Prepared remarks
Hello, everyone, and welcome to the fiscal 26 third quarter earnings call for Commercial Metals Company. Joining me on today's call are Peter R. Matt, CMC's president and chief executive officer, and Paul J. 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 will have instructions at that time. We would like to remind all participants that today's discussion contains forward-looking statements, including with respect to economic conditions, effects of legislation, and trade actions, U.S. steel import levels, construction activity, demand for finished steel products and precast concrete products, the expected capabilities, benefits, costs, and timeline for construction of new facilities, and expected performance of our recently acquired Precast platform, the company's operations, the company's strategic growth plan, its anticipated benefits, the company's ability to achieve its stated deleveraging target within the anticipated time frame, legal proceedings, and company's future results of operations, financial measures, tax credits, and capital spending.
These statements reflect the company's beliefs based on current conditions but are subject to risks and uncertainties. The company's earnings release, most recent annual report on Form 10-K and other filings with the U.S. Securities and Exchange Commission contain additional information concerning factors that could cause actual results to differ materially from those projected in forward-looking statements. Except as required by law, CMC does not assume any obligation to update, amend, or clarify these statements. Some numbers presented will be non-GAAP financial measures, and reconciliations for such numbers can be found in the company's earnings release, supplemental slide presentation, or on the company's website. Unless stated otherwise, all references made to year or quarter are references to the company's fiscal year or fiscal quarter. And now for opening remarks and introductions, I will turn the floor over to Peter.
Good morning, and thank you for joining today's conference call. Before we get started, a quick but important housekeeping note. After more than six years of outstanding leadership in investor relations, Jason Brocious is transitioning into a strategy and corporate development role within CMC. Jason has been instrumental to CMC's success and a trusted partner for the investor community. We are grateful for all of his contributions and look forward to his continued impact here at CMC. Joining us to lead our investor relations efforts is Andy Larkin, who comes to us most recently from his roles leading investor relations at AngloGold and Summit Materials and who brings ten years of IR experience across construction materials, metals and mining, and consumer staples. We are excited to welcome Andy to our team and confident he will further strengthen our engagement with investors. Now, during our fiscal third quarter, we continued to execute our strategic plan.
Core EBITDA increased 78.6% year over year to $354 million, and our core EBITDA margin increased to 14.2% due to metal margin expansion, solid progress on our TAG initiatives and the addition of results from our recent Precast acquisitions. In addition, we continue to make good progress deleveraging our balance sheet. Despite the significant increase in results, our financial performance in the quarter could have been even better and is not indicative of our full potential. I am pleased with the progress we are making against our strategic agenda. We are advancing CMC towards structurally higher margins, reduced earnings volatility and more sustainable growth. Underpinning this transformation is a disciplined operating approach that extends across the enterprise. Our Transform, Advance, and Grow program, or TAG, remains a core driver of performance enhancement with initiatives spanning our operations, our commercial organization and our support functions.
We are tracking well ahead of our targeted $150 million run-rate annualized benefits for fiscal 26, amplifying existing initiatives to unlock further upside and replenishing our pipeline with new initiatives. Our results reinforce our confidence that TAG is a durable lever for margin expansion and improved quality of earnings. Meanwhile, integration of our Precast acquisitions is tracking on plan, we are seeing early operational and commercial benefits and most importantly, alignment between our teams. Starting with safety, we are rapidly rolling out best-in-class tools and practices across our Precast operations to embed a strong safety culture. I am pleased to report that we are already seeing dramatic improvement. Commercially, we are leveraging the broader network of facilities between the two acquisitions to better serve our Precast customers while utilizing the vast CMC network to share leads and strengthen existing relationships.
Operationally, we are applying best practices, taking advantage of the collective expertise and capabilities across the Precast and broader CMC portfolio. One example of this is the sharing of precast forms across facilities to improve production efficiency and better meet customer demand. On balance, we could not be more pleased with how the integration is progressing. At the same time, our organic growth investments are bearing fruit. Our Arizona facility is operating at approximately 75% capacity utilization, producing a broad product range of both merchant bar and rebar products. Meanwhile, progress at Steel West Virginia is continuing, and we look forward to hot commissioning our newest micro mill later this summer. Together, these investments will finish our network of modern, highly efficient and low-cost mills and position us to serve demand across our key markets for years to come.
