Commercial Metals Co

NYSE:CMC

Earnings Call Transcript 2022-Q3

[Operator]

Hello, and welcome everyone to the Third Quarter Fiscal 2022 Earnings Call for Commercial Metals Company. Today’s materials, including the press release and supplemental slides that accompany this call can be found on CMC’s Investor Relations website. Today’s call is being recorded. After the company's remarks, we will have a question-and-answer session. And we 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 economic conditions, the effects of legislation, U.S steel import levels, U.S construction activity, demand for finished steel products, the expected capabilities and benefits of new facilities, the Company’s future operations, the timeline for execution of Company’s growth plan, the Company’s future results of operations, financial measures and capital spending.

These and other similar statements are considered forward-looking and may involve certain assumptions and speculation and are subject to risks and uncertainties that could cause actual results to differ materially from these expectations. These statements reflect the Company’s beliefs based on current conditions that are subject to certain risks and uncertainties, including those that are described in the Risk Factors and forward-looking statements section of the Company’s latest filings with the securities and exchange commission, including 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 be correct, and 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 and are references to the Company’s fiscal year or fiscal quarter.

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

[Barbara Smith, Chairman of the Board, President and CEO]

Good morning, everyone and thank you for joining CMC's third quarter earnings conference call. Before we begin, I'd like to congratulate CMC's employees on another remarkable quarter of performance. Your dedication, creativity and customer focus are what makes results like this possible. And on behalf of the entire CMC leadership team, we're extremely proud and grateful for all your efforts.

I'd also like to welcome our approximately 650 new CMC employees at Tensar. You have certainly joined at an exciting time for our company, and I'm confident that your contributions, along with those of your talented colleagues will make CMC's future even brighter.

I will start today's call with brief highlights from the quarter as well as a discussion of CMC's markets and how we are positioned. I'll also share some early observations following the closing of the Tensar acquisition before turning to commentary on market trends we see developing in Europe.

Paul Lawrence will cover the quarters financial information in more detail. And I will then conclude our outlook for the fourth fiscal quarter and beyond, after which we will open the call to questions.

Before starting my prepared remarks, 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.

For fiscal third quarter 2022, net earnings were $312.4 million, or $2.54 per diluted share on net sales of $2.5 billion. Excluding the impact of nonoperational items that Paul will discuss, adjusted earnings were $320.2 million, or $2.61 per diluted share, the best in our company's history.

CMC generated core EBITDA of $483.9 million, an increase of 110% from a year ago and nearly 50% above the previous record, which was achieved in the first quarter of fiscal 2022. With this quarter's exceptional performance, CMC's 12-month -- trailing 12-month core EBITDA totaled roughly $1.4 billion and our trailing 12-month return on invested capital was in excess of 24%.

During the last 13 quarters, a time period that includes the global pandemic and widespread supply chain and labor force challenges, CMC has generated annualized return on invested capital well above 10%. Our past and current strategic actions have clearly created consistent and substantial value for our shareholders and we are poised to continue doing so.

I would like to now turn to CMC's market environment with a particular focus on the United States. Looking at our business, we see no signs of a slowdown. Demand in the third quarter was strong across each of our product lines in major geographies. The key indicators that lead rebar consumption by 9 to 12 months remain not only positive, but robust. These indicators include both external and internal metrics that have a history of reliability, and our indices we often referenced in our forward-looking comments.

First, I would like to discuss several of the key external indicators we track. The Architectural Billing Index has been in expansionary territory for over a year, signaling future growth in private nonresidential spending. The most recent reading of 56.5 is noteworthy as the ABI has rarely breached the 55 level in the 13 years since the global financial crisis. Additionally, readings for the Southern and Western regions, two geographies where CMC has a core presence are particularly strong.

The Dodge Momentum Index and other measure of nonresidential projects entering the planning phase hit a 14-year high in May. Both the commercial and institutional components of the index increased meaningfully on a year-over-year basis driven by offices, hotels, education and health care. Offices and hotels are two market sectors that may -- that many had assumed would take years to recover if ever, but both are now making a comeback. CMC's own internal view mirrors the picture provided by the external measures.

