Commercial Metals Co. (CMC) Q1 2021 Earnings Call Transcript

Commercial Metals Co. (NYSE: CMC) Q1 2021 earnings call dated Jan. 11, 2021

Corporate Participants:

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Paul Lawrence — Vice President and Chief Financial Officer

Analysts:

Christopher Terry — Deutsche Bank — Analyst

Curt Woodworth — Credit Suisse — Analyst

Seth Rosenfeld — Exane BNP Paribas — Analyst

Timna Tanners — Bank of America Merrill Lynch — Analyst

Andreas Bokkenheuser — UBS — Analyst

Phil Gibbs — KeyBanc Capital Markets — Analyst

Tyler Kenyon — Cowen — Analyst

Presentation:

Operator

Hello, and welcome everyone to the First Quarter Fiscal 2021 Earnings Call for Commercial Metals Company. [Operator Instructions]

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, the impact of COVID-19, 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 statements and may include — involve forecast and are subject to risks and uncertainties that could 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 Statement Disclaimer section of the company’s latest annual report and Form 10-K and subsequent quarterly reports on Form-10Q.

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 are historical non-GAAP financial measures, and reconciliations for such numbers can be found in the company’s earnings release or on the company’s website. Some numbers presented are forward-looking non-GAAP financial measures, and reconciliations are not provided due to the unavailability of forward-looking reconciling information. 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 the 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 — Chairman of the Board, President and Chief Executive Officer

Good morning, and welcome to our first quarter earnings conference call. I’d like to wish everyone on the line a Happy New Year and extend my thanks to CMC’s 11,500 employees for another great quarter. I’ll begin the call with brief comments on our first quarter results before providing some color regarding the current market environment and how CMC is positioned to succeed. I will also give an update on CMC’s strategic growth initiatives. 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 second quarter of fiscal 2021, after which we will open the call to questions.

As announced in our earnings release this morning, we reported fiscal first quarter 2021 earnings from continuing operations of $63.9 million or $0.53 per diluted share on net sales of $1.4 billion. Excluding the impact of certain charges, which Paul will cover in more detail, our adjusted earnings from continuing operations were $69.8 million or $0.58 per diluted share. CMC generated core EBITDA of $156.6 million, marking the seventh consecutive quarter near or above the $150 million level. This record underscores not only our company’s enhanced earnings capability compared to past periods, but also the stability provided by our integrated value chain.

Activity levels in CMC’s core end markets remained strong during the first quarter, leading to an increase in the company’s finished steel shipments compared to a year ago. In North America, demand for rebar from our mills was driven by resilient construction activity, as contractors continue to work off the healthy backlogs they carried into the pandemic. Demand for merchant product benefited from the ongoing recovery of domestic industrial production as well as a lean supply chain following heavy service center destocking in April and May.

Demand for CMC’s long products in Europe also remained strong during the first quarter. Residential construction in Poland continue to be strong and grew by 7% compared to a year ago, fueling rebar consumption. Meanwhile, demand for merchant and wire rod products was supported by recovering automotive and industrial production in Poland and Germany. Manufacturing PMI indices for both countries have consistently indicated growth since July.

I would like to now spend a few moments discussing the current and near-term market environment. On our earnings call in October, we highlighted elevated levels of uncertainty. Market uncertainty continues to persist. The prospect of future COVID-related lockdowns and their potential impact on the economy has led to hesitation among project owners to award new work. However, in recent weeks, we’ve seen more willingness to move projects forward.

We’ve also seen a rapid increase in global prices for steel and steel-making raw material. Domestic scrap has been particularly impacted, increasing significantly since the end of our fiscal fourth quarter. The current elevation in scrap pricing appears to be driven primarily by increased global demand, particularly China, and by near-term shortages as underutilized steel plants increased production level. While the extent and duration [Indecipherable] is really difficult to predict, it will certainly pressure margins in the near-term on both our steel and downstream products.

As we outlined during our Investor Day, CMC is built to weather turbulence and is structured to endure periods of volatility, our vertical value chain and integration provides CMC with sources of strength at any point in the economic and steel price cycle. Our approach to operational excellence and optimization ensures that CMC is lean and efficient, and our team is always looking for further improvement.

Let me give you a few examples of how CMC has responded to the current environment. In order to maintain metal spreads, we have responded to rapidly rising scrap costs with several rounds of announced price increases on each of our mill products. In addition, synergies we achieved following our fiscal 2019 rebar asset acquisition as well as our ongoing network optimization efforts have reduced CMC’s cost structure meaningfully.

During the first quarter, our controllable cost per ton of finished steel were 10% below the levels immediately following the transaction. This represents the cost incurred throughout CMC’s vertical value chain from the scales at our recycling yards all the way to the shipment of downstream products from our fabrication facilities. These cost reductions are significant and fall directly to our bottom line.

