Commercial Metals Co (CMC) 0 Q0 法說會逐字稿

Please stand by, we're about to begin. Good afternoon, everyone, and welcome to this Commercial Metals Company third quarter fiscal year 2002 release conference call. This call is being recorded. At this time for opening remarks and introductions, I would 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. We'll go through the usual format. I'll start out with some brief comments; Bill will then give what will probably be the bulk of the presentation; then we'll take your questions. Reuters notwithstanding, this was the best third quarter in our history. And again, we of course point out unusual items as part of our transparent financial reporting, which has always been the case for Commercial Metals Company.

But we think the quarter again showed our well-executed diversification strategy. In terms of the specific segments, all of the segments showed improved operating performance compared with the prior year. The manufacturing segment's profit was up 23 percent, and that was led by the steel group. Profit for our mini mills rose 28 percent, compared with the year ago, and that is really in the face of, as we said, abysmal selling prices, and the profit was also well above the second quarter.

As has been the case for several quarters now, the profit at the mills was generated from increased production and shipment. And we, in fact, set a number of production records at the various mills during the quarter.

Our average selling price, as we reported, was down $14 per ton, and unfinished goods was down $15 per ton to $273 per ton, which is an historically very low number.

The scrap costs went up -- average costs in the mills -- by $11, which of course helped our secondary metals processing division, and I'll get to that in a second. But that has created a near-term margin squeeze for our mills. In spite of that, they had a, as we've indicated, a nicely profitable quarter.

In the fabrication businesses, we are feeling some impact from the slowdown in commercial construction, and prices and volumes were mostly lower. We did continue to have good performance in rebar fabrication and concrete-related products and the post plants.

The results in steel joists and cellular beam manufacturing were not as good, although we have reduced our costs significantly, and also have shop efficiencies instituted.

Structural fabrication was about breakeven. That's excluding the sale of the SMI-Owen. And shipments from our fab plants were three percent lower than the prior year.

Copper tube division profit was down with softer demand and lower prices, which affected our spreads. Our volume, again, increased 18 percent against the prior year, and we continue to ramp up prudently the new line at the copper tube mill in Virginia.

For the recycling segment, this was in fact the highlight. It was the best quarter in operating profits since the third quarter of fiscal 2000, and essentially a result of the ferrous scrap market. We did not get that much help yet from the non-ferrous scrap markets.

But we had, as I indicated, a definite improvement in steel scrap prices, and gross margins were significantly above last year. And we saw better markets both domestically and internationally.

Non-ferrous markets, on the other hand, essentially went sideways. There was some upward movement in mid-May. There's been some retreat of that since then, but non-ferrous prices are relatively stable.

Our average ferrous scrap price in the recycling increased $13 a ton, and shipments climbed 12 percent. So that combination was very beneficial. Non-ferrous prices were, in fact about four percent below a year ago. Shipments were slightly higher.

In the market in trading, profits also up, 52 percent higher than last year, although last year was a relatively weak quarter. And again, this is still, this quarter, this past quarter still relatively weak markets.

Our sales did increase seven percent to $203 million. Volume was up in Australia, and China, was level in Europe, but was -- our imports into the United States were lower, and this applies to both steel imports through our trading and nonferrous

imports.

The -- we did see some product price improvement during the quarter and some weakening of the U.S. dollar. Our strategy of being down going more downstream in the market in trading continues to benefit us.

We did an extraordinary job in managing our working capital, and cash flows were extraordinary. Bill will go into that in more detail.

Our outlook -- well, I'll cover that after Bill goes through his part.

Well, good afternoon.

Let me call to your attention the detailed Safe Harbor statement included in our press release and in our annual report and in 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 doesn't always happen.

In addition, we've given guidance regarding our fourth quarter earnings and a general outlook for fiscal 2003. Subsequent to this call and our meetings in New York City, Los Angeles, and San Francisco this week and next, we will not be commenting further and won't be under any obligation to update the forecast.

You saw from the press release that Commercial Metals is coming on strong. Our long held diversification strategy and conservative outlook has proven its value once again, albeit different segments are now strongly contributing than were contributing at the beginning of the year.

