Commercial Metals Co

NYSE:CMC

Earnings Call Transcript 2021-Q4

[Operator]

Hello, and welcome, everyone, to the Fourth Quarter Fiscal 2021 Earnings Conference 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’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, 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 but 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 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 be correct, and actual results may vary materially. All statements are made only as of this date. Except as required by law, CMC does not assume any obligation to update, amend or clarify these statements in connection with future events, changes in assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances or otherwise.

Some numbers presented will be non-GAAP financial measures, and reconciliations for such numbers can be found in the Company’s earnings release or on the Company’s website. Unless stated otherwise, all references made to year or quarter-end are references to the Company’s fiscal year or fiscal quarter.

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

[Barbara Smith, Chairman President and CEO]

Good morning, everyone, and thank you for joining CMC’s fourth quarter earnings conference call.

As we reported in the press release issued this morning, it was an outstanding quarter with record consolidated and segment results. And I’d like to thank CMC’s 11,000 employees for their continued hard work and focused efforts on behalf of our customers and stakeholders. I’d also like to thank our customers for their continued trust and partnership with CMC.

I’d like to begin the call with a few highlights from CMC’s historic fiscal 2021, then I’ll turn comments to our fourth quarter results before providing updates on our strategic projects and current market 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 2022, after which we will open the call to questions.

I’m pleased to report that fiscal 2021 marked the best financial performance in our Company’s 106-year history. CMC generated its highest ever earnings from continuing operations as well as record consolidated core EBITDA. Both the North America and Europe segments also reported record results.

I’m also pleased to discuss our newly authorized share repurchase program and increased quarterly dividend payment, which should provide meaningful cash distributions to our shareholders. CMC’s exceptional fiscal 2021 performance translated to a return on invested capital of 14%, more than double the average for the three-year period preceding our fiscal 2019 rebar asset acquisition. We believe this sharp increase clearly demonstrates the dramatic strategic transformation CMC has undertaken in recent years. Not only has our bottom line grown significantly, but the returns on capital deployed have created tremendous value for our shareholders.

We believe our record performance in fiscal 2021 was also a testament to our team’s ability to respond quickly to robust market conditions. CMC shipped more product out of our mills than ever before, with 6 of our 10 mills setting all-time shipment records and 7 achieving best-ever production levels. Our team continues to demonstrate their ability to optimize facilities and further increase the productivity of CMC’s assets. This showed at several plants as improvements across a variety of KPIs, including optimized melt yields and energy consumption and melt shops, higher tons per hour in rolling mills as well as shortened lead times and shipping base.

Efficiency gains at our mills, combined with strong cost management throughout the entire North America vertical value chain enabled CMC to achieve a year-over-year reduction in controllable costs on a per ton basis. To underscore the strength of this accomplishment, particularly with an inflationary environment, I would point out that over the same time frame, the Census Bureau’s producer price index increased almost 10%. It was also a time frame in which the entire U.S. economy was challenged by supply chain disruptions and labor shortages.

Late in fiscal 2021, CMC commissioned its third rolling line in Europe. This is an important strategic growth investment we’ve been discussing for some time. I’m pleased to share that the project was completed well under budget and production was ramped up more quickly than anticipated. Both achievements are a testament to the capabilities of our Polish team. This new asset ran at a high rate of production during the latter part of the fourth quarter and was a meaningful contributor to Europe’s segment earnings.

During the year, CMC also made significant progress on our network optimization efforts. Following the full closure of CMC’s former Steel California operations, we’re now capturing an annual EBITDA benefit of approximately $25 million, while continuing to serve the West Coast market effectively and efficiently with bar source from lower-cost CMC mills. With these actions complete, we are halfway to our stated target of $50 million on an annual optimization benefits.

On the sustainability front, CMC published its latest report in June, featuring enhanced disclosures and a commitment to achieve ambitious environmental goals by the year 2030. CMC has been sustainable since its inception, 106 years ago, as a single location recycling operation in Dallas, Texas, and we have carried that legacy forward into the 21st century.

