Commercial Metals Co (CMC) 2003 Q4 法說會逐字稿

Good afternoon everyone.

Thank you for holding and welcome to today's Commercial Metals Company fiscal 2003 fourth quarter and year end 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 Stanley.

Good afternoon, everyone.

It will be -- Bill Larson is here with me.

It will be our typical format.

I'll open it, just for highlighting a few of the operational aspects of the year, and particularly the fourth quarter.

And then Bill will go into more detail on some of the financials and other information, and then I'll finish up with some comments about the outlook.

As all of you know who follow us, it was a difficult year, particularly for our manufacturing operations, because of our margin squeezes, and reflecting generally for a good part of the year the poor economic environment we were in.

As the year progressed, we did begin to see some improvement in the economy, more pronounced during the fourth quarter and going forward.

And of course another significant factor was the continued weakening of the U.S. dollar.

Just to highlight some operating thing, and particularly as I'd say, I'd like to focus more on the fourth quarter, in part because it was our best quarter.

But seriously, I think more because it reflects more the market dynamics that we're in now than did the earlier part of the fiscal year.

For our mills, the fourth quarter shipments were higher, both for rebar and other tons, that's fourth quarter versus fourth quarter.

The shipments actually were off somewhat from the third quarter, part of that was because of lower billet shipments.

Most importantly, our average selling price was up.

It was $289 in the fourth quarter, the year before it had been -- 289 is not great, but certainly in the right direction.

The year before was a pitiful with 267.

And the average in the third quarter was 280.

So the trend's in the right direction.

And for finished goods, the number was 297, $297, the previous fourth quarter was $275.

And the third quarter had been $289.

Ferrous scrap was actually lower in the fourth quarter compared to the third quarter, higher compared with the fourth quarter of the previous year.

That's because there was that correction in the scrap -- in the ferrous scrap market, and since then of course the ferrous scrap market has risen again.

In the -- oh, and most importantly, the metal margin in the fourth quarter for the mills average was $189 a short ton.

The previous year's fourth quarter had been $176 a short ton.

And of course that's one of the most important numbers to be increasing.

Fab plants, lower price compared with the prior year's fourth quarter reflecting the difficult conditions for most of our downstream businesses, market conditions, that is, particularly the falloff in commercial construction, and the average selling price was $542, versus $577.

However, it was higher than the third quarter average selling price, which was $520.

Now, the average selling price, we've always said we needed to be a little careful with because it depends so much on product mix.

But it does reflect at least a bottoming of the market.

And we think some upturn.

The tonnage was up, though, both compared with the year ago, and with the third quarter.

And that was mostly true because of increased fabricated rebar shipments.

Copper tube, a similar story in terms of the margin squeeze.

But you know, better in the fourth quarter.

Here, of course, the copper market continues to rise.

We produce more tube in the fourth quarter than either the previous fourth or the third quarter.

As copper scrap prices went up about 5 cents a pound compared with the previous year, 3 cents, with the third quarter.

Pounds shipped were higher compared with third quarter or the previous year's fourth quarter.

Average selling price at $1.22 was lower than the prior year, but was higher, about seven cents higher than the third quarter.

Secondary metals which of course recycling was a banner year, as we said, as it was for market and distribution.

And that's primarily because of the ferrous market, but not exclusively.

Ferrous tons were actually fairly flat, up some compared with the prior year, but actually down compared with the third quarter, no significance there, the ferrous market remains quite strong.

And again, the actual -- the selling -- average selling price in the fourth quarter was $5 a ton less than the third quarter, and that was because of that market correction which, as I said, has reversed again.

Nonferrous tons were down compared with the prior year, up from the third quarter, with some improvement in the nonferrous, average nonferrous price compared with the year before, about the same up slightly compared with the third quarter.

But that trend, that price trend is up, and copper and aluminum both within the last couple of weeks have broken out of that trading range that they were in.

Just one other thing I'd like to mention, and that's, which Bill might cover as well, that's the increase in utility costs.

I think we've been mentioning throughout the year that all of our input costs were going up, which exacerbated the squeeze at the mills.

Utility costs were up 9.3 million for the year, 2.7 million for the fourth quarter compared with the previous fourth quarter.

