Commercial Metals Co

NYSE:CMC

Earnings Call Transcript 2019-Q4

[Operator]

Hello and welcome everyone to the full year and fourth 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 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 to provide information other than historical information and will include expectations regarding economic conditions, 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 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.

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 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 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 would 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]

Thank you. Good morning and welcome to everyone joining us to review CMC's results for the full year and fourth quarter of fiscal 2019.

As we previously announced on August 31, 2019, Mary Lindsey retired as Chief Financial Officer of Commercial Metals Company. Mary has been with CMC for 10 years, starting as Vice President of Tax and serving most recently at Senior Vice President and Chief Financial Officer. I would like to thank Mary for her valuable contributions over the years and I also like to acknowledge the thoughtful and smooth transition of her duty. We wish Mary all the best in the next chapters of her life.

I am joined today by Paul Lawrence who assumed the role of CFO effective September 1. Paul has worked in the steel industry in numerous financial roles for more than 20 years with the last three years in financial leadership roles at Commercial Metals.

I would also like to acknowledge all those impacted by the devastating tornadoes that came through Dallas Sunday night, including several of our employees and ask that you keep them in your thoughts.

I will begin my remarks today with highlights for the fiscal year and fourth quarter. Paul will then cover the year and quarter financial information in more detail and I will conclude our prepared remarks with a discussion of our outlook for the first quarter of fiscal 2020 after which we will open the call to questions.

As announced in our earnings release this morning, we reported fiscal fourth quarter 2019 earnings from continuing operations of $85.9 million or $0.72 per diluted share on net sales of $1.5 billion. Excluding the impact of certain integration costs, our adjusted earnings from continuing operations were $90.8 million or $0.76 per diluted share. Through our own actions combined with good market conditions in which we operate, we have reported the highest consecutive quarterly earnings for CMC since the great recession.

I am also pleased to report that the Board of Directors declared a quarterly dividend of $0.12 per share of CMC common stock for stockholders of record on November 6, 2019. The dividend will be paid on November 20, 2019. This represents CMC's 220th consecutive quarterly dividend.

Fiscal 2019 was a significant and transformative year for CMC. I would now like to recap some of the major accomplishment of this past year. Before doing so, I want to recognize and congratulate all CMC employees for their contribution to this highly successful and transformative year.

Now let's review some of the highlight. On November 5, 2018, we concluded the largest acquisition in the history of the company acquiring four rebar mills and 33 fabrication facilities, adding 2.5 million tons of rolling capacity and increasing our fabrication capacity by almost 50%. The systems integration was flawless and got completed in less than four months, well ahead of schedule. The confirmed commercial and operational synergies were double our original expectations and the operational results have also exceeded our initial business modeling.

As a result of the acquisition and our growth initiatives, our revenue grew by 26% and our adjusted earnings from continuing operations grew by 41% in fiscal 2019. The rapid integration of the acquired assets along with the execution of our business plan also allowed us to reduce debt associated with the acquisition by $124.5 million in the fourth quarter. At the same time, we increased our cash on hand quarter-over-quarter, reducing net debt by $232 million from the fiscal first quarter 2019.

In addition, core EBITDA from continuing operations was $501.5 million for 2019 in comparison to $412.2 million in 2018. Our results in fiscal year 2019 demonstrate the benefits of the strategic repositioning of the company that we have completed over the last several years.

Other noteworthy accomplishments in the past fiscal year include the ramp up of our second micro-mill in Oklahoma has exceeded our original financial expectation. Its differentiated hot spooled rebar product has gained wide customer acceptance and is also producing very strong returns. To expand this product offering, we also successfully added this capability at our Arizona micro-mill during the past fiscal year.

In our recycling segment, we continued our investments in separation technology innovation in our nonferrous operations. Finally, our Polish operations generated EBITDA in excess of $100 million for the second consecutive year, while also achieving the best annual safety results in history. Today, CMC is the largest rebar producer in the United States where demand remains strong and margins are differentiated from many other steel products.

Now turning to the market outlook. We are poised to continue benefiting from the positive outlook in the markets in which we operate. We remain optimistic about the construction market as many of the key indicators we monitor support a positive view.