Our downstream bidding activity reached a new record high during the third quarter, driven by a broad basket of project types in both the public and private sectors. So to sum up our near-term view, while we certainly don't discount the economic concerns making headlines, the best indicators of future construction activity continue to point toward expansion ahead.

Beyond the near-term, we believe there are several structural trends underway that will bolster domestic construction activity. The first is a federal infrastructure package signed in November of last year. At full run rate this plan is expected to increase federal funding for core rebar consuming projects such as highways, bridges and related structures by 65% compared to the FAST Act that it replaced.

We estimate the impact will be 1.5 million tons of incremental annual rebar demand within a domestic market of roughly 9 million tons, representing an approximately 17% increase in consumption. Spending is expected to ramp up over a period of 5 years and assuming typical timeframes for project approvals, bidding and awarding, we should begin to see the impact on construction activity in early calendar 2023. This timing matches very well with the anticipated startup of CMC's Arizona 2 micro mill next year. This plant will have a capacity of roughly 500,000 tons and the ability to flex production between rebar and merchant products.

The second structural trend to note is the expected follow on local infrastructure and nonresidential investment to support the recent rapid growth in newly formed residential communities. This activity generally lags residential spending by 12 to 24 months and includes projects such as roads, wastewater treatment, water supply, schools and shopping centers.

Over the last 2.5 years, the North to South population migration that is already occurring has significantly accelerated. Of the five states that have experienced the greatest net in migration, CMC operates rebar mill in four then. The fifth state Georgia is next door to two CMC mills. So the pace of year-over-year growth in new single-family housing starts has slowed. Starts in the south are still more than 30% above the level seen in the first half of 2019 and 2020.

The third structural trend is the reshoring of critical industries. We have previously mentioned the massive scale and pace of construction of new semiconductor facilities. There are five such projects now underway in the U.S. Four are in core CMC states; two each in Arizona and Texas. Those plants are the highest profile examples of reshoring.

However, given the ongoing supply chain disruptions seen in everything from basic materials like fertilizer and chemicals to manufactured products, it's reasonable to expect other industries to invest heavily in domestic capacity. We have all learned over the last 3 years that global supply chains are more fragile than previously believed in the loss of a few critical inputs can have a significant cascading effect throughout the economy.

I have just discussed several reasons to anticipate continued strength and construction activity, and CMC is poised to capitalize on these trends. As I mentioned, we expect to start up our new Arizona 2 state-of-the-art micro mill in early calendar 2023 that will feature world class operations, operational footprint and product quality. Along with AZ 2, the addition of Tensar increases CMC's exposure to infrastructure through both existing and new markets and Tensar's already significant customer value proposition can create even greater value under the current labor, materials and trucking availability constraints.

Of course we know from experience that markets can shift quickly and the future does not always turn out as expected. If -- if our markets do shifts, CMC's business model is designed to weather the inevitable market cycles. To reinforce that point, our downstream backlog is sitting at record levels on both a volume and price basis, providing a strong base load of highly profitable work into the future.

We have invested nearly $900 million in working capital over the last 2 years, which would be harvested as cash in a softer environment. CMC also operates a world class network of facilities across which we can optimize production, product mix, logistics, and customer service to meet virtually any demand scenario.

Turning now to a quick update on CMC's acquisition of Tensar. Please reference the presentation available on CMC's Investor Relations website for more information and a detailed description of the business. As we stated in this morning's press release, CMC's leadership is even more confident in the strategic rationale for the transaction after the first five weeks of having the Tensar team on board.

What we have learned thus far confirms our expectations regarding both organizations shared customer solutions driven culture, value creation through innovation, and expertise in stabilization applications. Our interactions and work today have heightened our expectation that significant commercial synergies can be achieved and that CMC can build out a truly unique portfolio of solutions for both existing and new customers.

