Tensar Corporation (CMC) Earnings Call Transcript & Summary

Hello, and welcome, everyone, to Commercial Metals Company's financial community conference call to discuss its acquisition of Tensar Corporation. 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. Turning to Slide 2. I would like to remind all participants that during the course of this conference call, the company will make statements that provide information other than historical information and will include expectations regarding economic conditions, effects of legislation, U.S. steel import levels, U.S. construction activity, demand for finished steel products, the company's future operations, the company's future results of operations, financial measures, capital spending and the pending acquisition of Tensar. These and other similar statements are considered forward-looking and may involve certain assumptions and speculation and are subject to risks and uncertainties that could cause actual results to differ materially from these expectations. These statements reflect the company's beliefs based on current conditions but are subject to certain risks and uncertainties, including those that are described in the risk Factors and forward-looking statements section of the company's latest annual report on Form 10-K. Although these statements are based on management's current expectations and beliefs, CMC offers no assurance that these expectations or beliefs will prove to be correct, and actual results may vary materially. All statements are made only as of this date. Except as required by law, CMC does not assume any obligation to update, amend or clarify these statements in connection with future events, changes in assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances or otherwise. Some numbers presented will be non-GAAP financial measures, and reconciliations for such numbers can be found in the company's earnings release or on the company's website. Unless stated otherwise, all references made to year or quarter end are references to the company's fiscal year or fiscal quarter. And now I will turn the call over to the Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, Ms. Barbara Smith. Please go ahead.

