Commercial Metals Co

NYSE:CMC

Earnings Call Transcript 2020-Q4

[Operator]

Hello, and welcome everyone to the Full Year and Fourth 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 and we’ll have a few instructions at that time.

I would like to remind all participants that during the course of this conference call, the Company will make statements that provide information other than historical information and will include expectations regarding economic conditions, effects of legislation, 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 speculations 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 and 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 in 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 Web site. Unless stated otherwise, all references made to year or quarter-end are references to the Company's fiscal year or fiscal quarter. And now, for opening remarks and introductions, I will turn the call over to the Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, Ms. Barbara Smith.

[Barbara Smith]

Good morning, and thank you for joining this morning's call to review CMC’s results for the fourth quarter of fiscal 2020.

I will begin the call with highlights from what was an outstanding year for CMC. Then turn to comments on our fourth quarter results before providing updates on our strategic projects and the current macro environment. Paul Lawrence will then cover the quarter’s financial information in more detail. And I will conclude our prepared remarks with a discussion of our outlook for the first quarter of fiscal 2021, after which we will open the call to questions.

Before jumping into my remarks, I would like to direct listeners to the supplemental slide deck that accompanies this call. The presentation can be found on CMC's Investor Relations Web site. Let me begin by highlighting that fiscal 2020 was a historic year for CMC, showcasing the potential of a transformed company, following nearly a decade of purposeful strategic repositioning and portfolio realignment.

The benefits of these efforts became clear in fiscal 2020. CMC is now a company with significantly increased earnings, cash flow and operational capabilities. These actions also include an incredibly robust balance sheet, positioning CMC to thrive and grow. In addition to reaping the benefits of our strategic transformation, CMC generated a long list of accomplishments in fiscal 2020 as we work to continue to strengthen our organization and build for the future. First, we reacted quickly to the COVID-19 outbreak to protect the health of our employees and the continuity of our operations. We avoided business interruptions and disruptions to our customers, and we suffered no loss of productivity.

We increased our core EBITDA over fiscal 2019 by 30%, generated a 12% return on invested capital and $604 million of free cash flow, in turn creating meaningful economic value. We initiated a network optimization effort in North America that we expect will yield significant profit and working capital benefits. Though early in the process, we've already seen positive results, including lower costs and a release of working capital.

CMC made significant progress on our MBQ growth initiatives. We laid the groundwork for further expansion through an enhanced commercial focus, supported by broader product line offerings and improved product quality with our investment in additional climate controlled storage and improved handling. We acquired the GalvaBar product line and production facility, providing our customers with a complete range of corrosion-resistant options to choose from.

In August, we held a virtual Investor Day and provided a detailed view of the Company's strategy and growth initiatives. Lastly, our most important achievement in 2020 was continuing to keep our people safe. I'm proud to report that 67% of our locations worked incident-free this past year. Looking back on fiscal 2020, I'm extremely proud of our team. They achieved these accomplishments in an environment of unprecedented challenges that turned many people's work and home life upside down. Our employees once again demonstrated their dedication to serving our customers' needs and their ability to overcome obstacles safely through collaboration and innovative problem solving.

You will have seen that starting with the fourth quarter of fiscal 2020, CMC changed its reporting approach by consolidating its former Americas Recycling, Mills and Fabrication segments into one North America segment. This change was executed with a long-term, multiyear perspective and aligns with the way we manage and analyze our business. This approach also reflects the way in which CMC creates economic value through its vertically integrated operations, as we explained in detail at our Investor Day.

Turning to our fourth quarter financial performance. As announced in our earnings release this morning, we reported earnings from continuing operations of $67.8 million or $0.56 per diluted share on net sales of $1.4 billion. Excluding the impact of onetime charges, which Paul will cover in a moment, our adjusted earnings from continuing operations were $95.3 million or $0.79 per diluted share. This level of adjusted earnings represents a 35% sequential increase and a 4% year-over-year increase despite operating within an economy impacted by the COVID-19 pandemic.

Activity levels across most of our major end markets remained robust, pushing shipments of finished steel products during the fourth quarter to the second highest level ever for CMC, behind only the third quarter of fiscal 2019. During the quarter, we generated $206 million of free cash flow.