We are still too early in the planning phase to share specifics, but I would say this, any acquisition diligence process requires making certain assumptions about gray areas. Five weeks in, we can confidently share that our assumptions appear conservative, and that the Tensar team is proving to be an excellent addition to CMC's portfolio of construction solutions.

While on the topic of strategic growth investments, I will offer a brief note on CMC's announced fourth micro mill to be located in the Eastern U.S. Currently we are working through site selection and making progress toward a final choice of location. We remain fully committed to the strategically attractive project and look forward to providing a more complete update once the final decision is made.

I would like to now provide some color on developments in Europe. At the time of CMC's last earnings call in March, the war in Ukraine had already driven roughly 1.4 million refugees into Poland. Given continuing hostilities and ongoing devastation, that number has unfortunately grown to over 3.5 million, which is equal to nearly 10% of the Polish population.

No government can possibly be prepared to house, feed and care for such a massive and sudden migration of people. Much of the burden has fallen to the Polish citizens who have responded with remarkable compassion and empathy. I'm extremely proud of the efforts of CMC's team in Poland to assist those in need. Leadership continues to work with well-known humanitarian aid groups that specialize in helping victims of armed conflicts and natural disasters, and has also made CMC accommodations available to refugees.

Many employees have taken refugees into their homes providing them with shelter, food, comfort, and safety. The response to this tragedy is inspiring and we sincerely thank our employees and CMC Poland. In the midst of this crisis, our team in Poland has continued their exceptional performance. CMC's Europe segment generated a record adjusted EBITDA during the third quarter on strong volumes and margins.

It's worth sharing several emerging secular trends that may have a lasting impact on the eastern European steel market. The first is the trade sanctions placed on Russia and Belarus, which are only beginning to be felt during the third quarter. These two countries generally account for over a quarter of the long product imports into the European Union, and over half of the direct arrivals into Poland. The absence of these volumes will likely tighten the supply conditions meaningfully in Eastern Europe.

The logical alternative for imported material to Europe is Turkey. However, logistics directly to Poland and its neighbors are challenging. This could result in little or no impact backfill for the Russian and Belarusian material blocked from the market, allowing CMC the opportunity to fulfill this demand.

The other noteworthy secular trend is the ongoing energy shortage in Europe, which the war in Ukraine has only exacerbated. CMC is experiencing higher energy costs than in past periods, but to a far less significant extent than many competing producers. CMC's leadership in Poland has expertly navigated the situation by having in place physical and financial hedges prior to the start of the conflict, which have defrayed much of the cost impact.

Electricity and natural gas costs per ton were up 28% on a year-over-year basis, compared with an average spot price increase of over 200% in Germany, Spain and France. The recent addition of CMC's Europe's third rolling line has positioned us to more fully capitalize on these trends.

Over the last four quarters, volumes of finished products shipped have exceeded the mills 10-year average by 35%. With a third rolling line operating, we are better leveraging our melt shop benefiting from a higher value product mix and able to act with more commercial and operational agility.

Finally, as stated in our press release, our Board of Directors declared a quarterly cash dividend of $0.14 per share of CMC common stock for stockholders of record on June 29, 2022. The dividend will be paid on July 13, 2022. And this represents CMC's 231st consecutive quarterly dividend with the amount paid per share increasing 17% from quarter three of fiscal 2021.

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

[Paul Lawrence, SVP and CFO]

Thank you, Barbara, and good morning to everyone on the call this morning. As Barbara noted, we reported fiscal third quarter 2022 net earnings of $312.4 million or $2.54 per diluted share compared to prior year levels of $130.4 million or $1.07, respectively.

Results this quarter include net after-tax charges of $7.8 million, the majority of which relates to CMC's acquisition of Tensar. These costs were in the form of acquisition expenses and purchase accounting adjustments related to inventory write-ups. The quarter also included a small asset impairment charge taken in North America.

Excluding the impact of these items, adjusted earnings were $320.2 million or $2.61 per diluted share. Core EBITDA was $483.9 million for the third quarter of 2022, more than double the $230.5 million generated during the prior year period.