Slide 6 of the supplemental posted materials provides a clear illustration of CMC’s industry leadership position as an environmental steward. Going forward, we intend to publish our sustainability report on an annual basis, reflecting our commitment to transparency and timely measurement against our stated environmental goals.

Turning to fourth quarter performance. CMC generated earnings from continuing operations of $152.3 million or $1.24 per diluted share. Excluding the impact of a small onetime charge related to the write down of a recycling asset, adjusted earnings from continuing operations were $154.2 million, or $1.26 per diluted share. This level of adjusted earnings represents a 21% sequential increase and a 62% year-over-year increase, driven by strong margins on steel products and raw materials as well as robust demand from nearly every end market we serve.

During the quarter, CMC generated an annualized return on invested capital of 20%, which is far in excess of our cost of capital and a clear indication of the economic value we are creating for our shareholders.

I would now like to provide a quick update on the status of CMC’s key strategic growth projects. I’ve already mentioned strong execution to date on both our network optimization initiative and the rolling line in Europe. We are proud of the progress made on each. The only comment to add is that during the two months of commercial production at our new rolling line, EBITDA on an annualized basis far exceeded the $20 million target used to justify the project. Timing of start-up could not have been better. We have stepped into a very strong market with both demand and pricing at healthy levels.

Construction of our revolutionary third micro mill, the Arizona 2, remains on schedule for an early calendar 2023 start-up. At this point, we have completed earthwork and now are pouring foundations and beginning vertical construction. As a reminder, this plant will be the first micro mill in the world capable of producing merchant bar as well as rebar. It will also be the first in North America capable to connect directly to an on-site renewable energy source. We believe these capabilities, combined with a micro mills inherent low-cost and low-carbon footprint, will define a new level of operational and environmental excellence in long product steel making.

When CMC announced the construction of Arizona 2 in August of 2020, we also indicated that a meaningful portion of the investment costs would be funded through the sale of the land underlying our former Steel California operations. On September 29th, CMC entered into an agreement to sell that parcel for roughly $300 million. I would note that the sale price was much higher than the figure we estimated in August 2020 when we gave an expected net investment figure of $300 million for Arizona 2. Paul will provide more detail on this in a moment.

Now, turning to market conditions, first in North America. We are seeing strong activity levels within nearly all our end markets. At the mill level, demand for rebar, merchant bar and wire rod is robust. Rebar is being supported by continued construction growth, particularly in our core geographies. People are moving in, businesses are investing and state-funded infrastructure spending is healthy, which is reflected in residential, non-residential and public construction spend data. These factors have also benefited our shipments of wire rod.

In addition to construction, CMC’s merchant product is sold into a number of end market applications and nearly all are growing on a year-over-year basis. As you know, construction is by far CMC’s largest end market and our best leading indicator is our volume of downstream project bids. Activity levels have been very strong for the last two quarters, driven by a good blend of private and public sector work. Project owners are also awarding high volumes of new work which has allowed CMC to replenish our downstream backlog, following the lull that occurred in late 2020. In fact, we’ve actually built backlog over the summer months, a period that typically entails a seasonal runoff. Picture in Europe looks very similar to North America. Construction activity is strong with new residential construction starts increasing by double-digit percentages on a year-over-year basis. The Central European industrial sector continues to grow, highlighted by the current 14-month trend of expansionary PMI readings for both Poland and Germany.

CMC is now even better positioned to capitalize on this growth with production from our new rolling line, which allows our Polish operations to produce each of our three major product groups simultaneously. Supply conditions in Central Europe are tight, which has driven margins sharply upward from the historic lows of fiscal 2020 and early fiscal 2021.

Finally, as stated in our press release, the Board of Directors approved a 17% increase in CMC’s quarterly cash dividend. The new rate of $0.14 per share of CMC common stock is payable to stockholders of record on October 27, 2021. The dividend will be paid on November 10, 2021.

Additionally, as announced yesterday, the Board of Directors also authorized a new share repurchase program of $350 million. Paul will provide additional details regarding our capital allocation strategy during his remarks.

And 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?