The main ingredient in that increase was natural gas.

That is, in the annual increase, the electricity cost increase was a lesser factor than the increase in natural gas.

And that was strictly a function of the increase in the price of natural gas.

So in the manufacturing, while it was an off-year, I think on a relative basis, and even on -- given the conditions, we had in absolute basis, we think that we performed relatively well.

We can't ever be satisfied with that kind of performance, but it was -- we feel like an achievement to end up where we were.

Just one other thing, then I'll let Bill take over.

Yeah, I mentioned about generally better economic conditions, and the weaker dollar.

Of course, the other major, major factor which helped us in the market and distribution, but affects all of our businesses, was Asia, but specifically China.

You see we refer to the presentation we will give the next several days, China is still the gorilla.

In terms of their impact on global markets, it's just profound.

At this point, steel, for example, they are consuming about a quarter of the world's steel.

They are producing nearly a quarter of the crude steel that's being produced.

I'm talking about the most recent months.

And of course, they're having a significant impact on all raw material markets, and that includes nickel, stainless steel, copper, aluminum, ferrous raw materials including iron ore.

So they're just affecting everything.

And when we talk about the outlook I'll make a few comments about the near term and longer-term outlook for China.

Bill, you want to --

Thanks Stan good afternoon.

First couple of housekeeping items.

Let pee call to your attention the detailed safe harbor statement included in our press release.

And in our August 31st, 2002 10-K.

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 outlook for the first quarter and our fiscal 2004 in our press release.

Subsequent to this call in our meetings New York City, Boston this week and San Francisco and LA next week we'll not be commenting further and not under any obligation to update our outlook.

One last administrative item which I also mentioned last quarter, in accordance with Regulation G of the Securities & Exchange Commission, there is now a category discussion items known as non-GAAP financial measures.

Some of these have derived fairly staight forward from our financial statement or incumbent business use can be the subject to our discussion today in our investor visits.

You'll note there is an appendix in this quarter's press release where we've reconcile certain standard terms to the closest GAAP equivalents.

Our Website has additional information at www.commercialmetals.com.

But there are other items that may be outside our ability for discussion and you may need to be patient with us if we defer comment on those.

This was as Stan said a very solid fourth quarter.

In keeping with seasonal trends we would have expected this to be our best quarter.

But I think it far surpassed those expectations.

We more than matched the first nine months total in the fourth quarter alone.

Our marketing and distribution recycling segments finished the year strong but what separated this quarter from the other three is the performance of our steel mills.

They tripled their profit from the previous best quarter of the year.

Once again our diversifying operations has allowed us to perform adequately if not outstandingly during what would have been tough times in the industry.

We also have predicted probably more dire consequences with LIFO in the quarter and it did not turn out to have as large an impact as we had anticipated.

During the quarter we closed a new three-year revolving credit agreement totaling $275 million.

That backs up our commercial paper program.

This program is with a group of 16 banks, this was a $100 million increase over our expiring program, it has no short-term portion, and it broadens our banking relationships.

Fourth quarter sales were up 18% over last year with double-digit increases in each of our three segments.

For the year it wasn't quite sufficient to pull the manufacturing segment sales even with last year but it was pretty close.

Recycling and marking and distribution closed the year very strong.

As I commented earlier our vertical integration resulted in strong profits in the fourth quarter, I think it was especially encouraging that our manufacturing operating profit was 42% increase over last year fourth quarter.

The LIFO reserves stood at 17.4 million at August 31st.

That then resulted in a decrease, in other words, an expense in net earnings of $857,000 or 3 cents per share this quarter.

Last year's fourth quarter was a decrease of $1.1 million or 4 cents per share for the year, then LIFO decreased net earnings so it was an expense of some 6.1 million or 21 cents per share versus last year's entire year decrease of $1 million or 4 cents per share.

If you look at the gross margins, manufacturing had its best gross margins of the year in the fourth quarter, led by price increases at our steel mills.

The recycling margins are at the top end of what they've been able to realize over the last decade with the strength in ferrous pricing.

Marketing and distribution also realized excellent margins in the fourth quarter.

Depreciation and amortization for the quarter was $15,347,000, that makes then year to date the total depreciation and amortization, $61,203,000.