Our balance sheet is strong, we have 62 million in short-term investments, and short-term borrowings -- they're at minimum levels.

Our EBITDA to interest coverage, including our accounts receivables securitization fees, is almost 10 times for the quarter and over seven for the year-to-date.

We previously announced a two-for-one stock split effective towards the end of this month. Unless I otherwise indicate, the numbers that we'll discuss today are going to be on a pre-split basis.

As Stan mentioned, sales are up in each of the operating segments. If you wanted to point to a single factor, you could point to the purchase of Coil Steels Group, the marketing and distribution arm in Australia that we purchased in early September of this fiscal year.

Operating profit is also up in all of our segments. It's particularly encouraging -- the recovery of secondary metals.

The cash flow for the third quarter was 26.5 million. That compares to 29.2 million last year third quarter, and that per share was $1.82 this quarter as opposed to 2.23 in last year's third quarter. Year-to-date cash flows are 77.4 million compared to 63.2 million for the nine months last year. That translates into 5.55 per share this year and 4.81 last year.

The LIFO reserves stood at 6.3 million at May 31. The LIFO effect was almost insignificant. It increased -- it was income net earnings 137,000 or a penny a share. Last year's third quarter, it was an increase of 377,000 or three cents a share. Year-to-date, then, that makes the increase 101,000 or, again, just a penny a share income versus last year's income of 974,000 or seven cents per share.

If you look at gross margins excluding the Owens sale, gross margins were pretty steady overall, with some reduction in copper tubing, offset by better recycling margins. Depreciation and amortization for the quarter was 15 million 276, that makes it the year then 46 million 507, and I had been predicting a little bit higher depreciation for the year previous to this, now I would expect depreciation for the year to be about $63 million. As indicated in the press release, the sale of SMI-Owen's net after tax was 3.4 million, or 23 cents a share for the quarter.

Selling, general and administrative expense increased about 2.7 million this quarter versus last year's third quarter, that is predominantly some professional fees dealing with the sale of Owen and some other job resolutions, also corporate contributions, which rise in line with profits. For the nine months the increase of 15.6 million could be attributed to a couple of things, one instead of compensation, our bonus system, which rises and falls with profits, and again our contribution expense, which also rises with profits.

If you got a piece of paper and a pencil, you might want to scribble down three numbers on interest, on interest expense. We expensed four million 575 for the quarter, we capitalized 122,000 and our, and the program fees for our accounts receivable program were 69,000, so that means that we, our total carrying costs, or our total financing incurred was four million 766. I would anticipate for the coming quarter interest expense including all of these items would be about 1.4 million per month.

We did during the quarter implement an interest rate swap, the $100 million public offering that's due in 2005 was swapped to a floating rate, the rate's set at six month LIBOR plus 202 basis points. Balance sheet remains very strong. I mentioned before we have 62 million in temporary cash investments, total intangible assets of only 7.1 million, of which almost all of that is goodwill, at a total balance sheet footings of 1.2 billion. The current ratio's 2.0, our ratios on long-term debts and total cap are at 32.6, and total debt and total capital short-term debt is down to 32.7, so we're in very excellent shape from a leverage standpoint.

Book value per share is 34 88, at May 31st. You saw from the press release that third quarter average shares on a diluted basis were 14 million 565 719, and year to date those same diluted shares are 13 million, 952 183. The actual number of shares outstanding at May 31st is 14,218,955. Capital expenditures for the third quarter were 9.7 million, that makes it year to date 35 million when you include the purchase of Coil Steel. We had budgeted in fiscal 2002 81 million, we may not quite make that, I don't think we'll have that large a capital, cap ex in the fourth quarter to get all the way to 81, but we may end up around 70 for the year.

We repurchased no stock during the quarter, that left the authorization the same at the end of this quarter as it was last quarter at 533,781 shares. Very encouraging the stock options exercised nine months to-date. We've had 1,066,180 shares exercised. That along with our employee stock purchase plan has brought an increase in equity to the company of over $33 million -- Stan.

The outlook for the fourth quarter is good. The -- while the strengthening of the U.S. economy and global economy has been uneven in our markets, and most markets, it's still -- and was stronger in the first calendar quarter than the second -- it's still encouraging with, and with, as I indicated, some weakening of the dollar.