[Paul Lawrence, VP and CFO]

Thank you, Barbara, and good morning to everyone on the call today. I’m pleased to review with you our outstanding fourth quarter results. As Barbara noted, we reported record earnings from continuing operations of $152.3 million or $1.24 per diluted share, more than double prior year levels of $67.8 million and $0.56, respectively.

Results this quarter include a net after-tax charge of $1.9 million related to the write-down of recycling assets. Excluding the impact of this item, adjusted earnings from continuing operations were $154.2 million or $1.26 per diluted share.

Core EBITDA from continuing operations was $255.9 million for the fourth quarter of 2021, up 45% from a year ago period and 11% on a sequential basis.

Slide 8 of the supplemental presentation illustrates the strength of CMC’s quarterly results. Both of our North America and Europe segments contributed significantly to year-over-year earnings growth, while core EBITDA per ton of finished steel reached a record level of $155 per ton.

The fourth quarter marked the 10th consecutive quarter in which CMC generated an annualized return on invested capital at or above 10%, which is above our cost of capital.

Now, I will review the results by segment. North American segment recorded adjusted EBITDA of $212 million for the quarter, an all-time high compared to adjusted EBITDA of $174.2 million in the same period last year. Largest drivers of this 22% improvement were significant increase in margins on steel products and raw materials as well as solid volume growth. Partially offsetting these benefits was an increase in controllable costs on a per ton of finished steel basis. Prior to the fourth quarter of fiscal ‘21, CMC had achieved seven consecutive quarters of year-over-year reductions to our controllable costs per ton.

Selling prices for steel products from our mills increased by $300 per ton on a year-over-year basis and $106 per ton sequentially. Margin over scrap on steel products increased by $103 per ton from a year ago and $41 per ton sequentially. Average selling price of downstream products increased by $44 per ton from the prior year, reaching $1,014. This increase did not keep pace with underlying scrap costs, leading to a year-over-year decline in margins.

At this point, I’d like to spend a moment to discuss the pricing dynamics of our downstream backlog. Average price per ton of our downstream shipments is a function of the volumes and price points on the hundreds of fixed price projects that comprise the total backlog at any given time. The average price of our total backlog will move up or down over time based on the new work we are awarded and the older work that is being completed. Currently, we are in an environment in which our backlog is repricing upward with new work coming in at much higher prices than the completed work it is replacing, reflecting a margin above current spot rebar prices. We expect this upward pricing trend in our backlog will translate into the average shipment price increasing throughout much of fiscal ‘22. CMC does not give price guidance, but we can say absent a run-up of scrap cost, the margin benefit of our backlog repricing is expected to be significant in future periods.

Shipments of finished product in the fourth quarter increased 2% from a year ago. Demand for rebar out of our mills remained strong, but as shipments declined modestly from the prior year due to a shift in our mix towards merchant and wire rod. Volumes of merchant and other steel products hit a record level during the quarter, increasing 29% on a year-over-year basis and were 20% higher than the trailing three-year average. Downstream product shipments were impacted by a reduced backlog we had at the beginning of the year and resulted in a 3% volume decline from the fourth quarter of fiscal 2020. Barbara mentioned, our backlog was replenished during the latter half of fiscal ‘21 and has actually grown on a year-over-year basis for the past several months.

Turning to slide 10 of the supplemental deck. Our Europe segment generated record adjusted EBITDA of $67.7 million for the fourth quarter of 2021 compared to adjusted EBITDA of $22.9 million in the prior year quarter. Improvement was driven by expanded margins over scrap, strong volumes across our range of products and contributions from our new rolling line. I should note that the prior year period included a roughly $11 million energy credit that the current period does not. We expect to receive a similar sized credit during the first quarter of fiscal ‘22.

Margins over scrap increased by $119 per ton on a year-over-year basis and were up $27 per ton from the prior quarter. Tight market conditions provided the backdrop to achieve the segment’s highest average selling price in more than a decade, reaching $763 per ton during the fourth quarter. This level represented an increase of $317 per ton compared to a year ago and $99 per ton sequentially.

Europe volumes increased 21% compared to the prior year and reached their highest level on record. The strength was broad-based with shipments of rebar, merchant bar and other steel products increasing by double-digit percentages on a year-over-year basis. Polish construction market remains robust with new residential activity growing strongly.

