Commercial Metals Co

NYSE:CMC

Earnings Call Transcript 2020-Q3

[Operator]

Hello and welcome everyone to the Third Quarter Fiscal 2020 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 which will 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 the economic conditions, the impact of Covid-19, effects of legislation, U.S. steel import levels, U.S. construction activity, demand for finished steel products, the Company's future operations, the Company's future results of operations and capital spending.

These and other similar statements are considered forward-looking and may involve forecasts and are subject to risks and uncertainties that could cause actual results to differ materially from the expectations. These actual results – 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 statements disclaimer section on the Company's latest annual report and Form 10-K and subsequent quarterly reports from 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 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 and assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances or otherwise.

Some numbers presented are 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 Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, Ms. Barbara Smith.

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

Good morning and welcome to our third quarter earnings conference call. I’d like to begin with a sincere thank you to our 11,500 CMC employees around the world. The Covid-19 crisis forced each of them to make significant adjustments and sacrifices in nearly every aspect of their lives. In the phase of these challenges, they proved they are adaptable, creative and collaborative, while showing their commitment to their communities, and each other through countless acts of kindness.

The last several months clearly demonstrated the power of CMC’s people and our culture. They are the backbone of CMC and I am enormously proud of how they performed during this personally and professionally difficult time.

Turning to our third quarter results, I will now review highlights from the quarter including a discussion of the impact of COVID-19, as well as our response to the crisis and also provide a brief update on current business activity levels. Paul Lawrence will then cover the quarterly financial information in more detail and I will conclude our prepared remarks with a discussion of our outlook for the fourth quarter of fiscal 2020, after which we will open the call to questions.

As announced in our earnings release this morning, we reported fiscal third quarter 2020 earnings from continuing operations of $64.2 million or $0.53 per diluted share on net sales of $1.3 billion. Excluding the impact of certain charges which Paul will cover in more detail our adjusted earnings from continuing operations were $70.4 million or $0.59 per diluted share.

Both our GAAP and adjusted earnings from continuing operations increased sequentially from the second quarter. CMC’s entire third quarter was impacted by the COVID-19 pandemic. From the onset of the crisis, each of the U.S. jurisdictions where we operate, CMC was recognized as an essential business reflecting our company’s role in supplying the necessary materials and services for the construction of much of our nation’s most vital infrastructure.

Just a few examples of these critical projects include an expansion of the MedStar Georgetown Surgical Hospital in Washington D.C., the new Emory Winship Cancer Treatment Center in Atlanta, the D.C. Clean Water Project and the refurbishment of the New York LaGuardia Airport.

The regulatory designation in Poland is different, but the practical outcome was identical and construction activity continued largely unabated. While the essential business designation allowed CMC to avoid any mandatory curtailments, we took actions to ensure our people remain safe and all our plants remained open serving customers.

CMC acted early to institute practices that limited the spread of the virus at our facilities including social distancing, enhanced sanitation, visitor restrictions, and remote work arrangements. We formed a task force to respond to a constantly evolving set of circumstances in a timely and open manner. This group worked tirelessly to coordinate efforts and share best practices across our organization.

I am very proud to report that not only did CMC avoid any infection-related disruptions, we also avoided any loss of productivity which is highlighted by our third quarter cost performance. This achievement can be attributed to our operating teams who given any set of challenges always find a way to improve efficiency.

The COVID-19 pandemic created economic stress and uncertainties unique in our lifetimes. In such an environment, we concentrated our efforts on the elements of our business we can directly control, in particular, customer service, cost and cash management. On the customer front, we enhanced our collaboration even further to accommodate changing needs in an environment where forward visibility was diminished.

Fluid situations in their own businesses led customers to quickly adjust product needs, quantities, turnaround times, and even delivery procedures. Our ability to rapidly adapt was recognized with increased market share in both the U.S. and Poland. The difficulties presented by the pandemic gave CMC an opportunity to further prove our value to customers and our commercial, operations and logistics teams seized upon it.