In parallel, we are also bringing our new GeoGrid line in Blackwell, Oklahoma online and are making steady progress on our second GalvaBar line in Knoxville, which is scheduled to start up late in calendar 2026. Turning now to headline financial performance. In the third quarter, we generated $354 million of core EBITDA, the highest level in three years but with more upside potential. Paul will walk you through the period in detail. But in summary, a challenging sequential quarter in the North American Steel Group was offset by sequential improvement in the Construction Solutions Group and the Europe Steel Group. Our North American Steel Group third quarter performance was impacted by three temporary factors. First, planned maintenance outages at seven of our ten mills negatively impacted results by approximately $20 million in the quarter and affected available inventory for customers. In fiscal 26, planned outages were particularly elevated with a concentration in the third quarter.
Annual planned maintenance activities in 2026 have run at roughly two times normal levels. Second, metal margins were squeezed by the unexpected strength in scrap costs driven by war-related higher fuel costs. And lastly, weather-related disruptions curtailed construction activity across a number of key markets, including Texas which delayed customer consumption of rebar. For our Precast business, pockets of regional softness and stretches of wet weather also resulted in performance that was below our expectations for the third quarter. Importantly, these factors impacting our third quarter results have proven temporary. Plant outages are now behind us and our mills are running well. Previously announced steel price increases are in the market, taking hold and yielding higher metal margins. And our steel and precast shipments are seeing strength. Weather conditions have normalized thus far in Q4.
Underlying business fundamentals remain firmly intact and in many cases are improving. Downstream bookings grew by greater than 9% on a year-over-year basis in Q3. The value of our precast backlog was up low single digits versus the prior year period. And forward pipeline indicators in our TENSAR business point to healthy demand. As related to end markets, the outlook continues to be positive. More than 50% of the IIJA funding is yet to be spent, supporting highway construction and general infrastructure spending across our core markets remaining steady. While residential demand remains broadly subdued, pockets of resilience persist in markets such as Charlotte and parts of the Mid-Atlantic. Multifamily construction continues to outperform and is expected to remain stronger than single-family. For nonresidential markets, demand is increasingly being driven by a growing pipeline of large-scale mega projects.
Investments across data center, semiconductor capacity and energy networks are driving a multiyear pipeline of construction activity, with a significant concentration of these projects in our Sunbelt and East Coast footprints. Importantly, the impact extends well beyond the core facilities themselves. The associated build-out of supporting infrastructure, particularly the power grids, storm water systems, and utilities, create incremental demand across our steel, ground stabilization and precast solutions. Moreover, institutional spending to replace aging facilities and accommodate market growth is also very strong. The value customers place in our differentiated capabilities to perform on the complex mega projects across all different construction end markets is showing up in our pipeline and in our backlog. Customers know they can reduce risk by partnering with CMC and leverage the service, scale and solutions we provide.
On the steel supply side, we view the market as balanced with incremental domestic capacity being absorbed while prices are trending higher. While imports year to date have been somewhat elevated, we expect them to remain at manageable levels as a result of effective trade policy initiatives which most recently have led to final or preliminary anti-dumping and countervailing duties against producers in four countries that together imported approximately 500 thousand tons of rebar in calendar year 2024. These duties, once imposed, will be in place for a minimum of five years and provide durable trade protection against unfairly traded imports from countries that subsidize and overbuild their domestic industries. It is a further note that elevated ocean freight costs continue to provide an additional buffer for domestic producers. We will remain vigilant on steel supply dynamics and we will continue to work towards achieving fair trade and a level playing field.
These efforts, together with our increased commercial discipline and focus on value over volume, set CMC up to more fully capture the value we deliver to the marketplace. A similar, more constructive supply-demand dynamic is beginning to emerge in Europe. Demand is strengthening driven by steady economic growth, accelerating investment, and the early stages of EU-funded infrastructure deployment. At the same time, supply dynamics are tightening, with the Carbon Border Adjustment Mechanism in place and further EU enhanced trade protection set to take effect July 1st that should create a more level playing field against imports. With that, I will hand it to Paul to cover the details on the quarter.
