Commercial Metals Co (CMC) 2002 Q2 法說會逐字稿

Please stand by, we're about to begin. Good afternoon, everyone, and welcome to this Commercial Metals Company second quarter fiscal year 2002 release conference call. This call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to the chairman, president, and chief executive officer of Commercial Metals Company, Mr. Stanley Rabin. Please go ahead, sir.

Good afternoon. I'm here as usual with Bill Larson, and I'll begin the presentation. Bill will then take over, and I'll finish up with the outlook. And then, we'll take any questions that you have.

As you know, historically the second quarter tends to be our weakest quarter, because of the holidays, and the weather. Although this year, the weather was I would say fair, or at least as good as we would normally get during the winter months.

The second quarter of this year was, of course, a significant improvement over the second quarter of last year. And I'll highlight just a few items. And I think it'll be informative in a couple of cases to compare it with the first quarter, as well as the second quarter of last year.

The selling prices in our business segments remained extremely depressed, and we were able to increase production and shipments above last year's second quarter. And that was the key to the profitability of this quarter.

Also, raw material costs were flat to lower and this year, unlike last year, we benefited from the substantial decline in energy prices, which in fact peaked during last year's second quarter of especially natural gas prices. The big improvement came from the manufacturing segment and that's because of considerably higher profits by our skill group.

Again we're relating to increased output in shipments, which more than offset a lower composite selling price. Now just again that depends very much on product mix, but just to give you an idea in the second quarter of this year, the composite selling price was $467 a ton.

It was $502 a year ago and $507 in the first quarter. So we were able to offset that and also with a continued major contribution from our downstream operations.

And also continued profitability in our copper tube business. Our steel mini-mills in particular were significantly profitable compared with an operating loss a year ago.

Tons melted were up a third, tons rolled were 35 percent above last year's second quarter and shipments increased 20 percent to 501,000 tons. Compared with the first quarter, tons melted in the first quarter were 525,000 rolls, 485,000 shipped, 476,000 tons.

So, and that's extremely unusual for us to have higher shipments in the second quarter compared with the first quarter. In the first quarter, our average selling price was $277 a ton.

In this quarter, this past quarter, it was $266 a short ton. So it was not only $19 a ton below last year's already very low level, but it was $11 below the first quarter.

So that was quite a bit to overcome and so we're extremely pleased with the performance in light of that. And that was across the core selling prices across our product line.

Scrap costs on the hand were a benefit, $71 a short ton down $2 with last year and also down $2 compared with the first quarter. And utility costs, as I indicated, did decrease by 1.9 million compared with the second quarter.

Operating profit in our steel fabrication and related businesses increased compared with last year's second quarter. Again, prices were mostly lower, but volume was up, except for

, where they were down somewhat.

bar fabrication, concrete-related products, steel post

maintained their relatively good performance. And despite the lower shipments and prices, results in our

and

manufacturing improved nicely, and that's because of reduced startup and operating costs. And structural steel fabrication continues a major turnaround versus last year, and our shipments in the downstream were up seven percent.

The copper tube division's operating profit was less than half that of last year's comparatively robust second quarter, and demand is not as strong as it was, and that's because housing starts have declined, although much less than expected, but hotel/motel construction, which is another important market for us in copper tube, has dropped significantly. Our copper tube shipments decreased three percent against the same period last year, and the metal spreads dropped. But startup of the new line at our plant in Virginia continued, but we're bringing it up slowly and prudently, in view of market conditions.

The recycling segment reported a slight profit after providing for the shredder

. That's the midland Texas shredder, which was shut down. And this compared with an operating loss in the year-ago quarter. And again, we manage this despite a 14 percent decrease in our sales dollars. And profitably was significantly over the first quarter.

Gross margins were below last year, but operating costs were down even more. And we continue to be cash flow positive. Again, the major challenge are the markets, which we minimize the effects by the tremendous inventory turnover. Compared with last year, our average

price declined by $5 a ton to $71 a ton. But shipments climbed five percent to 338,000 tons.

Now, compared with the first quarter, it was the same average selling price for ferrous scrap, and shipments were a little bit higher in the first quarter, which would be normal.

The average non-ferrous scrap sales price was approximately 14 percent lower than a year ago, while non-ferrous shipments were up two percent. But during the quarter, ferrous and non-ferrous prices increased as the quarter progressed.

And this is a positive for the recycling. And while it creates a little bit of a near-term squeeze in the steel mills -- to anticipate question -- our experience has been that we've always been able to make up that difference in our selling price, although there's a little bit of a lag there.

The total volume of scrap processed, including our steel group processing plants, was up compared with the second quarter of last year, 583,000 tons against 540,000 tons last year. And finally, in the marketing and trading segment, our operating profit was slightly less than last year's second quarter, which was a relatively weak quarter.