Let me now cover some of them. U.S. construction activity remains resilient, led by an increase in public sector spending. According to Dodge, non-building construction starts were 3% higher through the first eight months of this year compared to last year. In the nonresidential sector, commercial construction starts, likewise, are 3% higher year-to-date. The Architectural Billing Index, a leading indicator for construction expansion, continues to be strongest in the regional markets we serve. Finally, U.S. unemployment rates and interest rates continue to remain historically low.

This positive outlook in construction activity is further supported by our fabrication segment bidding and booking activity, a key leading indicator for us. We booked a record number of projects during our fiscal fourth quarter and bidding activity remains robust. Bid and booked prices averaged above $1,000 per ton for the fiscal year, a level that will be profitable to us when shipping this material at current rebar prices. Overall, the prices have increased 23% compared to the same period in the prior year.

Turning to the markets we serve in Europe. Polish economy continues to outperform the broader European market with GDP growing by 4.5% in the most recent quarter. A 30 year unemployment rate of 5.2% and significant wage growth have been catalysts for a record level of consumer confidence for most of 2019. Poland has been allocated €100 million from the European Commission's Structural and Investment Funds designed to spur economic growth. Most recent reporting suggests roughly one-third of this allocation has been spent to-date with the remainder to be spent between now and 2023. Given these factors, the outlook for steel demand remains strong in Poland.

With that as an overview, I will now turn the discussion over to Paul Lawrence, Vice President and Chief Financial Officer, for further details on the fourth quarter and full year results. Paul?

[Paul Lawrence, Vice President, Chief Financial Officer]

Thank you Barbara and good morning to everyone joining us this morning. For the fourth quarter of 2019, we reported earnings from continuing operations of $85.9 million or $0.72 per diluted share, compared to earnings of $51.3 million or $0.43 per diluted share in the fourth quarter of 2018. Included in the fourth quarter 2019 results are after-tax costs of $4.9 million related to certain integration costs. Excluding these costs, adjusted earnings from continuing operations were $90.8 million or $0.76 per diluted share.

For the full year 2019, we reported earnings from continuing operations of $198.8 million or a $1.67 per diluted share, compared to $135.2 million or $1.14 per diluted share in 2018. As outlined in more detail in our earnings release, included in the 2019 results are net after-tax costs of $48.8 million related to certain integration costs, inventory step-up charges related to the acquisition and tax reform. In comparison, the 2018 results include $40.8 million of costs related to non-core operational item. Excluding these items, adjusted earnings from continuing operations for 2019 were $247.6 million or $2.08 per diluted share versus $176.1 million or $1.49 per diluted share in 2018.

Our core EBITDA from continuing operations was $159.2 million for the fourth quarter of 2019 in comparison to $123.6 million for the fourth quarter of 2018. For the full 2019 year, our core EBITDA from continuing operations was $501.5 million in comparison to $412.2 million in 2018, a year-over-year increase of 22%.

As Barbara mentioned, the results of the rebar assets acquisition have exceeded our expectations and have been a meaningful contributor to our results. As the operations are now embedded in our network of operations, this will be the last quarter in which we disclose the results separately. The acquired mills generated $58.1 million of EBITDA in the fourth quarter on shipments of 455,000 tons. The improved results from the third quarter to the fourth quarter are primarily result of higher rebar metal margins.

Excluding $4.2 million of costs associated with the closure of certain locations, the acquired fabrication facilities had an EBITDA loss of $9.0 million on 172,000 tons shipped. This EBITDA result is a 34% improvement from the third quarter. And the loss does not include the benefit of the amortization of unfavorable contracts of $16.6 million. Including the unfavorable contract amortization and excluding the facility closure costs, the business generated $6.3 million of operating income in the quarter. The remaining balance of the unfavorable contract amortization is $35.4 million and is expected to be amortized over the next six to 12 months.

Now I will review our results by segment for the fourth fiscal quarter of 2019. Our Americas recycling segment recorded an adjusted EBITDA of $4.2 million for the fourth quarter of 2019, compared to adjusted EBITDA of $17.0 million for the fourth quarter of 2018. Ferrous prices have declined by $81 per ton or 27% and nonferrous prices have declined by 7% over this period. Not only did the declining price environment squeeze margins, but this also constrained scrap flow through our operations with total volumes down 13% compared to the fourth quarter of the prior year.

