Commercial Metals Co (CMC) 2004 Q1 法說會逐字稿

Good day, everyone, and welcome to this Commercial Metals Company first-quarter 2004 earnings conference call.

Today's 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.

I'm going to let Bill cover the quarter as we've done in recent conference calls; and what I would like to do is just briefly talk about some of the key factors as they've been affecting our business and what's happening out there in the marketplace and elsewhere.

The global economy clearly has improved, especially in the United States and Asia.

Most notably we've seen a pickup in the manufacturing, not just in the US but globally; and I'd say in a broader sense a pickup in industrial production.

Construction is much more mixed by sector and by geography; but as I indicated in the press release, it's probably a little better at least in the US than we would've anticipated at this point.

And certainly some areas are recovering much more slowly than others like office buildings as you would expect.

But with some strength coming from the public spending, the infrastructure, some of the low-rise construction like distribution centers and the big retail stores, those areas are better.

The US dollar, of course, remains extraordinarily weak.

Today the euro as we speak -- not only as we speak but about 10 minutes ago was over 124 against the dollar.

The yen, 107.4.

Of course, this overall has been a positive for us and there's no indication yet of any near-term strengthening of the dollar.

The ferrous scrap price situation is remarkable to say the least.

As you know, we've had another spike in the price of steel scrap recently.

And that market gives every indication that it's going to continue to be firm and even strengthening.

Some new sales have been -- not by us because we're not an exporter -- but have just been concluded in Asia at even higher prices than -- and previously ocean freight rates remain extremely high; they have risen dramatically to at least in US dollars what are historically high levels, of course this in reverse this as the impact of making it much more difficult to sell steel into the American market.

China continues to be extremely strong, prices rising there, and this is both for steel and nonferrous metals.

I'd say here with the ferrous scrap price there's got to be some caveat, the concern about some type of bubble and it may be that the bubble lasts for two years.

We simply don't know.

But when we see both in the steel scrap market and in the Chinese market in general the kind of (indiscernible) price increases that we've seen, we just know that we have to be extremely careful as we have been in the past.

In terms of input costs, not only as for the steel has steel scrap risen significantly again but natural gas is around $7.00 -- Ferro alloys, graphite electrodes -- just about all the input costs are up, that's nothing new.

Conversely we've had a lot of success getting our steel prices up.

We're continuing to raise our prices and so just in terms of timing from one quarter to the next, we're confident we can re-establish our margins at very nice levels.

What we just don't know is which is the speed at which scrap is coming up compared with the steel prices.

The same thing is happening with Copper.

Of course, the good side for me -- those of you who know me know I've always been a firm believer that the copper market is a great barometer.

And yesterday it closed -- the (indiscernible) closes at over $1.00 a pound for the first time in six years; so to me that's quite positive.

Of course in terms of copper tube the copper more recently has risen more quickly than what we reported in the first-quarter that our two prices rose more than copper did, but our copper again is moving up.

Customer inventories are low from everything we can see.

Again, I think I said it after we reported our fourth-quarter results which isn't that long ago now, that I felt like a lot of consumers of steel and nonferrous metals misread the market and didn't continue with their ordinary purchasing, didn't catch the upturns in their own business so that this created I think a low inventory situation.

So again the key will be in terms of the level of profits, and we're quite confident, but the key will be the actual spreads and how quickly mill prices and fabricated prices move up compared with the underlying input cost.

But we particularly remain optimistic for the third and fourth quarters when spring arrives and we get that pickup in our business.

Just one other comment.

Again, we closed the transaction in Poland.

And so we are quite pleased with what's happened there and the future of that mill going forward and the positive impact it should have on our earnings.

Good afternoon, all. (indiscernible) Let me call to your attention the detailed Safe Harbor statement included in our press release and in our August 31, 2003 10-K.

The summary says that in spite of management's good-faith current opinions on various forward-looking matters, certain statements can change and not everything that we think will happen always happens.

In addition, we've given guidance regarding our outlook for the second quarter and our fiscal 2004 in our press release.

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

In accordance with regulations of the Securities and Exchange Commission you are now aware that there are discussion items known as non-GAAP financial measures; some of these have derived fairly straightforward from our financial statements or in common business use can be the subject of our conversation today and in our visits in New York.

You'll note the appendix of this quarter's press release where we've reconciled certain measures.

