a fairly sizable step down in third and fourth quarter, such that we expect it to end the year being breakeven or positive. And then, you have the Gerdau piece which will continue to show in the segment EBITDA results, the losses which will be offset by the amortization. It's hard to say how the shipments will play out exactly, but you can use a $10 million a month amortization level, and that's probably kind of a safe assumption.

[Matthew Korn, Goldman Sachs]

Got it. Thanks a lot for the clarity. I’ll follow-up with you’ll later on. Good luck.

[Barbara Smith, Chairman, President and Chief Executive Officer]

Thank you, Matthew.

[Operator]

[Operator Instructions]. The next question comes from Timna Tanners with Bank of America Merrill Lynch. Please go ahead.

[Timna Tanners, Bank of America Merrill Lynch]

Hey, thanks. Good morning, everyone. Happy new year.

[Barbara Smith, Chairman, President and Chief Executive Officer]

Happy new year, Timna.

[Timna Tanners, Bank of America Merrill Lynch]

On the discussion of the Gerdau assets acquired, I know that you mentioned the extra melt capacity and I was just wondering if you have any concrete plans to kind of crank that up or under what conditions you think about it? Is it an additional investment or what is the take to kind of eke out some additional plans [ph] from those acquisitions?

[Barbara Smith, Chairman, President and Chief Executive Officer]

We’re not prepared to discuss specific plans at this time, Timna. I think, first and foremost, it would depend upon market demand. And there would be some investment, obviously, in the downstream from the melt shop in order to debottleneck and take advantage of that excess melt.

Certainly, billet sales have been strong of late. And to the extent that there's opportunistic billet sales, we will always take advantage of those opportunities. But, right now, we don't have specific plans that we’re prepared to share.

[Timna Tanners, Bank of America Merrill Lynch]

Okay, that’s helpful. So, debottlenecking. And then, my second question is just on the European market, the last conference call, you sounded a bit more cautious on the outlook for Poland coming off of a really strong fiscal 2018. And the tone in this call sounds much more upbeat. So, I'm just wondering if you could help me understand if maybe I'm missing something or if you changed your mindset there? And also, if you have any thoughts on the Turkish rebar, where it's going, given the further restrictions EU and US? Thanks.

[Barbara Smith, Chairman, President and Chief Executive Officer]

Yeah. I think, Timna, as far as Poland and the outlook coming out of our August quarter, we were trying to temper expectations candidly. We still expected Poland to have a fabulous year in 2019. We knew we had the various outages. We never really forecast billet sales because they come and they go and they are very opportunistic. So, it was really to temper a little to not take last year's results and then increase that in terms of our guidance to the Street. And we now have one quarter under our belt, and the quarter was quite strong and we did take advantage of some opportunistic billet sales. Kudos to the team in Poland and their execution of that outage, which actually came in a little bit ahead of schedule. And so, we also are very cognizant in Europe that the safeguard measures had an expiration date, which, frankly, is coming up here soon, and we were uncertain how that might get resolved going forward. And so, all those things combined, we’re kind of the nature of having a little bit of caution coming out of such a fabulous year last year.

Having said that, we’re still very bullish on Poland. Demand is very good. We’ve repositioned these facilities very nicely. They're generating excellent returns. They’ve increased their flexibility tremendously by expanding their product mix over time. And we fully expect Poland to have another really fabulous year.

In terms of Turkey and that situation, thus far, we’re not hearing anything about a removal of the second 25%. However, as everyone knows, these trade matters can change quickly. And, certainly, we monitor that all the time and we do whatever we can to ensure that we have a level playing field.

But at this point in time, while we do see from time to time some Turkish offers, the trade actions that the administration have put in place seem to be working and having their intended effect. And at this moment, we’re not seeing a change in that.

[Timna Tanners, Bank of America Merrill Lynch]

Okay, thank you.

[Barbara Smith, Chairman, President and Chief Executive Officer]

Thank you, Timna.

[Operator]

At this time, there appear no more questions. Ms. Smith, I’ll turn the call back to you for closing remarks.

[Barbara Smith, Chairman, President and Chief Executive Officer]

Okay. Well, thank you, everyone, for joining us on today's conference call and we look forward to speaking with many of you during our investor visits in the coming days and weeks. Have a great day.

[Operator]

This concludes today's Commercial Metals Company conference call. You may now disconnect your lines.