The next lever, cost management yielded equally impressive results. As noted in our press release, the Americas mills achieved its best conversion cost levels since our November 2018 acquisition. This accomplishment was aided by our ongoing optimization efforts that included the earlier decision to curtail California melting operations and supplied billet from more efficient plants.

Cost reduction also benefited from the operating flexibility gained through the 2018 acquisition. In fact, in an environment of general economic malaise, we continued to improve. As an example, one of our mills set a new quarterly production record, while in May, two others posted their best monthly conversion cost under CMC ownership.

Not to be outdone, our Polish team demonstrated their ability to lower costs and improve efficiencies. Conversion cost per ton declined both on a sequential and year-over-year basis, despite modest reductions in shipping volumes.

Additionally, in our Fabrication segment, reduced discontrollable cost per ton to the lowest level in two years as we continue to optimize our network of Fabrication facilities allowing us to rationalize the location in California.

Turning to cash management, you can clearly see the results on our balance sheet. We nearly doubled our cash balance during the quarter, increasing it by $230 million and ending the quarter with $462 million of cash on hand. We tightly controlled working capital striking the right balance between keeping material in stock to provide a high level of customer service and mitigating the amount of cash tied up in inventory.

We reduced inventory by approximately 10% from the second quarter, much of this reduction was driven by our efforts to optimize our network and eliminate redundant stock. We also closely monitored accounts receivable and we are proactive in collection efforts. We do not occur any significant deterioration or aging.

In total, CMC was able to harvest $157 million of cash from working capital during the quarter and generated cash from operations of $278 million. As a result, our strong balance sheet and leverage profile improved further. Our net debt to trailing 12 month adjusted EBITDA stands at 1.2 times versus 1.6 times at the end of the second quarter and our net debt to capitalization improved from 32% to 24%.

CMC’s performance within a turbulent economic environment demonstrates both strength of our vertically integrated business model, as well as the attractiveness of construction end-markets.

Looking first oat our vertical structure, a robust backlog of prefunded Fabrication project supported volumes at our domestic mills during the quarter. Additionally, our downstream presence provided our mills with four rigs’ ability which allowed us to optimize production during the quarter and manage conversion costs and logistics costs.

The stabilizing nature of Fabrication was evident in the third quarter, while many businesses across the U.S. industrial landscape experienced margin compression, our Fabrication business achieved significant expansion as spreads between fixed selling prices and lower spot input cost widened. This more than offset market challenges faced in our upstream recycling business.

More broadly, the third quarter show that construction end-markets don’t behave like other steel-consuming sectors. They are not driven by near time discretionary spending and don’t quickly shutdown. Projects already underway are prefunded and will generally become income-generating properties upon completion. This means that work continues even as other sectors slow. We also experienced the same pattern during the last recession.

The combination of our vertical structure securing mill volumes, the impact of expanding margins on fixed price work and the resilience in construction activity led to an extraordinary outcome when viewed within the broader global economic context.

CMC’s finished product volumes, which excludes recycling declined only modestly year-over-year. Our gross margin as a percent of net sales actually increased from a year ago, while core EBITDA and EBITDA margins also increased.

As a reminder, our Polish operations also benefited from an identical vertical structure, which helped to stabilize performance during the quarter in an equally challenged European market.

Let me now make a few comments regarding current activity levels. Our domestic mills remain busy and are shipping at a historically normal rate for this time of the year. We did experience a temporary decline in order rates for merchant products during April as service centers purposely destocked. There was a rebound in merchant volume in May and buying patterns appear to be normalizing as the economy reopens.

The volume in our current Fabrication backlog is near record levels and metal margins on network are very attractive at current rebar prices. Fabrication bidding activity has remained strong. Our recent booking rates has also been good. Metal margins within our Americas Mills segment exited the third quarter at levels above historical cycle average.

Also as a reminder, the majority of our U.S. business is driven by prefunded construction projects that are six months or longer in duration. Construction demand in Poland continues to also be robust as I noted earlier.

Finally, as I stated in our press release, the Board of Directors – as stated in our press release, the Board of Directors declared a quarterly cash dividend of $0.12 per share of CMC common stock for stockholders of record on July 6, 2020. The dividend will be paid on July 20, 2020. This represents CMC’s 223rd consecutive quarterly dividend.

