Commercial Metals Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 8, 2024

There are 6 speakers on the call.

Operator

Hello and welcome everyone to the Q1 fiscal 2024 earnings call for CMC. Joining me on today's call are Peter Matt, CMC's President and Chief Executive Officer and Paul Lawrence, Senior Vice President and Chief Financial Officer. 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 few instructions at that time.

Operator

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, construction activity, demand for finished steel products, the expected capabilities, benefits and timeline for construction of new facilities, the company's future operations, the timeline for execution of the company's growth plan, 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 the 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 filings with the Securities and Exchange Commission, including the company's latest annual report on Form 10 ks.

Operator

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 under supplemental slide presentation 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.

Operator

And now for opening remarks and introductions, I would like to turn the call over to Peter.

Speaker 1

Good morning, everyone, and thank you for joining CMC's Q1 earnings conference call. I hope each of you had a wonderful holiday season. As we reported in our press release issued this morning, the Q1 Fiscal 2024 marked another period of strong financial performance with core EBITDA, core EBITDA margin and free cash flow continuing at Matt. I would like to thank CMC's 13,000 employees who make results like these possible. Your hard work and focused efforts for customers are the driving force behind CMC's success.

Speaker 1

I will start today's call with a few comments on CMC's Q1 performance and then discuss the rationale behind the realignment of our reportable segments and then provide an update on the current market environment and our strategic Growth Investments. Paul will cover the quarter's financial information in more detail and I will conclude with our outlook for the 2nd fiscal quarter and beyond. We will then open the call to questions. Additional information regarding the quarter is provided in the supplemental slides that accompany this call, which can be found on CMC's Investor Relations website. Before commenting on CMC's financial performance during the quarter, I would like to highlight our exceptional safety Matt.

Speaker 1

Our incident rate was the best on record, meaning we work safer than ever before. Keeping our employees safe is a core tenet of our culture and priority number 1 for every team member from the shop floor to executive leadership. Performance in the Q1 demonstrates how seriously we take this responsibility. Despite records being set, There is more work to be done to push forward our ultimate goal of 0 incident. As I mentioned, CMC's Q1 financial results were among the strongest in our company's history, though down from recent record levels.

Speaker 1

CMC generated net earnings of $176,300,000 or $1.49 per diluted share on net sales of $2,000,000,000 Excluding the impact of non operational items, which Paul will cover in detail, adjusted earnings were 190 $2,700,000 or $1.63 per diluted share. CMC generated consolidated core EBITDA for the quarter of Matt, Matt. Results in our North America Steel Group were supported by healthy construction activity and near record margins on downstream products. Our Europe Steel Group performed well against the difficult market backdrop, benefiting substantially from the recognition of $66,300,000 related to energy cost rebate programs. The Emerging Businesses Group was a solid contributor to profits during the quarter driven by supportive conditions in our North American markets, customers' continued adoption of our high margin proprietary solutions and The recent acquisition of EBSCO Fasteners' industry leading portfolio of anchoring systems.

Speaker 1

I would like to next cover the recent realignment of CMC's reportable segments. This decision follows important changes we have made to our organizational structure to better facilitate the execution of our strategy. From a financial point of view, Our objectives are to drive higher through the cycle margins and accelerate value accretive growth. The new structure also better reflects the varying characteristics and needs of our business groups. Internally, we believe these changes will greatly enhance visibility into our key value drivers, helping unlock commercial and operational synergies across the business, optimize capital resource planning and better focus our decision making on value creation.

Speaker 1

Externally, CMC's realigned segment reporting Should provide enhanced insights into the factors that drive value creation across the company and enhance the investment community's understanding of our strategy, future growth plans and capital allocation. Slide 5 of the supplemental presentation offers a brief outline of the strategic focus for each business group. Our North America and Europe Steel Groups operate in large, more mature markets where they have a high degree of penetration and strong positions. Their primary focus areas will be operational and commercial optimization to produce higher through the cycle margins with less volatility and value accretive growth that strengthens our core operations and enhances CMC's Customer value proposition. The businesses in our emerging business group or EBG, While often serving mature markets, can bring innovative solutions with relatively low levels of Penetration that typically have higher, more stable margins.