In Europe, our team reduced per ton controllable costs by roughly 10% compared to the prior year, which is a remarkable feat given our belief that this was already one of the lowest cost mills in the world. Even at the recent depressed metal margin level of $200 per ton, our European operation is generating segment adjusted EBITDA at an annualized rate of $55 million to $60 million. The fact that CMC Europe is succeeding in the current challenging environment gives us confidence that it will thrive in better time. The first quarter margin over scrap was nearly an eight year low and was $25 per ton below the long-term average. Our return to mid cycle levels would add $30 million to $35 million of annualized segment adjusted EBITDA.

Factors driving uncertainty in our markets have led to some erosion in the volume of work within CMC’s downstream backlog. As previously mentioned, customers have delayed awarding projects. However, in recent weeks, bookings have picked up and the backlog is starting to stabilize. Looking beyond the near-term uncertainty, longer term indicators remain encouraging. The amount of potential work that downstream customers are asking us to quote remained strong, indicating a robust project pipeline.

Our commercial teams continue to report the project owners, though currently hesitant to book work, are optimistic about future conditions. External indicators also point to reasons for confidence. Residential construction, which generally leads non-residential and local infrastructure by 12 to 24 months is very strong. The regional population shift into CMC’s core geographical markets has accelerated during the last year, boding well for medium to long-term activity. Additionally, the Portland Cement Association recently revised their 2021 and 2022 estimates for cement consumption growth upward, roughly 1% and 2% respectively. PCA is a forecast provider we have highlighted in the past as having the highest correlation to domestic rebar shipments.

Now I’d like to provide a quick update on recent strategic announcements. In conjunction with our announcement last August of construction of our third technologically advanced micro mill, we announced that we would eventually curtail all operations at our Rancho Cucamonga site. At the end of December, we ceased production at the mill, while maintaining full service to our customers. Operational changes and logistics were carefully planned. And we have experienced a seamless transition thus far. I would like to acknowledge and thank all of the CMC employees at the Rancho site for their service and professionalism through this difficult decision to cease operations.

During this quarter, we made significant progress on the construction of our third rolling mill in Poland. The equipment and support utilities are now being installed. We expect to begin testing equipment in a few months and continue to target commercial production later this fiscal year. As indicated during our last earnings call, total project cost should be under our original budget of $80 million.

Once operational, the third rolling line will allow our facility to utilize 200,000 tons of current excess mill capacity by converting it to higher value-add finished product. This will further increase our production flexibility and leverage fixed melt shop cost. Construction of our new and MBQ capable micro mill and our third rolling line in Poland in conjunction with our ongoing network optimization efforts and other smaller organic projects is expected to add approximately $135 million of through the cycle EBITDA over the next few years.

Before turning the call over to Paul, I will briefly mention efforts CMC is undertaking regarding sustainability. Sustainability is core to CMC and has been since our founding as a recycling company 105 years ago. Good business and good environmental stewardship are fully aligned at our company. This then demonstrated our adoption of the cleanest steel making technologies and our recent announcements of increased sourcing of renewable energy. In addition to better communicate CMC’s strong ESG performance, we are planning to offer new disclosures over the course of calendar 2021.

Finally, as stated 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 January 21, 2021. Dividend will be paid on February 4, 2021. This represents CMC’s 225th consecutive quarterly dividend.

That as an overview, I will now turn the discussion over to Paul Lawrence, Vice President and Chief Financial Officer to provide more comments on the results for the quarter.

Paul Lawrence — Vice President and Chief Financial Officer

Thank you, Barbara, and good morning to everyone joining on the call today. Today, we reported earnings from continuing operations of $63.9 million or $0.53 per diluted share compared to earnings from continuing operations of $82.8 million or $0.69 per diluted share in the first quarter of fiscal 2020. Ops in the quarter include net after-tax charges of $5.9 million related primarily to facility closure and asset impairment expenses at our Rancho Cucamonga Steel California operations. As Barbara mentioned, production ended in late December. Excluding these and other one-time expenses, adjusted earnings from continuing operations were $69.8 million or $0.58 per diluted share. Our core EBITDA from continuing operations was $156.6 million for the first quarter of 2020, a decrease of 10% from the near record level of $174.4 million reported first quarter of 2020.

Slide 5 of the supplemental earnings call slides, available on our website, shows the stability of our core EBITDA on a per ton of finished steel shipped basis over the course of the pandemic.

Now I will review results of segments for the first quarter of fiscal 2021. North American segment recorded adjusted EBITDA of $155.6 million for the quarter compared to adjusted EBITDA of $174.7 million in the same period last year. Largest driver of this reduction was lower margins over scrap cost on finished products. Margins for both steel products and downstream products were impacted by lower average selling prices compared to a year ago against higher scrap input costs.