I would now like to provide a quick update on recent strategic announcements. In conjunction with our Investor Day, CMC announced that it will construct our third technologically advanced micro mill, adjacent to our existing mill in Mesa, Arizona. This facility will have a nameplate annual capacity of 500,000 tons and be capable of flexing production between rebar and merchant bar. A significant portion of the investment will be funded through the sale of our Rancho Cucamonga site.

We view this investment as a smart way to grow. It replaces older, high-cost capacity, leverages our existing market position, an existing Mesa site infrastructure, and benefits from increased returns through the investment cost offset provided by the land sale. We anticipate breaking ground in early calendar 2021 and reiterate our previous intention to begin commissioning in fiscal 2023. In the meantime, CMC is preparing for the decommissioning of Steel California and a seamless transition of rebar supply to the West Coast, while maintaining high levels of customer service.

During the quarter, we made significant progress in the construction of our third rolling mill in Poland. Once operational, this project will allow our facility to utilize 200,000 tons of current excess melt capacity by converting it to higher value-add finished product. In addition to increased finished goods’ output and the resulting margin benefit, the third mill will also enhance our production flexibility and leverage our fixed melt shop costs. We anticipate a late fiscal 2021 startup and expect total costs will be well below our original budget of $80 million.

As mentioned earlier, in July, we completed the acquisition of GalvaBar, a growing provider of corrosion-resistant coating services to fabricators. GalvaBar is the only galvanized rebar product that can be fabricated after coating, which provides benefits to fabricators, including lower costs, streamlined logistics and increased productivity.

Turning now to the market update. We exited the fourth quarter at strong activity levels in both North America and Europe. Domestic demand for rebar has been supported by a healthy backlog of work at our own fabrication facilities, as well as our third-party customers. Consistent with our previous comments today we have seen very few cancellations. Demand for merchant products rebounded from the low points that occurred in the third quarter. Service center activity is now also recovering and customers appear to be buying in line with underlying needs.

CMC's current construction backlog in North America sits at a healthy level and we continue to hear similar conditions at our fabricator customers. However, we know there will be lingering market effects as a result of the pandemic. The outcome of the upcoming election will also remove current uncertainty regarding the direction of public policy and its impact on the economy. We are carefully monitoring the macro environment and building in flexibility to respond to changes in demand.

In Europe, construction demand remains resilient in both the private and public sectors. Conditions in residential are particularly strong and demand is currently growing on a year-over-year basis. As we shared during our Investor Day, the Polish government recently authorized infrastructure investments equal to about 200% of its normalized annual spend, which we expect to begin positively impacting construction activity levels this fiscal year. On the industrial side, manufacturing activity in Central Europe is recovering with PMIs in both Poland and Germany posting expansionary readings from the last several months.

Finally, as noted 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 October 29, 2020. The dividend will be paid on November 13, 2020. This represents CMC's 224th 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. Before getting into the results for the quarter, I would like to provide a few comments on how we will describe operational performance going forward in light of the changed segment reporting.

Reiterate what most of you are already aware, we operate our vertically integrated network to maximize profitability; the raw material operations providing a reliable low-cost source of the principal raw material, ferrous scrap, for the mills; the downstream facilities providing a base load of demand and protecting us from short-term selling price volatility and surges of unfairly priced imports.

With 60% of our raw material flows going to the mills, 40% of the mill production going to the downstream locations, separating the value chain into different components for the purposes of financial reporting is no longer aligned with how we run the business or how we make capital allocation decisions. In our commentary and reporting, we will focus on the products, prices and costs that are most impactful to our integrated operations and earnings stream.

Our volume commentary will look largely at external shipments of finished steel products, which is the combination of what we now term steel products and downstream products, as those tons travel the furthest through our integrated value chain, further most cost and also drive our profitability. In addition to using these volume levels as a gauge of activity, we will give per ton rates using finished steel product shipments as the denominator.