Good morning, everyone, and thank you for joining CMC's call to discuss our acquisition of Tensar Corporation, which we announced this morning. This is a compelling transaction that advances CMC's strategy to expand our leadership position in construction reinforcement. As you will note on Slide 3, Tensar will create a powerful platform for incremental growth into complementary high-margin engineered products that target our largest core market, construction, where CMC has solid brand recognition and strong existing relationships. Once complete, this transaction will strengthen CMC's position as a global reinforcement solutions provider, able to address multiple early phases of commercial and infrastructure construction, including subgrade foundation and structures. Tensar will bring us high value-added products as well as a portfolio of soil preparation solutions that are environmentally superior to conventional techniques and is a business that enjoys consistently high EBITDA margin. If you turn to Slide 4, this acquisition is strategically compelling for CMC. Tensar is an industry leader with high and stable margins. It has unparalleled innovation capabilities, including dozens of global patents on products and processes that originated, and it offers its customers a best-in-class value proposition. Tensar is a hand and [indiscernible] fit with our core concrete reinforcement business, adding complementary ground reinforcement solutions that occurs at a similar time to site concrete work, our understanding of customers' needs and ability to offer cost-effective, environmentally friendly, early stage solutions at this adjacent phase of construction makes this an attractive and relatively low-risk expansion for us. Tensar will increase our addressable market meaningfully by an estimated $13 billion and extend our growth runway. It will enable us to offer high value-engineered solutions earlier in the construction process in markets that are currently underpenetrated with significant long-term global potential. Tensar will deepen our exposure to markets we already participate in, such as North American and European concrete roadways, public infrastructure and general construction. It will also broaden our reach into new markets for CMC, including asphalt roadways, temporary access roads, rail beds and retaining walls. Tensar currently operates a well-established global manufacturing network that will provide CMC with exposure to a number of highly attractive overseas markets, many of which are growing rapidly. The business model is not capital intensive, which allows for rapid expansion into new geographies while requiring modest investments. Finally, Tensar's products have a strong environmental profile that complements our own. Its subgrade reinforcement soil stabilization products can reduce construction project-related emissions by up to 30% compared to conventional methods, making it a good fit from this perspective as well. Moving on to Slide 5. I'd like to take you through the core pillars that make Tensar such a good strategic fit. Before turning the call over to Paul to review the financial aspects of the transaction. As you can see on Slide 6, Tensar is a leading global provider of subgrade soil reinforcement solutions that project owners and contractors use to improve soil before construction begins. Tensar has 2 main customer offerings, geogrids and Geopier. Geogrids are polymer based products used for ground stabilization, soil reinforcement and asphalt optimization. They are installed under the aggregate layer and effectively lock the aggregates in place, which greatly increases the stability and integrity of the ground underneath application sites, which includes roadways, public infrastructure, industrial facilities and many other types of construction. The ground enhancement provided by this product generally allows for significantly less site excavation and aggregate usage, thereby decreasing construction time, expense and the project owners cost of lifetime maintenance. Tensar originated geogrid technology and today holds 14 patents in over 40 trademarks in the United States as well as a number of foreign patents. Since its inception, Tensar has remained at the forefront of innovation, product education and creation of customized solutions to meet the specific needs of project stakeholders. I would encourage conference call participants to visit Tensar's website, which provides extensive information as well as videos highlighting geogrid applications, benefits and project success stories. Shifting to Tensar's other major offering, Geopier. Geopier's are ground improvement solutions that increase the load bearing characteristics of structures and working surfaces and can be applied in soil types and construction situations in which traditional support methods like pilings are impractical or would make a project infeasible. Tensar holds over 140 global patents related to its Geopier technology and operates its business on a licensing model, designing and engineering a customized Geopier solution that is licensed to contractors for each project installation. Additional detail can be found on Tensar's Geopier website, including project case studies that outline the value this technology brings to project stakeholders. Geogrids are approximately 2/3 of its EBITDA and Tensar continues to innovate products at a wide range of performance and price points. Geopier's constitute the other 1/3 of EBITDA and revenues have grown at 9.2% compound annual growth rate since 2010, a rate nearly 2.2x faster than U.S. combined public and nonresidential construction spending. Looking at Slide 7. You can see that Tensar has a well-developed manufacturing footprint and commercial organization, giving it global reach. North American sales comprised 61% of revenue. Europe, the Middle East and Africa make up 23%, with the remainder split between Asia, Latin America and Russia. The company has 4 Geogrid manufacturing sites, 1 each in the U.S., U.K., Russia and China; and 2 geo peer engineering sites in the U.S. and Germany. Its Geogrid manufacturing network is more extensive than competitors, enabling it to serve customers worldwide. Strong logistical capabilities and teams of engineers who provide direct support during the design and implementation phases, increased Tensar's desirability to climb. Turning to Slide 8. One of Tensar's chief attraction for CMC is the relatively underpenetrated end markets for its Geogrid and Geopier solutions in markets that are complementary to our own. According to an extensive study performed by LEK Consultants, the addressable market for global soil preparation needs for the world's roadways infrastructure, energy and structures is approximately $11 billion. Of these, the energy segment is most highly penetrated at only 8%, and the other segments are currently in the mid- to low single-digit range. Looking at the market drivers in the right-hand column and the compelling economics and environmental benefits of geogrids solutions compared to conventional solutions, we believe Tensar can significantly increase its market penetration in the coming years. Meanwhile, the addressable market opportunity for Geopier, currently $2 billion, is equally attractive. In both cases, we believe CMC's reputation and relationships with project engineers and contractors will accelerate, first, product consideration and then product adoption as Tensar soil preparation solution. As I'll discuss on Slide 9, one of the reasons we were attracted to Tensar is that they, like CMC, are innovation leaders, who use value-added advances to win market share. Tensar created a geogrid category and since it's founder filed for the first patent in 1978 has created an unparallel portfolio of engineered products in Geopier technology. It's product development is stronger focused on customer needs and is well protected with patents for both geogrid and Geopier offerings. Tensar value-added product portfolio produces strong and stable margins, the company has sustained EBITDA margins in the mid-20% range and have a greater than 75% free cash flow conversion. It is noteworthy that approximately 60% of its revenue is from patented, that is non-generic products, and that it maintains margins greater than 20% throughout the great financial crisis. The fifth pillar, as shown on Slide 10, is the alignment of Tensar's product benefits with the interest of all stakeholders in the construction process. All participants, governments who sponsor infrastructure projects, private project owners, project engineers and contractors want to minimize costs by reducing excavated materials, aggregates and asphalt while speeding construction. And public sector and private owners certainly want to minimize total cost of ownership and life cycle maintenance as well as maximize the life of their assets. All of these critical objectives are met by using geogrids and Geopiers in place of conventional construction techniques. The environmental efficiencies of using geogrids and Geopiers are an additional and increasingly important incentive. Taken together, we believe this alignment of interest will be a powerful accelerant that enhances Tensar's product adoption. As noted on Slide 11, strong secular tailwinds position Tensar for success. The recently enacted U.S. Infrastructure Bill, when state, local and federal funds are fully committed, it's expected to increase Tensar's revenue by 20%, even assuming no additional market penetration gains. Internationally, Tensar can economically access major road building opportunities in emerging markets, including India and South Asia. As a more efficient construction methodology, Tensar's products significantly reduce manpower requirements for site execution and aggregates haulage. The green benefits and low market penetration are additional catalysts that support near-term growth. From an environmental perspective, usage of Tensar's products can reduce construction-related CO2 emissions by up to 30%, which is a feature we expect to become increasingly compelling to customers going forward. As shown on Slide 12, Tensar well executed and highly efficient go-to-market strategy was another important attraction. Like CMC, Tensar is disciplined in how it pursues revenue, recognizing that its full suite of proprietary products and engineering support are attractive to clients. Since our first goes broad with an array of product awareness and educational efforts. It then uses proprietary data sets and CRM tools to analyze and identify projects that are likely to need its projects, for example, identifying large products -- projects that will be built in areas with poor soils that will need treatment before concrete is poured or structures that will need significant soil stabilization and are thus good candidates for Geopiers, and then reaches out directly to those project sponsors, owners and engineers. This approach leverages the attractiveness of Tensar's products, putting it in direct contact with project decision makers and maximizes the effectiveness of its marketing and technical personnel. We believe this commercial model is ideally suited to Tensar's value-added engineered products and is a strong engine for growth. Now turning to Slide 13. The strong sustainability of Tensar's products was an added benefit to this transaction. Geogrids and Geopiers can substantially reduce the excavation that is required in the aggregates that are needed to improve project site. The resulting reduction in CO2 impact can be significant, averaging 30% less according to Tensar's calculation. Tensar is also efficient in its manufacturing processes with minimal material yield loss as it reuses more than 99% of its scrap. As you will see on Slide 14, the addition of Tensar will create a powerful global provider with a range of early phase construction reinforcement solutions. It will expand our total addressable market and extend our growth runway into an adjacent market that we know well and where our brand and relationships can be substantial assets. Tensar's business is aligned with our strengths, including a shared customer relationship-focused commercial culture, value creation through innovation, expertise in reinforcing technologies and, of course, operational excellence. And it enhances our sustainability profile, enabling project engineers and owners to reduce carbon emissions significantly compared to conventional soil stabilization techniques. For all these reasons, we see Tensar as a strategically aligned acquisition that builds on CMC's core, and we are tremendously excited about it. Before turning the call over to Paul, I'd like to give you one example out of many of how the acquisition of Tensar complements and expands CMC's own offerings into the construction market. Slide 15 illustrates a fairly standard distribution warehouse and the multiple points at which CMC touches the project. Our current reinforcement solutions are used in the foundation, parking areas and walls. Our merchant and wire rod products are further fabricated into sealing joist, [ racking ] systems, conveyors and roof panels. Most on the call may not realize that our construction-related products business also supplies the PPE, concrete forms and tools used on site. Today, we participate in many areas from the ground up. The addition of Tensar will provide CMC with the ability to offer customers valuable reinforcement solutions at the subgrade level as well. We will be the only market participant with an offering that covers the project's reinforcement requirements from soil to roof, making CMC a unique solutions provider for all project stakeholders. Now I'll hand the call over to Paul to discuss the financial aspects that make this transaction even more attractive for shareholders.