Selling prices for steel products from our mills decreased by $14 per ton on a year-over-year basis, but did sequentially increase due to price increase announcements that became effective in the latter half of the quarter. These price increases, which Barbara mentioned earlier, occurred largely in late November and have continued into January. Impact of these increases will be realized by the end of the second quarter.

Average selling price of downstream products declined by $42 per ton from a year ago as a result of the mix of work shipped as well as the impact of the high priced projects booked in the immediate aftermath of Section 232 rolling off our backlog. Margins in our backlog remained strong and profitable relative to historical levels.

As Barbara noted, exceptional operational performance helped offset the impact of lower margins. Compared to the first quarter of fiscal 2020, controllable costs per ton of finished steel shipped declined by roughly 5% with improvements throughout our vertical footprint. Most significant benefit was lower mill conversion costs, which is our largest cost outside of scrap. We continue to benefit from our decision taken in early fiscal 2020 to curtail melting operations at Steel California and supply the facility with lower cost billets from other plants.

Additionally, mill cost benefited from declining prices for consumables such as electrodes and alloys. Shipments of finished product in the first quarter were essentially equal to the pre-pandemic volume of a year ago with growth in steel products offset by a decline in downstream products. Rebar volumes out of the mills have been supported by sustained construction activity throughout the pandemic. Non-rebar volume, which is principally merchant bar and wire rod, saw an increase in volumes against the backdrop of flat industry consumption. Downstream product shipments were impacted by lower activity in certain geographies as well as multiple storms in the Gulf Coast region.

Recent trend in North American margins, volumes and cost performance can be seen on Slide 6 of the accompanying deck. Our European segment recorded adjusted EBITDA of $14.5 million for the first quarter of 2021 compared to EBITDA of $11.4 million in the prior year quarter. Largest contributors to the improved year-over-year performance was strong cost management, higher shipment volumes and a $1.3 million COVID-related benefit from the Polish government.

Margins over scrap were down on a year-over-year basis, but virtually flat from the prior quarter. Import flows continue to disrupt pricing and spreads in Central Europe across all long product categories. Our Europe segment has experienced four consecutive quarters of margins over scrap between $195 and $200 per ton, which is well below the long-term average, as Barbara pointed out. Based on pricing developments over the last several weeks, we believe margins have bottomed.

Europe volumes increased meaningfully compared to the prior year, rising 17%, due primarily the impact of improving industrial demand in Central Europe as well as service center restocking on merchant and wire rod. Rebar shipments were stable year-over-year, demonstrating the resilience of construction-related demand in the domestic Polish market.

Now turning to our balance sheet and liquidity. As of November 30, 2020, cash and cash equivalents totaled $465.2 million. And in addition, we had availability under our credit and accounts receivable programs of approximately $679 million. During the quarter, we used $12 million of cash to fund operating activities. Usage resulted primarily from the timing of payments related to certain accrued expenses, including the $32 million of acquisition, working capital settlement highlighted in the fourth quarter earnings release.

Looking ahead to the second quarter of fiscal ’21, we believe the funding of working capital to be a meaningful use of cash. Both our inventory and accounts receivable balances will be impacted by the generally higher price levels for scrap and finished steel. Our leverage metrics remained attractive and have improved significantly over the last two fiscal years.

As can be seen in Slide 10, our trailing 12 month net debt to EBITDA ratio now sits at 1.1, while our net debt to capitalization is just 21%. Our robust balance sheet and overall financial strength provides us the flexibility to fund strategic projects, navigate the uncertainties of the current economic environment and still pursue opportunistic M&A. Our effective tax rate for the quarter was 25.3% and in line with our full year effective tax rate forecast of between 25% to 26%.

Lastly, I would like to provide our current outlook for capital expenditures and 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 our typical capital spend averages around $150 million annually.

This concludes my remarks. I’ll turn it back to Barbara for the outlook.

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Thank you, Paul. We expect finished steel shipments in the second quarter to follow typical seasonal trends in both North America and Europe. As a reminder, volumes tend to decline mid-to-high single-digits from Q1 to Q2 as construction activity is slow this time of year with the holidays and winter weather. Shipments of steel and downstream products in North America should be supported by our construction backlog.

Manufacturing sectors of both the U.S. and Central Europe appear to signal continued recovery, which we expect to benefit volumes of merchant bar in both markets as well as our wire rod products in Europe. We anticipate margin pressure in North America during the quarter as a result of rapidly rising scrap cost and the timing lag on announced price increases. CMC is well positioned to navigate market volatility and uncertainty. This gives us confidence that over the long-term, our company is structured to earn average EBITDA of at least $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 believe we can grow our through the cycle EBITDA to $675 million over the next three to four years. Once again, I would like to thank all of the CMC employees for delivering another outstanding quarter of performance.