And again, the still further margin compression, and net sales declined 10 percent. And that's primarily a affect of a big reduction in volume, which is a result of the global recession, over-supply in most markets, and intense competition from domestic suppliers in the various markets in which we operate.

That's various geographic markets around the world. And the influence of the strong dollar continued to be a negative affect for us. Gross margins were down for virtually all the products that we market and distribute.

A particular bright spot was our operations in Australia, including our coiled steels acquisition. And business is brisk in Australia. Our results are very good there. That's the acquisition that we completed in early September of last year, where we bought the balance of the shares that we did not own.

And our strategy to grow our downstream marketing and distribution businesses has mitigated really the difficult trading conditions. So think we've had a very strategic approach there.

Bill, you want to take it?

Good afternoon.

Let me call to your attention the detailed Safe Harbor statement included in our press release and in our annual report and our 10-K filing, that in summary says that in spite of management's good faith current opinions on various forward-looking matters, circumstances can change and not everything that we think will happen always happens. In addition, we've given guidance regarding our second half earnings and the general outlook for fiscal 2002.

Subsequent to this call in our meeting this coming week in New York City, Boston and Toronto, we will not be commenting further and will not be under any obligation to update the forecast.

As Stan has said in his earlier comment further on the outlook, we think the tide has turned for the manufacturing sector in the United States.

We're optimistic about our second half and the prospects for Commercial Metals beyond fiscal 2002. Our long-held diversification strategy and conservative outlook has proven its value once again.

Our balance sheet is strong, short-term debt is at a minimum level, our EBITDA to interest coverage is almost six time. There's still some credit weakness among the customer base.

We've reinforced our bad debt allowances for all known exposures, as well as have more than sufficient reserves in trade indemnity insurance for the surprises that are out there. But we just don't know about them yet.

For the second quarter, sales were off slightly from last year's second quarter. Manufacturing increased sales, but all that, as Stan has indicated, was volume-driven.

All of our segments continue to suffer from historic low pricing. Operating profits increased substantially over last year's second quarter.

There was some turn around in secondary metals, but the bulk of the increase was mainly attributable to better volume at our steel mills.

Cash flow was a little over 25 million, compared to 19 million last year for the quarter, which translated to $1.81 per share versus $1.49 last year.

For the six months, cash flows right at 51 million versus 34 last year. And the translation into per share for the six months is 373 this year and 260 last year.

Our

reserves stands at 6.5 million at February 28. And here's something we haven't seen in a while,

expense is back.

For the second quarter, it decreased our net earnings 404,000 or $0.03 per share, and that's in contrast to last year's second quarter, where we had an increase of 160,000 or $0.01 a share.

Year to date, though, there has been essentially no effect on earnings, and it rounds to zero, so no earnings per share effect.

Last year, during the six months, we had an increase of 597,000 or $0.05 per share.

Gross margin percentage is down a little bit in the quarter as copper tube metal spread's not quite up to last year's pretty strong level. Also as Ben mentioned pricing pressure among our domestic marketing and trading subsidiaries has driven gross margin percentages down a little bit.

Depreciation and amortization for the second quarter was 15,466,000. That means for the year, depreciation and amortization's at 31,231,000.

I would estimate depreciation for the year to be right at 65 million. Our capital expenditures have been a little slower coming onboard this year, but there's a lot of used equipment out there and equipment manufacturers are cutting some pretty good deals.

So I think a little shopping around, a little patience during the fiscal year is going to pay off in some better pricing. You saw in the press release, we had a graphite electrode settlement this quarter.

The gross amount received was 2,508,000. That translated to about 12 cents a share.

And in anticipation of the question, there aren't any more graphite settlements that we would anticipate.

Selling, general, administrative expense up right at nine million.

Almost all of this is due to discretionary items that are tied to profitability, particularly incentive compensation and corporate contributions plus we had some strengthening of our bad debt reserves. Interest expense, if you want write down three numbers, we expensed 5,069,000 in the second quarter.

We capitalized 16,000 and our AR securitization program had discount fees of 283,000. So our total finance carrying costs for the quarter were 5,368,000 and I would anticipate that for the year when you add everything up, will probably right at about 22 million for interest expense.

Balance sheet's still strong. Out of 1.1 billion in assets, we have only $7,418,000 of intangibles and substantially all that is goodwill.

Current ratio's at 1.9, our short-term borrowings, if you include our AR securitization program and net out temporary investments against it, are at only 25 million at February 28th. Our long-term debt to total cap and our total debt to total capitalization plus short-term debt ratio's at the lowest that they've been in the last three or four years.

Book value per share is at 3393. The average shares diluted for the second quarter were 13,966,000 for '98 and year-to-date for the six months, that means the average shares were 13,645,414, and the actual number of shares outstanding is 13,666,994.