Thank you, Peter, and good morning to everyone on today's call. CMC reported third quarter net earnings of $173 million or $1.55 per diluted share. During the quarter, we incurred approximately $25.5 million in pretax expenses that were excluded from adjusted earnings. Of this amount, $19.8 million was non-cash amortization of the acquired backlogs, and $2.5 million was incurred to support our integration activities, both of which related to these recent Precast acquisitions. Excluding these items, adjusted earnings increased 142.4% year over year to $193 million or $1.73 per diluted share. If you recall, as we discussed in March, purchase price accounting impacts combined with higher interest expense tied to the financing of the Precast acquisition will continue to widen the gap between core EBITDA and earnings before income taxes by approximately $60 million to $65 million per quarter for each of the next two quarters.
Approximately one-third of that quarterly amount will be related to the amortization of backlogs which will conclude in fiscal 27. Third quarter consolidated core EBITDA grew 78.6% from the prior year to $354 million and core EBITDA margin expanded to 14.2%, an increase of 440 basis points year over year. North American Steel Group segment adjusted EBITDA was up 41% year over year to $254 million or $134 per ton of finished steel shipped. Year-over-year growth was driven predominantly by metal margins which expanded by $111 relative to third quarter 25 and ongoing contributions from our TAG initiatives. It is important to note that the TAG benefits are captured in most all of our business KPIs. In metal margin improvement, we see the results of our commercial discipline capturing top-line improvement as well as initiatives like our scrap optimization driving lower scrap costs. In our manufacturing costs, we see the results of initiatives like lower alloy consumption or yield improvement.
Our SG&A costs benefit from efficiencies of our scale and enhanced technologies. As Peter previously mentioned, adjusted EBITDA margin of 14.2% in the North American Steel Group was up 270 basis points versus the prior year period. For the Construction Solutions Group, net sales nearly doubled year over year to $395 million; $176 million of that was contributed from the acquired Precast businesses. Adjusted EBITDA increased by $56.5 million or 138% to $97.4 million, including $52.9 million in contributions from the Precast platform, with additional growth from the TENSAR business. Adjusted EBITDA margin expanded 400 basis points to 24.7% with the inclusion of CMC's Precast business contributing 4.4 percentage points of accretion during the quarter. Based on year-to-date performance and our visibility into the fourth quarter, we continue to expect fiscal 26 adjusted EBITDA for our Precast business excluding purchase accounting adjustments to be in the range of $165 million to $175 million.
In our Precast business, shipments in the Mid-Atlantic and I-90/5 corridors demonstrated solid strength while the Southeast experienced weather-related shipment delays during the quarter. Average selling prices for pipe and precast products and backlogs increased modestly on a year-over-year basis. Outside Precast, TENSAR profitability accelerated both year over year and sequentially on strong demand conditions driven by the value generation of our INTERAX product serving mega projects principally in the energy and data center areas. Adjusted EBITDA performance for all other businesses within the Construction Solutions Group was relatively stable. Turning to our Europe Steel Group, adjusted EBITDA for the fiscal third quarter was $34.7 million representing a significant increase versus the prior year. While the results benefited from a $20.4 million CO2 credit, underlying market conditions also improved meaningfully.
Metal margins expanded by $37 per ton year over year, driven by a $34 a ton increase in selling price and a $3 per ton reduction in scrap cost. As Peter noted, market fundamentals supported by both the CBAM and the upcoming strengthening of the EU safeguard frameworks gives us confidence that this momentum will continue. With respect to our balance sheet, we continue to make progress in reducing net leverage and remain very confident in achieving our target of below 2x by mid-27 or sooner. As shown on Slide 14, net leverage adjusted for acquisitions is now 2.1 times, based on adjusted EBITDA, including an estimated run-rate annualized contribution from our Precast platform. This marks meaningful progress from the net leverage estimate that we provided at the time of the acquisition. Our path to further delevering is underpinned by a step down in capital spending levels as we finish our micro mill investments, strong free cash flow generation from our Precast platform itself, and meaningful cash tax savings associated with the 48C program and the Bipartisan Infrastructure Law.