We expect our steel mill volume to be good in the fourth quarter. Mill pricing will improve, with help coming from the section 201. There will be some temporary margin squeeze for downstream operations.

Our copper tube business should be relatively steady with a good picture, particularly going into 2003, on the housings -- from the housing starts.

Recycling profitability, again, should be even better based on the strong ferrous -- relatively strong ferrous market, and fairly decent non-ferrous markets, although again, on a historical basis these are not robust scrap markets.

Good performance in our market and trading, especially internationally. So in general, a fourth quarter. Cap ex should pick up, and the balance sheet stay strong.

For fiscal 2003, we're even more optimistic with anticipating better domestic and global economies, moderately improved pricing, better margins, some volume increase, and in fact could be a record year.

So, the outlook is good. The performance has been consistently good, and we'll be happy to take your questions.

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

If you would like to signal for a question, you may do so by pressing the star key followed by the digit one on your touch-tone phone.

Once again, that is star one for any questions. We'll pause a moment to give everyone a chance to signal.

Our first question comes from Barry Vogel with Barry Vogel and Associates.

Good afternoon, gentlemen.

Barry.

Hello, Barry.

You guys have done a great job.

Thank you.

The question that I have is, you talk about, strategically your focus remains on creating economic value through internal growth by participating in industry consolidation, forming strategic alliances, growth in value-added businesses, and redeploying assets, thereby increasing our earnings power, cash flows and return on capital.

Given the consolidation that we've seen so far, mostly by Nucor, based on their three -- their four announcements in the last year -- if you had to pick a

of what's likely to happen on these items, could you talk about what's, you know, most likely for you to do, you know, between industry consolidation, strategic alliances and redeploying assets?

I think for us most likely is some combination of doing something down -- at the middle level and downstream.

Now, we -- I know you were interested in buying some of Birmingham's assets, but Nucore with their balance sheet took the whole thing. And I think that, you know, you probably were at a disadvantage, you know, in that process. Does that mean that you probably are limited at the

level in terms of size of acquisition?

Well, I think we always were. No reflection and comment on Birmingham one way or the other, but, yes, I don't think there's any doubt that there are some transactions out there that are beyond our means.

You know, as far as strategic alliances, what kind of alliances would you be interested in?

Well, these could be -- and some of these could be in the market

as well joint -- as joint ventures, for example, as we have already done.

And one step further, on the

of assets, I have to commend you on your selling of

, and I know you publicly had commented when you were in New York the last time I had seen you, that it's a possibility that pieces of your recycling business might be redeployed. Is this still the case?

That's always been the case. And pieces of any, you know, parts of the company subject to strategic ramifications if we can get a better return by disposing of those assets than we think we can achieve ourselves going forward, then we -- that's the procedure or process that we follow.

Are you more likely to redeploy assets in recycling with driving profits in recycling?

Well, Barry, it's a question of the -- of at any point of what value we can get for those assets. So it's a theoretical question based on what the -- what value they have to somebody else compared with the value they have to us.

Thank you very much.

Sure.

Once again, it is star, one for a question.

We will now go to Leo Larkin with Standard & Poor's.

Good afternoon.

Hi, Leo.

Hi. Could you give us any guidance for depreciation cap ex for '03 and interest expense?

We really haven't looked at that a lot, but I would say, Leo, on cap ex, excepting, you know, some strategic acquisition that we were just talking to Barry about, we'll probably be in that same 70 to 85 range. Really the Board's just now beginning their planning process, so I really don't have a more exact range.

Interest expense, again, barring against an acquisition of any magnitude, I would say, probably would -- and you've got to figure rates are going to go up, so if I indicated 1.4 million a month, if I anticipate a rate change, let's say it's maybe

a month, that'd be my early guess, depreciation expense will probably rise a little bit indicating we'd be at what, about 63 maybe we're talking 65 to 66 for next year.

I think, Leo, just as far as cap ex for this year, we're already in the fourth quarter, while we expect it to pick up this quarter, for the year, it'll be less than what we had originally prognosticated some months ago, for this year.

OK, thank you.

Sure.

Bye, Leo.

