Executive Summary / Key Takeaways

• Commercial Metals Company is executing a multi-faceted strategic plan focused on operational excellence (TAG), organic growth (micro mills, specialized solutions), and disciplined inorganic expansion to achieve sustainably higher margins, improved cash flow, and enhanced returns on capital.
• Despite recent macroeconomic uncertainty impacting steel pricing and new project awards, particularly in North America, management believes Q2 FY2025 marked a trough and anticipates sequential improvement driven by seasonal trends, expected margin expansion, and cost management.
• Powerful structural tailwinds, including significant infrastructure investment, reshoring of manufacturing, energy transition, and addressing the U.S. housing deficit, are expected to drive robust construction demand and support CMC's core markets for years to come.
• CMC's differentiated micro mill technology, including the unique capability of the Arizona 2 mill to produce both rebar and merchant bar, along with investments in specialized, higher-margin products within the Emerging Businesses Group, provides operational flexibility and competitive advantages.
• While facing competitive pressures from larger domestic players and import challenges in Europe, CMC's focus on cost management, strategic capacity additions in underserved regions, and pursuit of higher-margin adjacent markets positions it to enhance its competitive standing and capitalize on future market strength.

Setting the Scene: A Century of Steel and Strategic Evolution

Commercial Metals Company, with a history spanning over a century, has evolved into a leading provider of innovative solutions crucial for the global construction sector. Operating through a vertically integrated model primarily in the U.S. and Central Europe, CMC's core business revolves around manufacturing and recycling steel and metal products, serving diverse applications from infrastructure and non-residential buildings to residential and energy projects. This long history has shaped a company deeply embedded in the cyclical nature of construction and commodity markets, yet one that is now proactively pursuing a strategic transformation aimed at fundamentally enhancing its financial profile and reducing volatility.

The current industry landscape is marked by a complex interplay of factors. Domestically, while underlying demand indicators like the Dodge Momentum Index remain robust and point to a significant pipeline of potential projects, near-term uncertainty surrounding interest rates and government policy has led to hesitation in awarding new contracts. This has, in turn, increased competition for available work and pressured steel pricing and margins. Internationally, particularly in Europe, CMC faces challenges from the influx of imports from neighboring countries, which has offset benefits from improving local macroeconomic conditions and domestic supply discipline. Against this backdrop, CMC's strategic response is centered on leveraging its operational strengths, expanding its capabilities in higher-value areas, and positioning itself to capitalize on powerful, multi-year structural trends expected to drive future demand.

CMC operates within a competitive environment dominated by larger players like Nucor (NUE), United States Steel Corporation (X), Cleveland-Cliffs Inc. (CLF), and Steel Dynamics Inc. (STLD). While these competitors also engage in steel production and recycling, CMC differentiates itself through its specific market focus, operational model, and strategic initiatives. Compared to some rivals, CMC's vertically integrated micro mill model offers advantages in efficiency and flexibility, though larger players like Nucor often exhibit superior scale and potentially lower operating costs per unit, partly due to more extensive adoption of advanced manufacturing techniques. U.S. Steel, with older infrastructure, faces higher energy consumption per unit compared to CMC's more modern operations. Cleveland-Cliffs and Steel Dynamics, focusing on mini-mills and vertical integration, present strong competition in efficiency and growth. CMC's strategic emphasis on recycling and its global footprint provide advantages in raw material sourcing and market reach, offering flexibility that some domestically focused competitors may lack. The company's push into specialized products within its Emerging Businesses Group also sets it apart, targeting niche, higher-margin segments less directly competitive with the core long steel market.

The Technological Edge: Micro Mills and Specialized Solutions

Central to CMC's strategic differentiation is its investment in advanced micro mill technology. The company's third micro mill in Mesa, Arizona (AZ2), is a prime example of this, notable as the first in the world capable of producing both rebar and merchant bar products through a continuous production process. This technological capability offers significant operational flexibility, allowing CMC to adjust its product mix based on market demand and optimize profitability. While bringing this breakthrough technology online has presented unique challenges, the company has been systematically ramping up production, achieving monthly production records and working towards an annualized run rate near its 500,000-ton nameplate capacity. Management expects AZ2 to achieve operational breakeven on a monthly basis in Q1 FY2025 and be continuously profitable thereafter.