Thank you, Barbara, and good morning to all on the call today. As you can see on Slide 16, Tensar is a financially attractive business that has produced steady returns, which we think will be enhanced as part of the CMC family. Due to the value-added proprietary nature of its products, Tensar has consistently earned higher EBITDA margins generally in the mid-20% range. We are acquiring this business at a multiple of roughly 8.4x the forecast 2021 EBITDA, inclusive of cost synergies, which represents a discount to comparable building materials and construction material companies. We are forecasting full calendar year 2021 EBITDA of $60 million. Based on the attributes of Tensar's business that Barbara discussed, we believe we can achieve significant growth over the next 5 years through the commercialization of existing and new products and baseline growth in key end markets, and that is exclusive of the impact of the U.S. infrastructure package. This acquisition will take our net leverage from 0.8x at fiscal 2021 year-end to approximately 1.4x on a pro forma basis. This is well below our target of up to 3x for compelling acquisitions such as this one or even are through the cycle 2x target that we have publicized. I also remind you of the cash flow generative nature of CMC's operations, which produced discretionary cash flow of $380 million in fiscal 2021. Tensar itself is far less capital-intensive than our core steel operations with low capital expenditure requirements, even for product launches, and has free cash flow conversion to EBITDA, as Barbara mentioned, of more than 75%. Turning to the EBITDA waterfall on Slide 17. As disclosed in our press release, Tensar will be earnings accretive in year 1 and will contribute meaningful to our long-term financial model. We see Tensar adding annual EBITDA of $60 million once closed, with attractive prospects for growth once established in CMC's portfolio of offerings. Moving to Slide 18, let me take you through the details of the transaction before moving to your questions. The acquisition is structured as an equity purchase, which means CMC will acquire all assets, including the intellectual property as well as outstanding liabilities. The transaction value is $550 million, will be paid at closing and is subject to the customary working capital adjustments. The completion of this deal is not contingent on any financing arrangements, and we are exploring a number of options which could include opportunistically raising debt funds prior to the close. As we have highlighted in the past, the strategic transformation of our company over the last several years, as reflected in our significantly enhanced earnings and cash flow profile, has been impressive. As a result, after completing this transaction, we expect to continue to fund our in-flight growth projects with organically generated cash flows. Also, because of the strong financial profile we have built for CMC, we expect our net debt to EBITDA to remain modest, around 1.4x at transaction close. Turning to synergies, we have clear line of sight to approximately $5 million of cost benefits, which we anticipate success executing on. Using as a reference point, CMC's success in identifying additional synergies during the Gerdau asset integration, there may be opportunities to achieve further upside, particularly related to commercial activities. There are several exciting avenues to explore that could create significant value, but it's too early to provide a figure on these. That concludes our prepared remarks. And now, I would like to turn the call over to Gary for questions.

