Commercial Metals (CMC) Q1 2025 Earnings Call Transcript

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Commercial Metals (NYSE: CMC)
Q1 2025 Earnings Call
Jan 06, 2025, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, and welcome, everyone, to the fiscal 2025 first quarter earnings call for CMC. Joining me on today's call are Peter Matt, CMC's president and chief executive officer; and Paul Lawrence, senior vice president and chief financial officer. Today's materials, including the press release and supplemental slides that accompany this call, can be found on CMC's investor relations website. Today's call is being recorded.

After the company's remarks, we will have a question-and-answer session, and we'll have a few instructions at that time. I would like to remind all participants that today's discussion contains forward-looking statements, including with respect to economic conditions; effects of legislation; U.S. steel import levels; construction activity; demand for finished steel products; the expected capabilities, benefits, and timeline for construction of new facilities; the company's operations; the company's strategic growth plan; legal proceedings; the company's future results of operations; financial measures; 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 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-end are referenced to the company's fiscal year or fiscal quarter.

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

Peter Matt -- President and Chief Executive Officer

Good morning, everyone, and thank you for joining CMC's first quarter earnings conference call. I hope each of you had a wonderful holiday season. I will start this morning's discussion with an overview of CMC's first quarter results. I will then provide commentary on current market conditions and share an update on CMC's strategic efforts.

After which, I will offer a few brief remarks on a recent jury verdict reached in litigation against CMC and certain subsidiaries. Paul will cover the first quarter's financial information in more detail, and I will conclude with our outlook for the second fiscal quarter of 2025. We will then open the call to questions. As a reminder, additional information regarding the quarter is provided in the supplemental slides that accompany this call, which can be found on CMC's investor relations website.

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CMC reported a net loss for the first quarter of 175.7 million, or a loss of $1.54 per diluted share, on sales of 1.9 billion. The result included a 264 million after-tax charge for litigation expense as a result of a verdict the company intends to appeal. Excluding this item, adjusted earnings were 88.5 million, or $0.78 per diluted share. From an operational perspective, CMC's underlying financial performance remained historically strong, though down from recent periods.

For the first quarter, we generated consolidated core EBITDA of 210.7 million, producing a core EBITDA margin of 11% and a trailing 12-month return on invested capital of 8.4%. Results in our North America steel group were impacted by economic uncertainty that has weighed on new construction activity and pressured steel pricing and margins. This was partially offset by strong late-season demand for rebar as job sites worked to catch up from days lost to weather disruptions earlier in the year. Our Europe steel group returned to profitability on the receipt of an annual CO2 credit, while underlying business conditions remained challenging, similar to recent quarters.

Excellent cost management continues to be a bright spot, and I would like to commend our team for their ongoing efforts. Profitability for CMC's emerging businesses group softened during the first quarter, driven largely by dynamics we view as temporary in nature, including a lower-margin sales mix and project delays encountered in our Tensar division and a slower truck and trailer market affecting Impact Metals. We do expect to recapture the earnings impact from the Tensar factors later in fiscal 2025. Some of the first quarter weakness was offset by healthy activity in our CMC construction services division and in our performance reinforcing steel division.

Turning now to CMC's markets in North America. Demand for finished steel products was robust during the first quarter with shipments reaching the highest level since the third quarter of fiscal 2023. As mentioned previously, construction activity was stronger further into the calendar year in several geographies than seasonally typical. The stretch of favorable weather across much of the country in October and November provided an opportunity for many job sites to play catch up after enduring weather-related disruptions during the spring and summer months.

In fact, shipments remained higher than expected into the first few weeks of December and only cooled off with the arrival of the holidays. While shipment volumes due to ongoing construction projects were strong during the first quarter, we continued to feel the impact of market uncertainties. Customers remain hesitant to award new contracts, which has resulted in an overhang on steel pricing and margins. We mentioned this reluctance to finalize new work during our fourth quarter conference call, and we saw little change during the first quarter.

Though uncertainty related to the outcome of the U.S. election has been resolved, questions remain about the future path of interest rates and the nature and speed of policy implementation by the incoming presidential administration. As a result of new construction projects being fewer and slower to award, competition has increased for the work that does come to the market, putting pressure on pricing and margins for our steel products. This hesitancy is widespread across most segments of the construction markets, with the notable exception of publicly funded work such as infrastructure.