We also maintain significant financial flexibility with total liquidity of nearly $1.8 billion and no near-term refinancing requirements. Together, our strengthened balance sheet, ample liquidity and improving leverage profile position us to return to our long-term capital allocation priorities of supporting strategic growth investments while maintaining an attractive and disciplined approach to shareholder returns. Regarding CMC's capital spending outlook, we anticipate investing approximately $550 million in fiscal 26. Of this amount, between $300 million and $350 million is associated with completing construction of our West Virginia micro mill. The balance will be for maintenance and other growth projects including $25 million for our new precast business and the high-return growth investments within our Construction Solutions Group that Peter mentioned. CMC's effective tax rate in the third quarter was 8.4%, and on a year-to-date basis was 7.9%, in line with our fiscal 26 effective tax rate expectations of between 7% and 9%.
As a result of several factors including our 48C tax credit, bonus depreciation on the West Virginia mill investment, and accelerated depreciation on the assets acquired in CMC's Precast acquisitions, we do not anticipate paying any significant U.S. federal cash taxes in fiscal 26 and not much for fiscal 27 either. With that, I will turn the call back to Peter to discuss our fourth quarter outlook and provide some closing remarks.
Thank you, Paul. Turning to our outlook for the fourth quarter, we expect a meaningful sequential increase in core EBITDA driven by several factors. For the North American Steel Group, the absence of third quarter mill outages is expected to provide an approximate $20 million uplift to adjusted EBITDA, with a similar benefit from higher volumes and margin expansion. We anticipate improving pricing conditions with scrap costs remaining relatively stable. Expect sequential mid-teens adjusted EBITDA growth in our Construction Solutions Group, driven by increased contributions from Precast and solid underlying momentum across the broader platform. And in Europe, we anticipate modestly higher adjusted EBITDA performance excluding any impact from CO2 credits. These drivers are underpinned by a healthy demand environment and strong backlog visibility. Taken together with strong execution and continued contribution from our TAG initiatives, we are confident in closing fiscal 26 on a strong footing.
Stepping back, our business remains firmly supported by durable, long-term demand drivers across our end markets. At the same time, we have taken actions to improve the margins of our business and to reshape our portfolio to be more resilient, less volatile and better positioned to compound growth over time. This is translating into stronger cash flows and a steadily improving balance sheet providing us the flexibility and the confidence as we undertake capital allocation priorities that appropriately balance growth and returns. All in, we believe these elements firmly position CMC to deliver superior long-term value for our CMC shareholders. Finally, I would like to call attention to our upcoming Investor Day on August 5th. Our leadership team looks forward to providing a deeper view into CMC's evolution as a leading early-stage construction solutions provider and the steps we are taking to drive the next phase of growth and value creation.
The half-day event will chart our strategic trajectory, establish our operational priorities, and articulate our long-term growth outlook. We hope you can join us. I would like to close by thanking our employees for their continued dedication and our customers for their ongoing trust and partnership. With that, I will ask the operator to open the line so Paul and I can field your questions.
Questions and answers
We will now begin the question-and-answer session. You are using a speakerphone, we do ask that you please pick up your handset before pressing the keys. To withdraw your question, you may press *2. In the interest of time, we do ask that you please limit yourselves to one question and one follow-up. Please note you may rejoin the question queue if you have additional questions. Follow-ups will be taken as time permits. At this time, we will pause momentarily to assemble the roster. Our first question today comes from Nick Cash from Goldman Sachs. Please go ahead with your question.
Hi, team. Thank you so much for taking my question. Just wanted to walk or talk a little bit about the puts and takes within North America in the quarter and then to next. It seems like there are quite a few moving pieces here from maintenance outages to weather and price increases, etcetera. You mentioned the $20 million impact from maintenance, but can you help us quantify the impact from the other moving pieces in the quarter on the results? Then I guess as it relates to 4Q 2026 guide, you mentioned sequentially stronger EBITDA reflecting a $20 million absence in 3Q and then pretty much similar in terms of growth and margin benefits. I am kind of reading that as a sequential $40 million increase. Does that sound about right? And yeah, I will leave it at that.