[Operator Instructions] Our first question comes from David Gagliano with BMO Capital Markets.

I have 2. The first one is really just from a near-term perspective and just from the business perspective. If you can just drill down a little bit more how this business prices its product, how it's sold, I'm assuming it's on bids, and sort of what's the line of sight over the next couple of years to the EBITDA at the company and how do we get there? I'm assuming it's sort of a fee-based business model or something like that. That's my first question to talk a little bit about how the model works. And also where it will fit in, by the way, to the Commercial Metals current reporting structure? That's my first question. And then I have a follow-up.

Great. Thank you, David, for joining and for the question. Generally, we don't get into a lot of specifics around pricing. But there are the 2 product lines, the geogrids and the Geopier. And the -- I'll start with the Geopiers because it's really an engineered solution where it's a licensing fee and then there are certified installers, who actually complete the installation. On the geogrids side, it is a market-based pricing type of product. And it is -- there are different pricing based upon the different types of products that are offered. We mentioned the raw material component to it. That's certainly a factor that's taken into consideration, but it's based upon normal market dynamics in terms of determining the pricing as well as the proprietary nature of the product.

And David, with your respect to your question on the reporting structure, at this stage, we have not concluded on exactly how we'll be rolling this into our financial results. And so more to come on that as we get down the road on the transaction.

Okay. And then just my follow-up. It's a bigger picture strategic/capital allocation question really and just playing devil's advocate or cynical a little bit here. You mentioned 8.4x for this company, which is lower than the typical building and construction multiple, but it is higher than Commercial Metals' multiple. And $5 million of synergies on a $550 million base isn't massive. And then we've got the EBITDA contribution uplift is nice. It's not -- again, it's sort of 8%-ish or something based on our numbers versus our current estimates. So the question is really, is this the first move into more building and construction-related acquisitions to try to re-rate the company more towards a building construction multiple, which seems to me would require more acquisitions to get to that critical mass? Or is this just very specific to the opportunity here?

Thank you, David. I'll start, and Paul has any addition, he can certainly add that. Clearly, we start with what our core expertise is in construction and reinforcement, its core and key to Commercial Metals. And so, we want to make sure that we have the market expertise or manufacturing expertise, innovation, whatever our core capabilities are to bring to bear. But as I alluded to in my remarks and as we indicated in our Investor Day a little over a year ago, we are always looking for attractive growth opportunities. And we believe Tensar, with the large addressable market and the low existing penetration in those markets, provides a great opportunity for growth and candidly is part of the justification for the slightly higher multiple that we paid in this instance. But in addition to that, it does open up as we integrate this business open up other opportunities that may exist, all aimed at providing better solutions to our customers and feeding off of our core capabilities. Maybe I'll elaborate even further to your point of re-rating the company. I think if you look at Tensar with a high margin, the low capital intensity and the increased free cash flow of this business, to the extent that we can add other businesses like that, we would definitely expect to see our multiple expand over time.

The next question is from Seth Rosenfeld with Exane BNP Paribas.

If I can ask one, starting out with regards to the outlook for commercial synergies, I think in the presentation, this is kind of reference here and there, but could you give us a bit more detail on to what extent the business can really leverage each other to expanding market share in North America and Europe, principally looking broader field? Is there a view that you could see actually integration of sales teams they continue to operate in parallel for the time being [indiscernible]?