We will now open the call to question.

Questions and Answers:

Operator

[Operator Instructions] Your first question today comes from Chris Terry of Deutsche Bank. Please go ahead.

Christopher Terry — Deutsche Bank — Analyst

Hi, Barbara and Paul. Hope you both are well. I wanted to ask a question just around the infrastructure bill. I think previously you talked about the rebar market potentially benefiting at 1 million to 1.4 million tons a year, in that line. Just wanted your thoughts if we ought to get an improvement in the infrastructure bill how long in your experience something like that might take to flow through the numbers? And just checking that that 1 to 1.4 is the right range. Thank you.

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Thank you, Chris, and Happy New Year. We are still confident in that range of 1 to 1.4. I think we’ll have to see what the priorities are of the new administration, but certainly, infrastructure does seem to be one of the areas of focus early on in the administration’s term. So we would be highly encouraged if that move forward.

Christopher Terry — Deutsche Bank — Analyst

Okay. No, just in terms of the timing of how that might come through, I assume to announce now just on your experience on backlogs and is that sort of a ’22 or how long would something like that take to flow through the economy?

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Yeah. I apologize, I didn’t — your second half of your question. Normally, there is a 12 to 18 month lag. I would say given discussions with our customers, there is certainly enthusiasm to start projects. And so we’re just really watching a number of things and hoping for the continued recovery in the economy and no setbacks with COVID. But I think if the infrastructure bill is approved in this first year, we would start to see things in the following fiscal year.

Christopher Terry — Deutsche Bank — Analyst

Okay, thanks. And just a follow-up on the mechanics of the different parts of your business. Just checking that the fabrication business, it’s still sort of that 9 to 12 month lag on pricing sort of how you think about that business and then scrap steel flow through — flows through on 30 to 45 day lag into the mills division. Just wanted to think about some of the modeling.

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Yeah. I think the 9 to 12 months is a good average. More recently, we’ve seen more short duration and spot business in some of our fab business, which is good because it turns a little bit faster and you don’t have as much raw material exposure. But those are good averages for both fab turnover and scrap turnover.

Christopher Terry — Deutsche Bank — Analyst

Thank you. That’s it from me. All the best.

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Thank you, Chris.

Operator

Your next question comes from Curt Woodworth of Credit Suisse. Please go ahead.

Curt Woodworth — Credit Suisse — Analyst

Yeah. Hey, good morning, Barbara and Paul.

Paul Lawrence — Vice President and Chief Financial Officer

Good morning.

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Good morning, Curt.

Curt Woodworth — Credit Suisse — Analyst

I know there’s been a flurry of price hikes over the last three months and scrap pricing continues to go up pretty dramatically. Just wondering, you talked about how you expect to have all the price hikes fully in place by the end of 2Q, but obviously, scrap cycles into the business recovers quickly. So can you give us a sense on A, what type of metal spread compression you could be facing this quarter?

And then when I look at spot rebar and metal bolt and it’s about 755, so it’s up roughly 160 over the past three months, which is somewhat equivalent to what the scrap market has done if we include about $80 per ton rise this month. So would you say that, as it stands today, the price hikes you’ve announced by the end of 2Q assuming scrap stays where it is right now, you would be roughly back to where you were on metal spread?

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Curt, we don’t give any specific commentary on pricing for obvious reasons. But you certainly — there’s good transparency on the changes in raw material price and there has been good transparency on announced price movements. And assuming that those are accepted in the marketplace, we’re encouraged by that and obviously trying to optimize margins as best we can.

Curt Woodworth — Credit Suisse — Analyst

Okay. Maybe sort of another way in terms of the lag on the announced price hikes. So what would a typical lag be between your contract structure then the timing in terms of working through the inventory? Like if you announce a price hike today, would that kind of start to flow through on about a 60 day lag or how should we think about kind of the timing mismatch, if you will, between scrapping more fluid and pricing taking a little bit longer to its actuary?

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Yeah. Generally speaking — and every announcement is different based on the conditions in the marketplace. But generally speaking, if there is an announcement today and customers are projected for two to four weeks [Technical Issue] have the scrap flowing through like it does. But those are guidelines, there is a lot of factors and every action by everyone, every market participant is slightly different.

Curt Woodworth — Credit Suisse — Analyst

Okay. And then just a follow-up on, you talked about the backlog has ticked up a little bit more recently, maybe with — certainly around the election of various things. Can you talk about what’s — what sectors of the backlog — where you’re seeing activity? Is it more on the infrastructure side relative to non-res, and then you mentioned residential obviously doing better, but I don’t think you have that much exposure to residential. If you could just remind me on what that exposure is? And that’s it. Thank you.