Regarding margins, we intend to provide commentary with a focus on selling price spread over mill yielded scrap costs for both steel products and downstream products. With respect to costs, we'll be referring to controllable costs, which we define as costs excluding scrap, encompassing our raw materials, steel products and downstream product operations. This is because we own all of the economics from the point of charging scrap into the furnace to our final product sale.

This approach of describing our business separates costs that are largely out of our control, i.e., scrap costs and those which we actively manage. Operational stats we provide in our release should allow the investing community to identify, quantify and forecast each of these two buckets. To help parties better understand the reporting transition, we have posted several resources, as Barbara mentioned, to our Investor Toolkit section of our Investor Relations Web site.

Turning to the fourth quarter. As Barbara mentioned, we reported earnings from continuing operations of $67.8 million or $0.56 per diluted share compared to earnings from continuing operations of $85.9 million or $0.72 per diluted share in the fourth quarter of 2019. Fourth quarter 2020 results include net after-tax charges of $27.5 million, the largest of which related to the post-closing working capital settlement associated with our fiscal 2019 rebar asset acquisition.

This is essentially a finalization of the purchase price as working capital balances were part of the consideration paid and certain amounts were under dispute between the parties. Other charges taken in the quarter were largely noncash and included facility closure costs as we continue to optimize our footprint, as well as debt extinguishment costs related to the early paydown of CMC's term loan.

Excluding these and other onetime expenses, adjusted earnings from continuing operations were $95.3 million or $0.79 per diluted share. This marks the highest level of adjusted EPS in 13 years. Our core EBITDA from continuing operations was $176 million for the fourth quarter of 2020, an increase of 11% compared to the $159.2 million reported in the fourth quarter of 2019.

Now I will review our results by segment for the fourth quarter of 2020. North America segment recorded adjusted EBITDA of $174.2 million for the quarter compared to adjusted EBITDA of $152.5 million in the same period last year. Largest driver of this improvement was a reduction in controllable costs on a per ton of finished product basis. Year-over-year reduction was driven by cost improvements throughout the vertical footprint, most significant of which was the lower mill conversion costs.

We continue to benefit from our decision in early fiscal 2020 to curtail melting operations at Steel California and supply the facility with lower cost billets from other plants. Additionally, mill costs were helped by declining prices for consumables, such as electrodes and alloys. Cost levels at our downstream operations also improved due in part to the consolidation of roughly a dozen facilities since the completion of the Rebar Assets acquisition. The facility rationalizations have been carried out in regions where our acquisition resulted in overlapping downstream footprints. When addressing this issue, we have not reduced our service in any major local markets.

CMC's North American cost performance more than offset the margin compression seen in Slide 7 of the accompanying deck. Year-over-year margin squeeze occurred primarily in steel products, driven by a multi-quarter downward drift in average selling price against a modest rise in scrap costs. Margins over scrap on the downstream business expand modestly from a year ago due to higher average selling prices. These higher prices are a function of an attractively priced backlog. I won't provide guidance as to the future pricing but we can indicate that the current average backlog pricing should support a downstream average selling price above the trailing five year average in the near term.

Shipments of finished product in the fourth quarter were flat from a year ago with growth in steel products offset by a modest decline in downstream products. Rebar volumes out of the mills were supported by sustained construction spend throughout the pandemic. Downstream product shipments were impacted by multiple storms in Texas and the Gulf regions, as well as the wildfires in the West.

Our Europe segment recorded adjusted EBITDA of $22.9 million for the fourth quarter of 2020, essentially flat to the prior year quarter. It should be noted that $10.7 million carbon credit was received during the quarter. We are not treating this as a onetime benefit as this credit is for a 12 month period and part of an ongoing government energy program that will recur in the future, though the amount will likely differ. Our Europe operations also received $3 million labor cost refund as part of a COVID-19 stimulus program, which is included in the segment EBITDA but has been excluded from our consolidated core EBITDA figure.

Margins over scrap were down on a year-over-year basis but virtually flat from the prior quarter. Import flows remain a meaningful challenge to pricing and spreads in Central Europe across all long product categories. Several countries, namely Turkey, Russia and Belarus, continue to aggressively fill import quotas after periodic resets.