We would anticipate depreciation and amortization for 2003 to be around $72 million.

SG&A increased in the fourth quarter some $10 million over last year, spread out over a fairly wide range of accounts.

The main ones were salaries, an increase in our bad debt, allowance, some insurance costs, the one -- the single largest item was our incentive compensation accrual which ran with the results of the quarter.

Year to date there was also an increase of $10 million, again predominantly in the same category, salaries, increases in our bad debt allowance, but one other item that wasn't as prominent in the fourth quarter and that is medical expense.

Our employee retirement plans were flat for the quarter, and year to date are down, cut back in conjunction with our lower earnings.

Interest for the quarter, we expensed $3,904,000.

We capitalized $148,000 for the year then we expensed $[15,000,338] and capitalized $254,000.

For those of you who are trying to make the sum of the parts add up to the whole when it comes to interest expense, you'll need to know that in a previous quarter, we had someone or actually in the previous nine months we had $1.3 million of translation adjustments on some hedging instruments in our international operations that were mistakenly coded to interest expense, and we reclassed those out and they're sitting in SG&A, didn't affect the bottom line at all.

But if you're trying to roll forward some numbers, that would be the reason.

The balance sheet continues very strong. $75 million in cash and cash equivalents at August 31st, total intangible assets of only $10 million of which $6.8 million represents goodwill and this out of a total balance sheet fundings of some 1.3 billion.

Current ratio of 1.9.

Book value at August 31st was $18.08 a share.

For the fourth quarter the diluted average shares were 28,485,903.

That made it then for the year to date average diluted shares of 28,605,595, and at August 31st, the actual number of shares that were outstanding were [27,994,690].

Capital expenditures for the fourth quarter were 21.6 million, therefore the year to date is 63.2 which includes, as we always have indicated to you in our capital expenditure budget, some small acquisitions that totaled for the year some 13.4 million.

The capital expenditure budget anticipated for fiscal 2003 is around 60 to 61 million, but that would not include the acquisition of the Polish mill.

We did not repurchase any stock during the fourth quarter and our authorization remains the same as it was at the end of the third quarter at about 1.1 million shares.

Thanks, Bill.

Just to finish up with the outlook.

Essentially, our view is that conditions and performance should essentially carry over from the fourth quarter to the first quarter.

We did say, which is fairly typical pattern that we would expect the second half to be stronger than the first half.

And especially, I think, with some areas of construction, more likely to be picking up in the second half.

But the -- as we indicated, we would anticipate FIFO net earnings to be similar -- in the first quarter to be similar to the fourth quarter.

Mill price increases continue to work -- to work their way through, as we put in -- in the press release, the -- you know, for the two major product lines, we have the cumulative increases, assuming they all were to go through, would be $70 and $55 a short ton, respectively.

We would expect, for the mills, that steel scrap prices to at least be at the level where they are.

But this would still lead to a margin, further metal margin expansion, although still below where we'd like to be.

Fab should be better in the first quarter, but that's more operational improvements we've made.

We would expect some of those market improvements to be more delayed than the other improvement we're seeing.

We would expect the imports to stay, you know, under relatively low or moderate, mainly as a factor or consequence of the weaker U.S. dollar.

Relatively little improvement in copper tube.

As Bill said, secondary metals should continue strong and particularly now, with this further pickup in the nonferrous markets, assuming those hold.

We're expecting another good year, including another good first quarter for market and distribution.

Perhaps not quite to the record levels in 2003, but still another very good year and good quarter.

We would anticipate this year a little bit of a shift with more of the profits occurring in the U.S., and somewhat less outside of the U.S., a reflection there not of the dollar but of the stronger, relatively stronger economy in the United States.

And balance sheet to stay in good order.

And then if we, you know, look a little bit -- little bit further out, that the mill margins would continue to widen with finished goods prices rising, but it does appear the ferrous scrap prices will stay high, at least for a while.

And again, as the year progresses, at the downstream businesses, should do better.

And you know, relatively good performance on the other segments along the lines of what we were talking about.

Within our capital budget, internally, the major capital project which would be later in the fiscal year, would be the -- a new continuous [caster] at the SMI Texas mill in [Segeen].