I should note, however, that the market signals can be difficult to interpret during the seasonally slower period we are currently in, particularly around the winter holidays. The next few months will be key to watch for signs of recovery as we will enter the typical season for contracting new construction work. As we mentioned during our last call, we believe these market conditions are transient in nature and will subside once greater clarity emerges, allowing strong underlying fundamentals to return. CMC's downstream bidding activity has remained resilient, which points to a solid pipeline of potential future projects.

Our internal data is mirrored by external data points, such as the Dodge Momentum Index and insights from recent customer conversations. The Dodge Momentum Index, or DMI, measures the monthly value of construction projects entering the planning phase. Though off from its recent all time high, the index remains 55% above its pre-pandemic average and appears to indicate that project owners are confident that construction activity will rebound as we move through 2025 and are building a sizable pipeline in preparation to act once conditions improve. A meaningful shift in business sentiment gives us hope that we may be nearing a turning point in our markets.

As Slide 6 of the supplemental presentation illustrates, optimism across many sectors has improved sharply over the last two months, driven by expectations for an improved regulatory environment, tax reforms, and policies to support U.S. manufacturing and job creation. In particular, the outlook among construction firms has improved notably as evidenced by ENR's Construction Confidence Index, which recently hit its highest reading over the -- over two years -- in over two years. I would also note that our recent conversations with customers indicate similar optimism about the future.

Outside of the construction industry, both large and small businesses are feeling more confident about the months and quarters ahead. The NFIB's gauge of small business optimism registered the third strongest monthly increase in its 50-year history during November, while two separate measures of corporate CEO confidence also moved up meaningfully. These positive signals give us confidence that it is a matter of when, and not if, our markets return to growth. As we have discussed at length in the past, powerful structural trends will benefit the U.S.

construction markets, including infrastructure investment, reshoring of manufacturing, energy transmission, and transmission build-out, as well as measures to address chronic housing shortages. We believe these trends are in their early stages and will propel construction activity for years to come. Shifting gears to our Europe steel group, conditions were similar to recent quarters. Benefits from an improving Polish macroeconomic environment and supply discipline among domestic long steel producers have been offset by the influx of excess material from neighboring countries, namely Germany.

Total imports of rebar are up 50% on a calendar year-to-year -- year-to-date basis, while flows from Germany have increased by 75%. This foreign supply has more than matched the incremental demand from growing residential construction market and supply restraint from domestic players. As a result, margins remain under pressure. Amidst these difficult conditions, our team in Poland has performed commendably to manage all aspects of its business that can be controlled, taking an opportunistic commercial approach and aggressively managing costs.

Based on our current view of the landscape, we would not anticipate a meaningful positive change in either the overall market environment or CMC's Europe steel group's earnings until an economic recovery develops in Germany or new sources of demand emerge, such as the rebuild of Ukraine. Next, I would like to provide an update on a few of CMC's strategic initiatives. As we have discussed in the past, CMC is taking active steps to achieve our ambitious vision to drive the next phase of value-accretive growth. As outlined on Slide 9, our aim with this strategy is threefold: first, to achieve sustainably higher, less volatile through the cycle margins that are fortified by our operational and commercial excellence initiatives; second, to execute on attractive organic growth opportunities; and third, in a disciplined manner, to pursue inorganic growth opportunities that broaden CMC's commercial portfolio of early stage construction products, improve our customer value proposition, and meaningfully extend our growth runway.

Last quarter, we introduced Transform, Advance, and Grow, or TAG as we call it, our enterprisewide operational and commercial excellence initiative, with the goal of generating a permanent improvement in our margin profile. This program is unlike any ever launched at CMC due to the breadth and depth of its reach, as well as the visibility and the accountability structures built to support it. Every line of business and every support function has been involved in identifying and quantifying opportunities that now include over 150 different initiatives. Currently, we are executing on the first wave of these initiatives and are seeing very strong early results.

One such initiative is a program to reduce alloy consumption and waste. The effort is being led by process experts in coordination with melt shop operators from across our mill footprint. The team is working to minimize alloy costs while continuing to meet product quality specifications. We expect the efforts to date will produce a sustainable benefit of approximately $5 million annually.

In another initiative, we are working to improve our melt shop yields through enhanced technical knowledge sharing, increased scrutiny around measurements and waste, and more disciplined process execution. We expect this effort to produce sustained benefits of between 5 million and 10 million annually. These programs are just two of the larger initiatives that are being executed in the first wave and should provide a useful template for understanding the nature of these initiatives, how they are being delivered, and the overall scope and scale of CMC's broader TAG program. We have several other major operational and commercial work streams now underway that are intended to drive and sustain higher margins through a variety of pathways, including optimized logistics, lower insurance premiums, commercial excellence, and many more.