Europe volumes decreased just 2% compared to the prior year due primarily to lower shipments of wire rod, which was impacted by reduced German automotive production. Rebar shipments were stable year-over-year, demonstrating the resilience of the construction-related demand in the domestic Polish market. Volumes of merchant product were also flat compared to a year ago, helped by a recovering Central European industrial activity level and restocking.

Moving on to our consolidated results. Our effective tax rate for the quarter was 21.4%, bringing the full year average to 24.9%. This is consistent with the 25% guidance we provided over the course of our last few earnings calls and in line with our current expectations of 2021 to be between 25% and 26%.

Turning to our balance sheet and liquidity. As of August 31st, cash and cash equivalents totaled $542.1 million, and we had availability under our credit and accounts receivable programs of approximately $661.9 million. During the quarter, we generated $259.4 million of cash from operating activities. Strong earnings and working capital management allowed us to increase our cash balance sequentially even while funding $53.5 million of capital expenditures and reducing debt by almost $100 million.

As you can see by the trends on Slide 14 of the supplemental slide deck, CMC's enhanced earnings and cash flow generation has allowed us to rapidly delever over the last six quarters. Our net debt to EBITDA ratio now sits below one times, while our net debt-to-capitalization is just 18%. Our robust balance sheet and overall financial strength provide us the flexibility to fund our strategic growth projects, navigate the uncertainties of the current economic environment and still pursue opportunistic M&A.

Lastly, I would like to provide a current outlook for capital expenditures for fiscal 2021. We expect to invest between $200 million and $225 million with roughly $85 million earmarked for our new micro mill. For comparison purposes, we have previously stated that a typical capital spend averages around $150 million annually. This concludes my remarks, and I'll turn it back to Barbara for the outlook.

[Barbara Smith]

Thank you, Paul. We expect shipments in the first quarter to follow typical seasonal trends in both North America and Europe with some additional weather-related impact from storms in Texas and the Southeast. As a reminder, volumes tend to decline mid to high single digits from the fourth quarter to the first quarter as we exit the heart of the summer construction season.

Our view is supported by the backlog levels with which we entered the first quarter. During our last earnings call, we shared the 2021 outlook published by the Portland Cement Association, a forecaster whose projections have historically anticipated construction activity. Last week, this forecast was updated, projecting a modest decline of roughly 1% for 2021, indicating continuing relative strength in construction activity when compared to other steel consuming sectors.

Fiscal 2020 was an exceptional year for CMC and fourth quarter was an exceptional quarter. Looking ahead, we see challenges particularly in light of the economic uncertainty created by the upcoming Presidential election and the continued COVID-19 pandemic. Over the long term, we remain confident that CMC is positioned to earn average EBITDA of $540 million per year through the cycle as we shared with you during our Investor Day. Adding the growth projects that are currently underway, we remain confident that we can grow through the cycle EBITDA to approximately $675 million over the next three to four years.

Once again, I would like to thank all of the CMC employees for delivering an outstanding year of performance. Thank you. And at this time, we will now open the call to questions.

[Operator]

We will now begin the question-and-answer session [Operator Instructions]. The first question will be from Chris Terry of Deutsche Bank.

[Chris Terry, Deutsche Bank]

Just wondered if you could give an update on the potential timing for the Rancho sale. I think that's all in place, but just wanted a few more details on how that fits together with your CapEx profile and getting the money in from that. And the second one just relates to the market. Just trying to appreciate the seasonal comments around the next couple of quarters. Just maybe if you could give an indication of where backlogs have gone from and to maybe over the last several months. And just a little bit more detail around certain states and what you're seeing within the U.S. in particular. Thanks.

[Barbara Smith]

The marketing of the Rancho sale is underway and there's a team of folks that are working on that and we're also utilizing some external resources. We would expect to get that concluded over the next 12 months. So it's underway and tracking well and we'll provide additional updates as time goes on.

In terms of the market and the seasonal effects, generally at this time of year, the construction season winds down. We move into the holidays. Typically, there is time taken during the Thanksgiving holiday and then again, during the Christmas holiday. So you end up losing some days of work and shipments. But that's all very normal in what we see and I tried to give that indication in my remarks about what you can factor in, in terms of change in our shipping profile.