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Well, the backlog, as everyone can appreciate, when the pandemic literally shut the economies down around the world, that took everything to a screeching halt. And so there was a pause in quoting and bidding as everyone starts to understand things would go from there. And as time has gone on, as we all know that our business as an essential business has been able to upgrade very effectively throughout this, and I think construction activity in general has been able to move forward without any major disruption. So it then comes back to a lot of other uncertainty factors and people tend to be more hesitant to book when they don’t have [Technical Issues] policy matters going forward.

Long story short, after some decline in backlog, we do believe that the backlog is stabilizing. We are encouraged by recent quoting and booking activity. We know from our customers that there is good activity or good projects out there. And we’ve seen some really interesting ones over the last six to eight weeks that are finally coming to market after some months of hesitation or just pause to understand the economic fallout from COVID.

Our backlog still sits around 60% private, 40% public. There was an infrastructure bill of the magnitude that the House and Senate have talked about that could [Technical Issues] shift over time and be more heavily weighted towards the infrastructure. But I should remind folks, there has been a lot of population movement throughout this past year, and that’s where we do see some market strength as a result of those trends. And that’s probably going to continue and with that comes a lot of infrastructure that will follow on from the strength in residential.

I should remind our listeners that we do now with the addition of the recent acquisition, we do have wire rod exposure not only in Europe, but also here in the U.S. And there is now good [Phonetic] amount of wire rod that does go into residential. So we have a little more exposure there than maybe what you would think of historically. Again, with the strong residential follows non-residential. And so that’s a very encouraging sign for us going forward.

Curt Woodworth — Credit Suisse — Analyst

Great. Thanks very much. Be well.

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Yes, thank you. You too.

Operator

Your next question comes from Seth Rosenfeld of Exane BNP Paribas. Please go ahead.

Seth Rosenfeld — Exane BNP Paribas — Analyst

Good afternoon. Thanks for taking our questions today. If I may, I have first a follow-up question on your recent comments on MBQ, and then I want to come back to working capital, please. When it comes to MBQ, can you give us a sense on what’s driving these particularly strong volumes in both the U.S. and in Europe? To what extent you attribute this to market share gains versus some weaker competitors, inventory restocking after the summer trough by your trader customers a more — something more fundamental in real demand trends? If we can start there, please?

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Okay. Thank you, Seth. Happy New Year. Now the MBQ has been, as we’ve highlighted, is an important product, it’s always been in our portfolio. We very much appreciate our merchant customers. It’s not a simple answer. We have invested in providing a broader product range. And so that opens up opportunities for us. Clearly, there has been inventory restocking as a lot of the manufacturing sector was shutdown for a period of time in the early stages of the pandemic. And then, I think service centers have been very judicious and very conservative in managing their working capital, understandably so, given the market volatility and uncertainty. It’s a combination of things. I can also remind you that in the U.S. there was a one mill that was shut down over the past period of time. And so certainly that opened up other opportunities for us as well.

Seth Rosenfeld — Exane BNP Paribas — Analyst

Just to clarify, is there anything with these volume numbers that you think is uniquely or unsustainably boosted by restocking a vessel run rate we should take moving forward for MBQ to get to the bottom line?

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

I don’t think so. I think that — I don’t believe the manufacturing sector is fully ramped up to normal operations. I know there is still shortages throughout the supply chain. As you’re in the market buying anything, you certainly will be aware of some of the shortages throughout the supply chain. But — so yeah, maybe there is some short-term settling out of it, but I still think there is — and our data would indicate that there is going to be continued demand growth in 2021 as all of the sectors of the economy recover.

Seth Rosenfeld — Exane BNP Paribas — Analyst

Okay. That’s very clear. And if I can ask a follow-up question please on the guidance for working capital, please. Obviously, a big use of cash in Q1 and the guidance for a significant investment in Q2. Can you provide me framework for the scale of investment you would expect? And then is there any reason to expect a full year investment this year or assuming some moderation of trends would we expect to release in the back half, please?

Paul Lawrence — Vice President and Chief Financial Officer

Sure Seth, and good morning. As far as our working capital in the first quarter, as you indicated, you saw a normal use of cash for us. Typically the first quarter includes various year end related payouts that occur in the first quarter as well as some accrued interest and other activities. And so, the normal flow for us is an outflow in the first quarter and then holding everything else constant will recover that working capital throughout the balance of the year.