Progress to date gives us confidence that our TAG-related efforts should provide financial benefit in fiscal 2025 with more to come in the years ahead. We are making solid progress on CMC's key organic growth projects, particularly at our new Arizona 2 facility. As a reminder, this plant is the first micro mill in the world capable of producing both rebar and merchant bar product, and we are navigating the unique challenges that invariably come with any breakthrough technology. Good advancement is evidenced by the fact that our team was able to achieve two consecutive monthly production records at the end of the first quarter.

Output levels should continue to increase as we move through fiscal 2025, and we expect to exit the year at a run rate near nameplate capacity of 500,000 tons annually. Meanwhile, progress at CMC's Steel West Virginia site remains on track, and we are currently on target for the commissioning process to begin in late calendar 2025. On the inorganic front, we remain interested in entering attractive adjacencies for our business where we believe we have a clear right to play and an opportunity to offer immediate value, given CMC's current customer knowledge, market positioning, and operational capabilities. We are targeting segments of 150 billion.

Early stage markets should also benefit from megatrends that are expected to drive construction activity for years to come, which include infrastructure investment, reshoring, the general scarcity of labor, and environmental changes driving increased extreme weather conditions. Before I turn things over to Paul, I would like to make a brief comment on the litigation between CMC and Pacific Steel Group. In its complaint filed in the California courts in 2020, Pacific Steel Group claimed, among other things, various restraints on trade by CMC. A trial on Pacific Steel Group's claims concluded with a jury verdict and judgment in favor of Pacific Steel Group in an amount of 110 million, which was subsequently trebled as a matter of law.

CMC is very confident in how we conduct our business practices, and we were very surprised and deeply disappointed by the outcome of this trial. We are vigorously pursuing all appropriate avenues to appeal the decision. Because this litigation is ongoing, we are very limited in what we can discuss about the case or the potential outcome of the appeal process. Paul?

Paul Lawrence -- Senior Vice President, Chief Financial Officer

Thank you, Peter, and good morning to everyone on the call. As noted earlier, we reported a fiscal first quarter 2025 net loss of 175.7 million, or a loss of $1.54 per diluted share, compared to net earnings of 176.3 million and net earnings per diluted share of $1.49 in the prior-year period. Excluding an approximate 265 million after-tax charge related to the litigation accrual, adjusted earnings for the quarter totaled 88.5 million, or $0.78 per diluted share, compared to 176.3 million and $1.49 per diluted share, respectively, in the prior-year period. Consolidated core EBITDA was 210.7 million for the first quarter of 2025, representing a decline from 313.7 million generated during the prior-year period.

Slide 12 of the supplemental presentation illustrates the year-to-year changes in CMC's quarterly performance. Profitability at our North America steel group was negatively impacted by lower margins over scrap, while adjusted EBITDA at our Europe steel group declined on lower energy rebates. Results for CMC's emerging business group were hindered by lower contributions by our Tensar and Impact Metals divisions. Consolidated core EBITDA margin of 11% remained above historical levels and compared to 15.7% in the prior-year period.

CMC's North America steel group generated adjusted EBITDA of $188.2 million for the quarter, equal to $164 per ton of finished steel shipped. Segment adjusted EBITDA decreased 29% compared to the prior-year period, driven primarily by lower margin over scrap cost on steel and downstream products. Controllable costs per ton of finished steel shipped improved on both a sequential and year-over-year basis, helped by lower freight costs, better cost performance at our Arizona 2 micro mill, and improved fixed cost leverage across CMC's mill footprint. The adjusted EBITDA margin for the North American steel group of 12.4% compares to 13.5% in the fourth quarter of 2024.

As Peter indicated earlier, demand for long steel products was strong during the quarter. Finished steel shipments decreased by 4.4 -- or increased, sorry, by 4.4% compared to a year ago and were up 2.3% on a sequential basis, which compares to a normal fourth quarter to first quarter seasonal reduction of between 4% and 7%. Turning to Slide 14 of the supplemental deck, our Europe steel group reported adjusted EBITDA of 25.8 million for the first quarter of 2025 compared to 38.9 million in the prior-year period. The reduction was driven by lower receipts from energy costs rebate programs.