Building on this, CMC is constructing its fourth micro mill in Berkeley County, West Virginia. This facility is strategically located to serve key markets in the Northeast, Mid-Atlantic, and Mid-Western U.S., supported by the company's existing downstream fabrication network. With site work and infrastructure largely complete, equipment installation is underway, targeting commissioning in late calendar 2025 and melt shop production in the spring of calendar 2026. This investment, estimated at $550 million to $600 million net of expected government assistance and Inflation Reduction Act tax credits, is anticipated to conclude CMC's investments in new steelmaking capacity, establishing a highly flexible network. Achieving targeted profitability at both AZ2 and WV is expected to significantly improve CMC's return on invested capital by approximately 150 basis points, all else equal, demonstrating the tangible financial benefit of these technological investments.

Beyond core steelmaking, CMC is expanding its portfolio of specialized solutions, particularly within the Emerging Businesses Group. This includes investments to increase capacity for products like post-tension cable, GalvaBar (adding a second coating line), and GeoGrid (adding a new production line in Oklahoma). These offerings, part of the Performance Reinforcing Steel division, are characterized by higher, more stable margins and are currently underpenetrated in the market. They provide tangible benefits to customers, such as reduced construction costs, duration, labor usage, and CO2 emissions (GeoGrid), or enhanced lifespan and corrosion resistance (GalvaBar, Chromax, Cryo Steel). These investments require significantly less capital than traditional steel assets but generate high returns and strong cash flows, contributing to CMC's competitive moat by offering differentiated, value-added products that are less susceptible to the commodity price volatility of standard rebar.

Strategic Execution and Financial Performance

CMC's strategic vision is underpinned by three pillars: operational and commercial excellence, value-accretive organic growth, and disciplined inorganic expansion. The "Transform, Advance, and Grow" (TAG) program, launched in 2024, is the engine for the first pillar. This enterprise-wide initiative involves over 150 identified initiatives aimed at driving permanent improvements to margins, cash flow, and return on capital. Early results from the first phase of TAG initiatives, such as optimizing scrap utilization, reducing alloy consumption (targeting ~$5M annual benefit), improving melt shop yields ($5M-$10M annual benefit), and optimizing logistics ($5M-$10M annual benefit), have exceeded targets and are expected to provide annual run-rate EBITDA benefits exceeding $100 million when fully realized. This program is not just about cost savings; it's fostering a culture of continuous improvement and collaboration intended to sustain higher margins through the cycle.

The second pillar, organic growth, is evident in the micro mill projects and specialized solutions expansions discussed earlier. The third pillar, disciplined inorganic growth, targets attractive adjacencies within the $150 billion early-stage construction market. CMC seeks businesses with higher, more stable margins (targeting >20% EBITDA margin) and strong free cash flow conversion, aiming for acquisitions typically valued between $500 million and $750 million that offer scalability and geographical overlap. The goal is to broaden CMC's commercial portfolio and extend its growth runway while maintaining a strong balance sheet, targeting a through-the-cycle net debt to EBITDA ratio at or below 2x.

Financially, CMC's performance in the first nine months of fiscal 2025 reflects the challenging market conditions and the impact of a significant legal accrual, alongside the ongoing strategic investments. For the nine months ended May 31, 2025, net sales decreased 4% year-over-year to $5.68 billion, primarily due to lower average selling prices in the North America Steel Group, partially offset by increased volumes in Europe and Emerging Businesses. Net earnings saw a substantial decline, reporting a net loss of $67.1 million compared to net earnings of $381.6 million in the prior year period. This was largely driven by a $358.5 million litigation expense related to the Pacific Steel Group lawsuit, accrued in Q1 FY2025. Excluding this, adjusted earnings were $0.59 per diluted share for the nine months.

Segment performance highlights the mixed environment. The North America Steel Group saw adjusted EBITDA decrease 32% to $503.0 million for the nine months, primarily due to compression in steel and downstream product metal margins. However, finished steel shipments showed resilience. The Europe Steel Group's adjusted EBITDA increased 15.5% to $30.2 million, benefiting from higher tons shipped and lower conversion costs, despite facing import pressures and lower government assistance compared to the prior year. The Emerging Businesses Group's adjusted EBITDA remained relatively flat at $87.1 million, with strong performance in proprietary reinforcing steel offset by softness in Tensar (project delays) and Impact Metals (truck/trailer market).

