Company's Q1 2026 Earnings Call: Shifting Timelines on Arizona 2 Profitability, Volume Forecasts, and EBITDA Targets Erode Strategic Confidence

Date of Call: Not specified in transcript

Financials Results

• Revenue: Not explicitly provided, focus on EBITDA and EPS
• EPS: $1.58 per diluted share, compared to a net loss per diluted share of $1.54 in the prior year period
• Operating Margin: Core EBITDA margin of 14.9%, expanded both year-over-year and compared to the prior quarter

Guidance:

• Q2 consolidated core EBITDA expected to decline modestly from Q1 levels, partially offset by precast acquisitions.
• North America Steel Group segment adjusted EBITDA anticipated lower sequentially due to seasonal trends and planned maintenance, with metal margins stable.
• Construction Solutions Group financial results expected to improve with precast contribution offsetting seasonal weakness.
• Europe Steel Group adjusted EBITDA expected approximately breakeven, with margin growth potential later in FY2026.
• Full-year effective tax rate anticipated between 5% and 10%.
• Fiscal 2026 capital spending outlook is approximately $625 million.
• Target to exit FY2026 with annualized run rate EBITDA benefit of $150 million from TAG initiatives.
• Expect $165M-$175M EBITDA contributions from precast businesses in FY2026.

Business Commentary:

• Strong Financial Performance:
• CMC reported net earnings of $177.3 million or $1.58 per diluted share for Q1 2026, compared to a net loss of $175.7 million in the prior year period.
• Excluding certain charges, adjusted earnings were $206.2 million or $1.84 per diluted share, showing significant improvement from the previous year's $86.9 million.
• The company's consolidated core EBITDA of $316.9 million grew by over 50% year-over-year and nearly 9% sequentially.

• The strong performance was driven by strategic actions such as the launch of the TAG initiative, organizational realignment, and benefits from a supportive market backdrop with stable demand and rising metal margins.

• North America Steel Group Performance:

• The North America Steel Group generated adjusted EBITDA of $293.9 million for the quarter, equal to $257 per tonne of finished steel shipped, marking a 58% increase year-over-year.
• This was primarily driven by higher margin over scrap costs on steel products, resulting in an EBITDA margin of 17.7%, up from 12.3% in the prior year.

• Operational improvements and scrap optimization initiatives contributed to the performance.

• Construction Solutions Group Growth:

• The Construction Solutions Group reported first-quarter net sales of $198.3 million, growing by 17% year-over-year, with adjusted EBITDA of $39.6 million, a 75% increase from the previous year.

• The growth was attributed to strong results from Tensar and CMC Construction Services, driven by solid project demand and cost management efforts.

• Europe Steel Group Challenges and Outlook:

• The Europe Steel Group reported an adjusted EBITDA of $10.9 million, down from $25.8 million in the prior year period.
• The decline was primarily due to a lower CO2 credit received, which amounted to $15.6 million in Q1 2026 compared to $44.1 million a year ago.
• Despite this, excluding the impact of energy cost rebates, adjusted EBITDA improved due to stronger shipping volumes and higher metal margins.

Sentiment Analysis:

Overall Tone: Positive

• Peter Matt stated 'CMC had an exceptional start to our fiscal year' and 'The first quarter was one of the best in our company's history.' He expressed confidence in strategic initiatives, the new precast acquisitions, and TAG program, with 'optimistic about where things go there' regarding downstream backlog pricing.

Q&A:

• Question from Sathish Kasinathan (Bank of America): Based on what you have seen in the past 3 to 5 weeks since the closing of the CP&P and Foley acquisitions, can you talk about positive or negative surprises and potential for accelerating the 3-year synergy timeline?
  Response: Management is very pleasantly surprised with the cultural affinity and positive integration momentum, but it is early to speculate on accelerating the synergy timeline; they are confident the synergies are there.

• Question from Sathish Kasinathan (Bank of America): How do you see North American metal margins sustain or improve given new supply entering the market?
  Response: Not overly concerned about new supply given current low import levels and stable demand; Q2 steel product margins expected flattish, with TAG initiatives expected to contribute to sustainable margin improvement over time.