In the current year, obviously, in addition to the normal cycles, we have the impact of the inflationary pressures both on the inventory side and the receivable side. And really that’s clearly a — in a cyclical business that’s a temporary investment and really depends on your outlook for the cycle of costs and where you project the scrap prices to go and possibly recover. But the positive thing from our perspective, we’ve got a $1.1 billion of liquidity through the judicious cash balance sheet management that we’ve got. And so we view this as part of the normal management of the business. And we do see overall that we continue to look to optimize the business, which includes long-term having working capital reductions in day’s measure. But in today’s environment as a result of the rising prices, clearly we will see an investment in cash here in the second quarter.

Seth Rosenfeld — Exane BNP Paribas — Analyst

Very clear. Thank you.

Operator

Your next question comes from Timna Tanners of Bank of America. Please go ahead.

Timna Tanners — Bank of America Merrill Lynch — Analyst

Yeah. Hey, good morning, Barbara and Paul. Happy New Year.

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Happy New Year, Timna.

Paul Lawrence — Vice President and Chief Financial Officer

Good morning.

Timna Tanners — Bank of America Merrill Lynch — Analyst

I just wanted to clarify. So on the comments about the scrap margin or the pressure on margins from scrap. If we believe this could be the year of scrap and scrap is off to a sharply higher start for the year and into your February quarter, is your guidance more a commentary on like the temporary timing of passing it all through or is there any reason to believe that this is a margin squeeze that we could see beyond like the short-term? So I’m just really asking about sharply higher scrap prices. Maybe it’s just a question of timing and how you think about that adjustment for your steel business. And then I want to ask something about steel fabrication on those lines as well.

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Timna, we really — it’s a — we’re trying to signal the timing lag, very encouraged by the ability of — which has historically been the case, where our customers who understand as raw material prices change that there are adjustments to finish product pricing. So, right now, it’s really a question of the timing between product movement and price changes. And imports are relatively at bay, and that’s another factor, as you know, that plays into it. And so that [Technical Issues] that we’re going to be able to recover those raw material price changes as they occur.

Timna Tanners — Bank of America Merrill Lynch — Analyst

Okay. That makes sense. So, just — because of the unusually sharp increase and probably conservatism into February and unknowns there, it makes sense to be a bit conservative. But along those lines, I’m trying to understand how to think about the fabricating business. So, if I understand correctly, the inputs, the rebar that goes into that is priced on like a quarter lag. And then, the finished product is priced on like nine- to 12-month lag. So if we think about the rebar price inflation for now against what we know a year ago, is that — does that imply like a near-term margin squeeze until any adjustments can be made on the selling price or can you just guide us how to think about that? I believe you talked about it — Paul talked about it and cautioned on it, but I just want to make sure I understood that guidance.

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Yes. So, I’d make the following remarks and Paul can certainly add color if he’d like. And just as a reminder, first and foremost, generally higher prices are beneficial to the business overall, save the lags that we spoke of. So we were encouraged by the higher finished goods prices that we’re seeing in the marketplace.

I also want to remind everyone that on the raw materials side, when raw material prices move higher, that creates a nice opportunity in our recycling side of the business to improve margins, which helps to offset and buffer the temporary impacts on the other side of the coin, which is the fab side that you alluded to, Timna. And so, yes, there is going to be some temporary adjustments in fab as fab contracts adjust to the higher raw material prices. But I haven’t — I’m encouraged that not only as the fab backlog stabilized and started to build again, but also I think that we’re going to see fab prices begin to adjust to these changes in raw material prices. We try to really be very judicious in booking projects when you have this phenomena going on in. But we’ve been at this for a long time and there’s those offsetting factors between recycling benefit and temporary fab [Technical Issues] fab impact.

Paul Lawrence — Vice President and Chief Financial Officer

The only thing I would add, Timna, is if you look at where the margin is on our downstream products over scrap here in this most recent quarter, it is still at, in comparison to historical levels, elevated margins. And so, while we will see a temporary squeeze as Barbara has outlined, we’re starting from a place of elevated margins, which will mitigate the impact somewhat in comparison to some prior cycles.

Timna Tanners — Bank of America Merrill Lynch — Analyst

No doubt. I just want to make sure I understand. So the recycling business benefits on higher scrap prices. The steel business would hope to offset higher scrap with higher steel and maintain a solid if not better margin. And on the fab business, there’s a bit of an offset and just wanted to clarify, unless there is something, I was missing on an ability to pass through prices differently than in the past.

Paul Lawrence — Vice President and Chief Financial Officer

That’s correct.

Timna Tanners — Bank of America Merrill Lynch — Analyst

Okay. All Right. Thank you.

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Thanks, Timna.

Operator

Your next question comes from Andreas Bokkenheuser of UBS. Please go ahead.

