Commercial Metals Company (CMC) Q1 2021 Earnings Call Transcript

Commercial Metals Company (CMC -1.18%)
Q1 2021 Earnings Call
Jan 11, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello and welcome, everyone, to the first-quarter fiscal 2021's earnings call for Commercial Metals Company. Today's call is being recorded. [Operator instructions] I would like to remind all participants that during the course of this conference call, the company will make statements that provide information other than historical information and will include expectations regarding economic conditions and the impact of COVID-19, effects of legislation, U.S. steel import levels, U.S.

construction activity, demand for finished steel products, the company's future operations, the company's future results of operations, and capital spending. These and other similar statements are considered forward-looking statements and may include -- involve forecasts 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 current conditions but are subject to certain risks and uncertainties including those that are described in the risk factors and forward-looking statements disclaimer section of the company's latest annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. Although these statements are based on managing expectations and beliefs, CMC offers no assurance that these expectations or beliefs will prove to be correct and actual results may vary materially.

All statements are made only as of this date. Except as required by law, CMC does not assume any obligation to update, amend, or clarify these statements in connection with future events, changes in assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances, or otherwise. Some numbers presented are historical non-GAAP financial measures and reconciliation for such numbers can be found in the company's earnings release or on the company's website. Some numbers presented or forward-looking non-GAAP financial measures and reconciliations are not provided due to the unavailability of forward-looking reconciling information.

Unless stated otherwise, all references made to year or quarter-end are references to the company's fiscal year or fiscal quarter. And now for the opening remarks and introduction, I will turn the call over to the chairman of the board, president, and chief executive officer of Commercial Metals Company, Miss Barbara Smith.

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

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

Paul Lawrence will then cover the quarter's financial information in more detail and I will conclude our prepared remarks with a discussion of our outlook for the second quarter of fiscal 2021, after which we will open the call to questions. As announced in our earnings release this morning, we reported fiscal first-quarter 2021 earnings from continuing operations a $63.9 million or $0.53 per diluted share on net sales of $1.4 billion. Excluding the impact of certain charges which Paul will cover in more detail, our adjusted earnings from continuing operations were $69.8 million or $0.58 per diluted share. CMC generated core EBITDA of $156.6 million marking the seventh consecutive quarter near or above the $150 million level.

This record underscores not only our company's enhanced earnings capability compared to past periods, but also the stability provided by our integrated value chain. Activity levels in CMC's core end markets remained strong during the first quarter leading to an increase in the company's finished steel shipments compared to a year ago. In North America, demand for rebar from our mills was driven by resilient construction activity as contractors continue to work off the healthy backlogs they carried into the pandemic. Demand for merchant products benefited from the ongoing recovery of domestic industrial productions, as well as a lean supply chain following heavy service center destocking in April and May.

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

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

However, in recent weeks, we've seen more willingness to move projects forward. We've also seen a rapid increase in global prices for steel and steelmaking raw materials. Domestic scrap has been particularly impacted, increasing significantly since the end of our fiscal fourth quarter. The current elevation in scrap pricing appears to be driven primarily by increased global demand, particularly China, and by near-term shortages as underutilized steel plants increased production levels.

While the extent and duration of this rally is difficult to predict, it will certainly pressure margins in the near term on both our steel and downstream products. As we outlined during our Investor Day, CMC is built to weather turbulence and is structured to endure periods of volatility. Our vertical value chain and integration provide the CMC with sources of strength at any point in the economic and steel price cycle. Our approach to operational excellence and optimization ensures that CMC is lean and efficient, and our team is always looking for further improvements.

Let me give you a few examples of how CMC has responded to the current environment. In order to maintain metal spreads, we have responded to rapidly rising scrap costs with several rounds of announced price increases on each of our mill products. In addition, synergies we achieved following our fiscal 2019 rebar asset acquisition, as well as our ongoing network optimization efforts have reduced CMC's cost structure meaningfully. During the first quarter, our controllable cost per ton of finished steel were 10% below the levels immediately following the transaction.