Hey, Nick. Well, thanks for the question. Great question and we will respond to it. I will ask Paul to walk through the bridge. What I would like to say to start is that Q3 was a good quarter for us. It could have been a lot better. And importantly, we are really happy with the strategy and the progress that we are making and the long-term value that is going to deliver. We are really looking forward to Q4 and what the implications are in terms of increased profitability. But with that, let me hand it over to Paul. Thanks, Peter.
And Nick, yes, a little further detail on the items. As you mentioned, the mill outages at seven of our ten mills, the direct costs associated with those were around $20 million. The weather impact and I'm going to combine sort of the weather impact, the impact of having lower inventory coming out of the outages as well as commercial discipline probably all in cost us around 50 thousand tons in the North American Steel Group. So all in cost of around $10 million associated with the volume. All of those items are very temporary, as we mentioned in the script and we expect those to reverse in the fourth quarter. And then our expectation going into the quarter was stable metal margins. As you can see, they were compressed slightly in the quarter. And with the price increases that took effect during the quarter, we really see that we will reestablish those metal margins consistent with where they were prior to this past quarter.
So overall, I think your assessment that the North American Steel Group is on track for about a $40 million quarter-over-quarter improvement from those items is reasonable. I will take the opportunity just to talk a little bit about the other segments as well. It was not limited to the North American Steel Group. Both our Construction Solutions Group as well as our Precast business were impacted by weather, probably to the tune of around $5 million in the CSG segment. And then, just do not want anybody to overlook the Europe Steel Group having a $20 million CO2 credit that is received on a semiannual basis. So we would expect to receive another one in the first quarter but we will not receive that in the fourth quarter. So put all of that together, we are expecting a quarter-over-quarter improvement in our overall results in the $40 million to $50 million range for Q4.
Awesome. Thank you so much. I will pass it on.
Thanks. Our next question comes from Samuel McKinney from KeyBanc. Please go ahead with your question.
Hey. Good morning, Peter and Paul. Given what you have done so far this year, maintaining the full-year Precast EBITDA outlook at $165 million to $175 million implies a pretty heavy lift in the fourth quarter. What are you seeing that gives you the confidence that you can reach this goal for the August quarter?
Great question, Sam, and thank you very much. We are very confident we can reach the goal and let me tell you why. I think it is fair to say that our volumes were a little bit light in the third quarter. And importantly, when we look at our Precast business, the timing of shipments and given the regional concentration, weather events can affect the results in the quarter. In Q3, what we saw is that project releases, and by that, I mean the time from the order to the first shipment, were delayed by about two weeks. And that was compounded by really wet weather in the Southeast, in Georgia in particular. What we have seen as we go into the fourth quarter is that things have started to normalize, and that combined with the strong backlog—our backlog is at a record level—gives us confidence that we can hit the guidance that we have originally given. Let me also say that the team has done just a fantastic job, and so from an integration standpoint, that gives me additional confidence that we are going to get there.
As I have said on previous calls, this team is working incredibly well together. There is a tremendous affinity to the CMC team in terms of the people, and so it lends itself to working together. We are seeing more opportunities every day in this business to make it better and make it stronger. So I would say, looking at this today, I feel stronger than I did even at the acquisition date. And I felt very strongly about this at the acquisition date that this is a great acquisition and it is going to be a fantastic part of our portfolio. So yes, we are very confident in the ability to pull this together in the fourth quarter. But more importantly, we are very confident in the long-term impact that this business will have on our portfolio in increasing margins, reducing earnings volatility and increasing returns across the portfolio.
Alright. Thank you.
Our next question comes from Satish Kasinathan from Bank of America. Please go ahead with your question.
Hi. Good morning. Thanks for taking my questions. My first question is a follow-up on the Construction Solutions guidance. You maintained the full-year guidance for the Precast business, which probably would imply around a $20 million to $30 million improvement in EBITDA for Q4, and then additionally, TENSAR and other businesses should all see a strong seasonally better quarter. Can you maybe walk us through some of the different moving parts? Because it appears the guidance for mid-teens growth is conservative, and there seems to be some upside to that guidance. Also, maybe one question on the U.S. rebar market in general: on the demand side with the recent shift in the Fed's interest rate outlook and potential for rate hikes, are you seeing any change in leading indicators suggesting any delay or slowdown in projects being awarded? And on the supply side with imports up ~20% year to date mainly from South Korea, how should we look at the near-term supply-demand balance, and could we expect some potential trade action against South Korea? Thank you.