With that as an overview, I will now turn the discussion over to Paul Lawrence, Vice President and Chief Financial Officer to provide some more comments on the results for the quarter.

[Paul Lawrence, Vice President and Chief Financial Officer]

Thank you, Barbara, and good morning to everyone on the call today. I would like to begin with a few comments regarding CMC's balance sheet and liquidity profile, which is currently at its strongest levels in well over a decade. Our purposeful actions over the last several quarters to reduce debt levels have positioned us well to maneuver through today's uncertain environment.

As Barbara mentioned, net debt stood at just 1.2x trailing EBITDA at quarter end and our gross debt ratio was two times. We have a conservative capital structure with net debt of only approximately $700 million outstanding. Given the current economic backdrop, we are encouraged to see each of our bonds trading above par a sign that creditors also appreciate our solid financial position.

At quarter end, we had liquidity in excess of $1 billion including $462 million of cash, and $604 million of availability on our credit and accounts receivable programs. We currently have no plans or need to draw against our credit facilities.

Turning to the third quarter financial results, we reported earnings from continuing operations of $64.2 million or $0.53 per diluted share, compared to $78.6 million or $0.66 per diluted share in the third quarter of 2019. We incurred net after-tax charges of $6.2 million during the quarter, primarily related to our decision to continue to consolidate our West Coast operations and exit a Fabrication facility.

This is another action in our ongoing effort to optimize CMC’s network following the 2018 rebar asset acquisition. Vast majority of the charges taken were non-cash and we expect to realize cost benefits in future periods.

Our core EBITDA from continuing operations was $154.8 million for the third quarter of 2020, a slight increase from the $153.6 million reported in the third quarter of last year despite the pandemic impacting global economy.

The Americas Recycling segment recorded an adjusted EBITDA loss of $1.7 million in the third quarter of 2020, compared to EBITDA of $12.3 million in the same period last year. The market environment for scrap was already challenging exiting the winter months. The additional strain of COVID-19 pushed lower pricing even lower and caused several third-party mill customers to significantly reduce their buy programs.

We were able to preserve metal margins during the quarter by making early and rapid adjustments to our scale prices and tightly managing inventory turns. However, this was more than offset by the effect of sharply lower volumes as industrial scrap generation was meaningfully slowed due to the temporary idling of manufacturing facility.

The total ferrous and non-ferrous shipments declined by 21% from a year ago hitting their lowest mark in over three years. We did not however have any issues getting sufficient scrap into our mill operations. The Americas Mills segment recorded adjusted EBITDA of $133.2 million for the third quarter of 2020, compared to adjusted EBITDA of $158.1 million for the third quarter of 2019.

Shipment volumes declined by only 4% from a year ago. When compared to the broader steel market which will likely experience a sharp double-digit decrease, we believe the single-digit decline highlights the relative strengths and near-term stability of construction end-markets. Shipments of merchant products also declined only modestly, due largely to being able to gain incremental market share.

Barbara mentioned, our domestic mills achieved their best per ton cost – conversion cost levels in the last two years despite incurring some incremental cost relating to keeping our employees safe. Metal margins remained at historically high levels. The third quarter average of $367 per ton increased $17 per ton sequentially as scrap costs fell, but was down $19 from a year ago.

Over the last eight quarters, we have managed our metal margin within a $50 band from $350 per ton to $400 per ton. This stability occurred within an environment of pronounced price volatility in the broader steel market. As a comparison, during the same timeframe, margins over scrap for hot rolled coil the domestic markets’ biggest largest volume product category experienced a $250 per ton swing from peak to trough.

The Americas Fabrication segment recorded its best quarterly profit in nearly twelve years. Adjusted EBITDA of $31.9 million improved significantly from the adjusted EBITDA loss to $23.3 million in the prior year quarter.

Similar to the American Mills, volume was only marginally impacted by select job outages in certain jurisdictions. Financial results improved as a result of the rising average selling prices against declining rebar input costs which led to margin expansion. Average selling prices of $966 per ton increased $41 per ton, compared to the third quarter of 2019.

