Commercial Metals Co (CMC) 2004 Q3 法說會逐字稿

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

This conference is being recorded.

At this time for opening remarks, I would like to turn the conference over to the Chairman, President and Chief Executive Officer of Commercial Metals Company, Mr. Stanley Rabin.

Good afternoon, everyone.

It is our pleasure to be here.

Usual format -- I will speak at the beginning very briefly, even briefer than usual.

Bill Larson will give the bulk of our presentation.

I will talk then about the outlook, and then we will take your questions.

Let me just start -- I could be subtle -- let me just start out by saying it's a buying opportunity.

It was a superb quarter, simply superb by any measure that one can use.

We generated profits from a variety of related businesses and from a multitude of operations.

We generated profits around the globe.

Virtually all of our operations were profitable to extremely profitable, and where we have had the biggest lag in the fabrication, as we mentioned in the release, improvement is occurring there.

We're booking business at better prices, at higher prices, so the outlook there also looks favorable.

Our vertical integration has worked extremely well.

With the very strong raw material markets for our scrap, it has been a real benefit to have that tremendous presence that we have in the scrap procurement and scrap processing.

As we also indicated there, because of the nature of the markets themselves, where they actually peaked during the quarter and then had some corrections in a number of cases -- and I'm talking here more the scrap -- that there was some shift in profits towards the mills, and as I indicated, towards the fabrication.

Huge increase in our LIFO reserve, and we, of course, are of the belief that a substantial increase in the LIFO reserve during a period of rising prices is a good thing.

The domestic mill pricing is firm.

And in general, just a sensational quarter and a strong outlook, which I will talk about in a few minutes.

Bill?

Good afternoon.

Let me call to your attention the detailed Safe Harbor statement included in our press release, and it's also included in our August 31, 2003 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 have given guidance regarding our outlook for the fourth quarter of this fiscal year and early fiscal 2005 in our press release.

Subsequent to this call in our meetings in New York City, Chicago, and Milwaukee this week, we will not be commenting further and will not be under any obligation to update our outlook.

In accordance with Regulation G of the Securities and Exchange Commission, you are aware of items now known as non-GAAP financial measures.

Some of these have derived fairly straightforward from our financial statements or in common business use to be the subject of our discussions today and in our investor visits.

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

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

As Stan said, the results were nothing short of phenomenal.

Records have been shattered, both operationally and financially, and our prospects continue to look strong.

Prices have risen to the extent that our LIFO expense for the nine months -- get this -- our LIFO expense for the nine months was greater than our pretax income all of last year.

Our recycling and marketing and distribution segments achieved all-time quarterly earnings.

Our Polish mill, CMCZ, continues to perform magnificently.

And with Poland's accession to the EU on May 1, the future appears bright.

Our fabrication segment is coming around and should be building momentum in future quarters.

You know, it has got to be interesting times when our segment with the lowest sales increase achieved only a 45 percent increase over the prior-year quarter.

The sales growth was led by recycling, which almost doubled its sales.

Adjusted operating profit rose almost geometrically across all of the segments.

Our LIFO reserves that Stan mentioned sit at $53.2 million as of May 31.

The results for the quarter on LIFO, it decreased net earnings $16.2 million, or 54 cents a share, versus last year's decrease of $3.4 million, or 12 cents per share.

Then for the year -- so for nine months, LIFO has decreased net earnings $23.3 million, or 78 cents per share, versus a decrease of $5.2 million, or 18 cents per share.

If you look at our gross margins, our domestic mill margins are expanding.

The fab operations are improving.

Recycling continues at historic highs and market and distribution margins are staying very strong.

Depreciation for the quarter was $18,335,000.

That then brings the year-to-date to $52,328,000, and I would anticipate that depreciation for the year -- for fiscal year 2004, which will end August 31, will be $71 million.

You probably saw that SG&A expense rose $48.9 million this quarter versus the prior quarter of last year.

This is attributable in the main to profit-sharing and incentive compensation.

These are two items that run with profitability and they accounted for over 70 percent of the increase and a similar amount for the nine months.

Interest expense, if we look forward to the fourth quarter, should be about the same.