During this year's first quarter, total receipts amounted to 44.1 million and came solely from an annual CO2 credit, compared to receipts in the prior-year period of 66.3 million from two different programs, 27.7 million from the annual CO2 credit and 38.6 million related to a temporary energy cost reimbursement program. Including the impact of energy rebates, Europe steel group's financial performance improved by 9.2 million from the prior-year period as strong cost management efforts more than offset a 9% decline in shipments and stagnant metal margins. Results for the quarter include approximately 4.7 million in costs related to planned maintenance overhauls and a 1.2 million expense associated with early retirement and layoff costs. Employee-related costs are expected to drive further improvements in controllable costs at the facility as we move forward.

Margin levels have been range bound between roughly $270 per ton and $290 per ton for the last six quarters despite an improving Polish economic environment and positive developments within the Polish construction sector. We would expect margins to remain under pressure until the level of rebar imports begins to recede, a scenario that would likely require an economic recovery in Germany or new sources of demand such as the rebuild in Ukraine. Emerging business group first quarter net sales of $169.4 million decreased by 4.4% on a year-over-year basis, while adjusted EBITDA of 22.7% -- sorry, 22.7 million declined by 26.6%. The decline was driven by a lower-margin product mix and project delays within our Tensar division, as well as reduced truck and trailer sales at CMC's Impact Metals division.

We believe that the reduced profits in the Tensar division incurred during the quarter should be largely recaptured later in fiscal 2025, primarily in the third and fourth quarters. Internally, our annual outlook for the emerging business group is unchanged in the wake of the first quarter disappointing results. Strong project-related shipments of performance reinforcing steel and healthy activity levels in our construction services business helped to offset some of the softness elsewhere in the EBG group. A weaker sales mix during the first quarter led to a 400 basis-point decline in the adjusted EBITDA margin compared to the first quarter of 2024, but we expect recovery for the remainder of the year.

As of November 30th, cash and cash equivalents totaled 856.1 million. In addition, we had approximately 815 million of availability under our credit and accounts receivable facilities, bringing total liquidity to just under 1.7 billion. During the quarter, we generated 213 million of cash from operating activities, which included a $26.2 million release of cash from working capital. Capital expenditures of 118.2 million were largely driven by construction activity related to a Steel West Virginia micro mill project.

CMC's leverage metrics remain attractive and have improved significantly over the last several fiscal years. As can be seen on Slide 19, for the first fiscal quarter of 2025, our net debt to adjusted EBITDA ratio now sits at just 0.6 times. While net debt to capitalization is only 6%. We believe our robust balance sheet and overall financial strength provide us the flexibility to finance our strategic organic growth projects and pursue opportunistic M&A while continuing to return cash to shareholders.

As we look toward fiscal 2025 capital spend outlook, we expect to invest between $630 million and $680 million in total. Outside of normal sustaining investments of approximately $250 million in capex, our 2025 includes substantial dollars related to the construction of Steel West Virginia. As a reminder, approximately $200 million of spending related to this project was deferred from fiscal '24 into 2025. As outlined on past earnings call, CMC targets a prudent and balanced approach to capital allocation.

Our first priority is value-accretive growth that furthers our strategy and strengthens our business. Coming in, in close second is providing our shareholders with an attractive level of cash distributions in the form of both dividends and share repurchases. To this end, CMC returned approximately $71 million to our shareholders during the first quarter as we repurchased approximately 919,000 shares at an average price of $54.83 per share. As of November 30th, we had 353.4 million available for repurchase under our current authorization.

I'll now turn the call back over to Peter for additional comments on CMC's financial outlook.

Peter Matt -- President and Chief Executive Officer

Thank you, Paul. We expect consolidated financial results in our second quarter of fiscal 2025 to decline from first quarter -- from the first quarter level. Finished steel shipments within the North America steel group are anticipated to follow normal seasonal trends, while the adjusted EBITDA margin is expected to decrease on lower margins over scrap costs on steel and downstream products. Adjusted EBITDA for our Europe steel group should be in line with the prior-year second quarter as stringent cost management efforts continue to offset a weak market environment.

Financial results for our emerging businesses group are anticipated to decline due to normal seasonality and be in line with prior-year results. We are very encouraged by our conversations with customers and the optimism they have voiced about the coming quarters. Key indicators of the construction pipeline also point in a positive direction. Outside of construction measures of business confidence, both large and small have improved significantly over the last two months.

The palpable shift in sentiment gives us confidence that the current softness is transient and that we should soon enter a period of renewed strength in our core markets. Before we open the call to questions, I want to reiterate how excited we are about the potential to reach new heights in the future as we execute on our key strategic priorities and deliver significant value for our shareholders. As we move past near-term uncertainty, CMC is well-positioned to benefit from powerful structural trends in North America that should drive construction activity for years to come. I would also like to thank our customers for their trust and their confidence in CMC and all of our employees for delivering yet another quarter of very solid safety and operational performance.