Speaker 1

As an example, we estimate current penetration of CMC's Matt. Our geogrid solutions is around 10% to 15% of the addressable market with margins that are higher than our overall group margins. Our new structure will provide the attention and stewardship to these businesses to enable them to realize their full potential in the CMC portfolio. Accordingly, we expect that over time, EBG will grow faster and maintain higher through the cycle margins compared with The more mature steel groups, driven by an increasing levels of market penetration, commercial synergies Across our portfolio, organic investment and acquisitions. A key role of EBG will be to Strengthen our core steel business through the creation of commercial solutions that enhance the value of our steel offerings to customers.

Speaker 1

In summary, we are excited about what these organizational and reporting changes will mean for the future of CMC. We believe tremendous value can be realized over time by optimizing how we manage each group and by working as a group to strengthen CMC's commercial proposition. We are committed to providing updates on the evolution of this strategy over time. Turning now to CMC's markets in North America, Construction activity remained healthy during the Q1, providing a good demand environment for our reinforcing products. Total finished steel volumes increased on a year over year basis as did combined rebar shipments from our mill and downstream operations.

Speaker 1

Activity levels across our geographies and into our various customer groups were consistent with recent quarters. Overall, Seasonal volume pattern the seasonal volume pattern was normal. Last quarter, we discussed the pressure that increased Import competition exerted on CMC's steel product margins. This trend continued during much of the Q1, But has since abated. We expect that recent developments, including domestic price announcements and Higher global rebar pricing will support an inflection in steel product margins over the next few months.

Speaker 1

Turning to key external forward looking indicators. The indices we track point to stability in non residential construction overall and the likelihood of increasing levels of infrastructure activity in the quarters ahead the Dodge Momentum Index, which measures the value of non residential projects entering the planning phase, Generally leads on the ground activity by approximately 12 months. While off highs above 200, it has registered 4 Matt. Consecutive months of stability around 180, which is still within the top decile of all historical readings. On the infrastructure side, the value of projects in pre design and design phases reflects a strong multiyear pipeline of future work.

Speaker 1

Data provided by Dodge Analytics indicate that projects in these stages of development increased more than tenfold during the 3 months ended in November compared to the same period of the prior year. This indicator has a long lead time because once a project has been designed, it generally moves to budgeting, funding and letting phases. It is in the letting phases that contracts are awarded, resources are scheduled and the on the ground activity can begin. The Dodge analytics data has now been running at an elevated level for the past 9 quarters. We are seeing average increases in State Department of Transportation budgets of around 15% And continued strong growth in highway contract awards.

Speaker 1

We expect this to drive increasing infrastructure Matt. During the upcoming construction season. Although the construction pipeline is robust, We have continued to experience a slower rate of contract awards. This in turn has caused some reduction to the volume and the value of CMC's quarter ended downstream backlog, which declined 13% by volume compared to the prior year. We believe this weakness is temporary and would note that we saw a pickup in award activity during December.

Speaker 1

Looking beyond these near term dynamics, we remain very confident in the long term outlook for our business, which is driven by powerful structural trends that are remaking much of our economy and will bolster Matt. Enormous investments have been announced with some already underway to improve our nation's transportation infrastructure, reshore vital manufacturing, electrify vehicle fleets and upgrade the electrical transmission grid to facilitate the transition to renewable energy. As seen on Slide 8, We estimate that these structural trends could lead to incremental rebar consumption equal to 20% or more of the current domestic market. So even with the challenges in some areas of construction such as office, retail and hospitality, we anticipate higher overall rebar demand over a multiyear period. Additionally, the benefit won't be limited to rebar.

Speaker 1

We also expect a meaningful tailwind for many of the value added solutions within our emerging businesses group. I'll now turn to Europe where market conditions remain challenging. Sluggish demand put pressure on pricing and margins during the quarter. General economic uncertainty continues to negatively impact sentiment and activity levels across our construction and Industrial End Markets. The Polish Long Steel Industry has responded to market imbalances by meaningfully reducing production and rightsizing inventory levels.