This represents the cost incurred throughout CMC's vertical value chain from the scales at our recycling yards all the way to the shipment of downstream products from our fabrication facilities. These cost reductions are significant and fall directly to our bottom line. In Europe, our team reduced per-ton controllable costs by roughly 10% compared to the prior year, which is a remarkable feat given our belief that this was already one of the lowest-cost mills in the world. Even at the recent depressed metal margin level of $200 per ton, our European operation is generating segment-adjusted EBITDA at an annualized rate of $55 million to $60 million.

Fact that CMC Europe is succeeding in the current challenging environment gives us confidence that it will thrive in better times. The first-quarter margin over scrap was nearly an eight-year low and was $25 per ton below the long-term average. A return to mid-cycle levels would add $30 million to $35 million of annualized segment-adjusted EBITDA. Factors driving uncertainty in our markets have led to some erosion in the volume of work within CMC's downstream backlog.

As previously mentioned, customers have delayed awarding projects. However, in recent weeks, bookings have ticked up and the backlog is starting to stabilize. Looking beyond the near-term uncertainty, longer-term indicators remain encouraging. The amount of potential work that downstream customers are asking us to quote remains strong, indicating a robust project pipeline.

Our commercial teams continue to report that project owners, though currently hesitant to book work, are optimistic about future conditions. External indicators also point to reasons for confidence. Residential construction, which generally leads non-residential and local infrastructure by 12 to 24 months, is very strong. The regional population shift into CMC's core geographical markets has accelerated during the last year, boding well for medium- to long-term activity.

Additionally, the Portland Cement Association recently revised their 2021 and 2022 estimates for cement consumption growth upward roughly 1% and 2%, respectively. ECA is a forecast provider we have highlighted in the past as having the highest correlation to domestic rebar shipments. Now, I'd like to provide a quick update on recent strategic announcements. In conjunction with our announcement last August of construction of our third technologically advanced micro mill, we announced that we would eventually curtail all operations at our Rancho Cucamonga site.

At the end of December, we ceased production at the mill while maintaining full service to our customers. Operational changes and logistics were carefully planned and we have experienced a seamless transition thus far. I would like to acknowledge and thank all of the CMC employees at the Rancho site for their service and professionalism through this difficult decision to cease operations. During the quarter, we made significant progress on the construction of our third rolling mill in Poland.

The equipment and support utilities are now being installed. We expect to begin testing equipment in a few months and continue to target commercial productions later this fiscal year. As indicated during our last earnings call, total project costs should be under our original budget of $80 million. Once operational, the third rolling line will allow our facility to utilize 200,000 tons of current excess mill capacity by converting it to higher value-add finished product.

This will further increase our production flexibility and leverage fixed melt shop costs. Construction of our new MBQ-capable micro mill in our third rolling line in Poland in conjunction with our ongoing network optimization efforts and other smaller organic projects is expected to add approximately $135 million through-the-cycle EBITDA over the next few years. Before turning the call over to Paul, I will briefly mention efforts CMC is undertaking regardless -- regarding sustainability. Sustainability is core to CMC and has been since our founding as a recycling company 105 years ago.

Good business and good environmental stewardship are fully aligned at our company that's been demonstrated by our adoption of the cleanest steelmaking technologies and our recent announcements of increased sourcing of renewable energy. In addition, to better communicate CMC's strong ESG performance, we are planning to offer new disclosures over the course of calendar 2021. Finally, as stated in our press release, the board of directors declared a quarterly cash dividend of $0.12 per share as CMC common stock for stockholders of record on January 21, 2021. Dividend will be paid on February 4, 2021.

This represents CMC's 225th consecutive quarterly dividends. That is an overview. I will now turn the discussion over to Paul Lawrence, vice president, and chief financial officer, to provide more comments on the results for the quarter.

Paul Lawrence -- Vice President and Chief Financial Officer

Thank you, Barbara, and good morning to everyone joining on the call today. Today, we reported earnings from continuing operations of $63.9 million or $0.53 per diluted share, compared to earnings from continuing operations of $82.8 million or $0.69 per diluted share in the first quarter of fiscal 2020. NOC in the quarter included net after-tax charges of $5.9 million related primarily to facility closure and asset impairment expenses at our Rancho Cucamonga Steel California operations. As Barbara mentioned, production ended in late December.