Capital expenditures for the quarter were 10.8 million, which means year-to-date it brings us to 25.3. We didn't repurchase any stock this quarter. The authorization is the same as we talked about last quarter, and that's 533,781 shares.

One other piece of information with the excellent performance of the stock, and as I left to come down to the call, we were at 39.25, which puts us at all-time highs. We have had an excellent quarter of stock option exercises for the quarter. Oh, I take that back, for year-to-date, 494,538 shares have been exercised, along with our stock purchase plan, 128,730 shares were sold.

I mention this, because altogether the impact on stockholders equity has been a positive 16,300,000 -- Stan.

OK, I'm going to just talk briefly about the outlook, and begin, of course, with the section 201.

I'm assuming in our case all of the callers are familiar with the steel industry. And on March 5th, the president who was obliged to render a decision, and did, announced there's a remedy for those imports which had been determined to be a substantial cause of serious injuries to the industry, three-year tariffs. Which cover the majority of our steel

products, and range from 15 to 30 percent for the first year, with the degradation the following two years. Specifically, in the case of rebar, it's 15/12/9.

And in the case of hot

, which we cover our merchant bar products, it's 30/24/18. Those are percents, of course.

The remedies will be buttressed by an import licensing and monitoring system, as well as an antisurge mechanism. This is a very important aspect to the action by the administration. The details need to be fleshed out on how that will be done, but that's very important in terms of the administration of the tariff.

And the administration plans to continue discussions with other steel-producing countries to remove global excess capacity and eliminate subsidies.

In fact, in spite of all the outcry overseas, those discussions are continuing as far as I know.

As Bill said, our - and as we said in the release, we expect the second half to be significantly better than the first half, though not as strong as last year's near record level second half.

The really positive news is the - that our economy is showing increased signs of a recovery, although the rate and magnitude remain uncertain. Or as Greenspan said, the dimensions of the recovery remain uncertain.

But there's an increase in

, including the federal reserve chairman, who feel that the - our economy is in a recovery.

It also appears that Europe has bottomed, and other than Japan, Asia appears to be turning the corner.

So this is all good news. Most importantly, I think, is that inventories have been reduced substantially in the economy, including our customer inventory levels.

So as demand has picked up some, the orders improve. And, therefore, we expect our mill operating levels to rise further and prices to strengthen moderately, with scrap prices also somewhat higher.

We expect the good shipments to continue to the construction industry, despite the drop in private non-residential construction. And, clearly, expect improved demand for the manufacturing sector of - of the economy.

And steel imports should decline from recent levels as a result of the trade action. We also expect output in shipments at our downstream operations to increase incrementally.

profits are likely to remain at recent levels. Results in recycling should be better because the outlook for

and

scrap markets is modestly better.

And in market and trading, we have seen some improvement in our order intake. And there is more hope, as I indicated, in the global markets, although our own market's fair, and the market and trading remain weak and intensely competitive.

But the outlook is better.

Going on to the following fiscal year, we continue to believe that our improvement will - our performance will improve further in fiscal 2003, both internal and external reasons, including a strengthening of the global economy, which should result in a moderate upturn in volume and prices in most of our businesses combined with controlled operating costs. And let me just comment, I think you heard it as Bill and I spoke just permeating most of our businesses, if there's a - if there's a - good effect of the serious downturn we had in prices and a year ago in volume, it was that while we felt like we were already extremely productive and efficient and competitive, it caused us to become even more so to cut our costs even further and we've had further improvement in our conversion costs at our mills and a number of our other operations.

So longer-term, we're confident that we will experience strong demand for construction related products and services, particularly from the public sector and institutional building and that there will be a turnaround in commercial construction and that we'll see improved demand from the manufacturing sector. So we remain focused on creating economic value through internal growth, participating in the industry consolidation, forming strategic alliances, growth in value-added businesses and redeploying assets where circumstances become more favorable and enable us to do that at prudent prices.

And the end result being to increase our earnings, our cash flow and our return on capital. That concludes our comments and we'll be happy to take any questions.

Thank you, gentlemen. Today's question-and-answer session will be conducted electronically.

If you wish to pose a question at this time, you may do so by pressing the star key, followed by the digit one on your touch-tone phone. Once again that was star, one to pose a question.

We'll pose for only a moment to assemble our roster.

We'll take our first question from

at

.

I got a simple question I think.

Hello Frank.

How you guys doing?

All right.

Could you tell me what the, you know gross level of accounts receivable were this year and last year before all the securitization programs?

Yes.

Yes. Bill's checking those numbers.

Yeah.

It's I think 351 million this . . .

Go to your next question

.

OK, I got it. The next question is just -- I might as well as you, since you have the trading program. You said earlier that you thought the steel import levels should decline, due to the recent government actions.

There is, I guess, a theory going around, they'll actually pick up, because now the rules have been established, and people know what to do. And so, people will start importing the stuff. What do you think about that theory?