Slide 11 of the supplemental presentation illustrates the strength of CMC's quarterly results. Both our North American and Europe segments contributed significantly to year-over-year earnings growth, while core EBITDA per ton of finished steel reached a record level of $293.

Now I will review our results by segment for the third quarter of fiscal '22. CMC's North American segment generated adjusted EBITDA of $379.4 million for the quarter equal to $332 per ton of finished steel shipped. Segment adjusted EBITDA improved 83% on a year-over-year basis, driven by significantly increased margins on each of our steel products, downstream and raw material product groups over their underlying scrap costs.

Partially offsetting this benefit were higher controllable costs on a per ton of finished deal due primarily to the increased unit pricing for freight, energy and alloys. The pace of unit price increases for these items moderated in the third quarter. And as a result, when combined with the impact of the fixed cost leverage, CMC was able to hold controllable cost per ton flat from the prior quarter.

Selling prices for steel products from our mills increased by $316 per ton on a year-over-year basis, and $69 per ton sequentially. Margin over scrap on steel products increased $213 per ton from a year ago and $33 per ton sequentially. Average selling price of downstream products increased by $281 per ton from the prior year, reaching a new record of $1,244. This increase was 2.7x the rate of change in the underlying scrap costs, leading to significant expansion and profitability on volumes processed and shipped through CMC's vertically integrated value chain.

During our fourth quarter earnings call in October, I indicated that CMC's downstream backlog was expected to reprice higher throughout fiscal 2022 as new higher price work replaces older lower price work. We are seeing this scenario play out as demonstrated by the $230 per ton increase in downstream average selling price from CMC's fourth quarter of 2021 to the third quarter of 2022.

We continue to expect further upward movement in CMC's average backlog price, particularly in light of strong market demand and bid volumes that we are experiencing within our downstream business. Shipments of finished product in the third quarter were largely unchanged from a year ago and followed a typical seasonal pattern compared to the second quarter.

End market demand for our mill products remains robust, which we are seeing in both order rates and broader industry data we track. Downstream product shipments decreased by roughly 2% from the prior year period despite a mid-teening percentage increase in the backlog volumes. Progress on construction sites in certain geographies has been impacted due to the constrained supply of labor and materials. We expect this situation to dissipate heading into the autumn months.

And as a reminder, projects in the CMC's downstream backlog are contractually committed and, for the most part, fully financed. We believe current constraints are likely to extend the construction cycle rather than pose a threat to the ultimate shipping volumes.

Turning to Slide 13 of the supplemental deck, our Europe segment generated an impressive adjusted EBITDA of $121 million for the third quarter of 2022 compared to adjusted EBITDA of $50 million in the prior year quarter. The improvement was driven by expanded margins over scrap and a significant increase in shipment volumes.

Higher costs for energy and mill consumables partially offset these positive factors. However, on a sequential quarter basis, controllable costs per ton were largely unchanged, which is a remarkable accomplishment given the inflationary environment we are currently experiencing.

Margins over scrap increased $149 per ton on a year-over-year basis, reaching $437 per ton. Robust market conditions provided a backdrop to achieve a $303 per ton increase in average selling price with solid year-to-year trends across each product we sell. Europe volumes increased 18% compared to the prior year as a result of favorable market fundamentals and CMC's strong competitive position.

The supply side and energy cost factors that Barbara discussed have created commercial opportunities in our primary markets, while the addition of the third rolling line has allowed us to more fully respond to these circumstances. Shipments of each of our major mill products, rebar, merchant bar and wire rod were up 20% or more from the prior year period. In addition to incremental production, the third rolling line has enhanced our margin mix and improved our ability to leverage fixed costs.

Demand conditions within Central Europe remain supportive. The Polish construction market continues to grow, driven by solid expansion in residential spending. In addition, the EU COVID recovery funds should provide a tailwind to Polish construction activity towards the end of the calendar year.

Hence, our generated EBITDA of $4.9 million during the first 5 weeks as a CMC company. Excluding a $2.2 million adjustment related to purchase accounting effect on inventory, EBITDA amounted to $7.1 million on net sales of $28 million. EBITDA margin of 25.2% was consistent with the trailing 5-year average of the business.