Our Americas mills segment recorded adjusted EBITDA of $160.8 million for the fourth quarter of 2019, compared to adjusted EBITDA of $106.8 million for the fourth quarter of 2018. Including our new micro-mill in Oklahoma which was completing commissioning in the fourth quarter of 2018 and the acquired mills, our volumes increased by 375,000 tons or 45% compared to the fourth quarter of the prior year.

We have experienced less price volatility in our primary finished goods market compared to the broader steel industry. Average sales prices declined $25 per ton from the third quarter but ferrous scrap cost declined $38 per ton, resulting in a $13 per ton increase in metal margins. For the fourth quarter, our metal margins were $399 per ton, the highest that we have experienced since 2009. Our manufacturing costs were essentially flat in the quarter, if you factor the lag effect of the reduced scrap costs being realized in our results.

Our Americas fabrication segment recorded a substantially reduced adjusted EBITDA loss of $13.2 million for the fourth quarter of 2019, compared to an adjusted EBITDA loss of $24.6 million in the prior year fourth quarter. This fiscal quarter includes $4.2 million of costs related to the closing of four of the acquired fabrication locations. All of the closures were redundant operations in close proximity to existing CMC locations and do not reflect an exit from these markets.

As we transition from lower price backlog and shipped projects booked in a more favorable price environment, average sales price of materials shipped increased to $963 per ton, which is $120 per ton increase compared to the fourth quarter of the prior year and a $38 per ton increase than the sequential third quarter. This segment's results have now improved for two consecutive quarters and our legacy fabrication business produced breakeven results in the fourth quarter. We anticipate that this trend of improved earnings will continue into 2020. Including the acquired facilities, the volume increased to 141,000 tons or 46% compared to the fourth quarter of 2018.

Our international mill segment recorded adjusted EBITDA of $22.7 million for the fourth quarter of 2019, compared to $36.7 million from the same period of the prior year, which was a record quarter for the Polish operation. The construction sector remains strong in Poland and rebar shipment volume increased 4% compared to the fourth quarter of the prior year to a new quarterly record of 151,000 tons. Included in the prior year fourth quarter total volume was the 54,000 tons of opportunistic billet sales. Excluding these sales, total volume decreased 14,000 tons or 4%, primarily from lower merchant shipments. Metal spread is down $15 per ton or 6% as Poland experienced price pressures from a dramatic increase in long product imports into the European market, primarily from Turkey and Russia.

With respect to our consolidated results, our effective tax rate for the quarter was 16.4% as we realized certain discrete benefits during the quarter. We anticipate that our effective tax rate for 2020 will be approximately 25%.

Turning now to our balance sheet and liquidity. At year-end, cash and cash equivalents totaled $192.5 million and we had availability under our credit and accounts receivable facilities of approximately $611 million. During the quarter, we generated $256 million of cash from operating activities. This strong cash flow from earnings as well as diligent working capital management in a downward trending ferrous scrap market has allowed us to accelerate repayment of certain of our commitments. During the fourth quarter, we repaid $124.5 million of debt while also increasing our cash balance by $72 million.

For fiscal 2019, capital expenditures were $138.8 million. We estimate that our capital spending for fiscal 2020 will be in the range of $150 million to $200 million which includes some costs related to the previously announced investment in the third rolling mill in Poland.

This concludes my remarks. Thank you very much. And I will turn it back to Barbara for her perspective on the outlook.

[Barbara Smith]

Thank you Paul. Construction activity typically begins to slow toward the end of the first quarter as winter weather and the beginning of the holiday season start to affect shipments. These seasonal effects continue into our fiscal second quarter as well. However, we remain bullish regarding our underlying demand. Our customers are indicating that their backlogs are robust and our fabrication backlog level, as noted earlier, is healthy and priced attractively. For our mills, in contrast to the broader steel market, rebar metal margins remain above historic norms. And in Poland, the construction sector and the overall economic fundamentals remain positive.

We are proud of the year we accomplished in 2019 with our continued focus on providing our customers with exceptional product quality and service while continuing to foster strong partnerships with our suppliers, communities and other stakeholders. I am confident our team will continue to produce differentiated results again in 2020.

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

[Operator]

[Operator Instructions]. Our first question comes from Matthew Korn with Goldman Sachs. Please go ahead.

