Commercial Metals (CMC) is trading modestly higher today after it reported 3Q17 (May) earnings this morning that were above market expectations.
In terms of quick background, CMC manufactures steel and metal products through a network of steel minimills, steel fabrication and processing plants, construction-related product warehouses, metal recycling facilities and distribution offices in the US and in strategic international markets. CMC has five business segments operating across two geographic divisions. Its CMC Americas Division includes three segments: Americas Recycling, Americas Mills and Americas Fabrication. Its CMC International Division includes two segments: International Mill and International Marketing and Distribution.
- Americas Recycling segment processes scrap metals for use as a raw material by manufacturers to create new metal. This segment operates scrap metal processing facilities, including 14 locations in Texas and five in Florida. This segment purchases ferrous and nonferrous metals from a variety of sources, including manufacturing and industrial plants, metal fabrication plants, electric utilities, machine shops, refineries etc.
- Americas Mills segment includes five steel mills, commonly referred to as "minimills," two scrap metal shredders and ten scrap metal processing facilities etc. Its steel minimills primarily make reinforcing bar ("rebar"), angles, flats, rounds, small beams, fence post sections and other shapes.
- Americas Fabrication segment consists of steel fabrication facilities that bend, weld, cut and fabricate steel, primarily rebar.
- International Mill segment is comprised of all mill, recycling and fabrication operations located in Poland. CMC Poland operates a steel minimill in Zawiercie, Poland with annual rolling capacity of approximately 1.3 million short tons. Its Poland minimill is a significant manufacturer of rebar, merchant bar and wire rod in Central Europe, selling primarily to fabricators, manufacturers, distributors and construction companies. The majority of sales are to customers within Poland but it also exports to other Central European countries.
- International Marketing and Distribution segment (CMC announced in June 2017 this segment will be sold) includes international operations for the sales, distribution and processing of steel products, ferrous and nonferrous metals and other industrial products.
Turning to the MayQ results, EPS from continuing operations rose 13% YoY to $0.34, which was quite a bit better than market expectations. Revenue rose 12.6% year/year to $1.38 bln, which also was better than market expectations. The company did not provide specific guidance, as is usually the case. Results were driven by continued strength across CMC's markets, particularly in construction activity in both the US and Poland. That contributed to very strong volumes shipped this quarter and CMC's best quarterly adjusted EBITDA from continuing operations over the past couple of years.
This is a thin margin business and there was some modest margin compression in MayQ. Adjusted operating margin for continuing operations came in at 4.7% which was down from 5.0% in the prior year period. Adjusted EBITDA margin for cont ops came in at 7.0% vs 7.5% in the prior year period.
Its Americas Mills segment posted adjusted operating profit of $50.7 mln in MayQ, down from $55.0 mln in the prior year period. Shipment volumes in this segment were strong. However, margins have been under significant pressure in 2017 due to continued elevated import levels. Its Americas Recycling segment saw a jump in adjusted operating profit of $9.3 mln vs $(2.0) in the prior year period. This was primarily the result of strong ferrous scrap shipments, improved metal margins etc. Also, CMC acquired seven recycling facilities at the beginning of the quarter in the southeastern US which helped to boost profit as well.
In terms of its outlook, while not providing specific guidance, CMC expects stability in the key macro economic drivers that impact its business for the remainder of FY17, including continued strong demand in both the US and Polish markets and also historically low steel margins in the US. CMC is optimistic that the ongoing trade actions taken in both the US and Poland, once finalized, will provide some relief from the flood of rebar imports that have impacted its markets.