Andreas Bokkenheuser — UBS — Analyst

Thank you very much. Happy New Year, everyone. Just a quick question on kind of the order book this year, so fully understand the backlog and you were mentioning how residential kind of tends to be [Phonetic] non-res, so on and so forth. So when we look at some of the leading indicators like non-res starts and the ABI and so on, it would suggest that we could actually see pressure on construction steel demand this year. But from what I’m kind of taking away from all is that you’re pretty comfortable with your new order book.

So how should we kind of think about it overall? And maybe you’re effectively capturing market share. Is that kind of way the bulk of your volume growth is coming from this year in a potentially shrinking market or do you think that you’re looking at the ABI, looking at your non-residential construction starts but just not good indicators of how the market is going to play out this year. How should we think about that?

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Yeah. I think, we’re managing a portfolio of products. And while certainly rebar is a very, very key component of that, we do have these other products that are not tied to ABI and other things. We like to look at Portland Cement and cement consumption because cement consumption is more correlated to rebar consumption than just ABI or non-res because there are a lot of other uses of rebar outside of just non-res, certainly non-res is important. And Portland Cement also has a very, very good track record of forecast accuracy and Portland Cement over this past year during the pandemic candidly continued to improve or increase their projections going into 2021, factoring in all of the more current economic data. And Portland Cement is showing a modest increase in cement consumption year-over-year. So that gives us encouragement along with all the other factors that we’re watching.

Paul Lawrence — Vice President and Chief Financial Officer

One point I would add, Andreas, is geographic spread as well. You look at where we’re predominantly located in the Sunbelt areas, and those are clearly the strongest markets from a non-res perspective. Clearly, the northeast is weak and has been weak now for a number of years. Those often have some outweighted impacts to the overall numbers versus our markets.

Andreas Bokkenheuser — UBS — Analyst

That’s very clear. That makes a lot of sense. And one follow-up on scrap, if I may. Obviously we’ve seen the headlines about China kind of reopening their doors for import of scrap. I’m sure you saw this as well. How do you kind of think about that? Is this — do you think this is going to be a challenge in terms of your cost that China starts tightening the global scrap market and East Coast U.S. scrapyard is kind of exporting most scrap into the world? Or is this an opportunity for you to potentially manage your finished steel price at a higher level and kind of protect your spread if the global scrap market tightens? That’s my follow-up and that’s all the questions I have.

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Thank you, Andreas. As I said earlier, generally speaking, higher raw material prices, higher finished good prices lead to much improved results in our business. So, we’re not — certainly not discouraged by that. I think we also have a business model that’s designed to flourish because we know that raw materials also fluctuate within a year, and they can fluctuate certainly year-to-year. So we have a very flexible business model. Unlike other products in the steel value chain that have longer lags in order to adjust for raw material pricing, we have a relatively short lag in that regard.

And so we’ll see. Certainly we’re studying the current phenomena, and I think just like you have a number of mills that were down for a period of time this past year, and they are coming back online as industrial activity and economies begin to heal. I think you have a similar situation that’s occurring in China and Asia and other places around the world. So we’ll remain very nimble and flexible to adjust to [Technical Issues].

Andreas Bokkenheuser — UBS — Analyst

That’s very clear. Thank you very much for taking my questions. Stay safe.

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Thank you. You too.

Operator

The next question comes from Phil Gibbs of KeyBanc Capital Markets. Please go ahead.

Phil Gibbs — KeyBanc Capital Markets — Analyst

Hey, good morning. Happy New Year.

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Happy New Year, Phil.

Phil Gibbs — KeyBanc Capital Markets — Analyst

This first question from me, Barbara, I think you mentioned that backlogs on the downstream side domestically are starting to stabilize. But they had pulled back a little bit post-election. Where do you think we are year-on-year in terms of downstream US backlogs?

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

I don’t think the pullback was election-related. So I think it was just really the pandemic. So, that’s been slowly healing as time goes on and we’ll see what happens in the coming months in terms of — or recent uptick in COVID cases that I think everybody is learning to live within that environment. And I don’t think that we’ll see the pullback in industrials and other activities like we saw back in March of last year. The backlog is down a little bit. It fell single digits. But just encouraged that it’s stabilizing and we do see much more positive economic activity today than four months ago, six months ago.

And I would also add, I think I mentioned it earlier that in some parts of the business, our backlog is shorter duration, which is a good thing for us because it cycles through quicker. And they don’t have [Technical Issues] on that raw material and our price is not as exacerbated as when you fill up with a lot of long duration projects.

Phil Gibbs — KeyBanc Capital Markets — Analyst

Thank you. And as we look at your conversion costs, you’ve pointed to the quarter being very solid in terms of your execution. Any way to isolate how much that benefited you on an absolute basis year-on-year relative to 1Q ’20 or are we talking $5 million, $15 million? I’m just trying to get a sense of how much you’ve been able to optimize the business just in the last 12 months.