Our next question comes from

with Merrill Lynch.

Good afternoon gentlemen.

Good afternoon.

Hey

.

I wonder if you could sort of give us your thoughts on, sort of the

outlook on the rebar market and the scrap market, and i.e., how your sort of margins could evolve from here, after the decompression you've seen in this quarter?

Well historically we've, when we've had scrap prices move up like they have in this case, we've always established, reestablished our margins with higher steel prices. I would certainly expect the same thing to happen on this go around. We are expecting both rebar and merchant bar and light structural prices to increase. There are increases in place, and we expect to begin realizing those higher prices during this quarter.

Our general sense is that for the near term, steel scrap prices probably have peaked. But that's always an imponderable, if they move up more, then the products we produce will move up more in price subsequently, because all the competition is using, is using scrap and, or some amount of direct reduced iron or pig iron, but mainly scrap, globally.

Thanks Stan.

Sure.

Once again it is star one for questions. We'll go next to

with Lord Abbot.

Yes, thank you. Nice quarter. Could you talk a little bit, I don't know if I missed it on the beginning of the call, electric rates? What is happening there?

I'd say generally not much. Our total utility course costs were down for the quarter, compared with the, with the prior year, by what, about $600,000 I think ...

Right.

... for the, that's third quarter of '01 versus third quarter of '02. Natural gas prices have, somewhere around, I'd say around a three and a quarter dollar range, so it's, that market generally the last few months has been pretty uneventful.

And do those compare, I mean, clearly that's a, that's a favorable swing. When does that swing flatten out?

Good ...

It'll flatten out ...

I mean relative to the comparisons last year was higher obviously.

Yeah, it's going to flatten out right about in the fourth quarter. I think the comparison September to September will be about equivalent.

OK,. so you don't expect that favorable swing there.

Right.

How about your customers, and just in terms of their payments and, I don't know, potential problems that they may be having given, I mean, have those relieved in terms of there may be a changed in the economy, or are you still seeing the same sort of reserves for possible questionable accounts, et cetera?

We have maintained the accounts at what we feel are prudent levels, but I would say that in our own case, as far as the exposures that we have, we have seen a lessening of the exposures.

We have seen a little bit of pickup in the financial health of our customer base. But we still stay very, very cautious. It just takes one to be significant. But we do see it as better.

Yeah, and I think, because of the general improvement, particularly in this country in the surviving firms, if you will, in the steel and non-ferrous industries and suppliers to those industries, that that's been helpful.

And in terms of accounts or days outstanding, in terms of receivables, do you look at that? Or ...

Yes, we sure do.

What is that - what's that now? And what it was at the last quarter, the previous quarter?

Yeah, it - at the end of the previous quarter, it was a little over 57. And right now it's about 50.

Part of that increase, besides the bettering credit situation we discussed, was the sale of SMI-Owen, remember, is a large structural shop. It had a lot of retention, and the retention tends to age way out there in the right-hand column. And so, with its sale we improved - and I can't tell you offhand, you know, whether that was two or three of the days. But it certainly had an impact.

But we've gone from 57 to basically 50.

And, do you expect that to be kind of in the 50 range going forward now for awhile? Or ...

Well, ...

... you think it'll fall further? Or, I mean, it'll ...

... historically, if we were, if we got down into about the mid-40s, I think that's all you could expect. You've got to remember that a lot of our business is done internationally, and what is standard credit terms domestically aren't standard terms internationally.

So I would say that mid-40s would be a pretty good target to shoot for.

And also because of the high mix of downstream businesses that we have.

OK. Thank you.

Sure.

Gentlemen, we have no further questions at this time. I would like to turn the call back over to you for any additional or closing remarks.

Thank you very much for all of you who participated. As Bill indicated, or said, we will be going to be in New York tomorrow. And then next week, we'll be in Los Angeles and San Francisco as part of our ongoing effort to visit other cities, and then in subsequent quarters we'll include cities that we have in the past, and some that we have not.

So, as I said earlier, we remain optimistic and anticipate continued good performance from Commercial Metals Company.

So, thank you and we'll be seeing many of you.

That does conclude today's conference. Thank you for your participation. You may disconnect at this time.