Yes. Certainly, we look forward to the very strong commercial team from Tensar joining together with what we think is a highly capable commercial team here at CMC. And the idea is 1 plus 1 equals 3. And if you look at the 2 companies, one of the things that was very attractive to us, there is a lot of overlap in the customer base. So customers that CMC is currently supporting as well as customers that Tensar is supporting. In addition to that, there are -- there is the opportunity for new customers, particularly if you think about the asphalt space, which we, CMC, generally don't participate in today. Another aspect of this is the technical nature of the product and the engineered solutions that Tensar provides. They have significant technical expertise, but I would remind the listeners that CMC has a lot of technical expertise as well. We have some specialized products that we've either acquired or we've developed internally like cryo steel with Galvabar, products of that nature, which are also a more engineered solution technical sale. So I think the group are going to be very complementary, and we look forward to bringing them together and exploring all the potential opportunities for synergies, cross-selling, really providing a complete solution to our customers that has a greater value proposition than what they might otherwise get from different offerings.

Okay. Separate question, please. On Slide 6, it's interesting bit showing the sharpening price level rising performance requirements for geogrids, and high strength in 2021 launches. How should we think about that into the margin contribution of the more recent product launches and what that would imply for the EBITDA run rate going forward, please?

Thank you, Seth. It was a little bit difficult to hear your question. I don't know, if it's a technical difficulty on our end or your end, but hopefully, I heard it correctly. Tensar has a long history of continuously improving your products in each generation of products presents better and new features for the customer thus you can see the higher value proposition leads to a higher, higher margin for the business, um, but each generation of products is continued to be available and depending upon the application and the project need, you even select from, I'll call it good, better, best. And part of the opportunity is if a customer is familiar with one solution, maybe we have another solution that offers additional features. And so really bringing that technical expertise together with site-specific needs and issues, we can design a solution that is tailor-made for whatever the customer needs.

Great. And just one last one, please. Obviously, on Slide 8, a big focus is on the growth of penetration for these products. What do you view as the key driver of that going forward? Is it ultimately better customer education? Or is it growth and your capacity on organic fund or further M&A within the downstream engineered products, please?

Our materials today are really aimed on what we can do with this specific acquisition, not talking about potential other growth opportunities that might be available going forward. And we are in the construction business. Tensar is in the construction business, new product adoption is accomplished through a measured adoption rate and we think when you team CMC's commercial relationships, which are very, very strong. The track record of CMC in innovation, the track record of Tensar in innovation, customer service, that those 2 things combined will assist and aid in that penetration and adoption rate. Tensar was under a different ownership structure, which prioritized cash returns to shareholders. And under our ownership, we will balance the priorities and the cash return to shareholders, but we will also invest in the tools and the things necessary to continue to promote the product and increase that adoption rate. You combine that with all of the benefits of the product, especially the green benefits and the project contractor and owner benefits, whether it's a reduction of construction time, the construction costs, the fewer resources in terms of excavation, aggregate consumption, all translating into significant green benefits, not only in the initial construction phase, but the life cycle green benefits. It's just such a compelling opportunity. And I think when you combine the strength of both the commercial organizations and our reach that we can really accelerate this adoption rate over time.

The next question is from Timna Tanners with Wolfe Research.

A question and a follow-up. The first question being about the -- just to understand the industry a little bit better. First off, since you described how compelling the company is, its growth and its green aspects, anything you could tell us about why they wanted to sell and a little bit more about the industry dynamic? Is it very fragmented? Are there high barriers to entry?

Thank you, Timna. I appreciate your question. That was probably a couple in there. So hopefully, I'll catch them all. So the Castle Harlan, this was, of course, a portfolio company and a fund that they were as we understand closing. So this created an opportunity for them to sell the asset and made it a really interesting opportunity for us. And as far as the industry dynamics, Tensar is the largest player. There are others. They tend to have products that are really, I think, what Tensar would put more in their low-end, lower-value products. They do not have the established track record of R&D and innovation that Tensar has. So they're more me-too copycat. As far as barriers to entry, we think it's significant from the innovation, investment and R&D require the manufacturing process, interestingly enough, is much lower capital intensity than what you're familiar with on the steel side. But the real barrier is the upfront R&D required to develop these products.

Okay. That's really helpful. And then I wanted to -- the second part of my, second question is just kind of returning to the 17th slide that Paul had. I just want to make sure I understand why you would be using 2020 as the basis for your adjusted EBITDA, if that's the way you're thinking about through the cycle earnings. Because in that case, I'm wondering if you are implying that 2021 is unsustainable for any reason because a number of things I'm thinking happened in that year. One is the defense of the European market against imports. Others would be better up and down in the downstream business. So I'm just wondering, if there's a reason why 2020 is a bigger baseline or if I'm missing something on the way that this chart is laid out.