Speaker 1

These supply side adjustments appear to be having an impact as long steel pricing has begun to rebound from the lows reached in our fiscal Q1. Since our last earnings call, 2 potentially meaningful green shoots have appeared. The first is a rapid increase in new mortgage originations, driven by a government program to assist first time homebuyers. The value of new mortgages taken out in October improved Fourfold from the calendar 2023 low and approached all time highs. Hire new loan activity since late summer should support Polish residential construction over the next several quarters.

Speaker 1

The second development is the likely release of approximately $60,000,000,000 of European Union COVID relief funds that were held due to disputes with the prior government. Following the Polish elections held in mid October, the roadblocks have been Matt. For receipt of the funding. In fact, dollars 5,000,000,000 has been already released to projects in Poland. Much of this package is earmarked for renewable energy and the modernization of infrastructure and it should begin impacting Construction activity within the next 12 months.

Speaker 1

The environment in Europe is currently difficult, But we expect that it will normalize. Given our view of market conditions and the steps we have taken to optimize costs, We expect that beginning with the spring construction season, operational EBITDA for our Europe Steel Group Should improve sequentially for the remainder of fiscal 2024. Market conditions for the emerging businesses group We're supportive during the quarter, benefiting from good levels of construction in North America, where we derived nearly 90% of our net sales. Activity remains slow within our European markets, primarily due to the impact of economic uncertainty on construction activity in the region. Encouragingly, across our global footprint, we continue to see increasing adoption rates for CMC's newest and highest margin TENSAR GeoGrid solution, driven by a superior customer value proposition that reduces project costs and extends asset life.

Speaker 1

Growing investment in infrastructure, renewable energy and electricity transmission capacity have supported demand for EBG's Soil Stabilization, Performance Reinforcing Steel and Anchoring Systems Solutions. Before turning the call over to Paul, I would like to provide a brief update on CMC's key strategic projects where we made significant progress over the quarter. First, after a successful summer startup, Production levels at our new state of the art Arizona 2 micro mill have increased each month and are now routinely setting new daily output records. The team has done an exceptional job commissioning a very technologically advanced operation. However, The learning curve has been more extended than we originally anticipated.

Speaker 1

We now expect to produce approximately 250,000 Matt. In fiscal 2024 compared to our previous guidance of 400,000 tons. As a reminder, we are targeting 500,000 tons of output at a full run rate consisting of 350,000 tons of rebar and 150,000 tons of merchant product. Currently, the mill is focused on increasing rebar production and will begin commissioning merchant products early in calendar 2024. We anticipate monthly EBITDA breakeven for AZ-two by the end of Q3.

Speaker 1

Work at CMC's future Steel West Virginia site is progressing well. Civil work is nearly complete, after which we will begin setting foundations. We expect to begin commissioning this exciting project in late calendar 2025. Finally, we have successfully integrated a number of recent acquisitions, which extend our operational and commercial capabilities and further our strategic position. CMC's mill projects along with our recent strategic bolt broaden our exposure to favorable structural trends powering domestic construction and are expected to drive strong future growth in earnings, cash flow and shareholder value.

Speaker 1

With that, I will now turn the call over to Paul for more detail on our financial results.

Speaker 2

Thank you, Peter, and good morning to everyone on the call. As noted earlier, We reported fiscal Q1 2024 net earnings of $176,300,000 or $1.49 per diluted share compared to the prior year levels of $261,800,000 $2.20 respectively. Results this quarter include net after tax charges of $16,400,000 Related to the ongoing commissioning efforts at Arizona 2. Excluding these items, adjusted earnings were 192,700,000 or $1.63 per diluted share in comparison to adjusted earnings of 266,200,000 or $2.24 per diluted share during the prior year period. Core EBITDA was $325,300,000 for the Q1 of 2024, representing a decline from recent levels, but still among the most profitable quarters in CMC history.

Speaker 2

Slide 11 of the supplemental presentation Illustrates the year to year changes in CMC's quarterly results. Financial performance at our North American Steel and Europe Steel Groups declined from the prior year, while results of the emerging business group were largely unchanged. Consolidated core EBITDA margin of 16.2% remained well above average historical levels. Before reviewing our segment results, I would like to make a few comments on how CMC will report and discuss each group. For both the North America Steel Group and the Europe Steel Group, we will continue providing the same operating statistics as and the previous segmentation.