In terms of the backlog, we also historically would see our backlog start to decline a bit in the fall season and then it picks back up when construction activity begins to prepare for the busy season in the coming year. So I don't think there's anything remarkable or outstanding going on here. Clearly, this has been an unusual year. I would say that every year when we are facing an election, we do tend to see projects that are slower to be committed to because there's uncertainty.

And whoever the owner is of the project, they just like to know the outcome and what the major public policy will be based on the outcome of the election. So our sales team as well as our customers see a lot of good work and a lot of good projects that are out there, but we are seeing folks who are just sitting on the sidelines a bit, waiting for the outcome of the elections. And again, I want to emphasize that that is something a phenomena that we see every four years when we have a Presidential election.

In terms of states, I think there's been a good development over the last three or four months. If you go back six months or the beginning of the pandemic, there was a lot of concern around state revenues and the reduction in state revenues and that affecting all of the projects that states have on their agenda and have in their budget. But what we've seen is really a very nice recovery in state revenue receipts and that's consistent with the fact that tax filings were delayed from the normal March time frame to July time frame.

But I think that's a real positive development over the last couple of months that the revenues going into states, obviously, that's variable state to state. But in general, state revenues have recovered not quite to the pre-pandemic level but you're seeing that similar V-shaped effect as we've seen in other aspects of the recovery.

[Operator]

The next question will be from Matthew Fields with Bank of America.

[Matthew Fields, Bank of America]

So you obviously finished the year in a pretty comfortable spot on your balance sheet. You're well below that two times gross debt target that you've talked about in the past. I know you're kind of going to kick up the spending for the next couple of years on the new micro mill, partially offset by some sale proceeds. But is the time now for kind of return to shareholder returns? Or do we think that that gross debt target could get taken down a notch lower and maybe some aspirations for an upgrade to investment grade?

[Barbara Smith]

Well, there's a lot there. Let me start and then I think Paul can add some color. I think that right now, our focus is on the plan that we had laid out in the Investor Day and a number of really interesting high-returning growth projects and keeping our balance sheet strong to fund those, as well as have the flexibility to deal with any of the economic aftermath that is undoubtedly going to follow this global pandemic. We always evaluate our capital allocation. We revisit that topic every quarter with our Board. We revisit the dividend and other capital allocation. I think at this time, we're comfortable with the yield on our dividend. And our share price wouldn't suggest to us that buying back shares is the best use of capital at this time, but it's something that we are always looking at and always evaluating.

[Paul Lawrence, Vice President and Chief Financial Officer]

Matt, the only thing I would add is our indentures are essentially of investment grade type. And so really the benefits that we assess in terms of making the leap and having the constraints against us to be investment grade are not worth the hurdle. And as Barbara said, we've got a pipeline of projects with very attractive returns that we would rather focus our investment on.

[Operator]

The next question will be from Seth Rosenfeld of Exane BNP Paribas.

[Seth Rosenfeld, Exane BNP Paribas]

Hi Barbara and Paul, congrats on a strong set of results. If I can ask a few questions, please, starting out in Europe. Can you please give us a little bit more color behind the carbon credit gain that was reported this quarter? In your prepared remarks, you mentioned that you do think this might repeat in the future. Can you give us a sense over what frequency and the perhaps scale of that going forward? Is that set in stone or something that would reflect perhaps spot carbon prices within Europe? I'll start there, please.

[Paul Lawrence, Vice President and Chief Financial Officer]

The carbon tax credit in Poland is seen in quite a bit of Eastern Europe, where their energy costs as a result of the carbon tax burden that they pay on their energy rates is quite elevated. To remain business friendly, the government has put in place these subsidies to maintain the Polish economy competitive with the rest of the world. So this is a multiyear program. The credit received was for calendar 2019, so a 12 month period. It is in legislative circles and will be paid for calendar year 2020 as well. We do anticipate a similar amount to be paid in the fourth quarter of '21.