• Question from Katja Jancic (BMO Capital Markets): Can you talk about what typical seasonality means for volumes?
  Response: Expect typical 5% to 10% sequential decline from Q1 to Q2 due to winter construction slowdowns.

• Question from Katja Jancic (BMO Capital Markets): What is the ramp-up plan for the West Virginia mill?
  Response: Cold commissioning started, hot commissioning likely in June; ramp-up expected over the following 12 months, with project on budget and capital discipline aiding ROIC.

• Question from Tristan Gresser (BNP Paribas): What is the outlook for fiscal Q2 and seasonality for the precast business?
  Response: Precast business EBITDA contribution expected around $30M in Q2 due to seasonality; overall Construction Solutions Group should improve with precast offsetting seasonal weakness.

• Question from Tristan Gresser (BNP Paribas): How much benefit has scrap sorting provided and what changes have been made?
  Response: Scrap optimization initiative, now rolled out across all mills, contributed ~$50M EBITDA last year; benefits are growing with less high-cost scrap used and improved yield.

• Question from Alexander Hacking (Citi): Has counterparty risk been rising?
  Response: No, counterparty risk is not rising; the company is historically risk-averse and is implementing measures to reduce margin risk on long-term fixed-price fabrication contracts.

• Question from Alexander Hacking (Citi): How long could it take for prices in Europe to stop benefiting from CBAM?
  Response: Impact will play out over calendar 2026, with some benefit in Q2 and more substantial in later quarters; CBAM plus safeguard mechanisms should support market prices.

• Question from Timna Tanners (Wells Fargo): What volume impact might CBAM have in Europe?
  Response: Some volume opportunity exists but not huge, as production is already running relatively well.

• Question from Timna Tanners (Wells Fargo): Thoughts on Turkish and other imports?
  Response: Imports from case countries have pulled back; Turkey has increased shipments but overall imports are low, so not overly concerned.

• Question from William Peterson (JPMorgan): How has the AI mill ramp progressed and what utilization is expected?
  Response: AZ 2 reached profitability in Q4 and Q1, with EBITDA improvement; utilization expected to increase but not reach full run rate in FY2026 due to merchant spec development.

• Question from William Peterson (JPMorgan): Is new order entry priced higher than backlog and what role does commercial discipline play?
  Response: Yes, new orders continue to be entered at higher prices, and commercial discipline initiatives are helping achieve better margin outcomes.

• Question from Carlos de Alba (Morgan Stanley): How much of fabrication business is indexed and how will that evolve?
  Response: Indexed contracts are a relatively low percentage; the company is working to increase indexation and enforce escalators to better protect margins over time.

• Question from Carlos de Alba (Morgan Stanley): What EBITDA margin does the $165M-$175M guidance represent for precast, and is it conservative?
  Response: Guidance is for precast EBITDA; it is considered conservative given early integration phase, with existing business margins in high teens and precast in 30-35% range.

• Question from Michael Harris (Goldman Sachs): Why was the expected TAG EBITDA benefit adjusted from greater than $150M to $150M?
  Response: The target was moved towards $150M as a result of more clarity and a focus on sustainable, vetted initiatives rather than throwing many programs.

• Question from Philip Gibbs (KeyBanc Capital Markets): What is typical volume seasonality for North America?
  Response: Typical 5% to 10% sequential decline from Q1 to Q2.

• Question from Philip Gibbs (KeyBanc Capital Markets): What should be anticipated for baseline depreciation/write-ups from precast deals?
  Response: Not in a position to provide guidance on amortization due to purchase accounting complexity; focus is on attractive cash flow from the businesses.

Contradiction Point 1

Arizona 2 Mill Profitability Timeline

This is a direct contradiction regarding a key capital project's achievement of the critical profitability milestone. It shifts the expected timeline from a specific future quarter (Q4 2025) to a statement that profitability was already achieved in the past (Q4 2025/Q1 2026). This significantly impacts investor expectations for project returns and future earnings quality.