Operator?

Questions & Answers:

Operator

[Operator instructions] The first question today comes from Sathish Kasinathan with Bank of America. Please go ahead.

Sathish Kasinathan -- Bank of America Merrill Lynch -- Analyst

Yeah. Hi, good morning. Thanks for taking my questions. My first question is on the North American steel product shipments.

You mentioned that you saw some late-season construction activity in Q1, which continued into first two weeks of December. And with the Arizona 2 mill ramping up, how should we look at the steel product shipments for Q2 compared to last year?

Peter Matt -- President and Chief Executive Officer

Yeah, I think what you should expect is to see a normal seasonal trend between Q1 and Q2 going into our second quarter for 2025.

Sathish Kasinathan -- Bank of America Merrill Lynch -- Analyst

So, that's generally about 5% to 10% lower?

Paul Lawrence -- Senior Vice President, Chief Financial Officer

That's right, Sathish.

Sathish Kasinathan -- Bank of America Merrill Lynch -- Analyst

OK.

Paul Lawrence -- Senior Vice President, Chief Financial Officer

Yeah, verging on the higher end, given that we're starting from a higher place.

Sathish Kasinathan -- Bank of America Merrill Lynch -- Analyst

OK, understood. Thank you. My next question is on the emerging business group. So, you talked about several large project delays for Tensar.

And can you provide more color on what's driving these delays? Is it limited to Europe? Or are you seeing more broad-based delays across all regions?

Peter Matt -- President and Chief Executive Officer

No, I think -- well, first of all, thanks for the question. I think in this instance the delays are really pretty broad-based. Both in North America and in the rest of the world, we're seeing kind of some project delays. I think -- you know, it turned out in North America, some of these projects, they're lumpy projects, and the delay of these projects has really kind of impacted the earnings in the quarter.

But as we said in the prepared remarks, we fully expect that these projects are going to move forward. We've got, you know, kind of a number of data points around them that give us confidence in that fact. And so, it's a matter of the earnings -- the revenue and the earnings coming in just later in the year.

Sathish Kasinathan -- Bank of America Merrill Lynch -- Analyst

And given that these projects are mostly lumpy, should we assume that the recovery will be more meaningful and, on an annual basis, probably the impact is not that significant?

Peter Matt -- President and Chief Executive Officer

Yeah, I think -- again, we expect Tensar to grow nicely this year. So, we're really shifting what might have been some revenue and EBITDA in Q1 into Q3 or Q4. So, when you look at it on an annual basis, we should see some nice growth in Tensar this year.

Paul Lawrence -- Senior Vice President, Chief Financial Officer

Given that tensar really soil stabilization occurs at the outset of the projects, you know, projects that get pushed from the fall generally are not going to start up until the spring time. That's why Peter outlined, you know, really, it'll be Q3 and Q4, not necessarily a pull-up in Q2.

Sathish Kasinathan -- Bank of America Merrill Lynch -- Analyst

OK. Thanks, Peter. Thanks Paul.

Peter Matt -- President and Chief Executive Officer

Thank you, Sathish.

Operator

The next question comes from Katja Jancic with BMO Capital Market. Please go ahead.

Katja Jancic -- BMO Capital Markets -- Analyst

Hi, and happy new year, everyone.

Peter Matt -- President and Chief Executive Officer

Hi, Katja.

Katja Jancic -- BMO Capital Markets -- Analyst

Maybe first on -- Peter, you mentioned two initiatives under TAG that should generate, I think, combined 10 million to 15 million in annualized benefits. Is this going to be generated in fiscal year '25? Or how should we think about this?

Peter Matt -- President and Chief Executive Officer

So, these are -- those numbers are kind of run rate estimates for what we think we can get to. What I will tell you, Katja, is we expect -- or we will -- we had TAG benefit in Q1, and we clearly expect TAG benefits in fiscal 2025. What we have not done is we've not quantified precisely what 2025 will be in totality from TAG. And that's purposeful.

We are -- you know, we kind of built this program. We're in the middle of a number of phase 1 initiatives, and we're wanting to kind of pressure test what we're doing here before we outline in great detail the program for you. But the intent of this was to give you some perspective on the potential magnitude of initiatives. We said these are some larger initiatives, but remember, we have a backlog of 150 different initiatives, right? So, hopefully, that gives you some perspective.