Speaker 2

You can find the recast figures on our Investor Relations website. We view these metrics as offering valuable insight into the factors that drive these businesses, including selling prices, margins over scrap and product volumes. We will also begin highlighting adjusted EBITDA margins Matt. As a percentage of net sales to support our focus on higher through the cycle margins across our businesses. The 2 key metrics for the emerging business group are net sales and EBITDA margin.

Speaker 2

As Peter mentioned, we expect faster growth from this segment over time. And a fundamental measure of our success will be the ability to Matt. Given the high value add proprietary nature of the solutions offered by EBG, we anticipate EBITDA margins With that, I will now review our segments for the Q1 of fiscal 2024. CMC Steel Group generated adjusted EBITDA of $266,800,000 for the quarter, equal to $2.43 per Matt. Segment adjusted EBITDA decreased on a year over year basis, driven primarily by lower steel product margin over scrap costs as well as higher costs related to the operational Startup of Arizona 2.

Speaker 2

The adjusted EBITDA margin for the North American Steel Group of 16.8 percent compares to 21% in the prior year period. Turning to Slide 13 of the supplemental deck, our Europe Steel Group reported adjusted EBITDA of $38,900,000 for the Q1 of 2024 compared to $61,200,000 in the prior year period. The decline was primarily driven By a lower margin over scrap cost and a 27% reduction in shipment volumes. Partially offsetting these headwinds was the recognition of energy rebates totaling $66,300,000 during the quarter. Of these, dollars 27,700,000 is related to an annual CO2 credit under a government program that extends and the remaining $38,600,000 is structured as a reimbursement by the Polish government for elevated energy costs Matt.

Speaker 2

The prior year period includes $9,500,000 related to the annual CO2 program. The Q1 adjusted EBITDA margin for the Europe Steel Group of 17.3% compares to 15.8% in the prior year period. Despite lowering production levels to meet demand, controllable Costs benefited from lower energy costs during the quarter. The Emerging Business Group 1st quarter net Sales of $177,200,000 decreased 3.9% from the prior year period, driven largely by the addition of anchoring systems, Matt. Previously called EDSCO Fasteners.

Speaker 2

Demand conditions were generally positive during the quarter With relative strength in North America and a weaker environment elsewhere, construction activity in the United States drove solid demand for TENSAR Geogrid Solutions, Construction Services, Anchoring Systems and Performance Reinforcing Steels. Adjusted EBITDA for the Emerging Business Group of $30,900,000 during the Q1 was flat compared to the prior year period. The adjusted EBITDA margin of 17.4% represented a decline of 100 basis points as a Positive impact from the addition of CMC anchoring systems and the benefit of improved adoption rates for the proprietary geogrid solutions in North America We're offset by lower construction activity in Europe and the Middle East impacting our geogrid business outside of North America. Turning to the balance sheet. Moving as of November 30, cash and and cash equivalents totaled $704,600,000 In addition, we had approximately $820,000,000 of availability under our credit and accounts receivable facilities, bringing total liquidity to just over $1,500,000,000 During the quarter, we generated $261,000,000 of cash from operating activities.

Speaker 2

Our free Cash flow amounted to $194,100,000 defined as our cash from operations less $67,000,000 of capital expenditures. Our leverage ratios remain attractive and have improved significantly over the past several fiscal years. As can be seen on Slide 18, our net debt to EBITDA ratio now sits at just 0.3x with no maturities until and 30. We believe our robust balance sheet and overall financial strength provide us flexibility to finance our strategic organic growth Matt. And pursue opportunistic M and A while continuing to return cash to shareholders.

Speaker 2

CMC's effective tax rate for the quarter was 21.6% due to the release of a valuation allowance. Looking ahead for the remainder of fiscal 2024, we currently expect an effective tax rate of approximately 24% with a rate slightly higher in the Q2. Turning to CMC's fiscal 20 and 24 capital spending outlook. We reiterate our previous guidance of between $550,000,000 $600,000,000 in total. Outside of normal sustaining investments, anticipated expenditures in fiscal 2024 include substantial capital dollars for construction of Steele West Virginia of approximately $250,000,000 Lastly, CMC repurchased nearly 622,000 shares during the fiscal Q1 at an average price of $45.70 per share.