Consumption of our merchant and wire rod products has been supported by an expanding Central European industrial sector. Barbara mentioned, the ramp-up of our third rolling mill helped CMC capitalize on these strong conditions and increased volumes during the quarter.

Turning to capital allocation and our balance sheet. We are excited to issue yesterday’s press release that CMC is increasing its cash distribution to shareholders in the form of an enlarged dividend, the first increase in 13 years and a sizable share repurchase program. The new share repurchase program equates to roughly 9% of our market capitalization and will replace the previous program enacted in 2015. These actions highlight the confidence that CMC’s Board and senior leadership have in the earnings capability of CMC as well as our future prospects. Our intention is to target a cash distribution to shareholders that represent a meaningful portion of free cash flow and is competitive with sector peers. We plan on executing against this target by utilizing share repurchases to supplement our dividend payments. We believe this approach will allow CMC’s strategic flexibility in our deployment of capital as well as provide a mechanism to directly return excess cash flows with shareholders during the periods of strong performance.

CMC’s rebalanced capital allocation framework with its greater emphasis on cash distribution should in no way impede on our first priority, which is pursuing value-accretive growth. We expect to fully fund our current strategic growth projects with organic cash generation while simultaneously providing enhanced cash returns to shareholders and maintaining a high-quality balance sheet.

Our capital allocation priorities are laid out explicitly in simple terms on slide 14. We have proven ourselves as excellent stewards of capital and generator of economic value. We believe our best use of capital is the execution of attractive value-creating growth. As we look beyond the completion of the slate of strategic initiatives outlined during our Investor Day last year, we’re encouraged by the pipeline of attractive strategic growth projects that are currently being explored. However, we believe that given the robust and stable cash flows we expect to generate through the cycle, CMC will have the ability to both fund attractive growth and return elevated levels of cash to our shareholders.

We always look to optimize our debt costs. However, given the current slate of our balance sheet, we do not believe delevering is in the -- best advantageous strategy to us at this time. Overarching our entire capital allocation strategy is our objective to maintain a strong balance sheet that provides strategic flexibility and gives CMC the wherewithal to navigate any economic environment.

Moving to the balance sheet. As of August 31, 2021, cash and cash equivalents totaled $498 million. In addition, we had approximately $699 million of availability under our credit and accounts receivable programs. During the quarter, we generated $134 million of cash from operations, despite a $48 million increase in working capital. The rise in working capital was driven by the significant increase in both scrap input costs and average selling prices. Looking past these factors, our days of working capital have decreased from a year ago.

Our leverage metrics remain attractive, and we have improved significantly over the last two fiscal years. As can be seen on slide 17, our net debt-to-EBITDA ratio now sits at just 0.8, while our net debt to capitalization is at 17%. We believe a robust balance sheet and overall financial strength provides us the flexibility to fund our strategic growth projects, navigate economic uncertainties and pursue opportunistic M&A while returning cash to shareholders.

CMC’s effective tax rate for the quarter was 21%. For the year, our effective tax rate was 22.7%. Absent the enactment of any new corporate tax legislation, we forecast our tax rate to be between 25% and 26% in fiscal ‘22.

Lastly, I would like to provide CMC’s fiscal ‘22 capital spending outlook. We currently expect to invest between $450 million to $500 million this year with a little over half of which can be attributed to Arizona 2. We are entering the middle phase of mill construction when investment and on-site activity is anticipated to be the highest. As we indicated in the past, proceeds from the sale of our Rancho Cucamonga land are expected to be used to offset much of the cost of the state-of-the-art mill.

Total gross investment for Arizona 2 is forecast to be approximately $500 million, against which, we’ll apply roughly $260 million net after-tax proceeds from the land transaction. This nets out to be $240 million of spend for the new mill compared to the $300 million net investment figure we had previously provided. The difference, as Barbara previously mentioned, is due to the higher than expected valuation on the land sale.

This concludes my remarks. And now, I will turn back to Barbara for the outlook.