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

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

Straightforward, this was one damn fine quarter.

We earned 12.6 million after-tax or 44 cents a diluted share.

Included in continuing operations were two nonrecurring items, 2.8 million in expenses related to the early retirement of 89 million of our long-term debt due in 2005; and 1.5 million in income from the market value of the Polish zloty that was bought forward to close the acquisition of our mill in Zawiercie, Poland.

Our manufacturing segment rebounded from what was a disappointing fiscal 2003; recycling results continue to track the ferrous scrap markets and marketing distribution's global reach again paid off handsomely.

After quarter end, as Dan mentioned, we closed the acquisition of CMC Zawiercie, our 1 million metric ton mill in Poland.

This will give us a solid position in the most expansive part of Europe.

We straightened our balance sheet during the quarter as we retired 89 million of our 7.2 percent debt that was due in 2005.

Hidden (ph) in the Polish acquisition we're funded by the issuance of $200 million of bonds due in 2013 at a rate of 5.625 percent.

This extended our debt maturity profile and lowered our overall effective long-term rate.

If you can look now at the results spurred by both volume and price increases, each of our segments approached or exceeded a 30 percent sale or increase over last year's first-quarter.

Offer operating profit rose over 200 percent and CMC had its finest first-quarter in over 15 years.

Our LIFO reserve at November 30th stood at 18.7 million.

The LIFO effect this quarter decreased net earnings 818,000 or 3 cents a share versus last year's first-quarter where it increased net earnings about a penny a share.

Our manufacturing segment increased its gross margins both sequentially and over last year's first-quarter as finished goods price increases begin to add to our metal margins.

The recycling segment's margins remained at historic levels -- at historically high levels -- and though results were good at marketing distribution there were some margin erosion mainly in the United States markets.

The depreciation and amortization for the quarter was 15,123,000, and I would expect depreciation for the year of 2004 to approach 68 million.

But I've mentioned the two nonrecurring items during the quarter, our debt expense of 2,792,000 and the mark to market of the Polish zloty forwards of $1.5 million at November 30th.

SG&A increased a little over $11 million this first-quarter versus last year's first-quarter.

Over half of that will be attributed to our incentive compensation program which rises and falls with the results of the Corporation; the next largest was salary expense which went up about 2 million.

Of that about half of it was attributable to new acquisitions we made during last year that were not with us in the first-quarter of last year and they are with us now.

I would note that around $600,000 of the increase in total SG&A is due to the movement in foreign currencies.

As Stan has mentioned, the US dollar is weak and therefore the translation of our foreign subsidiaries results back into US dollars has caused some of the SG&A to rise.

Interest expense for the quarter was 5,094,000.

We capitalized 48,000 and we had 116,000 of discounts on our accounts receivable program.

I would anticipate because of the new debt, both that was issued here in the United States and that which was acquired when we bought the 71 percent share of the Polish mill, that our interest expense for the second quarter would approach 6.4 million.

Our EBITDA to interest coverage was well over seven times.

We had balance sheet assets totaling 1.4 billion, and of that less than 10 million represented intangibles and less than 7 million of that represented goodwill.

We had net working capital of 540 million at November 30, and the current ratio was 2.2.

The book value per share was 1866.

The average shares diluted were 28,999,960, just short of 29 million.

The actual shares outstanding at November 30 were 28,325,301.

Capital expenditures for the first-quarter were 7.1 million.

The budget for 2004 would be 61 million which does not include the mill in Poland.

We did not repurchase any stock during the first-quarter which means that our remaining authorization was the same as it was at August 31st at 1,116,000 shares.

Okay.

That concludes our presentation and we'll be happy to take your questions.

(OPERATOR INSTRUCTIONS) Barry Vogel of Barry Vogel & Associates.

Congratulations, gentlemen.

The first question I have is yesterday you're very well aware that Newcor announced -- for what I believe is the first time since I've been familiar with the company -- that they are instituting effective January 1st a raw material surcharge.

As you know, Newcor has been very aggressive in trying to raise prices to offset the scrap squeeze which is the primary culprit.

And I was wondering if you thought about what they did yesterday and what you would do assuming that they stick to their guns and they keep that in place.

We will decide shortly our position.

It's quite possible we will not do what they've done, that we would institute another price increase as it becomes necessary based on what's happening.

Why wouldn't you put it in?