This can be a meaningful contributor and not a meaningful contributor in isolation. What we're trying to do is we're trying to elevate the margin over time of our business so that we will, through the cycle, generate higher margins. And I think this TAG program is a critical piece of that exercise.

Katja Jancic -- BMO Capital Markets -- Analyst

Can you let us know, of those 150 initiatives, how many of those are considered larger?You know, the 5 million to 10 million type of initiatives?

Peter Matt -- President and Chief Executive Officer

Not -- no, we're not going to do that at this point. It's a clever question, but we're going to stop short of that. Look, what we've said is, and based on my comments, hopefully, you can gather, this is a meaningful effort. And if it's going to elevate our margins meaningfully over the duration of this project, there need to be some serious initiatives here.

And we're confident that we have them. But we need to spend the time and understand this and execute on these before we share too much of that detail with all of you.

Katja Jancic -- BMO Capital Markets -- Analyst

And then, maybe on the capital allocation, you know, when I look at the past few quarters, you've been spending about 50 million per quarter on share buybacks. Is this level sustainable over the next few quarters, given that capex is expected to move higher?

Peter Matt -- President and Chief Executive Officer

We think so. We think so. We've been -- you know, we've been very purposeful in kind of coming up with a balanced capital allocation strategy. And what we aim to do is to be consistent.

And we set this program up -- when we set the share repurchase program up, we said we would execute it over, you know, kind of roughly three years. And that's our intent to do. So, we intend to be in the market on a regular basis, buying our shares. And barring any kind of unusual circumstance, that's what we'll do.

Katja Jancic -- BMO Capital Markets -- Analyst

Perfect. Thank you very much.

Peter Matt -- President and Chief Executive Officer

Thank you.

Operator

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

Philip Gibbs -- Analyst

Hey, good morning.

Peter Matt -- President and Chief Executive Officer

Good morning, Phil.

Paul Lawrence -- Senior Vice President, Chief Financial Officer

Hey, Phil.

Philip Gibbs -- Analyst

Question is just kind of about the second half of the fiscal year in terms of expectations for recovery and just construction overall and what's driving that in terms of specific areas, where it be in industrial or energy or semis. Just trying to understand some of the conversations that you're having, what you're seeing in your order book, that sort of thing, in terms of the viewpoint.

Peter Matt -- President and Chief Executive Officer

Yep. Great question, Phil. Thank you. So, we are optimistic for the back half of our fiscal year, as you note, and I think we are kind of cueing off of some of the general optimism that we're seeing all around us.

You'll note that we introduced a number of additional indices to kind of project the confidence that we feel. And so, we're seeing that in general around us. And then, in our order books, we are seeing a high level of bidding activity. We're seeing backlogs maintained.

And if we tick through some of our end markets, infrastructure is here, right? The spending is on the ground. I can give you an anecdotal conversation I had with a southern state DOT representative, who told me that based on the backlog of activity that they have, they're going to be busy for years to come. So, this is kind of a multiyear trend that we've been talking about. If you move to nonresidential, you know, we have been seeing an elevated level of spending and manufacturing, and that seems to be kind of -- that seems to have some renewed momentum in it.

There's a number of projects in the Gulf, LNG projects, that are now moving forward. Some of the chip projects, particularly in the West, appear to be moving forward again. So, you're getting some more of this kind of reshoring energy transition activity that -- these are big consumers of rebar. And if we look at the Dodge Momentum Index from an outsider's perspective, what we see is that it's been at an elevated level for the past -- really the past year.

And that indicates that we should be coming into the period when some of these kind of design phase projects start to become, you know, kind of real. So -- and conversations that we have with our contractor customers suggest that they're also very busy. So, while, you know, there are some sectors of the nonresidential space that we think will remain a little bit lackluster, we think, in general, the demand is setting us up for, again, in this case, kind of multiyear strong demand. And lastly, even in residential, I know there's been a lot of conversation about interest rates, but interest rates are moving down.

And we do have this deficit of 2 million to 4 million homes in North America that needs to get addressed at some point. So, again, these are data points, but they suggest to us that the tipping point is near, and we're very optimistic about that.

Philip Gibbs -- Analyst

Thanks. And then, secondly, just on the market conditions as we come into the new year, any visibility on where you think scrap may settle out over January here?

Peter Matt -- President and Chief Executive Officer

Well, it's interesting. We -- I will say scrap has been a bit of an enigma for us. We've been thinking that it was hitting bottom for a while. We were surprised to see scrap down in December.