Excluding these and other one-time expenses, adjusted earnings from continuing operations were $69.8 million or $0.58 per diluted share. Our core EBITDA from continuing operations was $156.6 million for the first quarter of 2021, a decrease of 10% from the near-record level of $174.7 million -- $174.4 million reported first quarter of 2020. Slide 5 of the supplemental earnings call slides available on our website shows the stability of our core EBITDA on a per-ton-of-finished-steel-shipped basis over the course of the pandemic. Now, I will review results of segments for the first quarter of fiscal 2021.

North American segment recorded adjusted EBITDA of $156.6 million for the quarter, compared to adjusted EBITDA of $174.7 million in the same period last year. Largest driver of this reduction was lower margins-over-scrap costs on finished products. Margins for both steel products and downstream products were impacted by lower average selling prices compared to a year ago against higher scrap input costs. Selling prices for steel products from our mills decreased by $14 per ton on a year-over-year basis but did sequentially increase due to price increase announcements that became effective in the latter half of the quarter.

These price increases, which Barbara mentioned earlier, occurred largely in late November and have continued into January. Impact of these increases will be realized by the end of the second quarter. Average selling price of downstream products declined by $42 per ton from a year ago as a result of the mix of works shipped, as well as the impact of the high-priced projects booked in the immediate aftermath of Section 232 rolling off our backlog. Margins in our backlog remained strong and profitable relative to historical levels.

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

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

Downstream product shipments were impacted by lower activity in certain geographies, as well as multiple storms in the Gulf Coast region. Recent trend in North American margins, volumes, and cost performance can be seen on Slide 6 of the accompanying deck. Our European oper -- segment recorded adjusted EBITDA of $14.5 million for the first quarter of 2021 compared to EBITDA of $11.4 million in the prior-year quarter. Largest contributors to the improved year-over-year performance was strong cost management, higher shipment volumes, and a $1.3 million COVID-related benefit from the Polish government.

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

Europe volumes increased meaningfully compared to prior -- the prior year rising 17% due primarily to the impact of improving industrial demand in Central Europe, as well as service center restocking on merchant and wire rod. Rebar shipments were stable year over year, demonstrating the resilience of construction-related demand in the domestic Polish market. Now, turning to our balance sheet and liquidity. As of November 30, 2020, cash and cash equivalents totaled $465.2 million.

And -- in addition, we had availability under our credit and accounts receivable programs of approximately $679 million. During the quarter, we used $12 million of cash to fund operating activities. Usage resulted primarily from the timing of payments related to certain accrued expenses, including the $32 million of acquisition working capital settlement highlighted in the fourth-quarter earnings release. Looking ahead to the second quarter of fiscal '21, we believe the funding of working capital to be meaning -- to be a meaningful use of cash.

Both our inventory and accounts receivable balances will be impacted by the generally higher price levels for scrap and finished steel. Our leverage metrics remain attractive and have improved significantly over the last two fiscal years. As can be seen in Slide 10, our trailing 12-month net debt-to-EBITDA ratio now sits at 1.1, while our net debt to capitalization is just 21%. Our robust balance sheet and overall financial strength provides us the flexibility to fund strategic projects, navigate the uncertainties of the current economic environment, and still pursue opportunistic M&A.

Our effective tax rate for the quarter was 25.3% and in line with our full-year effective tax rate forecast of -- between 25% to 26%. Lastly, I would like to provide our current outlook for capital expenditures in -- for fiscal 2021. We expect to invest between $200 million and $225 million with roughly $85 million earmarked for our new micro mill. For comparison purposes, we have previously stated that our typical capital spend averages around $150 million annually.

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

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

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

Manufacturing sectors of both the U.S. and Central Europe appear to signal continued recovery, which we expect to benefit volumes of merchant bar in both markets as well as our wire rod products in Europe. We anticipate margin pressure in North America during this quarter as a result of rapidly rising scrap costs and the timing lag on announced price increases. CMC is well-positioned to navigate market volatility and uncertainty.

This gives us confidence that over the long term, our company is structured to earn average EBITDA of at least $540 million per year through the cycle as we shared with you during our Investor Day. Adding the growth projects that are currently under way, we believe we can grow our through-the-cycle EBITDA to $675 million over the next three to four years. Once again, I would like to thank all of the CMC employees for delivering another outstanding quarter of performance. We will now open the call to questions.