Because if we don't it's because we've concluded that we feel like a better way to go is to continue to increase price.

Okay.

Now as far as the scrap prices, we all know, Stan, that you're very conservative; and I know that if we would've mused about where scrap prices would be today, you probably would not have projected this.

What is your feeling now, given what you know about China, as far as where scrap prices can go?

The only correction I would make is that it wasn't probable;

I would not have forecast that we would be at these price levels.

The weakness of the dollar notwithstanding.

One of the big issues for me is how these mills in places like South Korea and Turkey can continue to keep paying higher and higher prices for scrap.

As I've been saying for some time, fairly consistently, and China is in the same category, China is a little different because of their huge domestic market -- but that these overseas mills have been consistently paying for given grade of scrap like shredded it seems to me about $20 a ton higher than our prices here in the US.

What we are seeing, of course, they're having to raise their prices consistently like we've been able to do in the US, but I just don't know what kind of margins these mills there -- some of these countries have at these kind of price levels where they're almost totally dependent on the imports of scrap or dependent to a large degree.

So we'll just have to see how all this plays out.

I've been through a lot of cycles including '73-'74 when we had what I thought at the time was the most extraordinary rise in the price of steel scrap and in fact nonferrous at the time as well.

But we are again in uncharted territory.

We'll just have to see.

But of course as we've said in our meetings and comments to the investment community, if we could sell steel at $500 a ton and pay $280 for scrap and our spreads 220, that's okay.

Where is the price of scrap right now in the United States?

Shredded is actually probably around 100 -- probably around this month -- now this is a long ton so we have to take off about 11 percent -- I'd say about 100, probably on average about $188 a long ton delivered, this is to a variety of consumers.

Then these are our -- I'm basing this on our own sales.

So if you took off 11 percent, you take off about $20?

Yes, because it's 22.40 so, yes.

So about $168?

It would be a long ton?

Yes.

I mean a regular ton?

It's going to be higher -- well, figure over 170, but a short ton, yes.

On your LIFO, and this might be a question for your Chief Financial Officer.

I was surprised that your LIFO charge was so small given the rising prices.

Can you explain that?

I wish I could explain LIFO.

More often than not it's a question of the mix of the inventory, Barry.

Okay, so that's your answer?

Yes.

Okay, thanks very much.

Continue the good work.

I'll see you tomorrow.

Charles Bradford of Bradford Research.

Good afternoon.

I'd like to also focus a bit on the scrap since that's a pretty high portion of your cost, at least on the steel mill side.

You referred to Korea and Turkey specifically, would that imply that they're the bigger drain or sucking sound if you will on scrap or --?

No.

I was contrasting them with China.

For example, well, let's say specifically on long products China, and you would know the number, let's say their domestic market is 40 million tons, whatever that exact level is, it's a very big domestic market and they don't import, at least historically, let's go back to 1993 when they were last importing long products in any significant degree that I can remember.

They may have an ability -- may, I don't know -- to pay higher prices than I would think mills in South Korea or Turkey could pay.

That was the contrast I was trying to draw.

Because China has got a pretty small minimill industry, electric furnace industry and it's pretty big in Korea.

Yes, except China is a big producer now of -- internally of long products.

Where are you seeing the long product prices in the US?

You refer to maybe not going along with the surcharge.

Where are rebar and merchant bar prices these days?

Probably the current price, of course there's a whole range, but it's probably in the neighborhood now of around $400 a short ton.

It doesn't mean that what we're shipping is at those levels, but current selling prices would be of that magnitude.

Okay.

In your earnings release you had an average price for scrap of $118 -- for your purchase price.

Where would that be today given the big increase in prices for factory bundles and whatever over the last couple of weeks?

I would guess it would probably be more like $150, that's a fairly -- that's just a real guesstimate.

Your purchase price, not your selling price?

Yes, but I'd have to actually see the numbers because it's a blended price including turnings, number one heavy metal, shredded, some of the other grades we would buy.

Okay.

What's your feeling in regards to inventories of scrap at the yards?

You know what yours are presumably.

Do you have any sense of what the situation is in and around the country?

I think inventories are low, clearly I would say they're low.

Because at these price levels, even the most speculative scrap processor is going to keep it moving.

Given the seasonality in the business, usually with scrap up during the winter because it's so hard to collect, when do you see maybe some increased supply of old scrap or the typical reaction that's happened in the past like in 1974, with supply jumping pretty dramatically?