As noted in this morning's press release, Tensar performance will be included within CMC's existing segments, but we intend to provide ongoing visibility into the business results and developments. Of the $7.1 million in EBITDA, excluding purchase accounting adjustments, $5.4 million was included in -- within CMC's North American segment, while the remaining $1.7 million was reported within the Europe segment. Based on the preliminary allocation of purchase price, we expect to incur annual depreciation and amortization of intangibles related to the acquisition of $10 million and $20 million, respectively.

Turning to the balance sheet, liquidity and capital allocation. As of May 31, 2022, cash and cash equivalents totaled $410.3 million. CMC also had $126.3 million of restricted cash, which is primarily earmarked for the funding of Arizona 2 and was raised through the offering of the 25-year tax-exempt bonds.

In addition to cash and equivalents, we had approximately $623 million of availability under our credit and accounts receivable programs bringing total liquidity to slightly over $1 billion. CMC's $330 million 2023 notes have moved into current -- on the balance sheet. We are currently evaluating refinancing alternatives that are consistent with our commitment to maintaining a healthy balance sheet, financial flexibility and a strong liquidity position as well as utilizing cash to lower CMC's overall leverage.

During the quarter, we generated $187 million of cash from operating activities despite $212 million increase in working capital. The rise in working capital was driven by the significant increase in average selling price across CMC's legacy businesses. Our leverage metrics remain attractive and we’ve improved significantly over the past several fiscal years.

As can be seen on Slide 17, our net debt-to-EBITDA ratio now sits at just 0.7x even after the purchase of Tensar. We believe our robust balance sheet and overall financial strength provide us flexibility to finance our strategic organic growth projects and pursue opportunistic M&A, while continuing to return cash to shareholders. CMC's effective tax rate was 22.9% in the third quarter, and we expect the forecast for the full year tax rate to be between 23% and 24%.

Turning to CMC's fiscal 2022 capital spending outlook, we expect to invest between $475 million to $500 million in total this year, roughly half of which can be attributable to Arizona 2. Looking ahead to fiscal 2023, we anticipate our capital investment will be relatively consistent with the level of 2022 with a large portion continuing to be attributable to strategic growth projects.

Barbara noted, our announced fourth micro mill project remains in the site selection phase. As a reminder, we assess projects like this using a view of through-the-cycle cash flow expectations. So while site selection has taken longer than anticipated, we remain very encouraged by the strategic merits of this project.

Lastly, CMC purchased roughly 1 million shares during the fiscal third quarter at an average price of $38.34 per share. Transactions since the initiation of the buyback program have amounted to roughly $55.6 million, leaving a little over $294 million under the authorization that we announced in October. We plan to maintain the pace of repurchases in the fourth quarter, consistent with what we have accomplished to date.

This concludes my remarks, and I will turn -- turn it back to Barbara for the financial outlook.

[Barbara Smith, Chairman of the Board, President and CEO]

Thank you, Paul. We expect strong financial results in the fourth quarter of fiscal 2022. Demand for CMC's major product lines is anticipated to remain robust across our key geographies. In North America, shipments should be underpinned by record levels of construction backlog volumes, while in Europe, we anticipate tight market supply to continue providing CMC with opportunities for share gain. Margins in both North America and Europe should remain near third quarter levels.

Looking a little further ahead, we expect the market factors I previously discussed to continue to support business activity. CMC's pipeline of new downstream work is very strong, pointing to healthy demand into our fiscal '23. In North America, the impact of increased federal infrastructure funding should begin to manifest in the second half of fiscal 2023, and reshoring projects currently underway will benefit much of our mill and downstream network.

Our view of future demand in Europe is a bit more difficult to predict, but supply dynamics should remain favorable, benefiting both our volumes and margins as highlighted in my earlier market outlook comments. Once again, I'd like to thank all the CMC employees for delivering yet another quarter of outstanding performance.