Yes, Timna, it's a good question. And it really is going to come back to the conservative nature of how we have always managed CMC. First and foremost, we had our Investor Day last year and, therefore, leveraged the 2020 year. And really, we're continuing the story that we laid out with the Investor Day. And ultimately, that is the purpose for using 2020. Now, if we dive in a little bit deeper to how these assumptions were developed, we recognize that we are in a cyclical business. And again, given the conservative nature of how we developed and published these targets, we use 10-year averages looking back. And I agree with you that there are some dynamics that certainly have changed in those 10 years versus what we see today. We have the European protection, which you mentioned. We also have a different dynamic in the market after the consolidation activities in the long steel in the North America as well. And both of those things should allow for margin expansion. However, until we've gone through a revised cycle, we're not willing to commit to exactly what the benefits of those types of things are. What we can be confident of is certainly the dynamics have changed, and they should, based on other industries, promote a higher-margin environment. But more to the point of this chart is just to continue to show the growth opportunities that we have with CMC and whether it's the project Danieli 3 project that is now producing results, the Arizona 2 project that is coming on in early '23 or now the exciting opportunities with respect to Tensar, the growth that we can layer on top of the historical results is impressive.

Thank you, Timna. I would further add that there's not -- nothing has changed in the current market from what you heard us talk about as we concluded our fiscal year, we're still very optimistic and bullish for 2022. And this is really trying to reference back to that Investor Day and build from there. And as Paul pointed out, looking at a 10-year history, which, each year going forward, is going to re-rate that 10-year history.

The next question is from Sathish Kasinathan with Deutsche Bank.

My first question is on Slide 8, where you talk about the low single-digit penetration levels today. Where do you see this trend in future? So where do you see the penetration levels 5 years from now? What kind of growth rates should we expect? I know in Slide 17, you have assumed some growth from Tensar. So any color you can provide?

Until we get in and analyze together with the Tensar team, it's hard to commit a specific growth number by each of these various categories. But suffice it to say, if you look back at, I think the example we gave on the Geopiers where they've been growing at 9% per annum, which is significantly higher than GDP growth, I think you can use that as a good barometer going forward. We would expect, as I said, with our commercial expertise as well as theirs as well as providing additional support for growth initiatives, that we can accelerate the penetration and move these to more meaningful penetration over time. But at this point, we need more time to get in and target specific goals by year or, say, 5 years from now. So our projections were really based upon the track record, primarily based on the track record that Tensar has had as well as the -- just the structural market situation with the infrastructure coming in and so forth.

Okay. So the 9% growth that you talked about is more for the Geopiers. Anything for the geogrid or for the total company on the historical growth rate?

The growth rate for the grid activity has really been in 2 pieces. One is, as Barbara talked about in terms of the new products and higher product margin, that is achieved on the new products as well as the volume increase. Again, both of those provide an attractive top-line growth in that space that is well above GDP and is in the 5% to 7% per year growth rate.

I don't know, if it was clear, Sathish, there's a couple of product launches that are underway and planned for this coming year. So those all play into the margin as well as the top-line growth.

Okay. My second question is on the -- is the funding for this equation. You mentioned that you're looking at various funding options, but any initial thoughts on what the mix of debt versus cash could be, just for modeling purposes?

Obviously, the markets today, Sathish, are quite attractive and receptive, and we look to potentially utilize that very attractive market in early part of 2022. But at this stage, we'll reserve right until we actually enter the market.

The next question is from Phil Gibbs with KeyBanc Capital Markets.

So this is clearly, from what you all have said, a non-rebar type business. Is the baseline raw material for these products more of chemicals-based solutions? I think you mentioned polymers.

Yes, it's a polymer, so it's oil derivatives.

Okay. And that's largely what drives the ups and downs in terms of the raw materials and the cost for them?

It's really been stable over the period of time outside this recent rise in commodity pricing, Phil, otherwise, the commodity input price for the polymers over the 5-year history has been very stable.

Much the same as in our existing business, raw material price fluctuations are easily absorbed into the product pricing in the market.

Okay. And then as we think ahead to when this closes, it seems like it's reasonably imminent given that there's no direct overlap with the products that you currently sell. How do we think about this being tucked into your business in terms of segmenting given that, I think, investors would want to see how you're executing against your targets, and you obviously have some of these locations outside the U.S.?