Speaker 2

Transactions since the initiation of the buyback program through the Q1 have amounted to approximately 292 $1,000,000 leaving $58,000,000 remaining under our current authorization as at November 30, 2023. This concludes my remarks and I'll turn the call back to Peter for additional comments on CMC's financial outlook.

Speaker 1

Thank you, Paul. We expect shipment volumes within our North America Steel Group to decline sequentially due to normal seasonality during the winter months. Margins on steel products are likely to experience some further compression during the Q2. However, recent price announcements on rebar, Merchant Bar and Wire Rod should support an inflection point in the coming months. Downstream product margins Should exhibit good stability sequentially.

Speaker 1

Conditions in Europe are expected to remain challenging, but adjusted EBITDA excluding Energy rebates should improve from the levels of the past two quarters. Financial results for our emerging businesses group Are anticipated to follow a typical seasonal pattern with some slowing of activity in Q2. Looking beyond the Q2, which is CMC's seasonally slowest period, we expect robust spring and summer construction activity driven by the increased impact of rising infrastructure investment, which should support an already healthy demand backdrop. Both the North America Steel Group and the Emerging Businesses Group should benefit from anticipated strong activity levels. Regarding the Europe Steel Group, supply side adjustments and the impact of increasing levels of residential and infrastructure construction should drive sequential improvement in financial results beginning with the spring construction season.

Speaker 1

It's an exciting time for CMC. We believe the realignment of our organizational and Matt. Will allow us to better execute our key strategic priorities and harvest significant value for shareholders. Powerful structural trends in North America should drive construction activity for years to come and CMC has positioned itself as a key beneficiary. Additionally, the green shoots emerging in Poland and our strong cost position should provide an opportunity for results to rebound going forward.

Speaker 1

Once again, I would like to thank our customers for their trust and confidence in CMC and all of our employees for delivering yet another quarter of very solid performance.

Operator

Thank you. And at this time, we will now open the call to questions. If you're using a handset today, please pick up your phone before pressing the buttons. In the interest of time, we ask that you limit Today's first question comes from Phil Gibbs with KeyBanc Capital Markets. Please go ahead.

Speaker 3

Hey, good morning.

Speaker 1

Hey, Phil. Hey, Phil.

Speaker 3

In terms of the scrap market for January, there's been a lot of Mixed news on the market over the last couple of weeks. Just curious in terms of what You all are seeing for your key consuming grades.

Speaker 1

Yes. So thank you, Phil, for the question. We have kind of heard and anecdotally seen some of this weakness and honestly Not a huge surprise for us given the rapid run up that we've seen over the kind of last several months in scrap. I think it's important to say that as it relates to the price increase that we announced, which I think may be Part of what you're getting at. The move in scrap, the price increase that we announced did not fully cover The move that we've seen in scrap.

Speaker 1

And the move in scrap was kind of part of what motivated our move on price, but only part and the other part was the strong demand that we're seeing in the market. So in spite of the Potentially sideways movement in scrap, we remain very confident in the pricing position that we've taken and our ability to Hold on to it and build on it.

Speaker 3

Thank you. And then as it relates to CapEx, you said your outlook there was intact. You had $250,000,000 related to West Virginia. How much is left over to spend for West Virginia in 2025 and beyond fiscal 2025 and beyond? And what's your sustaining CapEx

Speaker 2

Matt. Yes, Phil, as far as the our CapEx, our guidance typically Is that our CapEx, our maintenance CapEx, which is a pretty liberal definition of anything not Significant enough to call out is around $250,000,000 per year. This year, On top of that, we've got the finishing off of the investments in Arizona II as well as with the West Virginia spend. So we anticipate given that we anticipate starting up West Virginia late 2025 that next year's spend will be somewhat similar to this year in West Virginia And then possibly finishing up a little bit into 2026.

Speaker 4

Thank you.

Speaker 2

Thanks, Phil.