Margin in our backlog is solid and we expect material to be profitable when shipped in future quarters based on current rebar pricing. Also, the volume of our backlog remains strong sitting at approximately 96% of recent peak levels.

International Mill segment recorded adjusted EBITDA of $14.3 million for the third quarter of 2020, compared to adjusted EBITDA of $24.1 million in the prior year quarter. The modest decline in shipments from a year ago was driven by lower opportunistic billet volumes last year.

Finished goods shipments out of our mill actually increased by 2% year-over-year helped by continued strength of demand for construction steel and market share gains in merchant and wire rod products. Within an environment of contracting Central European industrial activity, our Polish team added new customers and took share.

Metal margins were down year-over-year, but stable on a sequential quarter basis pressured by import orders and the overall challenging steel market in Europe.

Turning back to our consolidated results, our effective tax rate for the quarter was 27% and we anticipate that our effective rate for 2020 will be approximately 25% to 26%.

In the third quarter, we generated $278 million of cash from operating activities with the $157 million coming from working capital liquidation. Looking at cash flow performance over the last 12 months, gives us an even bigger picture of CMC’s capabilities following our strategic 2018 acquisition. We generated $787 million of cash from operating activities and free cash flow, defined as cash flow from operations minus capital expenditures has totaled $606 million.

This has allowed us to pay down $200 million of debt over that time period and increase our cash balance to $462 million at May 31. We estimate that capital expenditures for fiscal 2020 will be in the range of $155 million to $170 million. This is down slightly from our prior guidance of $160 million to $185 million and is based on a clear view of total spend as we approach the end of the fiscal year.

This concludes my remarks. And now I will turn it back over to Barbara.

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

Thank you, Paul. As we previously indicated, CMC exited the third quarter with near record level backlogs. This will support fourth quarter shipments at our Americas Mills and Fabrication segments where we expect normal volume seasonality despite COVID-19.

Fabrication margins are anticipated to remain strong as we continue to benefit from a solidly priced backlogs and easing of input costs. Recycling should return to a modest profitability with activity levels picking up from depressed third quarter levels. International Mill performance is expected to be relatively stable quarter-over-quarter.

Stepping outside of our internal view, I’ll share the 2020 and 2021 outlook published last week by the Portland Cement Association, one of the most reputable forecasters of construction activity. The organization expects cement consumption to decline just under 4% this calendar year followed by roughly 1% growth next year.

We are proud of our company’s excellent third quarter performance, the strong profits and cash flows are a result of the extraordinary efforts of our CMC team. The last three months were unlike anything we’ve ever experienced. The determination, creativity, and collaboration of our people, which is the CMC way, steered our company through every challenge and brought us out stronger than ever.

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

[Operator]

[Operator Instructions] Our first question today will come from Chris Terry with Deutsche Bank. Please go ahead.

[Chris Terry, Deutsche Bank]

Hi, Barbara and Paul. Thanks for your comments. My question just relates to the overall market in terms of the backlog and what you are seeing there. In some of the comments you indicated that it may have shortened a little bit, so just wanted if you could elaborate on maybe some more detail on your specific backlog?

And then, as part of that question, I noted the market share comments. You’ve done a great job with it during the quarter. Just wanted if you could comment on other opportunities there and whether you think you’ll be able to continue to get market share in future quarters?

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

Yes. Excuse me. In terms of the backlog, our backlog is extremely strong as we indicated. And in every year, our backlog has a certain amount of seasonality in it. Construction is obviously impacted by weather and so this is the busy time a year when you move into spring and summer. And typically, you tend to see the backlogs go down a little bit in the fall and then it picks back up as you enter the New Year and build for the spring.

But what I would – so, we are not seeing any change in and in a normal pattern of our backlog. We are obviously monitoring that carefully given the economic carnage from COVID-19. But, thus far, we are not seeing any project cancellations to speak of. We continue to see good projects to bid on. We continue to see a nice booking rate which follows historical patterns. So, we are really pleased with how that’s evolving and of course, many states are reopening and economic activity is beginning to pick up nicely.