The latest indications that I've heard are, you know, flat to up 20 for January, but that remains to be seen. I think the -- you know, as we've gotten closer to these data points, it seems like the -- it seems like they grow negative over time. So -- but flat to up 20 is what we've heard. We do still believe that we are very close to the bottom on scrap.

And obviously, a change in the direction of scrap would be a nice catalyst for us in terms of inflecting rebar pricing and merchant pricing.

Philip Gibbs -- Analyst

Thank you.

Peter Matt -- President and Chief Executive Officer

Thank you, Phil.

Operator

[Operator instructions] The next question comes from Mavis Liu with BNP. Please go ahead.

Mavis Liu -- BNP Paribas Exane -- Analyst

Hi, good morning. Happy new year. Thank you for taking my questions. My first question is on the rebar demand outlook.

Within the presentation, you commented on the highway projects and also the housing shortages and their impacts on the rebar demand. Just on the timeline, when do you expect those to start having impact?

Peter Matt -- President and Chief Executive Officer

Yeah, thank you very much for the question. So, on highway demand, it's here. It's happening now. We are very busy on the infrastructure side.

And again, given the structure of the program, we expect that to grow over time. And that is going to be a -- you know, kind of for the next three to five years, we're going to have strong demand on that front. On the residential front, so in 2024, demand was mixed. Single family wasn't so bad.

Multifamily was weaker. If we look at most of the forecasters, including Dodge, what they seem to indicate is that residential will shift back into the positive in 2025 and kind of a small positive uptick in '25 and a much stronger uptick in '26. So, you know, exactly when that occurs, it's not entirely clear. But we're optimistic that the demand there is going to be inclined to pull things forward.

Mavis Liu -- BNP Paribas Exane -- Analyst

Yeah, thank you. That's very clear. Just a bit follow-up on that. So, actually, we are expecting for some new rebar supply capacity to come online later this fiscal year.

What's your view on those additional supplies? And also, do you think the additional demand on rebar can offset those additional supply?

Peter Matt -- President and Chief Executive Officer

Yeah, we -- so, when we look, we look very carefully at this, as you can imagine. We believe that the kind of the real new supply in the market by kind of new competitors in the market, so to speak, is not such a big number. There is, obviously, Hybar is going to be starting up. That's a -- that's one increment, and that's going to happen in the, you know, second half of 2025.

There's an increment that's been put in the market by a group called Optimus. That's already in the market today. So, that's not new capacity as we sit here today. And then the rest of it is, you know, kind of new core and ourselves putting in capacity.

And in most instances, we believe that is replacing existing capacity. So, we are sanguine about the ability to absorb the incremental capacity given the demand profile that we see. And if you think about what we've said in the prepared materials, you can see that from the market that we have today, we expect there to be over a million tons of incremental demand over the next several years.

Mavis Liu -- BNP Paribas Exane -- Analyst

Yeah. Thank you very much.

Peter Matt -- President and Chief Executive Officer

Thank you.

Operator

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

Alexander Hacking -- Analyst

Yeah. Good morning, and thanks for the call. I just had one question. I guess just following up on your last comment there, Peter, your commercial metals have sold around 4.5 million tons or so in North America for the last five, six years, but, you know, you're adding a million tons of capacity between Arizona and West Virginia.

How should we think about the mix of that between, you know, growth in capacity and replacement capacity? And if rebar demand grows strongly, you know, can CMC ultimately sell 5.5 million tons, or there's a chunk of it that's just going to be a replacement? Thank you very much.

Peter Matt -- President and Chief Executive Officer

Yep, thank you very much. So, Arizona, let's just start with Arizona first. Arizona, if you go back a few years, you know we had a plant in California, which we kind of idled and then ultimately sold the property on, right? So, Arizona 2 is really the rebuild of that capacity. So, we don't view that as kind of incremental capacity from CMC.

We're kind of replacing obsolete capacity that we had. And if you look at the kind of split of what we're expecting to do in Arizona 2, 350,000 tons are expected to go to rebar, 150,000 tons are expected to go to merchants. So, it's exactly offsetting the California capacity. If we go to West Virginia, the Northeast is an area where we are kind of underrepresented from a share perspective.

And so, our perspective on that market is there is room, given the demand and the likely demand growth for -- in that market for us to expand capacity a bit with our existing footprints. So, there is some expansion in the case of the West Virginia business. But again, we think it's manageable when we look at our share around the rest of the country relative to that region.