What I would say is we are confident in the guidance. As I responded to the prior question, we believe the Precast business is going to land in the original guidance that we gave. Our TENSAR business is performing very well. Our fourth quarter tends to be a strong quarter, although we did have a very strong third quarter. The estimates that we have incorporate a solid performance in TENSAR in the fourth quarter. The rest of the businesses in the Construction Solutions Group should perform in line with expectations. So we feel comfortable with the guidance. Regarding the U.S. rebar market, demand remains very robust. And but for the rains that we had in the central Texas region, we expect that to continue. If we take a step back, the demand picture is good—U.S. apparent consumption is up about 3.2% this year—so the long-term drivers across infrastructure, nonresidential spending, and ultimately residential spending remain supportive.
On the supply side, an important point is that CMC will not disrupt the supply-demand balance. We operate a network of highly efficient micro mills and mini mills that are very flexible, and we will work to keep supply and demand in balance and maximize the profitability of our network. Regarding new domestic capacity, it is in the market, and an important proof point is that domestic capacity is in the market and we are increasing prices. We continue to feel that the capacity is manageable. On imports, we expect them to go down in the second half. The big increase in imports has come from one country—South Korea—and when we look at the economics of bringing material from South Korea to this market, it does not appear to be competitive to do so at current prices, so we believe there will be a natural inclination to reduce supply from that source. We have initiated discussions with the U.S. government about supply from that country and from others, and we will pursue all remedies available to us to ensure that imports that come here are fairly traded.
We filed four cases, we have final duties against one country—Algeria—at about 200%, and preliminary duties against the other three countries. If preliminary duties become final, we believe we will have effectively removed the tonnage that amounted to about 500 thousand tons from the market for at least five years. That is significant and durable. We will continue to enforce trade laws and work to level the playing field. Bringing this together, we are comfortable with the supply-demand balance and the ability to sustain it going forward.
I would only add that the TAG program and our commercial discipline are part of how we manage through these dynamics. We continue to see benefits from pricing, and our trade remedy work is an important part of protecting the domestic market. The combination of market dynamics, trade enforcement and disciplined execution is what gives us confidence in the outlook.
Okay. Thank you for the color.
Thank you. Our next question comes from Timna Tanners from Wells Fargo. Please go ahead with your question.
Hey. Good morning, guys. I could follow up on the last question. Maybe, Peter, just to put some numbers to them. You are bringing on 500-plus thousand tons between Arizona 2 and West Virginia—not all rebar. Rebar market's about 10 million tons in the U.S., give or take. High Bar is adding 700. Next year, we are supposed to get 500 to 700 thousand tons from Pacific Steel, and then another quantity probably next year from Hybar 2. So is there enough demand? And how do you run your new mills in light of that magnitude of additional supply? Also, could you give an Arizona 2 and West Virginia update on how those are progressing?
Good question. First, demand: we think demand is going to grow, which is important. We are seeing demand growth this year—apparent consumption up about 3.2%—and the long-term drivers remain intact. Regarding new capacity, for a player like us, we will be rational and operate our network on a value-over-volume basis, flexing up and down to meet market conditions. Our import strategy and progress on trade enforcement should reduce unfairly traded tons and make room for domestic entrants. We believe the situation will play out over a couple of years but so far domestic capacity and pricing dynamics are manageable. On Arizona 2, as you heard in the prepared remarks, we made a lot of progress in the quarter. We got up to about 75% utilization. We still aim to demonstrate full utilization this year. We are producing the vast majority of the volumes of merchant product that we expect to produce there.
We continue to believe that mill will be a workhorse for decades and a tailwind to our 2027 earnings. On West Virginia, we are proud of the team's execution. From a capital standpoint we are coming in right where expected, and the team has done a masterful job keeping the project on budget. We will start hot commissioning later this summer. We are probably a little behind our original expectation on timing due to weather delays, but removing those weather delays we are right on time. The operational team is hired, and we expect this mill—which is a standard rebar micro mill similar to our Oklahoma mill—to ramp. In terms of time frame to ramp, about 12 months is a reasonable estimate, and we are very excited about it.