[Barbara Smith, Chairman President and CEO]

Thank you, Paul. We entered fiscal 2022 confident about what lies ahead. Based on our current view of the marketplace and our internal indicators, we anticipate continued strong financial performance. Signs point to healthy demand in our key end markets, and we expect supply-demand conditions to remain favorable, supporting good margin levels.

Additionally, several of the sector trends we’ve discussed previously are likely to provide tailwinds in an already growing domestic construction market. These trends include the regional population migration, which has been occurring for many years but accelerated over the course of the pandemic as well as supply chain hardening. Exceptionally strong new single-family construction activity in CMC’s core geographies is likely to be followed by the build-out by municipalities and private businesses of local infrastructure to support expanded or newly formed communities.

The positive tone of our outlook is mirrored by the latest cement consumption forecast from the Portland Cement Association and consensus non-residential forecasts compiled by the American Institute of Architects. The PCA expects growth in cement consumption of 2.2% in fiscal 2022 and 1.4% in 2023. The AIA consensus outlook for private non-residential spending anticipates an increase of roughly 5% in 2022.

More near term, in looking to the first quarter of fiscal ‘22, we expect shipments to follow a typical seasonal trend, which has historically equated to a modest decline from fourth quarter levels. Margins on steel products as well as controllable cost per ton should generally -- be generally consistent on a quarter-over-quarter basis.

Once again, I’d like to thank all of the CMC employees for delivering yet another quarter of outstanding performance. At this time, we will now open the call to questions.

[Operator]

[Operator Instructions] Today’s first question comes from Sathish Kasinathan with Deutsche Bank. Please go ahead.

[Sathish Kasinathan, Deutsche Bank]

Yes. Hi. Thanks for taking my questions. The first question is on the European operations. Given the recent move in energy prices, can you talk about the inflationary pressures you are seeing in Poland? Also, can you remind us how much of your electricity requirement is currently hedged? I believe you have 2 gigawatts of power hedged. So, any color you can provide? Thank you.

[Paul Lawrence, VP and CFO]

Good morning. Sathish, I’ll start. And if Barbara has any comments, she can add afterwards. I’ll start with -- again, we’re very fortunate to be operating in Poland versus other areas of the EU that have seen more accelerated pressures on energy prices. As you know, Poland is much more coal-oriented and less natural gas-oriented in their electricity generation, and their inflationary factors that we’ve seen thus far have been, as a result, reduced.

We do have hedges in place, both for natural gas and energy. We have very constructive arrangements on electricity that really are attractive to give us good certainty on our cost position as well as supply throughout this period. I’ll point out that we did receive a CO2 credit in the fourth quarter of 2020 that we have not yet received for calendar year 2020. We expect to receive that here in the first quarter of 2022, and that will essentially offset a lot of the inflation that we’re expecting for the full year.

So overall, Sathish, we do see that energy prices are a factor. But, to us at CMC, it certainly will be a lot less than the industry. And I think we will benefit as a result of the pricing environment, given that others have already introduced surcharges in energy that are far greater than the implication to us of the rising energy costs that we will see at our facility.

[Sathish Kasinathan, Deutsche Bank]

Okay. Thank you. So, I think a good position to be in with the opportunity to gain market share as well as expand margins given that your peers are implementing surcharges, I guess?

[Paul Lawrence, VP and CFO]

It is an opportunistic to have a margin opportunity versus the peers, yes.

[Sathish Kasinathan, Deutsche Bank]

Okay. One more follow-up, if I can. Just on the North American rebar volumes. It appears to be down 6% sequentially as well as year-on-year. Is the weaker volume just a function of CMC prioritizing MBQ over rebar, or did you see some slowdown in construction demand during the quarter?

[Barbara Smith, Chairman President and CEO]

Sathish, we’re very optimistic about demand, and we didn’t see any measurable change within the quarter. We -- our objective is to serve our entire customer base, and we have a portfolio of products, including rebar merchant and wire rod. And as you know, the market has been extremely strong in the U.S., and we’re trying to balance the needs of our customers and provide the best service that we can. But there’s no underlying market situation that is driving that. I would remind the callers that our Jacksonville facility has been repositioning their mix to a higher portion of wire rod. That’s part of the impact that you’re probably seeing.