We -- just one other final comment on the Polish situation, the [Huta Zawiercie] acquisition, we are awaiting government approval and we are anticipating that by mid December.

And with that, we'll be happy to answer your questions.

And if anyone would like to ask a question today, you may do so by pressing the star key followed by the digit 1 on your telephone key pad.

We will pause for a moment to assemble a roster.

Looks like you have a question from Eric Fell (ph) with Taza Capital.

Hi, just a question on a marketing trading division.

Very new to the story actually very new to the story.

Just trying to get a better understanding of that business.

You say you expect profits to remain good, better in the U.S.

Is that more on the distribution side, or is that on the trading side, or a combination of the two?

Well, we don't use the term trading.

We've evolved out of that term.

We call it market and distribution.

Because you know, we're not -- for us it's a physical business.

It's either distribution or profit, for example, in Australia where we do significant processing of steel.

So the -- and what also what some people would refer to marketing where we still are involved internationally in marketing a certain quantities of bulk, bulk cargos, if you will of products, or in other cases, containers.

But we're not screen traders.

It's a physical business.

We perform a lot of functions, and our earnings come from hopefully getting paid for performing those functions.

We have increased our presence in the processing, as we have in the distribution.

So you know, our whole thrust is to get closer to the end users, and also to work very closely with the suppliers around the world.

On the processing side, is that mostly inventory that you'll take ownership of or do you do totaling as well?

We do both.

Your outlook is based on better pricing in the steel environment in general and better volumes generally speaking?

I would say good volume, good margins.

Okay.

Thank you.

We'll move to John Hudson (ph), [Inaudible] Capital.

Hi Stan and Bill.

Quick question for you on the scrap business.

With the strong prices you're seeing have you witnessed any upward pressure on your buying prices for scrap?

I'm thinking of ferrous scrap mainly.

The answer is yeah.

You talking about like the unprepared scrap?

Yeah, like your cost of goods if you will.

Yeah, John, what would typically happen is, over time, there would be some shrinkage of margins because of the competition for the unprepared scrap.

What the margins generally are greatest when you get the -- these significant moves.

Right.

Then you're sitting with -- even though we turn our inventories very quickly, you still have some inventories, plus we're buying at the lower levels and it takes a little while to catch up.

Although scrap dealers are smart.

So -- and industrial people, too, now follow, you know, the markets pretty -- pretty closely.

So people know what's -- and of course a lot of industrial scrap is based on formula.

But -- so that adjusts as well.

So there might be some lag.

But the sort of a long-winded way of saying yes, there would -- there would be some -- some decrease of margins.

Okay.

And then do you export any significant amount of ferrous or nonferrous scrap?

Ferrous, no.

Nonferrous, yes.

And is that Far Eastern destination?

That would be the main destination.

That's all I had.

Thank you.

Sure John.

Richard Firie (ph), Delphi Management.

Can you give us further details on new revolver a lead on who is the lead bank, what is the LIBOR, is it a LIBOR based spread,

Bank of America led it.

It's a backup to the commercial paper program.

Right.

We have never borrowed on the revolver in the 15, 20 years that we've had one.

In fact it is a LIBOR based spread in the underlying document but that's never come into play yet.

All right.

If you are not using it do you have to pay some sort of fee anyway for having that?

Yes.

What is that, what are the terms on that?

Actually, I don't recall.

I believe it was in the 20 basis point a year range but I don't recall the exact number.

All right.

But there is a -- there is an annual fee.

Okay.

Thank you very much.

Again, if you do have a question today you may ask it by pressing the star key followed by the digit 1 on your telephone key pad.

Please do that now.

And we'll go to Greg McCosco (ph) with Lord Abbott.

Would you talk a little bit about some of the operations in the mini mill area?

I know that some were more and less profitable.

Is there an opportunity going forward to improve margins in the mill area?

Greg, this is Stan, hi.

Hi.

Yes, there is.

Of course, we think we're -- we are, have been and have gotten even more efficient operationally.

So I would have to say the -- the bulk of the improvement that we anticipate will come from better metal margins, because bearing in mind that we were at historically low metal spreads at the mills, and of course those did vary, and it was worse at some mills than the other.