[Matthew Korn, Goldman Sachs]

Thank you. Good morning, Barbara. Good morning, Paul.

[Barbara Smith]

Good morning Matt.

[Matthew Korn, Goldman Sachs]

A question on Poland. Could you expand maybe a little more on the situation on the ground there? As you said and all we hear is that demand there is rapidly softening all across Europe, imports remaining high. What gives you the confidence there the results won't face any incremental headwinds in relative to this year as you go into next year?

[Barbara Smith]

Yes. Thank you Matthew. These trends have existed in Europe for a period of time. And Poland has consistently been a different economic situation than other countries across Europe. And I think you have to look at the indicators that I spoke of earlier. GDP has been strong. The outlook continues to be strong.

There is the stimulus money for infrastructure buildout. Those funds are allocated. They are going to continue to be utilized and create economic activity for us in Poland. So I think it's really just a different economic situation in Poland.

No doubt, everyone is well aware, during this period of trade actions by the U.S., Turkey and other countries have diverted their product to Europe. Europe, of course, put in safeguard measures and that was then converted to quotas and they have made some revisions to those quotas in order to further combat the onslaught of imports going into Europe. This is a situation we have been dealing with all throughout 2019.

And despite that, Poland has produced superior results. Some of that due to our repositioning of Poland, increasing their product range, activities over the last six to eight years to continue to lower their cost. So Poland is a very, highly efficient, high quality operation with a broader product range today than what it had historically with a very positive economic outlook in Poland, which is our primary market.

[Matthew Korn, Goldman Sachs]

Right. It seems like it's the right market, the right time and that continues. Now let me ask a little bit something on close to home. News this morning. Any significance of this new trade case on the bent rebar from Mexico for you? If I recall, like the fabricated rebar was explicitly excluded from the structural steel cases I think earlier this spring. So I don't know if this is a bit of a makeup? If it means anything for you and the anticipated effect there? Thanks.

[Barbara Smith]

Yes. We saw the news last night and that is a positive development for us. It's clearly a circumvention of the intent of the trade action. And so you know, all of the produces in the U.S., they have good communication with the Department of Commerce and we have clear instructions from Commerce when we see circumvention that we report that. And so we are very pleased that Commerce is taking a look at that. This was a very, very clear-cut case of circumvention where they were welding a hook on the end of straight rebar and designating that as fabricated rebar. And we have produced all the evidence to Commerce to prove that it was really a circumvention.

[Matthew Korn, Goldman Sachs]

Thanks. I will pass it along.

[Barbara Smith]

Thank you Matthew.

[Operator]

Our next question comes from Seth Rosenfeld with Exane BNP. Please go ahead.

[Seth Rosenfeld, Exane BNP]

It's actually Seth Rosenfeld of Exane BNP. Two questions, please. First on the Polish market again and then going back to the U.S. With Polish rolling mill development, can you comment a bit more on actually what's being built in the terms of the volumes uplift you expect? I understand that you have a quite significant excess melt capacity versus rolling at present in the CapEx budget? And again the timeline for completion on that? Can you give a status update, please? And then separately moving back to the U.S., there has been some industry press in the last couple of weeks about CMC shutting down one of their melt facilities in California, recently acquired from Gerdau. Can you comment on that? And specifically, how does capacity adjustment could be changing your overall melt capacity and ability to service the West Coast market? Thank you.

[Barbara Smith]

Yes. Thank you Seth. Good to hear from you again. With regard to the third mill in Poland, that's a project that I think we talked about last year as being in our capital plan. And it will be another 18 to 24 months for that to complete construction and begin the commissioning phase of it. The project was initiated to take advantage of excess melt capacity that we have and should add a couple hundred thousand plus tons to our Polish operation once it's up and fully commissioned.

In terms of Rancho Cucamonga, I think it's no surprise to anyone on this call that doing business in California, if you are a large manufacturer such as we are, it's a very burdensome regulatory environment, very, very high energy cost. And like many other steel producers, we do have excess melt capacity throughout the system. And so these are operational decisions that we make on an ongoing basis, really to optimize our network of operations and to reduce cost. So we are going to take advantage of our other melt shops to provide billet to the Rancho operation and continue rolling there. And that should improve the overall cost of the product coming off of that mill substantially.