[Operator]

Thank you. [Operator Instructions] Today our first question comes from Emily Chieng of Goldman Sachs. Please go ahead.

[Emily Chieng, Goldman Sachs]

Good morning, Barbara and Paul. Thank you for the update today. My first question is just around the power price environment in Europe. Thank you for some of the detail in the presentation back there. But could you remind us how those contracts are structured? How long those extend until and if there is any spot power exposure there at all?

[Paul Lawrence, SVP and CFO]

Sure. Good morning, Emily. Our team in Poland has done a phenomenal job of managing energy. And the key point to note is, obviously, these were put into place well before all of the volatility that we have recently seen. The Polish arrangement for electricity include a 10-year financial hedge that's in place that is now being in place probably for 1.5 years. So it has a very long runway associated.

In addition to that strip, that 25% strip, there's another strip of more of a physical arrangement with the provider, which provides some longer term, but it's probably in the 2-year rotating we are repricing environment that does around another quarter of their energy needs. The rest is -- has been subject to spot. And I would say that in relation to other countries in Europe, the volatility of energy pricing has been significantly less.

So as Barbara mentioned, the impact to us in our overall energy costs, including natural gas, has been around 28% on a year-over-year basis. And I think these instruments that we have in place will continue to ensure that competitively, we are at an advantage against other European producers.

[Emily Chieng, Goldman Sachs]

Great. That's very helpful. And my second question, I wanted to ask was just around I think your order book there. I think, Paul, you made a comment earlier around perhaps if you were to see some demand weakness on the downstream that you might not necessarily see as large of an impact to shipment levels there. But maybe talk through the strength of your order book, how many months ahead do you have that visibility? And do you think that there is enough of a cushion there in terms of pent-up demand that shipments will not, in fact, be as impacted as in a very down -- back scenario?

[Barbara Smith, Chairman of the Board, President and CEO]

Yes. Let me take a crack, Emily, and we can -- Paul can add anything that I might omit here. But our downstream backlog, as we indicated, is at the highest level that we've seen in 13 years. And I would say through the cycle backlog, normally is about a 6-month backlog contained in that could be shorter-term projects and then some that are much longer-term projects. But in this case, the backlog is well above that cycle average. So it gives us a lot of confidence moving into 2023 in terms of the demand scenario for our business. And I would add that we continue to see very, very strong bidding levels. So that's where the backlog stands today, but there are still lots of projects across a broad spectrum of geography and types of projects that continue to come to the market.

[Paul Lawrence, SVP and CFO]

Yes, and that's what I would add to that, Emily, is if you look at construction, it's a very diverse makeup in terms of where construction activity takes place, whether it be infrastructure on the public side, nonresidential, obviously, has ebbs and flows and we see the onshoring activities really picking up steam. We see the community build out, as Barbara mentioned, in addition to residential construction activity. And so if you look at our flexibility of serving all of those various markets within the construction industry, I think we are very well protected by the outlook for each of those areas that Barbara outlined in the prepared remarks.

[Barbara Smith, Chairman of the Board, President and CEO]

And that's absent significant sign of -- or it's absent really the effect of the new infrastructure spending bill, which we would anticipate seeing coming in this coming fiscal year.

[Emily Chieng, Goldman Sachs]

Understood. That’s very clear. Thank you.

[Barbara Smith, Chairman of the Board, President and CEO]

Thank you, Emily.

[Operator]

Our next question today comes from David Gagliano of BMO Capital Markets. Please go ahead.

[David Gagliano, BMO Capital Markets]

Hi. Thanks for taking my questions. I did want to ask about this dichotomy between the strong results and the optimistic outlook versus the broader headwinds that seem to be fairly significant, aside from the general concerns about demand, [indiscernible] inflation, rising interest rates. A few weeks ago, the Portland Cement Association, they cut their cement consumption forecast for 2023 from plus 2.5% to minus 0.8%. The reason I flagged that it's because the PCA is another source that CMC has cited in the past is a really solid proxy for demand for CMC's business. So my question is, is that PCA forecast for negative year over demand in 2023, is that a reasonable proxy for your business as you look beyond what you see now? Because I do think that PCA also factors in the positive offsetting variables that you've noted in the prepared remarks. And if it's not a reasonable forecast, if you can just touch on your view why it's different now versus when things were going positively.