There is, in terms of our trading business, our own volume might in fact increase because of the elimination of the uncertainty.

That part's true,

.

Right.

But on an overall -- but particularly reinforcing bar, which has been a very high volume item on imports, we would expect that to decrease.

One of the major exporters has been Japan, and they are subject to the 15 percent. Turkey also, which has been a big exporter, although it's a developing country, it's covered under rebar, or under this three percent rule that exists for developing or emerging countries. So and of course, eight countries previously had dumping, or anti-dumping.

And I would ask,

, if the exports were to increase, or not decrease, at low prices ...

Right.

... you could anticipate further anti-dumping.

OK, and one last question.

Yes?

Now that you guys waited all these years, and you've exercised your options, and made money finally, are there going to be a significant amount of sales just to pay the taxes on these things? Or, do you know how much -- of that 494,000 of stock options that were exercised, about how many might come back on the market?

OK, I'll let Bill comment on that. Then I'll answer your question on the receivables.

OK.

Yes, receivables gross were around 375,

.

And did you do any of that last year? Or is this a whole new thing this year?

It started in -- June 22nd, last year.

OK. So, OK, great.

So the comparative, no, not ... The answer is that I would -- and it's all just circumstantial evidence, because I don't know what every employee does, but my guess,

, is that probably upwards of 95 percent of the shares that are exercised are sold.

OK. OK, I mean, at least within this industry, if anybody deserves to make money on their stock options and have the stock go up and actually do well over the long term, it's you guys.

Thank you.

Well, thank you.

That's it. Thanks.

Thanks,

.

Once again, ladies and gentlemen, please press star one. We'll go next to

, with

.

Good afternoon, gentlemen.

Hey,

.

.

Congratulations.

Thank you,

.

Thanks.

Considering economic conditions for the three months ending February, your results are just short of spectacular. However, the opportunity that is presenting itself long term is the question.

Yes?

We know that

is going after

four steel mills.

And we know that you're sort of a baby new

consolidator. Where are you in the process of taking advantage of your financial strength?

And now you have a currency at your beck and call. Where are you in the process, you know, to buy assets that are attractive as far as a synergistic fit?

Well, of course, our policy, as you well know, is that we don't comment on specific - you know, rumors of specific acquisitions or divestitures. That's our policy.

Let's just, you know, say that our comment is our plan is to participate in the consolidation.

Now, of course, we haven't seen you yet participate.

You'll see it when it happens.

No, I understand that.

But do you intend to be aggressive or do you intend to quibble on pricing?

We intend to take advantage of strategic opportunities at reasonable prices.

Do you think in the next 12 months we'll see you be a consolidator of some sort?

Pardon?

Do you think in the next 12 months, knowing what you know today, that you'll probably be doing something?

Could, but it has to be, of course - you know, we use - number one, strategically important, that's obvious.

And secondly, give the right projected financial returns, including accretion for the shareholders.

OK.

Now as far as divestitures, I congratulate you for that press release in the middle of February, where you were re-deploying some assets.

I know - I don't know if you've spoken about this publicly, but let me frame the question. Are there other assets that really don't fit long term that you considered divesting of?

There - we have - there are - there are some. By the way, just so everyone will be clear, that divestiture has not closed yet.

And - but in terms of other assets, we have mentioned in the past it could be some assets in the recycling which are not of significant strategic value vis-à-vis our mills. And if they're not sufficiently profitable then - you know, independent operations as we run them, or most of them, then those would be candidates for a divestiture.

Yeah not withstanding being candidates when do you time something like this?

When the markets - when those markets - improve because the problem is, particularly in the recycling part of our business, the markets have been so bad plus this horrific failed consolidation of a couple of years ago that has many properties - scrap properties - on the market as there is scrap is available.

So, and I'm being a little flip, but not totally, there therefore hasn't been an advantageous time and since those are cash flowing positive, we don't see a compelling need to just dump any of those operations. So the key is - and our anticipation is that those operations, or any of those, are the most value locally to someone who's in that business in that same area of the country.

OK, thank you very much. I'll see you tomorrow.

All right.

Good, Barry.

Thank you, Bill.

Once again, ladies and gentlemen, please press star, one to ask a question. And Mr.

it appears we have no further questions at this time.

I'd like to turn the conference call back over to you for any additional or closing comments.

OK as we say at the annual shareholders' meeting, there being no further questions, the meeting is adjourned, but we thank you for participating and I assume we will see a bunch of you in New York, Boston and Toronto the next three days.

And as we've said in the past for those of you who are not located in those areas, we have been making a significant effort over the recent years to get to other locales as well and will continue to do that. So, we will be talking to you and thank you again.

Once again ladies and gentlemen that does conclude today's conference call. Thank you for your participation.

You may now disconnect at this time.