[Seth Rosenfeld, Exane BNP]

Thank you. Can you confirm what the melt and rolling capacity will be pro forma for the closure of Rancho, please? And perhaps comment on which of your mills will be supplying the billets to that California mill given the logistical challenges?

[Barbara Smith]

No, I would prefer not to confirm because it really depends on market demand and we will are always evaluating how to run our operations based on what the market demand is. But the Rancho mill will continue operations as it has in the preceding month and the supply billet will really flex with demand in the other regional markets.

[Seth Rosenfeld, Exane BNP]

Thank you very much.

[Operator]

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

[Chris Terry, Deutsche Bank]

Good morning Barbara and Paul. Thanks for taking my question. First one I wanted to touch on is just around the rebar spreads. What gives you the confidence that they can stay above historical levels? And maybe if you could just touch on your view on the scrap processing into year-end as part of the answer? Thanks.

[Barbara Smith]

Yes. I think it's a dynamic market. We all know that. But I think we view this past year as probably the best indicator that rebar metal margins have been more stable than other steel products and may have been stable at, I will call it, elevated levels to historical norms. I think that speaks to the consolidation and it speaks to the good demand environment that we see in our end markets. And you know, we will see where things go from here. But in the near term, we are fairly confident that we will be able to maintain very attractive metal margin based on all the market factors.

In terms of scrap, look, if I can predict scrap prices, I would probably be on a beach somewhere. And so I think you can look at all of the market data as you do normally. Certainly, scrap has retreated over the last couple of months. If you look at iron ore, it would suggest that scrap is undervalued. We are moving into seasonal period of the year and scrap tends to fluctuate based on seasonal factors and weather and all of those types of things. So we will see. Our product prices tend to adjust and flex when raw material prices change.

[Chris Terry, Deutsche Bank]

Thanks Barbara. And then just in terms of the comment on you paying down debt quicker than expected and can potentially look at growth initiatives, I just wondered if you could touch on what or a bit more color on what that comment meant and maybe if you just could tie that into your priorities of cash for our growth initiatives versus capital management? Thanks.

[Barbara Smith]

Yes. I think we are very proud of the fact that we were able to accelerate the debt repayment in terms of, if you looked at our original expectations when we took on the debt to fund the acquisition, we are basically paying that back at least a year or two sooner than what we had anticipated. If you take the payments that we made in the fourth quarter, it fits all of our debt metrics and very, very comfortable position, significantly strengthens our balance sheet and bottomline gives us a lot of flexibility. There is nothing specific on the horizon in terms of growth but it's really a statement about the work that's been done over the last eight years to reposition the company, focus on our core manufacturing, integrated manufacturing platform. And at this stage, given that we concluded the Gerdau acquisition and it was highly successful, we have the balance sheet flexibility to either continue to reduce a bit of the debt or remain open if some interesting opportunities were to come along.

[Chris Terry, Deutsche Bank]

Okay. Thanks Barbara. I will leave it there.

[Barbara Smith]

Thank you.

[Operator]

Our next question comes from Martin Englert with Jefferies. Please go ahead.

[Martin Englert, Jefferies]

Hi. Good morning everyone.

[Barbara Smith]

Good morning Martin.

[Paul Lawrence, Vice President, Chief Financial Officer]

Good morning.

[Martin Englert, Jefferies]

So over the past month or so and recent weeks as well, there has been some speculation that U.S. 232 duties against Turkey could both increase or decrease or be eliminated altogether. If you see the import duties eliminated altogether, can you talk about if you would expect Turkey would reemerge as a competitive import force in today's market and region any share there? Or has anything changed markedly with the dynamics that might prevent him from participating as they did historically?

[Barbara Smith]

Yes. As you know, the trade situation is fluid and I think what I would say is that given the current environment with Turkey, I think that the 25% is more likely than not to remain in effect and we will see where those relationships evolve over time. I think the President and the administration is consistent in their message of creating a fair and level playing field. And that's all we are asking for. We know that we are low-cost on a global basis. And if given a level playing field, we can be competitive regardless.