Of course, prices are sufficiently high that any obsolete scrap is going to be -- there I cannot imagine a change based on pricing at these levels.

I think where we are beginning to see an increase is in industrial scrap.

But clearly given the current level of demand the supply is not adequate in terms of pricing because prices continue to rise.

Yet the American Iron and Steel Institute on Monday said the average operating rates are less than 78 percent in the US in the steel industry.

I saw those numbers and this is a steel scrap market that for a number of months has been driven by -- the price increase has been driven by exports.

Thank you, see you tomorrow.

(OPERATOR INSTRUCTIONS) Sal Sarani (ph) of Goldman Sachs.

I have a couple of questions.

I missed a couple of minutes at the beginning.

Are you making comments on your Polish acquisition also?

Only that we made it and we paid 200 million zloty for it.

What I want to know it are you expecting it to run at full capacity or is it not running at full capacity currently?

I have to be fairly general and this will be probably the first of many times that I will ever concede the weather to results.

I've never been a big fan of the weather because if bad weather causes bad results then why doesn't good weather cause good results.

But in Poland December, January and February are the -- are pretty severe weather months; and the general operating philosophy is to run as much as you can perhaps market bill its (ph) as well as finished goods to maintain the scrap supply and the mill going.

However, that one, of course, is going to lower your average realized price.

I would say that you probably cannot expect during the winter months that we would be flat out.

I think you'd expect us to operate at a good rate but not flat out probably until the spring.

Okay.

And what kind of operating profit per ton do you think this facility can produce in a normal cycle?

I think you're go to have to let us operate it for a little while, Sal.

I mean we know what's been done historically, but that really wasn't under our operating philosophy, our financing, our way of approaching the markets and the coordination with our marketing/distribution guys in Europe.

I mean, I don't want to be coy, but I really think we need to find out what we can do with it.

Okay, fair enough.

And your second-quarter outlook of 7 to 10 million FIFO, does that include the Polish acquisition also there?

Yes, it does.

And the range is -- I know it's probably a little disappointing in that it's quite a range, but there's just a lot of what ifs out there and I think the range isn't so much the concern at the bottom end as it is just how high it might get on the upper end.

Okay.

And one last thing, on your copper tube division, it did a wonderful job this time.

Is that something which is sustainable?

I think it is, but again we're in more of a squeeze there because the copper has recently again risen fairly quickly in the last several weeks, so we need to get our two prices up commensurate with the raw materials cost.

And do you expect on the steel side that the Newcor price announced as a surcharge and if for other minimills like (indiscernible), do you think that integrated mills can (indiscernible), would they be also raising the prices at this level?

Well, I can't comment or wouldn't on the integrated mills because we don't compete against them in our product.

The only observation I would make there is that iron ore prices are going up as well.

It's just -- although the scrap price rise has been the most dramatic.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS) J.P.

Benson of CIBC World Markets.

I've just got a question about your guidance for second-quarter.

It's seasonally slow so I assume your volumes are down.

I'm wondering what you're assuming in terms of your metal spreads.

Scrap has really taken off in the last couple weeks, you've obviously announced a lot of price increases along with everybody else.

What's the underlying assumption on the metal spread?

Does it contract a little bit in Q2 and then you see it expanding out again in the second half of the year, or what's modeled in there at your end?

I would say that generally implicit in our numbers is that -- right, that's the scenario and we mentioned in our press release that we anticipate that margins would widen as the year progresses.

So we're going to take a step down potentially on metal spreads in the next quarter?

We might.

It's a very fluid situation and when you have scrap prices moving as quickly as they have been, and part two is how quickly those flow through which typically is more quickly than our steel price increases flow through.

That makes sense.

Okay, that's all for me.

Thank you very much.

(OPERATOR INSTRUCTIONS) Mr. Rabin, it appears there are no further questions at this time.

I'll turn the call back over to you for any additional or closing remarks.

I'll simply say again and let me reiterate what Bill said.

It was a darn good quarter and we remain optimistic for the year overall.

It's probably the best balance we've had in our business in sometimes.

So we remain optimistic.

I'd like to wish all of you a very happy holiday season and a happy and healthy new year.

For those of you in the New York area, we will see you tomorrow.

That's it.

This concludes today's teleconference.

Thank you all for your participation.

You may now disconnect.