In terms of the market share, and we had a stated strategy to grow our merchant business and with the added flexibility of our larger mill footprint that gives us more flexibility for the mills that do produce merchant products. We have made some rather small investments in order to improve that product offering, increase the size ranges available, be able to better protect the product in a climate-controlled environment in certain geographies.

And I would remind you that there was some capacity that has been taken out of the market on the merchant side and that has presented a nice opportunity for us to step in and supply the needs.

[Chris Terry, Deutsche Bank]

Great. Thanks, Barbara.

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

Thank you, Chris.

[Operator]

And the next question will come from Seth Rosenfeld with Exane BNP Paribas. Please go ahead.

[Seth Rosenfeld, Exane BNP]

Good morning. Thank you all for taking my questions today. If I may, I have a question with regards to the outlook for conversion cost within Americas Mills. Obviously very strong performance this past quarter significantly improved after the Gerdau acquisition. How should we think about this on a go-forward basis?

Are we now approaching a, kind of post-Gerdau steady state worker down conversion cost for on par with the legacy commercial metals assets? Or do you see any significant more to come? You could comment on some of the non-cash charges in this past quarter. How much contribution if anything from that moving forward?

And then, secondly please, with regard to the outlook for working capital, obviously strong release this past quarter. Do you please give some little bit of guidance on the outlook for Q4 and past going into 2021 assuming the market continues to strengthen. Thank you.

[Paul Lawrence, Vice President and Chief Financial Officer]

Good morning, Seth. Yes, as far as conversion cost fits, if we look year-over-year, again we see a huge benefit in terms of the decision that we took in terms of closing the melt operations in California and that’s – that really has provided a significant opportunity for us to drive the overall costs lower.

In addition to that, there – because of some of the negative economic activities, we’ve seen some deflationary pressures in some of the costs, some of the alloy pricing has come down and some of the electrode costs have also come off certainly their peaks from 12 to 18 months ago. And so, we believe that these costs that we saw in this past quarter certainly are things that we can continue into the future.

I think in addition, we are not done optimizing the network of facilities and there are still opportunities to drive these costs lower. But I think you will see cost in the fourth quarter probably be similar to what we had in the third quarter.

With respect to working capital, we are obviously very proud of the release of working capital in the quarter. If we look at the components of what drove that is, we saw some tightening in terms of the days receivables and days of inventory that we have outstanding at this time.

So those were very prudent measures that we took in order to manage our working capital levels as we got ourselves into this uncertain period. But we also saw a fair bit of valuation reduction in terms of our inventory levels, given that the value of scrap in the second quarter was substantially higher than what it was in the third quarter.

We do see however, as we look forward that the fourth quarter will likely be another generator of working capital. There is still more opportunity, but it certainly won’t be at the same level as the third quarter unless of course we have a major price change of the underlying assets which we don’t see.

[Seth Rosenfeld, Exane BNP]

Great. Thank you very much.

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

Thanks, Seth.

[Operator]

The next question will come from Timna Tanners with Bank of America Merrill Lynch. Please go ahead.

[Timna Tanners, BofA Merrill Lynch]

Yes. Hey. Good morning. Wanted to ask about a little bit more about the American Mill – Americas Mills segment. Just broadly, when you made the comments, Paul talked about single-digit declines, potentially in construction relative to double-digit declines for overall steel. Is that just using like high level industry forecasts?

Or is there something specific you are seeing there that you can talk through and what timing you are referring to? And also on the Americas Mills, if you could talk a little bit about the supply side in terms of the – if you are seeing much impact of the increase in imports in April and May and some new supply coming into the market. Thanks.

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

Thanks, Timna. Hope you are doing well. So, as you can appreciate, everybody is trying to get their arms around the go-forward forecasts coming out of COVID-19 and what I would say is that, each time we see some expert in the market and there are many, many indicators that we all follow. The revision seems to more optimistic.

In other words, the magnitude of economic decline following the pandemic is not as dramatic as what folks thought two or three months ago when we were in the beginning of it. So, what I reported was the Portland Cement latest projections which is calling for a 4% decline year-over-year in cement consumption for 2020 and then a rebound of 1% next year.