What progress has been made with the Arizona 2 mill? What is the utilization rate? - William Peterson (JPMorgan)

20260108-2026 Q1: Arizona 2 reached profitability in Q4 and was nicely profitable in Q1. - Peter Matt(CEO)

What about the Arizona 2 mill's Q2 financial performance and whether it will achieve positive EBITDA with higher volumes in Q3? - Sathish Kasinathan (Bank of America)

2025Q2: The Arizona 2 mill did not break even in Q2 due to transformer outages and startup issues. It’s more realistic to expect it to cross the breakeven threshold in Q4, with continuous profitability expected moving into 2026. - Peter Matt(CEO)

Contradiction Point 2

North American Steel Product Volume Outlook

This involves a change in the forecast for sequential volume trends, a key operational and revenue indicator. The shift from expecting "flattish to slightly up" volumes to explicitly forecasting a "5% to 10% sequential decline" alters the near-term demand narrative and impacts revenue projections.

Given that seasonality hasn't been material so far, can you explain what the expected seasonal impact on volumes means? - Katja Jancic (BMO Capital Markets)

20260108-2026 Q1: Q2 typically sees a 5% to 10% sequential decline due to winter conditions and construction slowdowns. Expect volumes to follow typical seasonal patterns. - Peter Matt(CEO)

Why was Q3 North American steel volume growth only ~7% vs. typical 10-15% seasonal increase? Was this due to timing or outages? What are Q4 volume expectations? - Sathish Kasinathan (Bank of America)

2025Q3: Q4 volumes are expected to be "flattish to slightly up" and follow normal seasonal trends. - Peter Matt(CEO)

Contradiction Point 3

West Virginia Mill Startup Timeline

This is a contradiction in a specific project milestone (hot commissioning/start-up). The timeline shifted from a seasonal target ("summer 2026") to a precise calendar date ("June 2026"), representing a material change in the capital expenditure and production ramp-up schedule.

Can you provide an update on the ramp-up plan for the West Virginia mill? - Katja Jancic (BMO Capital Markets)

20260108-2026 Q1: Cold commissioning has started; hot commissioning (official start-up) likely in June 2026. - Peter Matt(CEO)

What caused the 6-month delay in the West Virginia mill startup—market conditions or other factors? What is the CapEx outlook for next year? - Tristan Gresser (BNP Paribas)

2025Q3: The West Virginia delay was due to pursuing an $80 million Investment Tax Credit (ITC) under the IRA and weather, not market conditions. - Peter Matt(CEO)

Contradiction Point 4

European Business Performance and Outlook

This reflects a significant shift in the assessment of a major geographic segment's current health and near-term prospects. The change from describing the business as "strong" to "softened" with a near-term loss (Q2 EBITDA near breakeven) impacts the forecast for regional contributions to overall company profitability.

How many quarters would it take for European prices to no longer benefit from CBAM? - Alexander Hacking (Citi)

20260108-2026 Q1: Europe softened due to import pressure, but CBAM expected to help pricing; Q2 EBITDA near breakeven. - Peter Matt(CEO)

1) Will the Q3 mix shift between rebar and merchant bar reverse in Q4? What is the shipment outlook? - William Peterson (JPMorgan)

2025Q3: Shipments in Europe are expected to remain "strong" in Q4... - Peter Matt(CEO)

Contradiction Point 5

Timeline for Achieving $150M EBITDA Benefit from TAG Initiatives

This involves a change in the characterization of a key financial performance target. The shift from an aspirational "exceed $150 million" target to a more concrete, albeit lower, "$150 million annualized run rate" goal with a focus on sustainability alters the expected trajectory and magnitude of operational improvement.

Is the TAG EBITDA benefit reduction from exceeding $150 million to $150 million due to timing or conservatism? - Michael Harris (Goldman Sachs)

20260108-2026 Q1: The target has been clarified to $150 million annualized run rate by year-end fiscal 2026. Approach is more measured, focusing on sustainable, durable margin improvement rather than rushing unvetted programs. - Peter Matt(CEO)

How much demand is coming from infrastructure, residential, industrial, and energy given the strong growth in construction? - Cecilia Chen (Goldman Sachs)

2025Q4: TAG initiatives were previously expected to exceed $150 million in EBITDA benefit. - Peter Matt(CEO)