Questions & Answers:

Operator

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

Chris Terry -- Deutsche Bank -- Analyst

Hi, Barbara and Paul. I hope -- I hope you're both well. I wanted to ask you a question just around the infrastructure bill. I think previously, you talked about the rebar market potentially benefiting at 1 million to 1.4 million tons a year in that -- in that line.

I just wanted your thoughts if we are to get an improvement in the infrastructure bill, how long, you know, in your experience something like that might take to flow through the numbers and just -- just checking that -- that -- that 1 million to 1.4 million is the right range. Thank you.

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

Thank you, Chris, and Happy New Year. We're still confident in that range of 1 million to 1.4 million. I think we'll have to see what the priorities are of the new administration. But certainly, infrastructure does seem to be one of the areas of -- of focus early on in the administration's term.

So, we would be, you know, highly encouraged if -- if that move forward.

Chris Terry -- Deutsche Bank -- Analyst

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

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

Yeah. I apologize I didn't hear -- hear the second half of your question. You know, normally, there's a, you know, a 12- to 18-month lag. I would say given discussions with our customers, there's certainly enthusiasm to -- to start projects.

And so, we're just really watching a number of things and -- and hoping for the continued recovery in the economy and no setbacks with COVID. But I think if the infrastructure bill is approved in this first year, you know, we would start to see things in -- in the following fiscal year.

Chris Terry -- Deutsche Bank -- Analyst

OK, thanks. And just -- just a follow up on the mechanics of the -- the different parts of your business. Just checking that -- the fabrication business. It's still sort of that 9- to 12-month lag on pricing, sort of how you think about that -- that business.

And then scraps still flow through -- flows through on 30- to 45-day lag into the mills division. Just -- just wanted to think about some of the modeling.

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

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

Chris Terry -- Deutsche Bank -- Analyst

Thank you. That's it for me. All the best.

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

Thank you, Chris.

Operator

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

Curt Woodworth -- Credit Suisse -- Analyst

Yeah. Hey, good morning, Barbara and Paul.

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

Good morning, Curt

Paul Lawrence -- Vice President and Chief Financial Officer

Good morning.

Curt Woodworth -- Credit Suisse -- Analyst

You know, I know there's been a -- a -- a flurry of price hikes over the last three months and, you know, scrap pricing continues to go up pretty dramatically. Just wondering, you know, you talked about how you expect to have all the price hikes fully in place by the end of 2Q. Obviously, scrap cycles into the business through COGS, you know, quickly. So, can you give us a sense on, you know, a, what -- what type of metal spread compression you -- you could be facing this quarter? And then when I look at the spot rebar and metal bolting, it's about $755,000.

So, it's up, you know, roughly $160,000p over the past three months which is somewhat equivalent to what the scrap market has done, you know, if we include about a $80-per-ton rise this month. So, would -- would you say that as it stands today, the price hikes you've announced by the end of 2Q, assuming scraps stays where it is right now you would be roughly back to where you were on metal spread?

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

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

Curt Woodworth -- Credit Suisse -- Analyst

OK. May -- maybe put it another way in -- in terms of the lag on the announced price hikes. So, what would a typical lag be between, you know, your -- your contract structure than the timing in -- in terms of working through the inventory? Like if -- if you announce a price hike today, will that kind of start to flow through on -- on about a 60-day lag? Or how should we think about kind of the timing mismatch, if you will, between, you know, scrapping more fluid and pricing taking a little bit longer to effectuate? 

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

Yeah. And generally speaking, and every announcement is different based on, you know, the -- the conditions in the marketplace. But generally speaking, if there's an announcement today and customers are protected for two to four weeks with the scrap, you know, flowing through like it does. But, you know, those are -- those are guidelines.

There's a lot of factors and, you know, every action by everyone -- every market participant is -- is slightly different.

Curt Woodworth -- Credit Suisse -- Analyst

OK. And then just a follow up on -- you talked about the backlog as it's ticked up a little bit more recently maybe with, you know, certainly around the election or various things. Can you -- can you talk about what's, you know, what sectors of the back -- like, you know, where you're seeing activity? Is it -- is it more on the infrastructure side relative to non-res? And then you mentioned residential ops are doing better, but I don't think you have that much exposure to residential. Could you just remind me on -- on what that exposure is? And that's it.