The mill, I would say, that stands to -- where we'd stand to improve our performance the most is our South Carolina mill.

Is that profitable at this point?

Well, yes.

But we would be -- we would be looking to, you know, do, you know, certainly do better.

But again, the -- the degree at which that happens will or rate at which it happens will depend be, also, on what happens with these various input -- input costs.

If they -- if they were to include natural gas, if they were to stay even flat, then we should see a significant margin improvement at all of the mills.

So in other words, a margin improvement with, say, flat scrap cost and flat natural gas and inputs, in other words, the controllable part of your margin you would expect to increase.

Does that depend just on increasing volume or is there savings there if volumes were flat as well?

Volumes are pretty good right now, Greg, and so and of course our conversion costs are generally are quite, quite competitive.

So that we still constantly try to improve those, a dollar a ton here, a dollar a ton there.

But being relatively efficient, there's -- the reality is there's not as much room for improvement as there would be if we were less efficient.

But certainly, you know, being able to run at high volume, which you know, we're there, I mean, if we are in the range of depending on product line mix, 2.3, 2.4 million tons a year for our domestic mills combined, you know, that's pretty good.

I know that you're somewhat dependent upon state budget, highways and also schools, et cetera.

How are those looking?

Funding's pretty good, actually.

In spite of the obvious, you know, budget problems that most states have, the -- certainly the highway program, highways and bridges, as a category, that spending has held up relatively well.

There's been a lot of work bid.

That's a good area, institutional building has been good.

It could -- you know, there certainly are some potentially vulnerable areas like, you know, school and will districts pass bond issues.

And we'll just have to see.

But you know, my hope would be that because these are high priority, highly visible projects, that they would continue to get reasonable funding.

And then finally, I know that you've talked about the scrap area as not one you want to invest in especially recycling.

Are you -- is there a possibility that there could be some, oh, asset sales or some divestitures in the recycling area now that it's strong?

What we have said historically is if we have Non-strategic assets and we could get a good price to those assets, we would look at disposing of those.

And at the same time we might increase our position regionally, you know, where we have a strong strategic -- strategic interest.

So it could go either way, could go both, could go both ways.

But certainly for us, in this cycle has proved it again with our vertical integration, we consider, you know, the raw material in our ability to be very competitive on the raw material, a major strategic competitive advantage for us.

Okay.

So we don't expect to see any -- at this point there's not a likelihood of any assets, unless a good opportunity arises through a particularly good price?

Yes.

Okay, thank you.

Aldo Mazoferro (ph) Goldman Sachs.

Hi Stan.

Hi Aldo.

A question on the marketing and distribution division.

That year to year gain in revenues which I think was a little bit more than 30% or so, could you help us in terms of how much of that might have been volume and how much might have been price realizations or other things that might have driven that revenue line?

It's probably a combination of both.

If we're just kind of walking through the various areas in international, it's -- you had volume increases because we expanded our distribution operations in Australia very early in the year, we bought out a competitor.

And also, the Chinese, and you'll recall from previous quarters, that kind of waxed and waned.

It was strong in the first and beginning of the second quarters, and then they closed up shop for a couple of three months and then came back strong at the end.

So there, it was a -- both a volume and a price.

And of course China as Stan mentioned caused the prices in the rest of the world to have to react as well.

We had better volume in the U.K., surprisingly, for a Western European market that was pretty good for us.

Volumes out of our joint venture arrangements with our [Trinecke Zelezarny] partner were also up, although the pricing wasn't quite as strong inasmuch as that is going into Western Europe.

Here in the United States it is a mixed bag price.

Probably as a whole I'm mixing up a lot of stuff like copper and aluminum and brass, were probably down, as volumes were down.

About the only -- and certainly steel imports in the United States which is what drives our domestic Dallas trading operation, were down, but the only bright spot in the domestic market was our co-metals operation in Fort Lee, New Jersey, the importers of minerals chemicals and ores, they had a very good year.

We also had Aldoe with our domestic operations increased third country business.

Our iron ore sales to China were up.

The -- we exported some steel from the U.S. which -- so I would say was -- like Bill said, volume as well as pricing in a number of cases.

I know that freight rates are up a lot, too.

How would that impact your numbers, if freight were up?