Operator

Thank you. The next question is from Timna Tanners with Wolfe Research. Please go ahead.

Speaker 5

Hey, guys. Good morning and happy New Year. I wanted to just kind of ask a little bit more about capital allocation just because of the Stark, reduction in your debt. You point out really nicely on Slide 18. You kept the dividend flat.

Speaker 5

I think some of us were expecting that you might have raised that. And your cash is running above trend at least for the last 6 quarters. So can you talk to us a little bit more about how you're seeing opportunities in M and A versus Organic, you haven't and you said you're not going to build any more steel mills after these next ones, which sounds good. What else are the types of opportunities that you Might be looking at for uses of cash.

Speaker 1

Yes. So thank you for the question, Timna. I mean we continue to plan a Balanced capital allocation strategy, and that's going to include given our balance sheet condition is very good, it's going to Focus on really growth and then returns to shareholders. We have on the growth side, Obviously, we've got the kind of West Virginia project that we're in Full course on at this point in terms of getting that spending ramped up. And there are kind of other smaller organic projects around the Matt.

Speaker 1

On the M and A side, we see a lot of different opportunities and We're doing a lot of work around strategy to figure out precisely where our priorities are because we want to make sure that the M and A growth Matt. We do pursue is M and A growth that is number 1, complementary to the core and number 2, Growth that we can generate growth where we can generate returns in excess of our cost of capital. So but we do see a decent amount of M and A opportunity out there. And we're just going to be kind of disciplined about doing that. As it relates to returns to shareholders, we did increase our share buyback in the most recent quarter.

Speaker 1

You'll note, as others have noted, that we are coming to the end of our authorization on share buybacks. And I would say, This is a topic that we discuss on a regular basis with our Board. So I would stay tuned on Share buybacks as overall piece of the pie. And on dividends, again, we periodically review the dividend And we'll continue to do that. But overall, the strategy is balanced capital allocation

Speaker 5

Matt. Okay, great. Thanks for the comprehensive answer. I know I threw a lot in that last question. And just the next one is a little hopefully smaller one.

Speaker 5

We have seen the pace of government awards and highways slow down a bit. And I know you alluded to that in your commentary. Can you give us a little more color on what's driving that? Is that just tough comps? Is that Resources availability, is it anything to be cautious about or is it just kind of the normal cadence after a big spending program coming through?

Speaker 1

Yes. We actually feel very confident about where we are on government awards. And actually, We've seen government awards continue at a healthy pace here. What I'd say is just kind of taking a couple of steps back. If you look at infrastructure spending, infrastructure spending grew in 2023.

Speaker 1

We expect and all the other prognosticators expect that it's Matt. And we can see both in the form of kind of the pipeline of projects Matt. In the design and predesign phase, significant increases that have been significantly increased over the last literally 9 quarters. So that we think is kind of evidence that there's more coming through the pipeline. And lastly, what we're seeing is state budgets are growing at a healthy rate.

Speaker 1

And we commented in the prepared remarks Matt. They're up about 13% on average. And we believe we are seeing some of the IIJA money coming through now. Remember, it's a little difficult to see precisely when it comes because the funds are co mingled with state monies, But we do believe we're starting to see that and we believe that's going to grow over the course of 2024. And one thing that I'd also kind of point out on IIJA J.

Speaker 1

A. Is. Remember, the way the program is structured, every year there's a grant, but it doesn't See kind of an escalating level of spending. So we continue to be very bullish on what infrastructure means for our business and the demand for rebar.

Operator

Thank you. The next question comes from Alex Hacking with Citi. Please go ahead.

Speaker 4

Yes. Hi. Good morning. On the emerging business Group, which you've highlighted that you see that growing faster than everything else. Are there any long term targets there for How big you want that business to ultimately get, either in absolute terms or as a percentage of the total company?

Speaker 4

Thanks.

Speaker 1

Yes. Thanks, Alex. Good question. We're very excited about the potential of the emerging businesses group. I think it's Premature at this point to kind of articulate a specific target for where we Think it will be what we like about that business as we said is it tends to have the businesses in there tend to have solid organic growth rates.