Thank you.

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

Well, the backlog as -- as everyone can appreciate when the pandemic literally shuts the economies down around the world that -- that took everything to a screeching halt. And so, there was a pause in voting and bidding as everyone searched to understand things would go from -- from there. And as time has gone on, as -- as we all know, the -- our business as an essential business has been able to -- to operate very effectively throughout this. And I think construction activity, in general, has been able to move forward and without any major disruptions.

So, it -- it then comes back to a lot of other uncertainty factors. And -- and people tend to be more hesitant to work when they don't have their policy matters going forward. Long story short, after some decline in backlog, we -- we do believe that the backlog is stabilizing. We are encouraged by recent quoting and -- and booking activity.

We -- we know from our customers that there is good activity or good projects out there and we've seen some -- some really interesting ones over the last, you know, six to eight weeks that are finally coming to market after some months of -- of hesitation or just paused to understand the economic fallout from COVID. Our -- our backlog still sits around 60% private, 40% public. If there was an infrastructure bill of the magnitude that the -- the -- the House and Senate have talked about that could cause that shift over time and be more heavily weighted toward infrastructure. But I should remind folks there has been a lot of population movements throughout this past year.

And that's where we do see some market strength as -- as a result of those trends. And, you know, that's probably going to continue and -- and with that comes a lot of infrastructure that will follow on from -- from the strength in residential. I should remind our listeners that we do -- now, with the addition of the recent acquisition, we do have wire rod exposure not only in Europe but also here in the U.S. And there is no good amount of wire rods that -- that go into -- into residential.

So, we have a little more exposure there than maybe what you would think of historically. At -- again, with a strong residential follows a non-residential. And so, that's a very encouraging sign for us going forward.

Curt Woodworth -- Credit Suisse -- Analyst

Great. Thanks very much. Be well.

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

Yes, Thank you. You too.

Operator

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

Seth Rosenfeld -- Exane BNP Paribas -- Analyst

Good afternoon. Thanks for taking our questions today. If I may, I have first a follow-up question on your recent comments on -- on MBQ. And I want to come back to working capital, please.

When it comes to MBQ, can you give us a sense on --on what's driving these particularly strong volumes in both the U.S. and in Europe? To what extent you'd attribute this to market share gains versus some weaker competitors, inventory restocking after the summer trough by your trader customers, and more -- something more fundamental and real demand trends. If we can start there, please.

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

OK. Thank you, Seth. Happy New yYear. Now, the MBQ has been -- as we've highlighted, it's -- it's an important product.

It's always been in our portfolio. We very much appreciate our -- our merchant customers. It's not a simple answer. We have invested in providing a broader product range.

And so, that opens up opportunities for us. Clearly, there has been inventory restocking as a lot of the manufacturing sector was shut down for a period of time in the early stages of the pandemic. And -- and then, you know, I think service centers have been very judicious and very conservative in managing their working capital understandably. So, given the market volatility and uncertainty, it's a combination of things I -- I can also remind you that in the U.S., there was a one mill that was shut down over the last period of time.

And so, certainly, that opened up other opportunities for us as well.

Seth Rosenfeld -- Exane BNP Paribas -- Analyst

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

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

I don't think so. I think that -- I don't believe the manufacturing sector is, you know, fully ramped up to normal operations. I know there are still shortages throughout the supply chain. It's -- here in the market, buying anything you -- you certainly will be aware of -- of some of the shortages throughout the supply chain.

But -- so -- yeah, maybe there are some, you know, short-term settling out of it. But I -- I still think there's -- and our data would indicate that there's going to be continued demand growth in 2021, you know, as all of the sectors of the economy recover.

Seth Rosenfeld -- Exane BNP Paribas -- Analyst

OK. Looks very clear. And -- and if I can ask a follow-up question, please, on the guidance for working capital, please. Obviously, a big use of cash in Q1, the guidance for significant investment in Q2.

Can you provide any framework for the scale of investment you'd expect? And then is there any reason to expect a full-year investment this year? Or assuming some moderation of trends, would you expect a release in the back half, please?