Alexander Hacking -- Analyst

Thanks. I guess just following up, you know, Rancho Cucamonga has been closed for a while now, right? So, there's still an incremental million. I guess, you know, if -- are you planning on idling other capacity, I guess, is more of my question so that -- or if, you know, we get strong rebar demand as we expect over the next several years, you know, you would be able to grow into both Arizona and West Virginia?

Peter Matt -- President and Chief Executive Officer

Yeah. What I'd say is we are expecting, as hopefully you gather from my prior comments, Alex, that we are expecting rebar demand to grow. And so -- and we are the natural kind of party to fulfill that need. And so, yes, it's really built on the expectation that we have a growing market.

To the extent that we do not have a growing market or the market doesn't grow as quickly as we think, we have a system here. And what we like about our system is that we can flex our system up and down to meet the demands in the market. And one thing that I want to be really clear about is that our focus is on value over volume. So, we are going to flex our system to meet the demand in the market.

And I think that will result in a good outcome for us.

Alexander Hacking -- Analyst

Thank you very much.

Peter Matt -- President and Chief Executive Officer

Thank you.

Operator

The next question comes from Matt Dushkin with Wolfe Research. Please go ahead.

Matt Dushkin -- Wolfe Research -- Analyst

Hey, guys. Happy new years.

Peter Matt -- President and Chief Executive Officer

Hey, Matt.

Matt Dushkin -- Wolfe Research -- Analyst

So, just curious on Europe, let's say demand is structurally damaged longer term, and, you know, just for some reason, German demand doesn't fully bounce back, you know, if that is the case, what levers you'll have to pull just beyond the TAG initiatives? Is there anything else you have in mind?

Peter Matt -- President and Chief Executive Officer

Well, again, we've done a lot of work so far. There's always more to do. We have -- as Paul noted in his remarks, we've been right-sizing the operation from a manning perspective. In the event that we were, you know, kind of structurally -- for some reason, structurally damaged over there or could not see a recovery, we could do some -- you know, we could do some more reductions on that front.

And I think we'd have to, you know, kind of turn over more stones and get to just a more bare bones structure until we see a recovery. Now, just the positive side of this is that we don't think the scenario you're positing is the scenario. We believe the scenario is that Germany is going to recover. Europe is going to recover.

There is going to be an end to the war in Ukraine, and that's going to create some demand here. And given the cost position that we built in Poland, which we are very confident is a low-cost position, when those conditions occur, we're going to see profitability inflect nicely up well before what you might expect. And the other thing that I would say is that when you look at Poland -- and we always talk about breakeven. We want to get the business to breakeven.

And when we're talking about breakeven, we're talking about breakeven excluding all of these energy credits and so forth that we've been getting. If we factor those energy credits in, we're actually generating a profit there, and we are cash flow positive there. So, our perspective is this business is a business that has contributed a tremendous amount. To your point on TAG, the Polish team is -- they're great steelmakers, and they've given us a lot of really powerful ideas that can help our network across North America.

So, it's a business that we're really proud of what they've done, and we think there's a bright future for them.

Matt Dushkin -- Wolfe Research -- Analyst

That's all super helpful color. I'll leave it there. Thank you.

Peter Matt -- President and Chief Executive Officer

Thanks, Matt.

Operator

At this time, there appear to be no further questions. Mr. Matt, I'll now turn the call back over to you for closing remarks.

Peter Matt -- President and Chief Executive Officer

Thank you. At CMC, we remain confident that our best days are ahead. The combination of the structural demand trends we have noted, operational and commercial excellence initiatives to strengthen our through-the-cycle performance, and value-accretive growth opportunities create an exciting future for our company. We are committed to a balanced capital allocation strategy that includes investments in our company's future and a return of capital to our shareholders.

Thank you for joining us on today's conference call. We look forward to speaking with many of you during our investor calls in the coming days and weeks. Thank you very much.

Operator

This concludes today's CNC conference call. [Operator signoff]

Duration: 0 minutes

Call participants:

Peter Matt -- President and Chief Executive Officer

Paul Lawrence -- Senior Vice President, Chief Financial Officer

Sathish Kasinathan -- Bank of America Merrill Lynch -- Analyst

Katja Jancic -- BMO Capital Markets -- Analyst

Philip Gibbs -- Analyst

Phil Gibbs -- Analyst

Mavis Liu -- BNP Paribas Exane -- Analyst

Alexander Hacking -- Analyst

Alex Hacking -- Analyst

Matt Dushkin -- Wolfe Research -- Analyst

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