One thing to add: we have been carrying the West Virginia project and the costs associated have been between $4 million and $5 million a quarter. It will ramp up this quarter to probably double that before we get any real saleable product out of there, and that is built into our outlook for the quarter. Arizona has tremendous upside once we continue to enhance utilization and fully realize the capital we have deployed.
Okay. Appreciate it, and we will see what happens. Thank you.
Our next question comes from Alex Hacking from Jefferies. Please go ahead with your question.
Hi, all. Thank you for taking my question. Just wanted to touch on capital allocation with the leverage target likely to be hit ahead of schedule possibly in the near future. How are you approaching growth versus excess returns? You previously stated that further bolt-on acquisitions in the Precast space were possible but more of a further out strategy until fully integrated and realized synergies from the first two acquisitions. If that is the case, are there any types of organic growth on the steel or downstream product side versus maybe upside to capital returns?
Thanks for the question. The way we think about it is the 2x net leverage target is a fulcrum point. When we get to 2x, which we are approaching, the green light goes on for the ability to consider new growth opportunities and simultaneously to consider more elevated shareholder distributions. We would expect to increase share repurchases once we hit that milestone. We bought two companies and are integrating them; we will get integration to a place we are comfortable with before entertaining another sizable acquisition. We will consider smaller tuck-ins and continue to do that. We do want to grow the Precast business and build a number one position over time. For organic growth, we have a number of projects: Blackwell, Oklahoma GeoGrid line is starting up now; our GalvaBar project in Knoxville is finishing up with startup scheduled in calendar 2026; there are other capital-light roundouts across the portfolio to improve margins and returns. We do not intend to make additional mill investments beyond what we have committed.
I would add we are on the precipice of a cash flow generation inflection point. We've been building low-cost modern mills for a number of years. Looking forward, CapEx for 2027 is likely to be about $200 million less than this year as we complete the final parts of West Virginia and other investments. Combined with enhanced EBITDA from West Virginia, continued AZ2 production improvement, TAG benefits and lower CapEx, we expect significant cash flow generation. That gives flexibility to grow, return cash to shareholders and maintain a healthy balance sheet.
Understood. Thank you.
Our next question comes from Bill Peterson from J.P. Morgan. Please go ahead with your question.
Hi. Good morning. Thanks for taking the questions, and nice job on the quarter and guide. You mentioned that the TAG program is tracking above the $150 million target. I guess maybe just coming to the topic of where you have seen the most success but also looking at where you see the greatest opportunity?
Great question. We will expand more at Investor Day in August, but TAG has been a tremendous add to our company. Most of the benefits to date have been operational—scrap optimization, melt shop yields, rolling mill yields, logistics savings and so forth. These continue to accumulate. The secret of TAG is that once you start, you find more opportunities. Commercial excellence is another part of TAG; we've had significant wins but it has not yet grown to the size of the operational benefits. We believe commercial excellence will become a larger source of value over time. It starts with reducing leakage, improving pricing discipline, deploying tools that help make better decisions in the marketplace, and aligning the organization so we capture more value. With the Precast platform, lead sharing is working and gives us earlier visibility into projects so we can influence them and perform value engineering. When we can value-engineer a project we can save costs for owners and contractors and create more opportunity for CMC. We also see opportunities to deploy AI to help commercial performance and we are excited about that potential.
Thanks for that. On Europe, you talked about various tailwinds forming such as CBAM, enhanced protection, and infrastructure funding. How should we rank these in terms of likely benefit to the market and to CMC? And last quarter you noted a potential $10 to $15 per ton incremental cost headwind from EU energy needs—where does that stand today?
We are optimistic about Europe. From a regulatory perspective, CBAM is in place and we continue to believe that properly enforced it should be a roughly €50 per ton impact on the price of steel. The safeguard measures are reducing quotas and increasing tariffs on imports above the quotas, effective July 1st, which should have a positive impact. We've already seen a decline in some imports. Demand in Poland has been strong, supported by infrastructure spending and recovery and resilience funds. Overall, supply dynamics are improving and the demand backdrop is solid.