Paul Lawrence -- Vice President and Chief Financial Officer

Sure, Seth, and good -- good morning. You know, as far as our working capital in the -- in the first quarter as you indicated, you saw a -- a normal use of cash for us. Typically, the -- the -- the first quarter includes various yearend-related payouts that occur in the -- in -- in the first quarter as well as some -- some accrued interests and -- and -- and other activities. And so, you know, the normal flow is -- for us is -- is an outflow in the -- in the first quarter and then, you know, holding everything else constant.

We recover that working capital throughout the -- the balance of the -- the -- the year. In the current year obviously, in addition to the normal cycles, we have the -- the impact of the inflationary pressures both on the inventory side and the receivable side. And really, that's, you know, clearly a -- a, you know, cyclical business that's a temporary investment and -- and really depends on your outlook for the -- the -- the cycle of costs and where you -- where you project the -- the scrap prices to -- to go and -- and possibly recover. But, you know, the -- the positive thing from our perspective, you know, we've got $1.1 billion of -- of liquidity through the judicious cash balance sheet management that we've got.

And so, we view this as -- as, you know, part of the normal management of the -- the -- the business and we do see, you know, overall that we continue to look to optimize the -- the business which includes long-term having working capital reductions in, you know, a day's measure. But in today's environment, as a result of the rising prices, clearly, we will see a -- an investment in -- in cash here in the second quarter.

Seth Rosenfeld -- Exane BNP Paribas -- Analyst

Very clear. Thank you.

Operator

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

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

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

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

Happy New Year's, Timna.

Paul Lawrence -- Vice President and Chief Financial Officer

Good morning.

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

I just wanted to clarify. So, on that comments about the scrap margin or the scrap -- the pressure on margins from scrap, you know, if -- if we believe this could be the year for scrap, and scrap is off to a sharp -- sharply higher start for the -- the year and into your February quarter. Is your guidance more a commentary on like the temporary timing of passing it all through? Or is there any reason to believe that this is a margin squeeze that we could see beyond like the short-term? So, I'm just really asking about, you know, sharply higher scrap prices. Maybe it's just a -- a question of timing and -- and how you think about that adjustment for your steel business.

And then I want to ask something about steel fabrication on those lines as well.

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

Timna, we really think it's -- it's a -- we're trying to signal the timing lag. Very encouraged by the -- ability, you know, -- which has historically been the case where our customers understand as raw material prices change that there are -- there are adjustments to finished product pricing. So, right now, it's really a -- a question of the timing between scrap movements and price changes. And imports are relatively at bay and that's another factor, as you know, that plays into it.

And so, that guess to us that we're going to be able to recover those raw material price changes as they occur.

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

OK, that makes sense. So, just, you know, because of the unusually sharp increase and -- and probably conservatism into February and unknowns there, it makes -- makes sense to be a bit conservative. But along those lines, I'm trying to understand how to think about the fabricating business. So, if -- if I understand correctly, the inputs, the rebar that goes into that is priced on like a quarter lag.

And then the finished product is priced on like 9- to 12-month lag. So, if we think about, you know, the rebar price inflation for now against what we know a year ago, is that -- does that imply like a near-term margin squeeze until any adjustments can be made on the selling price? Or -- or can you just guide us how to think about that? I -- I believe you talked about it -- Paul talked about it and -- and cautioned on it, but I just want to make sure I understood that -- that guidance.

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

Yes. So, I'd make the following remarks and Paul can certainly add color if he'd like. And just as a reminder, first and foremost, generally, higher prices are beneficial to the business overall. Save the -- the lags that we spoke of.

So, you know, we were encouraged by the higher finished goods prices that -- that we're seeing in the marketplace. I also want to remind everyone that -- that on the raw materials side, when -- when raw material prices move higher, that creates a nice opportunity in our recycling side of the business to improve margins which helps to offset and buffer the temporary impact on the other side of the coin which is the fab side that you alluded to, Timna. And so, yes, there is going to be some, you know, temporary adjustment in fab as fab contracts adjust to the higher raw material prices. But I haven't, you know, -- I'm encouraged that -- that not only is the fab backlog stabilized and started to build again.