Speaker 1

They tend to have higher margins and they tend to have less volatility, all of which will be kind of helpful in the overall financial profile for our Company. So it's an area that we intend to grow, we want to grow, but coming back to my comment on M and A, We got to be disciplined about how we grow, and that means that we got to be comfortable that we can generate returns in excess of our cost of capital and the moves that we're making in that space. We are very optimistic that we can do that. So we're confident that you're going Matt. See some nice growth in that segment, but it's a little bit premature to call it specifically.

Speaker 1

What I would say is that Our expectation is that it will be a significant contributor to our earnings and Cash flow, if you look out kind of 3, 5 years.

Speaker 4

Okay, thanks. And then something A bit more discrete, the European cost rebates, energy rebates, given where energy prices are today, do Do you have any estimate of what kind of rebate you would expect at the end of this year? Thanks.

Speaker 2

Yes, Alex, it's a good question. So there's 2 separate programs as I outlined that we received. The first Relates to the cost of CO2 credits that's embedded in the underlying energy costs that the operation and Pays. And that is most closely tied to the CO2 credit costs themselves. And given that the demand over time is expected to continue to increase for those credits, we expect that that Credit is likely to remain at the level it is today or increase.

Speaker 2

The Other credit was in relation specifically to higher cost energy and you're correct as you state that Energy costs have come down from their peak. They're still elevated. And so while the program itself was simply for 2023 and we have received the full amount of that. It could be that the new government that comes in Matt. Put a further program in place should the energy costs continue to remain elevated and uncompetitive with other geographic jurisdictions.

Speaker 4

Okay, thanks. So sorry, just to clarify, the CO2 program is still in place and is sort of linked to The market price of CO2 credits and the energy rebate program is now gone, but potentially could be replaced?

Speaker 2

That's correct. The CO2 is in place through 2,030.

Speaker 4

Okay, perfect. Thank you.

Operator

Thank you. The next question is a follow-up from Phil Gibbs with KeyBanc Capital Markets. Please go ahead.

Speaker 3

Hey, thank you. What's the length of your fabrication backlog right now if you think about it in terms of months

Speaker 1

Yes. I mean the fabrication backlog tends to run with a duration of about 12 months And we're kind of that's a weighted average duration. That's I think a good level for where it is today.

Speaker 3

And then as you talk about the typical or normal seasonality associated with the Q2 versus the Q1, What is that in your mind? Is that 5%? Is that more or less?

Speaker 2

Yes, Phil. Clay, because of the weather and the slowdown in construction activity that occurs, usually It's between 5% 10% of a reduction in volume. The volumes in the Q1 were We're relatively strong in relation to other seasonal impacts. So we would expect somewhere in the middle there, around the 7% reduction in In volume, now that all depends on what weather occurs. So far December It was a very strong month from a construction activity despite the holidays.

Speaker 2

However, I think there's an Arctic blast Matt. Coming through affecting much of the U. S. This week and so we'll see what happens over the remainder part of the quarter.

Speaker 3

And when you talk about this 5% to 10%, is that for U. S. Mills and U. S. Fabrication?

Speaker 3

Right. Or both or Okay.

Speaker 2

Yes, as well as the EVG businesses, which are construction oriented.

Speaker 3

And then lastly, depreciation, as you guys noted and carved out stepped up pretty solidly. I would I think based on your disclosure that it was largely for AZ2, but is that a good level to be using moving For that stepped up rate that we saw in Q1.

Speaker 2

Yes. That reflects both the AZ2 depreciation as well as the acquisitions that we did throughout 2023.

Speaker 3

Thank you.

Speaker 1

Thank you.

Operator

At this time, there appears to be no further questions. Mr. Mott, I'll now turn the call back over to you.

Speaker 1

Okay. Well, thank you for joining us on today's conference call. I just want to say in conclusion, CMC has Matt. Positioned itself to take advantage of the wave of construction spending underway and in this environment we are confident in our ability to drive higher through the cycle margins and Generate excess returns from our growth initiatives. We look forward to speaking with many of you during our investor calls in the coming days weeks.

Speaker 1

Thank you very much.

Operator

This concludes today's CMC conference call. You may now disconnect your lines.

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