And we highlighted that one because we have found of all the indicators that we monitor Portland Cement tends to be fairly accurate in their projections. But, clearly, there is a lot more that we need to monitor and watch is, as time moves on. But I am still fairly optimistic in the go-forward, because of course, the President is discussing his Infrastructure Bill.

The House and the Senate have a proposal out there and that’s before you think about onshoring or reshoring of manufacturing and supply chain adjustments that may occur as a result of this. But certainly, we are going to continue to monitor all the different market projections going forward.

On the supply side, you are very familiar, of course with the capacity coming online. More specifically, the two NUCOR rebar mills and Sedalia is coming online and of course NUCOR will update their progress on that and we are starting to see a bit of that product in the market.

But, as they had plans to introduce that commercially, we had plans to make room for that so to speak. So, we have not seen any major impacts yet and of course, the Frostproof is not yet ready for commissioning. So, we’ll see how that progresses later on this year I think as their projected date.

In terms of imports, most definitely we are seeing more import offers, particularly, Mexico and Turkey. We monitor that very carefully as well. There has been a surge of products from Mexico, not only on the rebar side but also merchant.

And at this point, we believe customers are hesitant to take the risk on a lot of that product, but it is something that we are monitoring and again, with our larger network, we have more ability to satisfy the customers and meet their needs and provide more flexibility for them. So, you’ve been around this business a long time and that’s – it’s always something that we are monitoring very carefully.

I should point out, Mexico Department of Commerce ruled on the fact that Mexico was circumventing the 232 tariff situation by manipulating the straight bar and welding a hook on it and clearly trying to circumvent our trade regulation.

So, I would remind those listening that, these other countries don’t respect our trade laws and it’s a constant battle for us to try to keep them honest and convey those things back to our trade regulators and we are very pleased to see commerce come out and recognize that Mexico was definitely circumventing.

[Timna Tanners, BofA Merrill Lynch]

Okay. That’s really helpful overview. Thanks. And then either a question I want to sneak in if I could is just on the mention of the much improved liquidity or the best liquidity in over a decade is I think a really important point.

And I just wondered if along those lines you could update us on your capital allocation priorities, any thoughts on M&A or increasing the dividend or other uses of cash and what timeframe are you thinking with it? Be to get past this current environment or are you thinking maybe opportunistically about opportunities really in the downturn?

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

Thank you, Timna. We are so proud of where we stand. Of course, we could never have anticipated that we would be facing a global pandemic, but this is a cyclical business. So you always need to protect the balance sheet for any unexpected situation. And so, it’s really helping us in this current moment. And having said that, this could be a moment where there are opportunities that present themselves.

And I think that we are in a position where we have enormous flexibility for potentially M&A if it were to present itself. The dividend, we have a fairly robust dividend and it’s certainly something that we look out on a continuous basis. I think we would like to see a little more clarity before making a dividend change. So we have all options available to us.

We constantly keep a list of attractive CapEx projects that we are continuously considering and evaluating based on market conditions and other cash needs. So, there is always a set of ideas there and you are going to see us be disciplined and prudent with whether it’s CapEx or dividend or M&A or any of those types of uses of cash. But certainly, if there are opportunities, we are in a really great position to consider and seize those opportunities.

[Timna Tanners, BofA Merrill Lynch]

Okay. Thanks again.

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

Thanks, Timna.

[Operator]

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

[Phil Gibbs, KeyBanc Capital Markets]

Hey. Good morning, Paul and Barbara and team. How are you?

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

Doing great.

[Phil Gibbs, KeyBanc Capital Markets]

Good. Pricing in Americas Mills, I think was pretty stable quarter-on-quarter and we’ve seen some easing at least in the indications from folks like Platts just in the rebar pricing. And clearly that didn’t play out as a result. So I am curious if this is a product mix issue or any good way or a timing thing where we may see some pricing creep down in Q4. You’ve obviously given the outlook on the volume side, but I am curious in terms of spreads?

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

Yes, Phil. We really don’t give pricing guidance. That’s an area that we don’t step into. However, we manage the business by trying to manage the metal margin which really what drives our earnings and our results.