But also, I think that, you know, we're going to see fab prices begin to adjust to -- to these changes in -- in raw material prices. We try to be judicious in booking projects when you have this phenomena going on and -- but, you know, we -- we -- we've been at this for a long time and there's those offsetting factors between recycling benefit and temporary fab -- fab -- fab impact.

Paul Lawrence -- Vice President and Chief Financial Officer

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

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

Oh, no doubt. I just want to make sure I understand. So, the -- the recycling business benefits on higher scrap prices. The steel business, you know, would -- would hope to offset higher scrap with higher steel and -- and maintain a -- a solid, you know, if not, you know, better margin.

And on the fab business, there's a bit of an offset. And -- and just wanted to clarify unless there was something that was missing on an ability to pass the prices differently than in the past.

Paul Lawrence -- Vice President and Chief Financial Officer

No. That's -- that's correct.

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

OK. All right. Thank you.

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

Thanks, Timna.

Operator

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

Andreas Bokkenheuser -- UBS -- Analyst

Thank you very much. Happy New Year, everyone. Just a quick question on -- on kind of order book this year to fully understand the backlog. And -- and you were mentioning how residential kind of tends to be non-res so and so.

When we look at some of the leading indicators like the non-res starts, and the ABI, and so on, it -- it would suggest that we could actually see, you know, pressure on construction steel demand this year. But from -- from what I'm kind of taking away from your call is that, you know, you're -- your pretty comfortable with your -- with your new order book. So, how -- how should we kind of think about it overall? I mean, you're effectively capturing market share. Is that kind of where the bulk of your volume growth is coming from this year, you know, in a potentially shrinking market? Or -- or do you think that you're looking at the ABI, looking at, you know, non-residential construction starts' management good indicators of -- of how the market is going to come play out this year? How should we think about that?

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

Yeah. I think we're managing a portfolio of -- of products. And while certainly, rebar is very, very key component of that, we do have these other products that are, you know, not -- not tied to ABI and other things. We'd like to look at Portland Cement and cement consumption because cement consumption is more correlated to rebar consumption than just ABI or non-res because there are -- there are a lot of other uses of rebar outside of just non-res.

Certainly, non-res is -- is important. And Portland Cement also has a very, very, you know, good track record of -- of forecast accuracy. And Portland cement, over this past year during the pandemic, has candidly continued to improve or increase their projections going into 2021, you know, factoring in all of the more current economic data. And Portland Cement is -- is showing a modest increase in cement consumption year over year.

So, that -- that gives us encouragement along with all the other factors that we're -- we're watching.

Paul Lawrence -- Vice President and Chief Financial Officer

One -- one point I would add, Andreas, is, you know, geographic spread as well. You know, you look at where we're predominately located in the -- in the Sun Belt areas and, you know, those are clearly the -- the strongest markets from -- from a non-res perspective. Clear, the northeast is -- is -- is weak and has been weak now for a number of years. Those often have some out-weighted impacts to the overall numbers versus our -- our markets.

Andreas Bokkenheuser -- UBS -- Analyst

That's -- that's very clear. That makes a lot of sense. And -- and, you know, one follow up on scrap, if I may. Obviously, you know, we've seen the head -- headlines about China kind of reopening their doors for importing scrap.

I'm sure you saw it as well. How -- how do you kind of think about that? Is this, you know, do you think this is going to be a challenge in terms of your costs if China starts tightening the global scrap market and East Coast U.S. scrap yard kind of exporting more scrap into the world? Or -- or this -- is this an opportunity for you to potentially, you know, man -- ensure your finished steel price at a higher level and -- and kind of protect your spreads if the global scrap market tightens. That's my follow-up.

That's all the questions I have.

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

Thank you, Andreas. As I said earlier, generally speaking, higher raw -- raw material prices, higher finished goods prices lead to much improved results in our business. So, we're not -- certainly not discouraged by that. I -- I think we also have a business model that's designed to -- to flourish because we know that raw materials also fluctuates -- fluctuate within -- within a year and they can fluctuate, you know, certainly year to year.

So, we have a very flexible business model, unlike other products in the steel value chain that have longer lags in order to adjust for raw material pricing. We have a -- a relatively short lag in that regard. And so, we'll -- we'll see. Certainly, we're studying the current phenomena.