Despite the earnings impact of the litigation and margin compression, CMC maintains a robust financial position. As of May 31, 2025, cash and cash equivalents totaled $893.0 million, contributing to total liquidity of over $1.7 billion. The company's net debt to adjusted EBITDA ratio remains attractive, and it was in compliance with all credit facility covenants. Operating cash flow generation remained solid, supporting capital expenditures, which increased year-over-year for the nine months to $293.9 million, primarily driven by the West Virginia micro mill construction.

Outlook, Risks, and Competitive Dynamics

Management expresses confidence in a rebound in the latter half of fiscal 2025, believing Q2 marked a trough. They anticipate sequential improvement in consolidated results in Q4 FY2025, driven by normal seasonal trends in North America volumes and expected sequential increases in adjusted EBITDA margins for both the North America Steel Group (on higher steel product margins over scrap) and the Europe Steel Group (excluding the impact of a ~$28 million CO2 credit expected in Q4). The Emerging Businesses Group is also expected to improve sequentially and year-over-year based on project backlogs.

This positive outlook is predicated on market stabilization, the eventual release of pent-up demand, and the continued momentum from powerful structural tailwinds. Infrastructure investment, fueled by government programs, is already strengthening and expected to continue for years. Reshoring initiatives, evidenced by over $1.6 trillion in announced corporate investments in 2025 across various sectors, are anticipated to provide significant catalysts for rebar consumption. Growth in energy generation/transmission and the build-out of AI infrastructure further bolster demand prospects. While acknowledging that inflationary impacts have slightly reduced the estimated rebar tonnage potential from infrastructure spending (now estimated at 0.6M-0.9M tons), management notes that approximately 80% of this spending is yet to occur.

However, risks persist. Macroeconomic uncertainty, particularly regarding interest rates and government policy, could continue to delay project awards. The potential for a resurgence of steel imports, especially if Section 232 tariffs are relaxed or challenged, poses a threat of renewed downward pressure on U.S. steel prices. Domestic overcapacity could also emerge as new EAF projects come online from competitors like Nucor and Steel Dynamics, potentially exacerbating price competition. The ongoing PSG litigation, with a significant judgment currently under appeal, represents a material financial and operational risk depending on the ultimate resolution. Environmental liabilities, while currently accrued at immaterial levels, carry inherent estimation uncertainties.

In the competitive arena, CMC's strategic investments and operational improvements are aimed at strengthening its position. The TAG program's focus on cost reduction and efficiency directly addresses the need to compete effectively against lower-cost producers. The micro mill strategy, particularly the West Virginia mill's location, targets underserved markets where CMC can gain share. The expansion of the Emerging Businesses Group's specialized offerings provides differentiation against competitors primarily focused on commodity steel products. While larger rivals may have advantages in scale and financial resources, CMC's targeted approach, technological flexibility, and focus on value-added solutions are designed to enhance its competitive standing and capture growth in key segments benefiting from long-term trends.

Conclusion

Commercial Metals Company is navigating a complex market environment marked by near-term uncertainty and competitive pressures, yet its strategic transformation plan positions it for a potentially stronger future. By focusing on operational excellence through the TAG program, executing value-accretive organic growth projects like the advanced micro mills and specialized EBG expansions, and pursuing disciplined inorganic opportunities, CMC is building a more resilient business with the potential for sustainably higher margins and improved returns. While recent financial performance reflects the impact of market headwinds and a significant legal accrual, the company's robust balance sheet provides the flexibility to fund its strategic initiatives and continue returning value to shareholders. The confluence of powerful structural demand trends in construction, coupled with CMC's enhanced operational capabilities and differentiated product portfolio, suggests a compelling long-term investment thesis for those looking beyond the current transient softness. The successful execution of its strategic plan and the realization of benefits from its technological investments will be key determinants of CMC's ability to capitalize on future market strength and deliver enhanced value.