So rather than speculate, I would say that when things change, we will have a plan and we will respond with haste to whatever changes in the market. I think you know the case overnight with Mexico and circumvention is evidence again supporting the trade policy of creating a fair and level playing field and given that we know we are highly competitive on a global basis.

[Martin Englert, Jefferies]

So should I read that as there might be other, if 25% duties would go away tomorrow, there may be other levers to be pulled on the trade front to potentially prevent influx of imports against Turkey?

[Barbara Smith]

Again, I am not going to speculate. We will utilize the trade laws for the purpose that they were put in place. And I think again, the policy of this administration is to have a fair and level playing field. And the industry and CMC will respond quickly if we see that that's not the case. But our primary focus is to be high quality producer, serve our customers in a differentiated fashion and to be very, very efficient and low-cost. So that's what we focus on every single day. But we will take advantage of our trade laws to support that fair and level playing field.

[Martin Englert, Jefferies]

Okay. Thanks for the color there. And one more, if I could, on downstream fabrication. When will segment results turn positive potentially on a quarterly basis? It seems like maybe this is getting pushed a little bit here, if you can talk about some of the dynamics there? It seems like you are booking at a pretty healthy price level at close to $1,000 a ton?

[Barbara Smith]

Yes. I am going to let Paul get involved in the conversation here.

[Paul Lawrence, Vice President, Chief Financial Officer]

Yes. Martin, I think as we said, we crossed a milestone which we had been targeting the entire year, which was by the exit of the fourth quarter that we would be positive in the legacy fabrication business and to follow soon thereafter with getting the acquired fabrication backlog positive. If you recall, that when we acquired those locations, the acquired backlog was slightly valued less than ours, so it's taken a little bit longer to get through the older work. But going forward, we anticipate that we will be positive from this point forward at today's rebar prices. I think we will continue the upward trend of profitability as the selling price continues to increase for the at least the next six months. And at today's rebar pricing, that is a very valuable backlog that we have in the fabrication business.

[Martin Englert, Jefferies]

Sure. And to be clear, you expect to be positive moving forward on a segment EBITDA level from this point, not just the legacy business. Correct?

[Paul Lawrence, Vice President, Chief Financial Officer]

Correct.

[Martin Englert, Jefferies]

Okay. Excellent. Thanks for the color there. and nice job on the results.

[Barbara Smith]

Thank you Martin.

[Operator]

[Operator Instructions]. Our next question comes from Curt Woodworth with Credit Suisse. Please go ahead.

[Curt Woodworth, Credit Suisse]

Yes. Thanks. Good morning everyone.

[Barbara Smith]

Good morning Curt.

[Curt Woodworth, Credit Suisse]

Barbara, can you talk more about your leverage to the public infrastructure? And there has obviously been a pretty sharp acceleration in letting activity and it seems like the geographies you serve would be very levered to that. So just curious to get any anecdotal color on what you are seeing there?

[Barbara Smith]

Yes. I think that that's always been an important part of our backlog and we track all those projects and there has been a trend for some period of time where public infrastructure has been increasing. The FAST Act money took a while to make its way through the system. And we are starting to see quite a few of those projects. We are well-positioned across the country and certainly we have always had the Southern footprint now with our presence in New York and increased presence in California. We really are in the largest consuming rebar markets and well-positioned to serve any and all of those projects. But yes, we have seen a lot of interesting projects that come to market over the last period of time.

[Curt Woodworth, Credit Suisse]

And what's the magnitude of that end market in terms of like a percent of revenue for the mill segment?

[Paul Lawrence, Vice President, Chief Financial Officer]

We are essentially two-thirds, three-quarters public and the overall construction market. I guess, better said, is overall two-thirds, three-quarters private work and then a third to a quarter of public.

[Curt Woodworth, Credit Suisse]

Okay. And then on fab, can you give us a sense of the timing of when the lower rebar price will really flow through? Like I understand that the pricing is very strong, but when you look at just inventory cycling or how you book the transfer price, if rebar goes down a lot in month one, when does that flow through your fab cost of goods sold?

[Paul Lawrence, Vice President, Chief Financial Officer]

Our working capital levels are fairly tight through the system. So the fabrication business may have a one-month type lag but it's nothing significant. Certainly within the quarter, it will realize the benefit of the other lower cost rebar. And you saw the average selling price in the quarter for the fabrication segment was $963 a ton. So I think that gives good credence that a good portion of the lower price backlog has flowed through.