One other data point: from December through the end of May we realized around a $75 a ton price increase across our product mix, more heavily weighted towards rebar which is impacted by imports and CBAM. Over that period we've seen a roughly $25 a ton increase in scrap, but for the most part the net has been margin enhancing. On the energy cost side in Europe, we have been pleasantly surprised: in the third quarter we did not see a material increase in energy costs to our business. With the hopeful end to the conflict in the Middle East, things should stabilize. Also, we are roughly 50% hedged on electricity in Poland which provides protection against sudden shocks. So as of today, we are cautiously optimistic on the energy cost front.
Thanks for all the details.
Our next question comes from Richard Garchitorena from Barclays. Please go ahead with your question.
Thanks. Good morning. Wondering if you can talk about your expectations for raw materials and metal margins heading into the fiscal fourth quarter. We saw scrap costs up $28 per ton sequentially in fiscal 3Q and you had a number of planned outages. How should we think about net costs as we go into the fourth versus the third quarter? Also, one competitor had pushed back on pricing in North America last month—are you seeing any changes in the competitive landscape when trying to price rebar or was that a one-off and the market should be relatively stable?
Richard, as we look at scrap today, we see stability for the balance of our fiscal year. The scrap costs that increased in the quarter were largely a flow-through effect of increased collection costs coming through from winter and correlation to diesel and other collection costs. Going forward, we see things fairly stable. The maintenance costs were elevated in Q3 due to the concentrated outages and will not continue into the fourth quarter. Otherwise, we see relative stability in our cost structure as we look to Q4 and continue to drive improvements through TAG.
Regarding pricing, we have been increasing prices and we are pleased with the progress. We are aware of some discounting in the market from a competitor, but given the demand picture we do not see the need to move in that direction. We are realizing increased pricing across the country and you will see higher prices and higher metal margins in our fourth quarter. We feel comfortable with that, particularly with the demand profile and the mega projects where CMC's broader capabilities create value beyond just selling rebar.
Our next question comes from Tristan Gresser from BNP Paribas. Please go ahead with your question.
Hi. Thank you for taking the questions and all the best to Jason in his new role. First, on West Virginia could you share a volume target for fiscal 27 or maybe an exit utilization rate? I think you mentioned a faster ramp-up than for Arizona 2, but any additional color? Also on Europe, you had strong volume performance in fiscal Q3—was that a bit of a one-off or some restocking? How should we think about volumes for fiscal Q4 and returning to full utilization given CBAM and quotas? And final one for me on the Construction Solutions Group: would the Q4 guidance be a good run rate moving forward in terms of profitability for the division and can you remind us of the synergies you expect for fiscal 27?
We expect the West Virginia mill to be fully ramped over the course of 2027. As an approximation, we would expect around 250 to 300 thousand tons for next year, which includes a bit of inventory build needed before commercializing much of the operation. On synergies for the Precast acquisitions, we discussed a combined range in the past of about $35 million to $40 million and expected to realize that over a multi-year period. Year one will have integration dis-synergies and then you should see synergies start in year two and more fully in year three. We remain confident in the synergies from the acquisitions.
On Europe, demand in Poland has never been the issue—it has been strong—and what has changed is a curtailment of some supply which has allowed us to sell more tons in a price-efficient way. We've increased prices multiple times this year and are successfully placing those tons. We do not view the recent strength as a one-off and expect it to continue.
Alright, perfect. Thanks a lot.
With that being our final question for today, I would like to turn the floor back over to Peter for any closing comments.
Thank you. At CMC, we are excited about the opportunities ahead. Our strategy is working. Our markets are remaining supportive. And our disciplined execution continues to position the business for sustained value creation. With that, I would like to thank you for your time and continued interest in CMC. We hope you can join us on August 5th for our Investor Day. You do not want to miss that, and we look forward to speaking with many of you in the coming days and weeks. Have a good day.
And with that, we will be concluding today's conference call and presentation. We thank you for joining. You may now disconnect your lines.