[Barbara Smith, Chairman of the Board, President and CEO]

Yes. Thank you, David. I appreciate your question and certainly appreciate that there's a lot of moving parts out there, and folks are trying to digest it all. What I would say is there has been a severe cement shortage recently that I think probably factors into to some of what you're seeing there. And that's why we really -- we like Portland Cement. We track that like we do many of the other indicators that we spoke of, but we track a wide range of indicators because you can see anomalies in one indicator from time-to-time. And so we remain quite bullish. We also remain quite nimble to adjust to any market conditions that we may be presented with. But there's been a significant shortage, I think that's going to resolve itself. But we've seen that on our own projects, and it's a fact -- a number of factors and outages and unexpected outages and so forth. And I think that will get resolved in the coming months and quarters.

[David Gagliano, BMO Capital Markets]

Okay. That's helpful. So your view is that the Portland Cement demand forecast is actually a supply constraint driven negative headwind for cement specifically. And then just in terms of the combination of the duration of the backlogs for most of your business, if you could just, in general, give us a sense if there is a demand slowdown. As of today, when would that actually start to flow through CMC's results at this point given the backlog that you have?

[Barbara Smith, Chairman of the Board, President and CEO]

Yes, David, before I move to that, I just want to also back to the Portland Cement point you to some recent market comments from Vulcan and Martin Marietta, which are good indicators, and they're pretty bullish in their market outlook. So you might want to take a look at that. Our business model is really designed to weather cycles, I believe, better than other companies or other sectors of the economy. And the reason why is because we carry that backlog. And the backlog is prefunded, and in periods of changes in economic conditions, that provides a very strong baseload of work to keep our operations running at nice utilization rates.

Having said that, we also have a very flexible cost structure and a very flexible product mix and a wide network of operations and we can flex very quickly to any set of market conditions. But at the end of the day, if one part of the construction sector starts to slow, generally, there are other parts of the construction sector that can and will offset that. And I say that to point again to the infrastructure, which we haven't seen the increased spending levels. We have said for a long period of time that we expect to see that. And many other companies are making similar projections that the infrastructure is going to begin to come to fruition in fiscal 2023.

And so again, our business model is designed to weather bumps in the road and shocks. And there are many parts of the residential, nonresidential infrastructure that we see good demand ahead back to the non-res that follows the housing formation. And if you go back in time in other periods, areas of the country where there has been a strong residential component as these ebbs and flows in the economy occur, that nonresidential build out, it has to come to support those communities. And we're seeing that occur just as it always does, there's a lag 12 to 18 months following a strong residential build out.

And I think you know the areas of the country that have seen rising population and strong residential build out. And I point to an announcement yesterday where Caterpillar is moving their headquarters location into the heart of where we are in Irving, Texas. So there continues to be a lot of that kind of change that's occurring. And again, the supply chain rebalancing is a topic that we've been talking about for a while. Just the projects that are well publicized are massive. They are multiple years. They are massive consumers of the structural steel that we produce and they're in the heart of where we are located. So we still remain very optimistic from a demand perspective.

[David Gagliano, BMO Capital Markets]

Okay. That’s very helpful. Thank you for the additional color.

[Barbara Smith, Chairman of the Board, President and CEO]

Thank you, David.

[Operator]

[Operator Instructions] Our next question today comes from Seth Rosenfeld of BNB Paribas. Please go ahead.

[Seth Rosenfeld, BNP Paribas Exane]

Good morning. Thanks for taking our questions today.

[Barbara Smith, Chairman of the Board, President and CEO]

Hi, Seth.