[Curt Woodworth, Credit Suisse]

And like in a given quarter, what percentage your fab volumes would be backlog based versus spot? Is there any spot in a given quarter, i.e. the discussion on pricing going to $1,000, should that occur even given the fact that scrap has gone down so much, which I assume impacts spot fab business?

[Barbara Smith]

The spot is pretty minimal in terms of overall fab business, but you do have jobs that maybe they are booked and they ship over one or two months, some that are three months and some that are up to two or three years. So there is a lot of variety in terms of timing of when it's booked and when it ships. But just pure spots, our business is probably a pretty low percentage of the total.

[Operator]

Our next question comes from Matthew Fields with Bank of America Merrill Lynch.

[Matt Castellini, Bank of America Merrill Lynch]

Hi guys. Matt Castellini here, on for Fields. I just wanted to get a sense of what debt was sort of specifically paid down? Was it the Term Loan A long with the AR facility? And so I just wanted to confirm just how much of each?

[Paul Lawrence, Vice President, Chief Financial Officer]

Yes. Matt, this is Paul. Yes, your assumption is correct.

[Matt Castellini, Bank of America Merrill Lynch]

Okay. Great. And so after that reduction, how do you sort of feel about your overall debt level now? Do you think you need to reduce it any further depending on what steel prices do moving forward? Or are you sort of comfortable with generally where it is?

[Paul Lawrence, Vice President, Chief Financial Officer]

I think as Barbara mentioned, our debt ratios are in a place that we are very comfortable with. However, you know, as we look to our outlook, we believe that the strong cash flow generation will continue and that will give us opportunities and certainly absence of any other use of the cash, we would value delevering further as a strong alternative. But we will make those decisions as we as we go.

[Matt Castellini, Bank of America Merrill Lynch]

Okay. Great. Thanks. Congrats on the quarter.

[Barbara Smith]

Thanks Matt.

[Operator]

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

[Phil Gibbs, KeyBanc Capital Markets]

Hi. Good morning.

[Barbara Smith]

Good morning Phil.

[Paul Lawrence, Vice President, Chief Financial Officer]

Good morning.

[Phil Gibbs, KeyBanc Capital Markets]

A couple of questions for me just because I know we have got nearly a full year of Gerdau under our belt now. You gave the $150 million to $200 million of CapEx guidance next year. How much of that number is going to be maintenance and how much of that is going to be growth just so we can understand what projects should be get out there? I mean I know you pointed to Europe.

[Barbara Smith]

Yes. So I think the growth one is the project in Europe that we announced last year. Off the top of my head, I don't know how much we have allocated to next year for that project, but it would be meaningful.

[Paul Lawrence, Vice President, Chief Financial Officer]

That's $25 million.

[Barbara Smith]

Okay. So $25 million is the third mill and the rest is a combination of normal sustaining capital and then we always have interesting cost reduction or efficiency type projects that are that are included in the budget. If you recall, we allocated some funds over the next number of years or we need to allocate more sustaining capital to the larger footprint of notes that we have but there is nothing extraordinary. And again, it's a combination of productivity, efficiency, cost reduction and pure sustaining.

[Phil Gibbs, KeyBanc Capital Markets]

I appreciate that. And speaking of some cost reduction, I wanted to loop in some of the Gerdau synergies. Can you just bring us up to speed in terms of what the operational synergies you are achieving now from, call it, on an annualized basis relative to today and then also some of the commercial synergies and whether or not we should expect more at the margin given some the things like Rancho?

[Barbara Smith]

At this point, Phil, we have fully integrated the Gerdau assets into our portfolio and we now do all of our production planning based on one footprint of operations. And so you know, we are making decisions irrespective of whether it was acquired or a legacy operation. And the savings come both ways. As you optimize your production planning, logistics, et cetera. Having said that, when we announced Gerdau, we said $40 million of operational synergies and we have completed a whole list of projects and can confirm that we have captured that on a run rate basis as we enter fiscal 2020.

And as indicated earlier, we are saying that we can confirm roughly double that in terms of commercial and operational synergies. I am not to going to go into more specific detailed project-by-project and it's hard to predict commercially where the markets are going to go. It depends on so many different factors. But we are very encouraged, as we said earlier, by the stable margins, by the elevated margins and it really confirms our thesis when we announced the transaction originally.