[Operator]

Our next question today comes from Emily Chieng with Goldman Sachs. Please go ahead.

[Emily Chieng, Goldman Sachs]

My first question is just on some of the other cost inflationary pressures as it relates to sort of the labor component and the freight pace as well. How much of these do you think are likely to be carried forward? And how much -- and perhaps which part of those ones are a little bit more transient over the next 12 months?

[Barbara Smith, Chairman President and CEO]

Thank you, Emily. CMC has a long track record of being -- managing what’s within our control. And I’m extremely proud that on a year-over-year basis, we saw a decline in controllable costs. I don’t think we’re seeing any different inflationary pressures than most out there. Clearly, in the fourth quarter, it was noted by several that there was a slight increase in controllable costs. That’s not only the inflationary pressures, but they are mix-related factors as well when the mix shifts to the other products that we just talked about. We, of course, are monitoring and following it carefully, but we’re quite confident in our business model to control to the best of our ability, to continuously find ways to be more productive with our asset base. So, I don’t see any outsized impact to us relative to the general market.

One final point I would make is logistics has been a topic that a lot of people talk about. We do have a fairly significant internal logistics group system set of equipment. And so, we do have a bit better control over logistics than those that would be dependent upon exclusively third-party logistics, both from a cost perspective and from a service perspective to our customers.

[Emily Chieng, Goldman Sachs]

That’s really helpful. And just one follow-up around the carbon credits there. I know you mentioned the 2021 credits will arrive in the first quarter of ‘22, but how do you think about the size of that credit for FY 2022 going forward? Thank you.

[Paul Lawrence, VP and CFO]

So Emily, just to be clear, the credit that we will receive here in the first quarter of ‘22 will be for calendar year 2020. At this stage -- while it’s expected that legislation will pass in Poland to continue that credit, at this stage, it has not been formally passed and therefore I can’t comment on outlook for the future.

[Operator]

Our next question today comes from Michael Glick from JP Morgan. Please go ahead.

[Michael Glick, JP Morgan]

As we think about capital allocation, I appreciate all the color you gave there, but could you talk about areas or markets you’re interested in from a growth perspective? And then, as it relates to the buyback, do you view it as more opportunistic or systematic in nature?

[Barbara Smith, Chairman President and CEO]

Yes. Thank you, Michael. And we’re never specific on some of the growth targets that we’re evaluating. I think you know our key core markets in the U.S. and Europe, and anything that we can leverage as it relates to that certainly would be on the horizon, but I can’t comment on anything specific.

As it relates to capital allocation, I think you’ll see us be good stewards, as we have in the past, but I think it will be something that we evaluated. But you will see a more systematic approach and as well as opportunistic buying.

I would remind the listeners that we report our fourth quarter results later than our other quarters. So, our open window will be rather short between now and mid-November for this current quarter.

[Michael Glick, JP Morgan]

Understood. And then, I would love to get your high-level thoughts on the North American rebar market maybe from a supply perspective, kind of what are you seeing in thinking on imports?

[Barbara Smith, Chairman President and CEO]

Well, imports are always a factor and today, we’re really not seeing a big gap between domestic pricing and import pricing. So, we would expect things to remain fairly stable from what we’ve been seeing.

[Operator]

Our next question today comes from David Gagliano with BMO. Please go ahead.

[David Gagliano, BMO]

I just wanted to try and ask the cost question a little bit differently, I guess. So, when the commentary regarding near-term controllable costs plus metal margins being comparable next quarter versus this quarter, I mean, is that essentially saying EBITDA per ton is going to be comparable or are there other obviously variable costs that are offsetting or moving that overall EBITDA per ton number, given that we’re basically halfway through the quarter?

[Paul Lawrence, VP and CFO]

I’m not sure, Dave, if I follow your question exactly, but your end conclusion in terms of really what we demonstrated in the fourth quarter was our record level of EBITDA per ton of finished product. And really, the outlook is in the first quarter that we will maintain a similar level of earnings to what we just delivered here in the fourth quarter.