And I think, Paul gave some great information around the stability of metal margin in this space owing in part to relatively strong construction markets, but also I think it speaks to our commercial approach and it speaks to the benefits of the acquisition that we did in 2018.

But if you go back in time, rebar metal margin have had a lot more stability and a tighter range around peak to trough than many other steel products. And we believe over the long-term, given the repositioning of our portfolio, that will be to more stability in our margin and our earnings profile when compared to other products that tend to have a lot more volatility in their metal margins.

[Phil Gibbs, KeyBanc Capital Markets]

Thanks, Barbara. And I know you have an expansion project in Poland that you talked about a handful of times on these calls over the last couple of years. Where does that project stand right now? And maybe you can remind us what it is or what the timing is and what the benefit is to you all over the next, call it, mid-term time horizon?

[Paul Lawrence, Vice President and Chief Financial Officer]

Yes. Good morning, Phil. The Polish investment is progressing well. Earlier this fiscal year, we received all of the necessary permitting and are continuing to complete that project. We are looking to start commissioning near the end of fiscal 2021 and just by way of reminder, this was a project to debottleneck our rolling activities in Poland to really free up an incremental 200,000 tons of capability at the site for some of the higher margin wire rod products that we produced in Poland.

And so, it is an attractive project from an overall return perspective. But from an overall incremental impact to our business, we are looking at 2022 and it will ramp up through that fiscal period to start contributing to our earnings.

[Phil Gibbs, KeyBanc Capital Markets]

What’s the investment cost, Paul?

[Paul Lawrence, Vice President and Chief Financial Officer]

It’s approximately $80 million.

[Phil Gibbs, KeyBanc Capital Markets]

And have you all started spending that money yet?

[Paul Lawrence, Vice President and Chief Financial Officer]

Yes. At this stage, it’s approximately half spent.

[Phil Gibbs, KeyBanc Capital Markets]

All half spent. Okay. Thank you. Appreciated.

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

Thanks, Phil.

[Paul Lawrence, Vice President and Chief Financial Officer]

Thanks.

[Operator]

Next question will come from Andreas Bokkenheuser from UBS. Please go ahead.

[Andreas Bokkenheuser, UBS]

Well, thank you very much. Thank you for taking my question. Just a brief two-part question for me related, it’s been a little while now since your rebar asset acquisitions in the U.S. The question is really, what were the kind of the problem areas you saw in those existing assets and that made you think that we can do a better job with these assets?

And could you give us just an update on how that’s going now that you’ve been operating them for a while? Those are my questions. Thank you very much.

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

Thank you, Andreas. Well, we are approaching 18 months of operating the combined platform of assets and really the biggest area of opportunity that we saw was to have a consistent commercial approach and to improve the overall service to the customers. The assets were fairly well maintained. Initially, we thought we would have to put a bit of capital into the assets, but after taking ownership, the capital need has not been as great as we originally anticipated.

But a lot of it is just basic locking and tackling in terms of really more on the customer service side and having the appropriate inventory available. Those assets had been starved of working capital which did not give them any flexibility to serve the customers’ needs. The other opportunity for us is really optimizing our network of operations and servicing the customer from the lowest cost site. And not freighting product past one facility to the end-customer.

So there has been some logistics savings and that type of things. Interestingly enough, there were even leverage by procurement savings. We didn’t expect that, because Gerdau is a much larger company. So we thought they had more leverage over their supplier. But there were even opportunities in that regard.

So, I think, it’s just been a home run for us all the way around and while we do see some opportunities going forward in terms of continuing to optimize the network and maybe bring out some additional working capital and it’s just our nature to constantly be working on cost opportunities. But at this point, we are well past the integration of those assets into our complete portfolio.

And I would further add that, we acquired a lot of really talented individuals and it was really giving them the tools that they needed to be successful and they have fully embraced and just really delivered beyond our expectations.

[Andreas Bokkenheuser, UBS]

That’s clear. Thank you very much.

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

Thank you.

[Operator]

[Operator Instructions] Now our next question will come from David Gagliano with BMO Capital Markets. Please go ahead.