[Seth Rosenfeld, BNP Paribas Exane]

I have a couple of questions that looks for imports into the U.S. Also, the market remains very tight, good pricing, but we have seen U.S. imports increased very sharply in recent months, possibly incentivize those high [indiscernible] spreads. What impact is that having on the market at present? Historically, [indiscernible] is high, I would assume it would have been much more problematic. But part of the issue simply that you're seeing higher costs in foreign market than Turkey and Europe, making a bit less painful from a pricing perspective? I will start there, please.

[Barbara Smith, Chairman of the Board, President and CEO]

Yes. Thank you, Seth. Hope you're doing well. As you know, imports are something that we constantly monitor, and there has been some recent increase for certain product lines. Again, I think it reinforces the points we've been making around the strong demand environment here in the U.S. What I would say is that there's still some structural factors that make it less attractive for buyers to make big commitments in this area. Logistics is the #1 thing I would point to in terms of inconsistent and very, very high cost logistics. So right now, we’ve seen some. We have -- we monitor that carefully, but we don't see a big structural shift at this point in time.

[Seth Rosenfeld, BNP Paribas Exane]

Okay. Thank you. And the second question, please, on the growth side. In recent months, your team has spoken publicly about an interest in potentially expanding capacity within European long products. Obviously, the geopolitical situation has changed dramatically over the last few months. But how do you think about your interest in European growth? Any potential time line of that? And what would make you want to pull the trigger despite a challenging macro backdrop?

[Barbara Smith, Chairman of the Board, President and CEO]

Yes, Seth, we take a very long time horizon to evaluate anything that we are doing, whether it's organic growth or inorganic growth. And certainly, you have to factor in the current environment and how long you think that that's going to persist. But when we make these decisions, we take a very, very long view, and we also take a very conservative view in terms of the financial metrics that we use to model those types of investments. And so I think our track record has been one of great discipline and actually yielding very good results.

If you look at the investments, incremental investments that we've made on the growth side, they have yielded margins that are well above our long-term average margin. So I guess, I'm not prepared to talk about anything specific, but we do look at things all the time because there's a long lead time to execute on particularly organic type projects. We have an outstanding balance sheet, a very strong balance sheet, and we remain very nimble. And if we were to move into a more difficult economic situation, that might present attractive opportunities for us to examine. And with our strong balance sheet, we certainly want to be in a position to take a look at that. But we always value them and think about them over a very long horizon.

[Seth Rosenfeld, BNP Paribas Exane]

Okay. Thank you very much.

[Barbara Smith, Chairman of the Board, President and CEO]

Thank you, Seth.

[Operator]

Our next call today comes from Phil Gibbs of KeyBanc Capital Markets. Please go ahead.

[Phil Gibbs, KeyBanc Capital Markets]

Okay. Hello.

[Barbara Smith, Chairman of the Board, President and CEO]

Hey, Phil. Go ahead. We can hear you [indiscernible]. Good morning.

[Phil Gibbs, KeyBanc Capital Markets]

Okay, great. Good morning. On the fiscal '23 initial guidance for CapEx of, I think, in the range of nearly $500 million, what's your assumption in that for your new proposed Northeast U.S. mill? And have you begun ordering the equipment for that given the lead times necessary for a lot of the plans on the books here?

[Paul Lawrence, SVP and CFO]

Yes, Phil. Good morning. The -- as we look at the sort of the construction process associated with a new facility, the permitting process is generally one in which it's a year to 15 months or so. And so we have not got any significant amounts in the guidance that we provided for '23 with respect to that project just simply because outside some initial down payment it would not be a significant amount of outlay that we would expect to do during that permitting process.

[Barbara Smith, Chairman of the Board, President and CEO]

As it relates to your second half of the question, we’ve had a lot of discussions with equipment suppliers and we are confident and they have assured us that they have the capacity to take care of our needs when the time comes.

[Phil Gibbs, KeyBanc Capital Markets]

Thank you.

[Barbara Smith, Chairman of the Board, President and CEO]

Thanks, Phil.

[Operator]

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

[Barbara Smith, Chairman of the Board, President and CEO]

Thank you everyone for joining us on today's conference call. We look forward to speaking with many of you during our investor calls in the coming days and weeks. Thank you so much.

[Operator]

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