[David Gagliano, BMO]

That’s fine. Thank you. And then, the other question somewhat related, and I don’t know if you mentioned it or not. Obviously, there are hedges in place for power. I don’t know if you mentioned the percentage that represents the total power cost. When those roll off and if they were to roll off and reset, what would -- if you could just frame out like the incremental change in overall costs stemming from those hedges rolling off?

[Paul Lawrence, VP and CFO]

As far as in the U.S. marketplace, we have a variety of contracts throughout the mills. And overall, we don’t expect to see significant inflation in our electricity in North America. With respect to Europe, we have some very long-term arrangements in place, different arrangements with different parties, but they are upwards of 10 years in length. And we don’t see significant inflation as a result. And like I said earlier, really, we see that as a competitive advantage against others that will bear the full brunt of these current prices.

[Operator]

Thank you. And our next question today comes from Matthew Fields of Bank of America Merrill Lynch. Please go ahead.

[Matthew Fields, Bank of America Merrill Lynch]

First question on raw material front. There’s been a focus on kind of industry consolidation from the supplier side, mostly on the flat rolled side, but we saw cliffs by that scrap provider. And I’m wondering how do you think of -- as a big recycler, how do you think about the scrap market in terms of potential consolidation? Do you have all your scrap supplied, [Technical Difficulty] go out and find more scrap suppliers? And do you see that industry kind of as right for consolidation?

[Barbara Smith, Chairman President and CEO]

Thank you, Matthew. I’ll start and Paul certainly can add his perspective, if he has something further to add. We’ve been in the scrap business for 106 years. We know it very well. We have a large network of operations, not only here, but also to support our operations in Europe. There’s various grades of scrap, and I think what you’re seeing is a consolidation to secure prime grades. We don’t, over the long run, and we study this on a continuous basis, see as much pressure on the obsolete scrap side. On a global basis, we do see a country like China continuing to develop their scrap industry and their scrap reservoir.

So, scrap is still a fragmented market. There’s still opportunity for consolidation. We look at those opportunities based upon our need and our regional mill footprint. We’re pretty disciplined as it relates to scrap acquisitions. We’ve done a few, if you go back and look at our track record. So, I think there’s definitely more interest in securing prime grades at this stage.

[Matthew Fields, Bank of America Merrill Lynch]

Thanks. That’s helpful. And then, on capital allocation, correct me if I’m wrong, but it seems like your attitude on investment grade has always been kind of -- would be nice to have but not too necessary for us. With the new buyback program, is that kind of cement or solidify that attitude of we’re not necessarily interested in getting -- achieving an IG rating?

[Paul Lawrence, VP and CFO]

Yes. Matthew, we have had the benefit of an inventory that is essentially investment-grade like and always wanted to maintain that flexibility to allocate the capital as we best see provides value to our shareholders. And having the constraints of being investment grade has not been something that we have sought and continue to have that opinion as we move forward.

[Operator]

And our next question today comes from Phil Gibbs at KeyBanc Capital Markets. Please go ahead.

[Phil Gibbs, KeyBanc Capital Markets]

Barbara, on the seasonality of volumes in the first quarter versus the fourth quarter, what’s the historical cadence on the mill or fabrication side or however you’re looking at it?

[Barbara Smith, Chairman President and CEO]

Yes. Phil, thank you. It’s a great question. And unfortunately, in our planning, we always assume holidays. In the U.S., we have Thanksgiving, we have Christmas, of course. In Europe, we celebrate the holidays as well. And many of our customers also celebrate the holidays. Then, you have weather factors, and particularly in Europe, and they’re difficult to predict. Some years, we have a mild winter in Europe and volumes remain steady and construction continues, and some years winter comes early. And we have the same phenomenon here in the U.S., as you can appreciate. So, from a planning perspective, we always remind our listeners of that.

And I could build you a scenario that from a demand perspective that it would lean towards strong shipments. But, you just can’t factor in the weather events, and we do have the holidays. So I don’t know, generally, you can see a 3% to 5% seasonality effect during the winter months, depending on whether we’re having a harsh winter or whether we’re not.

[Phil Gibbs, KeyBanc Capital Markets]

Okay, completely fair. I appreciate that. And the new mill in Central Europe, what should that be adding to annualized volumes in Europe? And what were you able to achieve relative to that in this past quarter?