[Seth Rosenfeld, Exane BNP Paribas]

Second question, if I may, on working capital. Obviously, you were able to release a very large amount of working capital throughout the course of this year. You've talked previously about how asset optimization and your production footprint allowed some structural relief. Are you able to give some guidance on what we should expect for fiscal '21? Do you still see further working capital release, or depending on market conditions, demand and pricing, would we expect that to reverse sort of what you saw in the last fiscal year?

[Barbara Smith]

The optimization effort is in its early stages. Certainly, we're going to be careful as we move that initiative forward that we don't jeopardize any of our customer service. But we do think that there is additional opportunity now that we have the larger network of operations to continue to optimize the level of working capital that we have across that entire network. And the idea is that you would not have safety stock everywhere if you can still provide the customer with quick turnaround and delivery for all of their needs. So I think that you'll see those dividends paying out in the coming year. And of course, that will be offset by whatever price fluctuations that we're going to see, whether it's fluctuations in scrap price or fluctuations in selling price. But really the objective on a tons basis is to carry a more optimal level of product while also balancing and maintaining exceptional customer.

[Seth Rosenfeld, Exane BNP Paribas]

So perhaps assuming stable market conditions, even more to come in '21, not necessarily waiting for the shift to the new mill in Arizona. And I guess a last question, please. In your earlier remarks, you commented on, again, benefit of optimization improving your conversion costs. Given that Rancho was initially closed some time ago, just to be clear. In fiscal Q4, did you see sequential improvement compared to Q3 or are you looking at it on a year-over-year basis? Is that common?

[Paul Lawrence, Vice President and Chief Financial Officer]

There was clear larger benefits year-over-year. However, we continue to focus on optimizing costs. So even quarter-over-quarter, sequentially, there were improvements but not to the same magnitude as the year-over-year changes.

[Operator]

Next question will come from Timna Tanners of Bank of America.

[Timna Tanners, Bank of America]

I wanted to ask some clarification questions regarding the outlook. The comments about the storm impact. Just curious is that reflecting just the risk around the corner? Or now that we're halfway through your November quarter, is there something you've already experienced, if you could just clarify that a bit?

[Barbara Smith]

I mean you have followed these storms and the two hurricanes that went through Louisiana. And here's what happens from an operational perspective, Timna, is that when the storm is coming, we're, of course, following the development. And generally, we have to prepare our operations for the surge. And so we tend to hunker down and protect our facilities, which means sometimes we have to shut down when the storm hits land. So you have some sort of disruption there. Obviously, our customers are doing the same thing. And so there's not going to be construction or steel being laid down when you have a hurricane coming onshore.

And in a given, let's call it quarter, it's very difficult to make up that time. Let's say that you prepare and you shut down the day before the storm comes on land, you're done and then you have to restart. So you lose two, three, four days in a specific region. And then things come back to normal and this is absent any kind of reconstruction effect. And it's hard within a 90-day time frame to make up those shipments.

So I'm not prepared to give a quantification of loss days or volume because obviously, those events did not affect the entire network, but we have had a number of weather-related events that caused those kinds of disruptions. And clearly, the work will be shipped over the longer-term time frame. Just within a quarter, it can cause some disruptions. But I can say that our shipping rates thus far within this quarter continue to be good and consistent with what we've seen over the last period of time.

[Timna Tanners, Bank of America]

So we'll watch to see what storm activity over the next six weeks or so. And then just really wanted to follow up on any further items that we might expect to see related to the Gerdau transaction. I just looked up it's over almost two years ago. So is this kind of the last then of those items and issues related to that transaction, or might we expect more to come?

[Barbara Smith]

I think the best guidance I can give you is really pointing back to the Investor Day where we laid out what we saw as the next phase and that being this optimization. And of course, there's cost benefits, whether it's logistics or other operating costs and there's the working capital benefit, which we just discussed with Seth. And so the big integration and benefit items are behind us. And clearly, as Paul reported, we had a number of fabrication location consolidations this past year where we had facilities within the same geography. And so most of the major benefit has already been accrued.