I would anticipate about $7.7 million in interest expense for the fourth quarter, and that does include the debt on the books of the Polish entity, which does not have recourse to any other entity at Commercial Metals Company.

Our interest coverage, as measured by EBITDA, is well over 12 times.

Our balance sheet is in very strong shape.

Of our $1.9 billion in assets, only $42 million or so represents intangibles.

Our net working capital is $594 million and the current ratio is 1.8.

We did have some improvement in our Days Outstanding and Accounts Receivable.

In spite of the good times, and maybe because of the good times, we are being very watchful on receivables.

You can get swept away by some of this earnings momentum, and some sales that were worth only $5 million last year, the same sale is worth $10 million this year.

And you have to constantly ask yourself if the creditworthiness of the underlying customers is still the same.

So we are being very watchful on that.

Our debt ratios are in good shape.

Our long-term debt to cap ratio is at 37.8 percent and our total debt to total cap plus short-term debt is at 39.8.

The book value per share at May 31 is 21.01.

The third quarter diluted shares were 30,134,716.

And for the nine months, the same diluted shares were 29,670,944.

The actual number of shares outstanding at May 31 was 29,147,853.

Capital expenditures for the third quarter were 18.6 million, which brings it to 33.2 for the year.

Our budget is $61 million.

I would not anticipate that we would get to 61.

Perhaps we will end up about 50 or in the low 50s.

That of course does not include the acquisitions of either the Polish mill or of Lofland.

We did not repurchase any stock during the quarter, nor have we done so for the year, and therefore the remaining authorization at May 31 is 1,116,152 shares.

Thanks, Bill.

Quickly on the outlook for the fourth quarter.

As we said, continued strong results in the fourth quarter.

Generally, third and fourth quarters are stronger quarters for us, with the usual strong shipments to the construction industry.

We have given a guidance for LIFO, LIFO net earnings of $1.45 to $1.65 per share.

That includes an estimated 10 to 15 cents per share as a result of the transformer failures at the Texas minimill.

I want to comment here about the heroic effort, literally, by our people in the steel group to get the mill back up and running in a relatively short period of time, considering (ph) we had the unprecedented situation of two transformers failing at the same mill.

Otherwise, as Bill said, margins are good and improving yet, and so our domestic mills overall should be strong.

Copper too -- that business is good.

Profit is good -- should maintain roughly where we are.

Our Polish (indiscernible), CMCZ, rolling along at these very good levels.

Fabrication on the upswing.

Recycling will retreat some, but the ferrous scrap market was up a little bit in June and we expect it to be up in July.

But as I indicated earlier, there is some shift in profits.

But we do expect the recycling to continue to do quite well.

And marketing and distribution might be off a little bit from where they were in the third quarter, keeping in mind the third quarter in marketing distribution as well was a record.

And of course, LIFO looms large.

And as we take a brief look out towards the first quarter of fiscal 2005, beginning September 1st, we would expect to see further improvements in the U.S. economy, particularly in construction.

Non-China, Asia is good.

We are seeing what we would consider to be a soft landing in China.

Lest it be misunderstood, from our vantage point, a soft landing is an extremely positive development, assuming they can continue to bring that off.

And already there has been in recent days -- the Chinese have come back into the steel scrap market.

They have -- still holding off somewhat on their non-ferrous purchases, but that is a positive sign.

Some backoff in Australia and further growth and building in what we call the new European Union.

So, strong profits, but again, some change in the mix.

But again, our tremendous diversification by product and by geography and vertical integration should continue to serve us well.

And we'll take any questions now.

Thank you. (OPERATOR INSTRUCTIONS) Barry Vogel with Barry Vogel & Associates.

Quite a quarter!

Yes, we agree.

You couldn't stop talking about it, it's so good.

If we don't talk about it, who will?

Anyway, on your sheets that you give us with all that great information, you had average FOB mills domestic selling price per ton on total sales and on finished goods.

And in the quarter, you had $409 on total sales, and $416 on finished goods.

Could you tell us right now, today, where those two numbers are -- approximately?

Either one of us can answer, but Bill will be happy to give you --

I am glad you asked this, Barry, because I asked that point-blank.

If you were purchasing rebar in Texas today, it would be between 520 (ph) and 530 per ton FOB mill.