Yes. So well, the regulatory process will be primarily in the U.S. and Russia. The U.S., we would anticipate to be fairly straightforward. As you point out, there's really not a major overlap in terms of this business and our existing business. Of course, we have holidays coming up, so that may slow it a bit. But the process overseas, we anticipate to be roughly a 90-day time frame. So first calendar quarter of next year is probably a proper way to think about the time frame for closing. And as far as Paul said earlier, we haven't yet worked through all the segment reporting. And as the teams work and figure that out and then, of course, get that blessed by our auditors, we will be more forthcoming with you all on how that's going to roll up into our financial statements. Clearly, we have our next quarterly release in early January, and we can potentially give you a little more insight at that point in time. But I think just like the Gerdau acquisition, we were very transparent in the performance and the integration results that we see when we do transactions, and we would anticipate being fully transparent here on the contribution that's being made by this acquisition.

And if I could get one more here. In terms of the fact that geogrid looks specifically very global in nature, there's a diversification in terms of where you're producing this product. And I know that you said you want to make some base-level investments as you grow this business. Are there specific regions that are adopting this product or solution quicker than others? And how does the U.S. adoption compare to the European adoption, that sort of thing? I mean where is this taking off relatively speaking?

Well, Tensar's business specifically is pretty straightforward in here that 60% of the current top-line is coming from the U.S. market. And if you ever followed a R&D company that's developing new products and then expanding and growing that, you start in one geography and you expand from there, Europe being the next largest market for these products. But we see great potential in other markets, and the same attractive value proposition would be interesting in those other markets just as it is in the U.S. and Europe. We see a lot of opportunity for further growth in Europe. Some of the competitors, interestingly, are foreign competitors. So they see the opportunity in their home market as well as international markets. So I think, it's really a function of just the growth where it started and where they went next, but we see ample opportunity in all the markets that Tensar is currently participating in and as well as potentially even beyond markets that they have some participation today.

The next question is from Alex Hacking with Citi.

I have a couple of questions around growth. Firstly, something kind of super basic. Is the fundamental competition for geogrids effectively construction sites that don't use fabricated-type products, they're just using compacted gravel and soil and whatever? And so this is really about, as you grow the business, about customer education? Or is it more about taking market share away from someone else?

It's a lot -- it's very much a lot about customer education and understanding of that value proposition that it can, by using the solution, it can lead to faster construction time, less excavation, less aggregate consumption, overall extended life cycle because using this product also allows for better performance over time and less maintenance over time. We actually have used this product on one of our greenfield sites, a greenfield fabrication site that we constructed a number of years back. And we have been really pleased with the performance of that overall. So it is a bit of education. And once customers have experience with the product, if we think the repeat buy of the product will be very high and has been -- that has been an attractive picture for Tensar thus far.

It's good to hear that you guys actually use the product. And do you -- is this like a cross-selling opportunity? Is that how we should think about it? Or is it really stand-alone sales organizations?

Well, obviously, there's existing stand-alone sales organizations. There's clearly product knowledge and expertise at Tensar that we would not have that level of expertise within Commercial Metals. But we do see ample cross-selling opportunities here. We see ample opportunities where we're making a conventional sales in CMC. We can bring the Tensar expertise and actually gain a larger share of the wallet on that particular construction site. There's some interesting AI that Tensar utilizes and other tools, commercial tools that they utilize that we think could have reverse synergies back into CMC. So there's a lot there that we are really excited about to explore.

Okay. And then just finally, as you look to expand the business at some point, I think you already alluded to this, but I would assume that it's very capital light. It's really just about getting sales and then finding people.

Yes. So 3 components. It's the strong R&D, which develops these innovative proprietary products with very attractive features. You then have the technical engineering expertise that is part of the selling opportunity. But from a manufacturing perspective, to expand the manufacturing is much less capital intensive than traditional steel making. However, there are proprietary or trademark trade secretive elements of the manufacturing process. So it's not that there aren't -- there is an innovation in the manufacturing or expertise needed, it's just the sheer cost of the equipment is a much lower capital-intensive equation than traditional -- our traditional business.

The next question is from Curt Woodworth with Credit Suisse.

Barbara, a question on the Infrastructure Bill. So you discussed that Tensar revenue could go up 20%. Is that at a total company level? Or would that just be, I guess, for North America because that would imply 30% to 35% growth, I guess, specifically to North America? And then given that leverage and, obviously, there's some tangential synergies or overlap between the businesses, can you just comment on how you see the Infrastructure Bill kind of overall benefiting your kind of mill level business?