[Paul Lawrence, VP and CFO]

Yes. Phil, I’ll take that one. When we announced the mill at the Investor Day or maybe it was before the Investor Day, we really thought as adding an incremental 200,000 tons of incremental rolling capacity to the facility. We started up very well. We started up in a very hot market, as we outlined. And you can see quarter-over-quarter that we shipped roughly 55,000ish tons incrementally. And I think you can see and allocate the vast majority of that to the incremental capacity that we were able to run because now we can run the three mills that we have there independently. So, we were able to really achieve even more than perhaps the 200,000 tons level that we anticipated. However, that’s still -- given its early stages in operations, we still have that as a goal. And you can see that really it contributed somewhat equally to the rest of the tons in Europe. And so, you can really do the math based on the EBITDA per ton to see that it was a meaningful impact out of the gate for the fourth quarter.

[Phil Gibbs, KeyBanc Capital Markets]

And then, in terms of that additional rolling capacity, and I know you’re just starting up the mill, what -- generally speaking, what was the mix between semi-finished and finished? Should we assume that you had some semis in there or should we assume that it was largely finished tonnage?

[Paul Lawrence, VP and CFO]

It was much larger in the finished space. In the past, the billet sales had been opportunistic. Now, we can capture more of that margin by selling the finished product.

[Operator]

[Operator Instructions] Our next question today comes from Tristan Gresser with Exane BNP Paribas. Please go ahead.

[Tristan Gresser, Exane BNP Paribas]

The first one, maybe on working capital for the next quarter, obviously, you guided for more modest volumes and probably stable ASP, stable costs. What really should we expect for Q1?

[Paul Lawrence, VP and CFO]

Yes. Tristan, it’s great question. We do see more or less stability in both the raw material pricing as well as the volumes. And so, from that perspective, we don’t see an impact to working capital. However, the first quarter is generally, if we look at traditional cycles that we go through is normally a use of cash for working capital as we pay out some of the accruals made throughout the past fiscal year. So, you’ll see that as a normal annual use of cash in the first quarter and then it generally replenishes over the back half of the year.

[Tristan Gresser, Exane BNP Paribas]

All right. That’s helpful. Thank you. And maybe another question. Low carbon steel is getting more traction on the flat side in Europe and now a bit more in the U.S., and those products could potentially command premium margins. So, do you think there is an opportunity on the long product side in the U.S. with your end market? In Europe, some companies actually need the material to cut their Scope 3 emissions. Are your customers looking at it? And is it something you’re looking at as well?

[Barbara Smith, Chairman President and CEO]

This is an evolving trend. And clearly, we have one of the lowest carbon footprints in the world. We continue to invest in low-carbon technology that will only improve our numbers going forward. We really look forward to Arizona 2 coming on line, because that’s yet another innovation that will reduce our overall carbon impact. We are seeing more inquiries from customers. And we are very, very well positioned with a great story in this arena and we’ll take advantage of whatever market opportunity presents itself in that regard.

[Operator]

And our next question today is a follow-up from Phil Gibbs at KeyBanc Capital Markets. Please go ahead.

[Phil Gibbs, KeyBanc Capital Markets]

Hey. Thanks very much. I have an easy one, hopefully. What was the spend on the new Arizona mill last fiscal year?

[Paul Lawrence, VP and CFO]

So, we spent more or less around 100 -- well, it’s really over two years now since we had some initial spend back in fiscal ‘20 as well. But to date, we’ve spent approximately $120 million to $150 million.

[Phil Gibbs, KeyBanc Capital Markets]

Okay. That’s helpful. That’s all I needed. Thanks so much. Best of luck.

[Barbara Smith, Chairman President and CEO]

Thank you.

[Operator]

And ladies and gentlemen, this concludes our question-and-answer session. I’d like to turn the conference back over to Ms. Smith for any final remarks.

[Barbara Smith, Chairman President and CEO]

Thank you so much 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. Have a great day.

[Operator]

Thank you. And thank you for joining the Commercial Metals Company conference call. You may all disconnect your lines. And have a wonderful day.