[Phil Gibbs, KeyBanc Capital Markets]

Terrific. And just one just one last one. Great quarter from free cash flow and a net working capital perspective. A lot coming your way in terms of cash this quarter as we have talked about so far. But how should we think about net working capital? Or how are you thinking about net working capital for 2020 assuming that there is a little bit of a scrap recovery next year and you called business levels stay reasonably consistent? Thanks.

[Barbara Smith]

Yes. Working capital and Paul can add if he has any additional thoughts when I finish. Working capital is always seasonal for us. When we move into the busy season and throughout the busy season, our working capital tends to peak in the summer months, the highest part of the year and then that working capital turns and we convert that to cash. And our high point is generally this time of year in terms of turning the working capital because we are going into the seasonally slower part of our year. And then all of that is also affected by raw material price changes which happened to occur this past quarter.

So the release of working capital was in part just normal conversion and then in part was the retraction in raw material price. And so as raw material prices adjust in the other direction, we will see some additional investment in working capital. I don't see that being necessarily that significant or meaningful. But again, we think there is strong market conditions that will be sustained in 2020.

So we will have our normal seasonal working capital builds and releases. And I think the cash flow generation again is reflective of, we are a larger company and the combination of the assets with the existing CMC portfolio has a much stronger cash generation potential is also confirming the work that we have done around the rapid integration and synergies.

[Phil Gibbs, KeyBanc Capital Markets]

Thanks Barbara and team. Nice work.

[Barbara Smith]

Thank you Phil.

[Paul Lawrence, Vice President, Chief Financial Officer]

Thank you.

[Operator]

Our next question comes from Aldo Mazzaferro with Mazzaferro Research. Please go ahead.

[Aldo Mazzaferro, Mazzaferro Research]

Hi Barbara. How are you?

[Barbara Smith]

I am great. How are you, Aldo?

[Aldo Mazzaferro, Mazzaferro Research]

Doing well. I was looking, trying to work the Gerdau assets into your overall as you laid out and it looks like if you adjust for the metal spread improvement, there was still a deterioration year-to-year in the manufacturing cost. And I know that's to be expected as you work the assets in. I was just wondering how close do you think you can come to the CMC run rate of manufacturing assets in those Gerdau assets that you so nicely acquired? Thanks.

[Barbara Smith]

Yes. Again, I think I will get Paul into the conversation here. But as you know, Aldo, we don't disclose specifics mill-by-mill. And we have some production that's rebar and some production that's merchant. And there are different costs associated with the product mix that you are producing. I think most of the cost change year-over-year was things that have been talked about in the past.

The full year effects of raw material price increases that had occurred and layered in over time. I think there could, for example, like electrodes. Now I think in the case of electrodes, that possibly there could be some abatement in those costs as time goes on. We will see. That market seems to be certainly stabilized and I don't think that it can support the same high spot prices that we have been experiencing the last couple of years.

But we are really pleased with the progress that we have made on these operations. And even though we have confirmed and concluded all the projects that we had identified when we did our due diligence, it doesn't mean that we are going to stop looking for ways to improve efficiency and cost at these operations. And that's just what CMC does, day in and day out. And we think we are quite good at that because we have, as I indicated earlier, some of the lowest cost mills in the world.

Further to that, we are very pleased with the performance of Oklahoma. That was obviously assisted by our experience in Arizona. Likewise, we introduced a spooler in Arizona and within days of startup it was producing commercial grade product. And that was due to the fact that we had experience of spooler in Oklahoma and how well our operations work together to share the learnings and accelerate the benefits of those types of projects.

[Aldo Mazzaferro, Mazzaferro Research]

Great. Well, thanks Barbara and congratulations on all the progress that you are making.

[Barbara Smith]

Thank you Aldo. Look forward to seeing you.

[Operator]

That concludes our question and answer session. I would like to turn the call back over to Ms. Barbara Smith for any closing remarks.

[Barbara Smith]

Thanks Ben. Well, thank you all for joining us on today's conference call. We look forward to speaking with many of you during our investor visits in the coming days and weeks. Thank you so much.

[Operator]

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