But I can tell you this past year, there's significant progress at all of our locations, not just the newly acquired, ongoing cost initiatives, productivity initiatives, process improvement initiatives that have yielded significant benefits. Clearly, the California decision was also key and we really look forward to new mill and serving that market in a differentiated, much, much lower cost way. But in the meantime, we will take advantage of capacity across the system in order to make sure that we have no disruption in service to our customers.

[Operator]

[Operator Instructions] The next question will come from Phil Gibbs of KeyBanc Capital Markets.

[Philip Gibbs]

Barbara, I just wanted to confirm the guidance that you provided on the mill side of mid to high single-digit decline. Was that for both North America and Europe or was that just for North America?

[Barbara Smith]

So that would be not just mill, that's overall shipments. We would see that seasonal effect. And I think that's across the entire network including the U.S. and Poland. Obviously, Poland weather can become a factor depending on whether they have a harsh winter or a mild winter and sometimes winter can come a little bit sooner in Poland than certainly here in the U.S. and then it's the holiday effects.

[Philip Gibbs]

So this does include your downstream products in North America then?

[Paul Lawrence, Vice President and Chief Financial Officer]

That's right.

[Philip Gibbs]

And then just in terms of the downstream products’ backlog in North America. Historically, that's been equally weighted between public and private work. Is that still about the same?

[Barbara Smith]

We haven't seen a significant change over the last few quarters, Phil. I think it tips a little bit more towards private in the current situation but it's been consistent over the last several quarters.

[Philip Gibbs]

And then lastly, any changes in demand that you're seeing among the regions that you serve? I mean I know you were predominantly a Sunbelt company prior to the Gerdau acquisition so you've got a bigger network now in terms of serving all the regions. Any differences and some being stronger than others or weaker than others? Thank you.

[Barbara Smith]

So at this point, I wouldn't point to anything dramatic or significant in terms of a shift. I think that we're trying to ferret out the lingering effects of the pandemic, and I could paint a scenario of some positives. In other words, I think it's no surprise that the population migration to the Sunbelt States, the business-friendly states, the lower tax states, has been going on for quite some period of time. And I think it is continuing and will continue which I think plays to our sweet spot in terms of our footprint. Clearly, the shutdown related to the pandemic, the state shutdowns, there's been a fair amount of variability in that. But I think it's just going to take some time for all of those effects to shake out. And in the current moment, we're not seeing any dramatic trends that I can point to.

[Operator]

The next question will be from Sean Wondrack of Deutsche Bank.

[Sean Wondrack, Deutsche Bank]

Hi Barbara and Paul, nice job operating in a pretty tough environment out there. So I just wanted to follow up on an earlier question somebody asked considering investment-grade ratings. I totally understand that you guys are operating with your own plan and with the best interest for sort of creating value for the shareholders in mind. But when you talk about sort of like a $675 million through the cycle EBITDA and you talk about sort of maintenance CapEx in the $150 million-ish level. Even with growth CapEx included in there, you're still going to generate a significant amount of free cash flow. I was curious just what you're hearing from the rating agencies in terms of your progress, even if you stick with your plan. And then also as you continue to move forward, is there a chance that you might achieve that split rating without even keeping the big things in mind like? What are the gating factors there? Is it a scale issue? Thank you.

[Paul Lawrence, Vice President and Chief Financial Officer]

Thanks, Sean, for the question. And I think in a lot of cases, you have outlined the answer I'm going to provide in the question that you gave. Clearly, to get to where we aspire to be where we have the vision to be at $675 million, we're going to have to make some investments and that's what we laid out on the Investor Day. So our capital allocation and priorities sort of are at point in time.

And so as of right now, where we find the most attractive use of our capital is reinvesting in the business through these growth initiatives that we believe will provide very attractive returns. Once we get to that level, we will have to have another assessment as to where are the opportunities for us to invest the cash. Is it that we want to prioritize being investment grade or are there future opportunities available to us? And so I think where we sit right now, we see that the best opportunities for us are to invest.

We do have good discussions with the rating agencies. And frankly, the discussion is similar to this around what do we want. And currently, we're looking to invest in the business, we're looking to build the third micro mill, which is a considerable investment but we think we can do that through our free cash flows over the next couple of years. So I think that's going to be the primary focus. But once we get those in place, we'll reassess and the priorities may change.