[David Gagliano, BMO Capital Markets]

All right. Thanks for taking my question. Since you mentioned the potential for infrastructure spending specifically as another potential tailwind, I do want to drill down on this a bit more. And I think a lot of us that have been around for a while have actually been down this path a few times.

We had the joy of trying to frame what the actual impact on steel consumption in the U.S. would be from a – say, for example, a $1 trillion spending bill, based on things like steel intensity of projects, total capital cost and projecting that over a $1 trillion incremental spending boost. And I think many came to the conclusion that it may not necessarily be this massive demand booster that obviously the headlines would imply.

Definitely helps obviously, but perhaps not a massive demand boost and it could even incentivize more supply that is needed. And then there is also a time lag issue I think that comes up as well. So my question specifically is, what do you think the specific impact would be on steel consumption in the U.S. from a – for example, $1 trillion spending bill and what do you project to be the timing of the onset of that impact in terms of actual orders for steel?

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

Well, thank you, David. And you are right. Infrastructure is the topic that’s been something certainly I talked about for the last ten years that I’ve been around CMC and fifteen years in this industry. And I think what’s encouraging about the current situation and we are not really even thinking in terms of the President’s $1 trillion.

What you have is a House proposal on the table and you have a Senate proposal on the table. And you have the existing FAST Act which is due to expire at the end of September. So, first and foremost to have both the House and the Senate have a proposal on the table at this stage is a good development. It’s not something that we’ve seen historically.

Second, both bills are an increase over the existing spending in the existing FAST Act. I think that there is no debate over the need for and that has never been the issue. I think – but there has been an unwillingness of both sides to come together to, to agree on something. And I think that, the pandemic, both sides of the aisle are highly incented to help the U.S. economy recover from the after effects and that means, creating jobs and jobs that create economic value.

And building our infrastructure is vitally necessary for the United States to remain competitive over the long-term. So, I think, there is going to be something that they can agree upon and I think it will be above the current spending levels. And there are many people that will make predictions on what the increase in steel demand will be as a result.

We do our own projections and our estimate would suggest that there is any one – anywhere from 1 million to 1.5 million additional tons of steel that could be consumed as a result of a bill that would be at a higher spending level than the existing FAST Act. And I think that’s good for the industry. It would certainly help absorb the capacity that’s been announced.

And this is a very innovative industry. We find ways to always improve productivity to meet those kinds of challenges. And so, I believe something will move forward and of course as you rightly point out, it depends on the type of project in terms of steel intensity. But we have some pretty bright people in our organization that have looked at it pretty carefully and they are well tied into both the House and the Senate’s proposals.

And I really look forward to seeing where this ends up. But I think it has a high likelihood of coming to some sort of resolution. And I think, in terms of the timing, as we said earlier, the U.S. economy was scorching hot prior to the pandemic as evidenced by our results in this quarter and the fact that the construction activity that was already planned. It continued on.

And so, I think that the timing could be ideal when this money would be become available and new work would be planned and begin to translate into steel order. So I don’t think there is going to be a tremendous time lag if the House and Senate come together and they take action prior to the expiration of the existing bill.

And as I said, I think there is a high probability that they will get something done. And I think we can’t forget the repositioning of the supply chain. I have no doubt that we learned quite a bit through this. We all are familiar with the amount of critical supplies that we no longer make in this country and we had shortages and difficulties, whether it was ventilators, pharmaceuticals, on and on.

And I know, I’ve talked to some of our customers who are actually already taking steps to move supply chain back. And I believe we are going to see a lot of supply chain rebalancing that will present opportunity for growth in industrial activity in the U.S., which would further support the need for a strong infrastructure plan.

[David Gagliano, BMO Capital Markets]

Okay. That’s helpful. I appreciate. I think there is some misquotes out there on Bloomberg. So I really appreciate clarifying the views on potential for an infrastructure spending package. Appreciate it. Thanks.

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

Thank you, David.

[Operator]

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

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

Thank you, Sean. Thank you all for joining us on today’s conference call. We look forward to speaking with many of you during our investor calls in the coming weeks. Have a great afternoon. Thank you.

[Operator]

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