Paul Lawrence — Vice President and Chief Financial Officer

If you take a look at the controllable costs [Indecipherable] sort of what we outline as everything between what we’ve received from the scale through to the fab locations outside of scrap. We have seen a significant reduction in those that are — that is meaningful. It’s certainly in the $10-plus-million range of what we’ve achieved over time.

Phil Gibbs — KeyBanc Capital Markets — Analyst

Thank you. And then, lastly, if I could on your margins, I think you had said on the US business on the mill side margins were starting to stabilize to improve later in the quarter as you push through higher pricing. Obviously you’ve talked about several successive rounds of increases. And then you’re saying margins are bottoming in Europe and maybe you’ve got some fab pressures that you talked about. So, at the end of the day, it seems to me like seasonally speaking you’ve pointed to the volumes being down, but it sounds like spreads could be reasonably stable given all the puts and takes. It just depends what type of business we’re talking about within your portfolio. Is it fair?

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

I think we’ll see where things go. It’s early in the quarter. But I think that the margins, they stabilize by the end of the quarter but you still got a push through raw material and the lag effect of price changes. So, I think, to recover back to a stable margin by the end of the quarter is probably a realistic expectation. But no doubt, there is going to be pressure on the margin within the quarter, but very encouraged by market [Technical Issues] escalations in raw material prices. We’re going to make as much money as we can. And we’re fairly encouraged for 2021 coming out of a period of time where it’s been very, very difficult to get any insight into where the markets were going.

Phil Gibbs — KeyBanc Capital Markets — Analyst

Thank you very much. Good luck.

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Thank you, Phil.

Operator

The next question comes from Tyler Kenyon of Cowen. Please go ahead.

Tyler Kenyon — Cowen — Analyst

Thanks very much. Good morning and happy New Year.

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Happy New Year, Tyler.

Paul Lawrence — Vice President and Chief Financial Officer

Good morning, Tyler.

Tyler Kenyon — Cowen — Analyst

Good morning. Wondering if you could maybe provide us an update on your progress and where you are in capturing that $50 million of projected EBITDA enhancement just from network optimization that you laid out in your Investor Day? Just with Rancho now closed and a number of other initiatives underway, maybe if you can give us a sense as to how the cadence in realizing that $50 million over the next couple of years and perhaps give us a sense as to what’s been realized today?

Paul Lawrence — Vice President and Chief Financial Officer

Hello, Tyler. As far as the activities there, it’s — it will be a long process to really reap all of the optimization benefits. Clearly, the low-hanging fruit which we’ve acted on is the closure of Steel California and leveraging the lower-cost facilities to ship the material to that market and continue to serve the California market. That’s the — as I said, the low-hanging fruit.

As far as the other items, we’re very confident but they require a lot of heavy-lifting. We’re in the early innings of the unleashing of those optimization opportunities. So, as we laid out on the Investor Day, it’s a two, three-year endeavor and that’s our current outlook as well. We’re seeing great benefits from the closure through the controllable cost reduction. But there’s still a good opportunity ahead that we continue to get more and more confident as we go down this path.

Tyler Kenyon — Cowen — Analyst

So it sounds like very little, if any, has been realized of that $50 million to-date?

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

I wouldn’t characterize it as very little to any, but [Technical Issues] over the four years and it’s going to be back-end weighted.

Tyler Kenyon — Cowen — Analyst

Got it. Okay. Thank you. And then, just with respect to the investment Poland, it sounds like that is expected to ramp by the end of this fiscal year. And how quickly do you think you can get to optimal utilization levels and attaining kind of that $20 million run rate?

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Thank you. Well, we have a really stellar team in Poland and always execute well on their major capital expenditures. And we would expect this to be no different. And I think we can better update you as time goes on because the commissioning activities are going to be late in this fiscal year. But we would expect a smooth commissioning and ramping up of that equipment.

Having said that, there’s — you have to look at the market conditions in Europe and that will be a factor that we’ll monitor and that will affect whether the market can absorb all of that volume as quick as we would like and hope. But at this stage, we think 2021, you’ll see a meaningful contribution office in new mill and you’ll see a [Technical Issues] commissioning and ramp up. And we can probably give you better view of things later in this fiscal year. Have a better view into 2022 outlook.

Tyler Kenyon — Cowen — Analyst

Thanks very much. Good luck.

Operator

This concludes our question-and-answer session. Ms. Smith, I’ll now turn the call back over to you.

Barbara Smith — Chairman of the Board, President and Chief Executive Officer

Thank you, Lisa. Thank you all for joining us on today’s conference call. We look forward to speaking with many of you during our investor calls in the coming weeks. And happy New Year and stay safe. Thank you.

Operator

[Operator Closing Remarks]