Various -- and then to just to switch continents, if you were overseas, the same rebar in Poland would probably run about 460 -- that would be metric ton, though.

So take about 10 percent off of that.

At merchant --

Wait, wait.

The 520, 530 in Texas, is that before that 10 percent or that's okay?

That's okay.

No, that's okay.

And that's rebar.

Our merchant bar prices and light structurals are higher.

Higher?

Where?

About 540?

Yes.

And on the same chart that you give us, is there a scrap purchase price per ton, which was 171 average for the quarter -- where is that now for you guys?

That would be lower than that, because I'm not exactly sure where that -- for example, in June, in terms of selling prices from our scrap -- from our secondary metals processing division, they sold shredded, generally speaking I would say, at an average of -- let's say about 170 -- probably shipping point -- or delivered, let's say 175 a short ton for shredded, and other grades would be lower than that.

So what would an average be right now?

Probably more like about maybe 150, something like that.

All right.

Which means that your metal margin is skyrocketing versus what it was in the third quarter.

It is very satisfactory.

One other question.

The Polish operation, which we have talked about several times, how in the world did it earn $32 million in one quarter of operating profit before minority interest with lower tonnage than the prior quarter?

The general reason I would say, Barry, was that selling prices went up even faster for us there than they did domestically.

Is that what happens when you come out of the winter?

We have only come out of one winter there, so we can't speak with the experience and authority that we have in other places.

Because we've asked you how much money you thought you would make there, and this blows away everything that you might have even talked about.

It was better.

Thank you.

I will let someone else ask a question.

Michael Christodolou with Inwood Capital.

I was just curious maybe to elaborate on some of the rebar pricing trends you're seeing, and some of the structural shapes trends you're seeing across some of the construction markets in the West, Southwest and more toward the East Coast.

At the mill level, I would say prices now are -- I would characterize them as steady at the higher levels, generally speaking.

In the downstream businesses, we have seen the upward trend, because there's a lag in getting those prices up, and particularly as an old contract rolls off and a new one comes on.

So each one of those is a significant improvement in the fabricated price.

And again, your policy has not been to do surcharges but to put through price increases.

Generally speaking, your positioning has been that you will lag on the way up, but then you're going to keep it more as it moves sideways to trending down.

Where are we in that sine wave now?

I think we are still in a period of tight steel and strong price, so I don't -- consumers are pretty much buying steel where they can get it, so there is not as much differentiation right now.

On the fabrication, I don't think there is any doubt that we are still on the upswing, that their peak earnings are yet to come, which will occur when the cycle turns and the prices begin to fall just a little bit.

That is when they will be in their sweet spot.

Thanks very much.

Great quarter.

John Tumazos with Prudential.

Congratulations.

The numbers are amazing.

Thanks, John.

Could you talk a little about acceleration in U.S. markets, particularly capital goods markets, and whether the U.S. is moving ahead faster than China at the moment, or if any gains in the U.S. are much greater than the corrections in China?

It feels like the world markets are collectively still growing (indiscernible).

John, they are, and I think the pickup in the economy here has generally been underestimated.

And I think part of that is because with the political campaign going on, you're going to get a lot of negative comments as well as positive comments about the economy.

But in terms of looking at it in an apolitical sense, it is strong.

And where we have the typical lag, an area like office construction, we are certainly optimistic for 2005.

And certainly in the area of capital spending, capital investments, it definitely seems to have picked up.

In the short term though, China, as you well know, is such a factor that when they do pull back, it is going to tend, as has happened, it tends to drive prices lower.

So on steel as well in Asia, we have had some pullback in prices.

The encouraging thing is more recently, we are seeing -- generally in China and Asia in general, (indiscernible) prices after that pullback either leveling out or even moving up a little bit.

So yes, overall, we're quite positive.

Could you describe a little bit the Polish economic backdrop?

I confess I don't have as many opportunities to focus on Poland as I wish.

Okay.

Poland is, I think, fairly typical of the countries in that bloc, which we now call Central Europe, in that Poland has generally been growing more quickly than the -- as the accession countries overall than the 15 countries previously belonging to the EU, although that has been dragged down by Germany.

Poland, one of their main lacks is an infrastructure, which we view as a real positive.