Okay. I want to make sure I'm capturing you correctly, Curt. But -- so I'll start with our traditional business. We believe that the Infrastructure Bill is going to present significant opportunity for demand for our base products. We think that the bill, by the time you get through all the upfront project stuff, really starts kicking in the end of calendar '22 into '23 and beyond. It's obviously multiyear, so it's going to really extend what is already a really attractive construction market. There are various estimates as to how much additional steel will be needed to support the Infrastructure Bill, anywhere from 1.5 million to 2 million tons of rebar, as an example, on a market that currently roughly 8 million ton market. So it's substantial. And I think the Tensar opportunity is twofold. If you think about that and say that there's similar opportunity for the application of these products, then you have a natural amount of growth that can occur for Tensar as it relates to just the increased funding for infrastructure. And then you layer on the adoption rate or penetration rate opportunity, which I think when you combine the -- all the benefits that these products can provide as far as construction time, construction costs and all of that, it's a multiplicative type of growth opportunity, infrastructure plus penetration. And as far as other markets around the world, it's going to be a different dynamic. But you have, in emerging markets, infrastructure need to build out the infrastructure in emerging markets is obviously very significant. And we've been enjoying that in Poland for a number of years and anticipate that continuing in Poland. But then these products can -- are already expanding into other high-growth markets. So we just, we see a tremendous amount of potential, not only from natural growth in all of these markets, but also by increased use and increased penetration based upon the attractive features of these products.

Okay. And then, again, just to clarify where you said Tensar's revenues go up by 20% from the Infrastructure Bill, was that total company? Or is that just specific to the North American component?

No. We expect that, that growth to be the consolidated growth because we're, as Barbara said, we're familiar with the U.S. infrastructure package, but there's already EU a year ago put in their infrastructure-related growth investment. So that 20% is across all of the revenue.

Okay. So that would imply about a 30% to 35% benefit to the North American business just from the Infrastructure Bill, correct?

But there's also infrastructure growth elsewhere. That's what I'm saying, Curt, is that it's across geographies.

Okay, okay. All right. Because it just states specifically impact the U.S. package is 20%, but understood. All right.

The next question is from Sean Wondrack with Deutsche Bank.

Just quickly on the business, I appreciate all of your help here. It sounds like there might be a service element and somewhat of your proprietary products given that 60% of your products are patented. So I was curious how that kind of works. And is this a backlog business where sort of as backlogs build, your margin builds here? How should we think about that?

The Tensar products are generally not backlog related like our fabrication business. The product can be distributed easily from the manufacturing points to the manufacturing site. The service element that you're talking about is really once the project is authorized and funded and ready for construction, then these products are scheduled to be delivered on site. But there isn't a significant backlog element to it like we have in our fabrication business. And the products are sold on a spot basis to the project at the time that they're ready for the site preparation.

Got it. Understand. And then how long is it between the time something is authorized in order and the actual installation, I guess, or I guess delivery to the site? And does this impact working capital at all for the sort of core business?

Well, there'll be a working capital element to this business like there is with any business with a manufactured product. But fight preparation is the first step in any construction site. So there's a short lead time between when or lag or however you want to think about it between when the project is engineered and authorized and ready to begin. And these will be the first products, much like the foundations, the concrete and the rebar are in the very, very early stages of the construction process. So the working capital is -- it's seasonal, just like the construction season. So this business naturally has some seasonality to the working capital. And as the business grows, the working capital will scale with the growth of the business, but there's a predictable amount of working capital needed on an ongoing basis with some seasonality.

Our final question today is a follow-up from David Gagliano with BMO Capital Markets.

Sorry, just really quickly. Out of a curiosity, I think in Slide 7, I see now there's the 4 manufacturing facilities, 30% of which are in Russia and China and 70% North America, U.S. and U.K. Is there a way to talk about, first of all, 2 things, capacity utilization rates at those current facilities? When will we need to see another one when we have the growth that's expected? And then secondly, just curious, how do you assess the liability risk of something like having a manufacturing facility in Wuhan and Russia in this type of acquisition?

Yes. Thank you, David. We think we have sufficient scalability at the existing sites in the near-term. And so we don't see an immediate need, but we -- that will obviously depend upon the growth and the speed of the growth. Clearly, we are well aware of the risk associated with Russia and China. And I would remind the listeners that CMC has the long history of experience and a lot of countries around the world, I think, 38 historically. So we will take all the necessary steps to further evaluate our risks in those jurisdictions and make whatever adjustments we need to make, to manage those risks properly. And so, it's hard to say at this point in time what changes may occur as a result. But that was all part of our calculus in evaluating this opportunity.

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

Thank you, everyone, for joining us on today's conference call. We look forward to speaking with many of you after our fiscal first quarter results, which will be announced in early January. Until then, I want to wish everyone a very, very happy holiday season. Thank you again for your interest this morning.

This concludes today's Commercial Metals Company Conference Call. You may now disconnect.