It could -- it could have some, in the near term, I would say some negative impact.

I think the freight markets, the freight market is one of these bubbles.

It's at levels we have literally never, never seen.

We don't -- you know, of course a lot of our market and distribution business is regional.

So we're not so affected, affected by it.

It will affect, it will impact some of our business in probably more in I'd say in the first half of the fiscal year.

Is that because it takes time to pass it through, Stan?

Well, well, that and of course, the other thing that you -- to the degree you have cargos booked, and you know, unfortunately we are not involved with large numbers of cargoes, you -- it's important to get performance when you get that kind of rise in the freight market.

Uh-huh.

Did you --

But as I said, I think, you know, for us, you know, a lot of our business now is regional.

And of course, the nonferrous is container, container shipments.

Now, again, those freight rates are affected but nothing like, you mean, these -- it's the bulk cargo vessels, you know, the Panamex vessels, even the Andy size which would normally be the size in which we'd be shipping.

Right.

But you -- you lease those vessels, and then charge -- I mean, I guess the freight rate would be an expense to you, but I think you could ultimately take it out on the customer, wouldn't you?

You can, but of course this is an issue now with the scrap market which we don't export.

Just as an observer.

I mean, if let's say if the export price is $183 a metric ton, CIF, to China, South Korea, and then suddenly you want to charge them another $20 a ton because the freight market's up, I mean at some point they can't keep paying it.

I don't think they can keep paying it even if the freight market didn't go up.

I mean, that depends on what price they can sell their steel at.

Okay.

But the ability to pass that along will depend on, you know, ultimately on their ability to get high -- if it persists, to get higher steel prices.

Okay, thanks, Stan.

Sure.

We'll move to a follow-up from Eric Fell

Just wanted to get better clarification or clarification on something you said earlier on recycling margin.

Someone had mentioned you might expect recycling margins to head down you know as going forward as scrap prices went up.

Is that what you said and is that going to be offset by improving margins on the manufacturing side and would that more than offset the decline in recycling?

Well, when I was talking about, the question related to the unit, unit margins on specifically in this case more on steel scrap.

And we didn't say that we would expect our overall margins to go down in recycling.

And it may well be on, you know, if there is an overall decrease in gross margins, because volume -- you know, we would expect volume to hold up well, particularly as more scrap is generated now industrially, because of the pickup in the manufacturing part of the economy.

So it could be a fairly good market, continuing good market on steel scrap with a slightly different dynamic, if you will, than the last year or two, where some of the -- or a significant part of the price increase also has come from the supply side.

But we also have the nonferrous side actually looking better, looking better now.

So now, the other part of your question, the big improvement we expect this fiscal year is in the manufacturing.

You don't necessarily see a decline on the recycling side?

No.

Okay.

All right, thank you.

And a follow-up from Richard Firie.

Yes, just doing a quick back of the envelope free cash flow for you guys and it looks as though your working capital worked against you this last year.

I'm wondering if you are doing anything more to correct that or make that look a little bit better in the coming fiscal year.

We pay very close attention to that.

I think you're right, if you just kind of pick up the raw numbers.

Some things though that you have to realize is that a lot of the increase comes out of marketing and distribution.

They generally, as a rule, have both credit insurance or letters of credit that back their sales.

And so from a working capital standpoint, I worry less about that.

But as business does pick up, we will be paying close attention to, you know, appropriate inventory levels.

And you know, let's not kid ourselves.

I mean, there is still a lot of weakness in the United States economy.

And we have been very diligent at looking at credit lines and following up on customers, because you know, there is -- there are still, you know, some potential bad debts out there that we're going to eliminate before they happen.

All right, thank you very much.

And those are all the questions I show at this time.

Did any of our speakers have any additional comments?

I don't think so.

So we will be in New York on Thursday, and for investor relations meetings.

Boston on Friday, and then next week, Bill and I will be in San Francisco, and then Bill --

I'll be in LA.

Bill will be in LA.

So we thank you for your participation, and we look forward to seeing most of you, if not all of you.

That will conclude today's audio presentation.

And again we do thank everyone for their participation.

Are we done operator.

Yes.

Everybody has disconnected, do you need anything further?.

Have a good day.