Poland does have some issues in terms of they have had frequent changes of government and all.

But it is, I think, a fairly remarkable country, and hard-working, skilled people with, as I say, tremendous prospects for construction ahead of them.

Which typically, if Spain is any indication, which we've often looked at as a barometer for what could happen in Poland, you would see tremendous increases in construction and tremendous increases in consumption of rebar and wire rods in Poland.

And it is a fairly large country in that part of the world, with about 40 million people.

So we are quite optimistic.

The currency is high.

Some mixture -- it's a little hard to (indiscernible) figure out what proportion is to the euro and to the dollar.

But it has been relative -- it is in a trading (ph) range since we got involved, and not any great move in either direction.

So for us, a positive backdrop.

Thank you.

Frank Dunau with Adage Capital.

Seguin, is that going to be up and running -- after the fourth quarter, is that going to be behind us or is that going to swap over into the first quarter of fiscal '05, too, in terms of hurting earnings and stuff.

We expected the reinstallation during September, and so hopefully the early part.

But it's a little bit early to pinpoint when that would be.

Okay, and now on the mathematics of LIFO, which I always find to be interesting, what drove the LIFO charge this quarter -- am I correct, it wasn't so much scrap as it was everything else you've got in inventory?

Or how does that work?

I will let Bill answer this one.

Yes.

The major driver, it is the snowball effect, and that is the fairest scrap prices in and of itself, since we hold that in inventory, (multiple speakers).

But since that is right now well over 50 percent of the cost inputs into the finished goods, that is causing them to rise in price.

And so you have got this tide rising and pretty much so, the LIFO is coming from higher prices.

There is some quantity and mix changes involved, but the easiest explanation is definitely the rise in prices.

And if you had to point to one, you would point to ferrous scrap, although I would point out that other commodities that we trade in -- for instance, ferro alloys -- are having a heck of a run of it.

Some of them have doubled in value over this last year.

So almost everything that we traffic in is up pretty much.

And nonferrous semis have moved up in price.

As Bill said, it's quite a number of items for us.

Okay.

And just remind me, how much did you pay for your interest in Poland again?

I know you gave that number out at some point.

It was -- well, on a 100 percent basis, it would have been about -- not quite $120 million.

We only brought 71 percent of it, but it's easier to understand in terms of what the whole interest would have been valued at.

Okay, that's all I wanted.

So if business keeps up (ph) like now, take about a year to pay it off -- is that about right?

Yes, we want to be a little leveraged.

Okay.

And that leads to the last question, with all this cash you are all generating here, and I saw you raised the dividend.

Anything else you want to do with it?

We seem to want to put it into receivables right now, but I would say that right now, really no preference.

But we will really be in a stronger cash, as opposed to working capital, position once the tide turns and the prices either level out or fall a little bit.

That is when we will get some of this inventory profits back in.

And I might as well ask another question.

On receivables, there’s some other commodities that I follow where this volume started to slow down because people like yourself felt uncomfortable extending credit.

What you were talking about -- the same volume -- your customers are buying the same volume, but the amount they are buying is much higher in dollar terms and they felt very uncomfortable doing that.

Have you ratcheted anybody back in terms of just not letting them buy as much in terms of buying, because you are worried about their creditworthiness?

Frank, there have been some situations where we've done that, because there is no question, that is one of the challenges, if you will, of a period like this, where you have high volume and high prices.

And yes, we have done some of that.

Some of our entities are covered by credit insurance.

And also, we have continued to increase our bad debt reserves.

Okay, that's it.

Thanks.

Great quarter.

(indiscernible), First Allied Securities.

Just want to let you know, great quarter, as per usual.

On a couple of issues, have we got any new research reports out there at the moment?

Well, the newest one, Mr. Mazzaferro of Goldman Sachs put out a note this morning.

I won't paraphrase it, lest I say something that shouldn't be.

But it was very positive, and as Stan said, it is a buy opportunity.

Good.

Excellent.

The other thing is obviously where I'm finding a lot of questions that are really coming out is the future.

And a lot about Texas, for example.

Like you have the Texas roads and construction company on the build (ph).

Does that benefit you guys, and is that something that is out in the public domain?

It does.

We have always been strong in the highway program.