And I think just like you have a number of mills that were down for a period of time this past year and they are coming back online as industrial activity and economies begin to heal, I think you have a similar situation that's occurring in -- in China and Asia and other places around the world. So, well -- we'll remain very nimble and flexible to adjust to.

Andreas Bokkenheuser -- UBS -- Analyst

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

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

Thank you. You too.

Operator

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

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Hey, good morning. Happy New Year.

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

Happy New Year, Phil.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

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

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

Yeah. I don't think that pullback was election-related. So, I think it was just really the -- the pandemic. So, you know, that's been slowly healing as time goes on.

And we'll see what happens in the coming months in terms of -- or recent uptick in -- in COVID cases. But I think everybody's learning to live within that environment and I don't think that we'll see the pullback in -- in industrials and other activity like we saw back in March of last year. The backlog's down a little bit, still single-digits. But just, you know, encouraged that it's stabilizing and we do see, you know, much more positive economic activity today than four months ago, six months ago.

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

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

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

Paul Lawrence -- Vice President and Chief Financial Officer

You know if you -- if you take a look at the -- the -- the controllable costs, Phil, or root which is, you know, sort of what we outlined as everything between what we receive from the scale through to -- to the fab locations outside of -- of scrap. We have seen a, you know, a -- a significant reduction in -- in those that are -- that -- that is -- is meaningful. You know, it's -- it's certainly in the, you know, $10 million-plus range of what we've achieved over -- over time.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Thank you. And then -- and then lastly if I could. On -- on your margins, I think you had said, on the U.S. business, on the mills side, margins were starting to stabilize to improve later in the quarter as you -- you push through higher pricing.

Obviously, you -- you've talked about several successive rounds of increases. And then you're saying margins are bottoming in -- in Europe and -- and maybe you've got some fab pressures that you talked about. So, at -- so, at the end of the day, it seems to me like seasonally speaking, you -- you pointed to the volumes being down. But it sounds like spreads could -- could be, you know, reasonably -- reasonably stable given all the -- given all the puts and takes.

It just depends what type of business we're talking about within your portfolio. Is that fair?

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

I think we'll see where things go. It's -- it's early in the quarter. But I think that the margins may stabilize at the end of the quarter. But you still got to -- you still got to push through raw material and the lag effect of price changes.

So -- so, I think to recover back to a stable margin by the end of the quarter is probably a realistic expectation. But no doubt, there's going to be pressure on the margin within the quarter, but very encouraged by markets' escalations in -- in raw material prices. We're -- we're going to make much money as we can. And we're fairly encouraged for 2021 coming out of, you know, a period of time where it's been very, very difficult to get any insight into where the markets were going.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Thank you very much. Good luck.

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

Thank you, Phil.

Operator

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

Tyler Kenyon -- Cowen and Company -- Analyst

Thanks very much. Good morning and Happy New Year.

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

Happy New Year, Tyler.

Paul Lawrence -- Vice President and Chief Financial Officer

Good morning, Tyler.

Tyler Kenyon -- Cowen and Company -- Analyst

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

Paul Lawrence -- Vice President and Chief Financial Officer

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

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

Tyler Kenyon -- Cowen and Company -- Analyst

So, sounds like very little of any has been realized of that $50 million to date.

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

I wouldn't -- I wouldn't characterize it as very little to any. But certainly, take it over the four years, it's going to be back-end weighted.

Tyler Kenyon -- Cowen and Company -- Analyst

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

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

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

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

Tyler Kenyon -- Cowen and Company -- Analyst

Thanks very much. Good luck.

Operator

That concludes our question-and-answer session. Miss Smith, I'll now turn the call back over to you.

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

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

Thank you.

Operator

[Operator signoff]

Duration: 61 minutes

Call participants:

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

Paul Lawrence -- Vice President and Chief Financial Officer

Chris Terry -- Deutsche Bank -- Analyst

Curt Woodworth -- Credit Suisse -- Analyst

Seth Rosenfeld -- Exane BNP Paribas -- Analyst

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

Andreas Bokkenheuser -- UBS -- Analyst

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Tyler Kenyon -- Cowen and Company -- Analyst

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