[Sean Wondrack, Deutsche Bank]

I think that makes a lot of sense. I appreciate the thoughtful answer there. And then just quickly, if I could add one more in there. There's been some M&A recently in the U.S. steel sector. I was curious if you had seen any increased interest in your business and maybe what you're seeing sort of on the M&A front in general?

[Barbara Smith]

Yes, Sean, I think I would answer that by saying Paul laid out our capital allocation strategy. We have a number of really attractive organic growth opportunities and projects that we're pursuing that we've been made the investment community aware of. We made a transformational acquisition a couple of years ago. And I think all the acquisitions we've done in recent times we've demonstrated a really strong discipline for evaluating any growth opportunity that we would undertake that it fits clearly within our strategy and our core capabilities and that it is something that we see where we can create significant value for our shareholders.

So we are always monitoring M&A activity that is potentially out there that could create attractive growth for the company. And I can assure all of you that we will apply that same disciplined approach to anything that we would consider. And Paul indicated in his remarks, we want to have a balance sheet that has a lot of flexibility, flexibility to undertake disruptions in the economy, like we saw this past year. I call it shocks to the system, things that are unknowable to us today but might occur.

We have to have the flexibility to respond to changes in demand and changes in market conditions or macro issues. We have to always make sure we have the flexibility to fund those internal organic needs that we have. And then we want to maintain a certain level of flexibility if there's a very unique opportunity that comes before us. And those are always things that we have to balance between all of those different priorities and opportunities that come to us.

[Operator]

The next question will be from Andreas Bokkenheuser of UBS.

[Andreas Bokkenheuser, UBS]

Just one follow-up question for me. I mean you answered some of it already. But just kind of when you look forward over the next couple of years and you look at your product specific segments and in terms of growth. I mean, you're obviously talking about the MBQ mill and where you're putting some of the CapEx inherently. So where do you see the market growing and you're obviously feeding into that? And also where do you see less growth but you're still investing basically to take market share from peers effectively over the next couple of years? Obviously, we have an infrastructure bill potentially happening. So maybe you can -- broke that into the answer as well, that would be great. Thank you very much.

[Barbara Smith]

I think it's clear that we are very oriented to construction markets. And so the growth that is going to have the biggest impact on the company would be growth in construction and that can come from infrastructure, which clearly we will be awaiting the outcome of the election and the policy decisions that will potentially create more demand from an infrastructure side. I think that can be a positive avenue of growth. I think that the readjustment of supply chains, which became very evident during the pandemic that's already starting to emerge. I recently spoke to someone that's in that industrial market and they're very busy and they see a lot of opportunity.

And for example, I think we learned a lesson in terms of having control over medical PPE, over the production of critical medicines and antibiotics and therapies. And I think that you all see that all of the pharmaceutical companies are gearing up for bringing back some of that production capability to the U.S. So we don't find ourselves in this situation in the future. So I'm actually in the medium to long term very optimistic for a lot of industrial activity. How quickly all of that comes at what pace, we'll monitor it and factor it in when we see it.

I mentioned the population migration. The residential statistics have been very good in the U.S. and following residential construction activity comes nonresidential construction activity. Household formation, the millennials are starting to settle down and have families and move to the suburbs. I think all of that can create some interesting construction trends going forward. And we see similar positives in Poland where we have our large operation there.

In terms of our merchant product, which a lot of that goes into general industrial activity, all types of products. Again, I think a readjustment of the supply chain is going to increase the demand for merchant products and we can certainly take advantage of that. And our strategies are continuing to improve our capabilities there. So I think we've got to get through the next period of time and see where the virus goes and how we finally get past it. But I think there are a number of positives that we can capitalize on going forward.

[Operator]

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

[Barbara Smith]

Thank you. Thank you all for joining us on today's conference call, and we certainly look forward to speaking with many of you during our investor calls in the coming days and weeks, and hope you all stay safe. Thank you, again.

[Operator]

This concludes today's Commercial Metals Company Conference Call. You may now disconnect.