If anything, we've strengthened our presence in the highway program.

And I made the comment in the release, right at the end, about this issue of state budgets in general improving.

And I just don't think people are honing in on that at all.

So to the degree that the limitations at the state level have hindered construction the last several years -- and it has been pretty good, but it would have been even better for the states in better shape.

Some of that should loosen up and should improve.

And of course long-term, as you know, Texas has some very bold and innovative ideas -- not just ideas, concepts that they are implementing in financing and designing and planning this major transportation corridor.

So long-term, there is a tremendous outlook for the Texas.

Good, I think when I watch how you guys have been performing and then just watching the stock, the only thing that explains it out to me in any form, just by having discussions with different people, is the idea that the people are saying, look, the future is not bright.

And obviously, if you suggest you are thinking that it should be bought, obviously the future is not looking pretty dim to you guys right now.

It is almost as if like everything has happened and there is nothing going to happen in the future.

And from all indications -- and correct me if I'm wrong -- it seems like the next few quarters ought to be very strong.

That's what we're certainly -- as indicated, quite certainly, we're very positive about the outlook.

Well, thank you very much and congratulations.

(OPERATOR INSTRUCTIONS) Sal Serani (ph) with Goldman Sachs.

I have a couple of quick questions.

On LIFO, in the past you used to break out into different divisions.

Are you going to do it this time?

Yes.

Are you going to come to see us tomorrow?

Yes.

I will have it then.

I didn't bring that sheet with me.

This is incredible -- two LIFO questions.

It's five times the amount we had projected.

Also, do you have any idea of what your adjusted operating profit at copper mill was?

Sure.

And I'll tell you that tomorrow too.

Okay, that's fine.

On the margin expansion you expect in the mill division, is that even after the 10, 15 cents loss you are going to take, even after that, or that does not include that?

No, that includes it.

Okay, and lastly, are you seeing any pushback prices from the imports?

We're hearing that China being not a big buyer now, and a lot of steel is diverting towards the U.S., there's a danger that long product especially will be under pressure.

Are you seeing anything?

Well, the long product, or some of the long product imports, have picked up.

But a fair amount of that has been in the buyers or consumers looking for imports to supplement the domestic availability, because of the tightness.

And there has been -- clearly there has been some weakening.

You saw our -- in Europe there has been some weakening of rebar prices, wire rod prices, and certainly in Asia, mostly out of China.

On the other hand, that seems to be leveling out, or even going up a little bit.

And if indeed we're in a period even where scrap -- were scrap to go up moderately, it has come off the bottom -- again, the bottom half of the correction (ph), then the mills will be under pressure to not reduce prices any further.

You guys have a very good penetration in China for a long time.

Do you see -- we are, of course, seeing that the demand is coming down over there, being strained by the government.

But on the supply side, isn't there danger that they will also reduce the supply by a considerable amount by restraining the credit to these companies?

I'm talking about steel only.

Yes, Sal, but I'm not sure I would call that a danger from our standpoint, because I think that is a positive development, to get rid of the small, inefficient producers, of whom there are quite a few with little capacity.

And the Chinese government wants to get rid of them because they are losers and they use high energy.

And I think in general, we have said this now for several months, the big thrust of what the Chinese government is attempting to do as far its cooling off is to slow the rate of investment in certain industries in China.

One of those is the steel industry.

And from the commercial metals standpoint, that is nothing but positive.

Yes, I believe so too.

Thank you very much.

I will see you tomorrow.

Here are your answers.

Copper tube made up about 10 percent of the domestic mills adjusted operating profit.

And on LIFO, of the 25 million pretax expense in the third quarter, $20 million of it came from the domestic mills segment; about $4.5 million came from the marketing and distribution; and about $0.5 million came from recycling.

Thank you very much.

Gentleman, there appear to be no further questions.

I will turn things back to you for closing remarks.

No more questions?

Well, I will say it again.

It just was a sensational quarter.

The outlook is good and we are excited.

And apologies to Boston this time; we are going to miss this time, but we need to visit the Midwest, and we will see you next time.

And we will be in New York tomorrow.

So thank you for joining us, and we will speak with you at the end of the next quarter.

And that does conclude today's conference call.

You may now disconnect.

Have a great day.