Commercial Metals Co (CMC) 2005 Q1 法說會逐字稿

Good afternoon. My name is Richard and I will be your conference facilitator today. At this time I would like to welcome everyone to the Commercial Metals (technical difficulty) 2005 earnings conference call. (OPERATOR INSTRUCTIONS) Mr. Rabin, you may begin your conference.

Good afternoon, everyone. This was just another sensational quarter in a string of what have been very successful quarters. And first of all, I really would like again to thank the employees of Commercial Metals Company, because these kinds of quarters just don't happen. We continue to have, as we've been saying, the wind at our back, although perhaps at a lower velocity than in fact in the fourth quarter. But I think it again reflects the strategy that we've had, particularly vertical integration, and the diversification. And as we had anticipated, we saw some shifts in profitability from our different businesses, but everyone contributed to the outstanding quarter that we had. And of course the results included a $34 million pre-tax LIFO expense.

What we're most pleased about was the breadth of the earnings, led by the domestic mills and the market and distribution, but just, as I say, everyone participated. And the downstream operations had a very good quarter. And those results are gaining, as we had expected. The quarter -- and of course Bill -- as usual, Bill Larson will go into the details -- it included an advance on the South Carolina mill transformer business interruption claim. At the mills, I would just say the domestic mills it was the best quarter ever for each of the mills.

Poland, we were impacted somewhat negatively by the strong Zloty. Since we made the acquisition just slightly over a year ago now, we fixed the Zloty at 4 when we made the acquisition and the Zloty today is 3.07. So it's firmed even more than the euro has against the dollar.

Again, our downstream businesses are picking up steam, and most of the old jobs are gone with an excellent backlog and just improved results everywhere. Another great quarter for recycling, although continued very volatile markets. We've seen nothing like it in our history literally. And certainly I've seen nothing like it in 35 years or nearly 35 years, the level of the volatility; but volatility within relatively strong markets. And again, a very good quarter for our marketing and distribution.

As we said in the release, and I said earlier, while the wind was at our backs not quite at the same velocity, largely a result of the cool down in China. And most notably during the quarter, China became a net exporter of steel. Traditionally they are a significant net importer of steel. But we will talk about what we anticipate at the end. And now, Bill, you want to just get right into it?

Good afternoon. Let me call to your attention the detailed Safe Harbor statement included in our press release and in our August 31, 2004 10-K that in summary states 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 second quarter of fiscal 2005 and a general overview of the coming year in our press release. Subsequent to this call and our meetings in New York City tomorrow, we will not be commenting further and will not be under any obligations to update that outlook.

In accordance with Regulation G of the Securities and Exchange Commission you're aware of some non-GAAP financial measures. Some of these, if they are derived fairly straightforward our financial statements or in common business use, can be the subject of our discussions today and in our investor visits. But 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.

The question of sustainability is constantly being lodged against steel companies, even as we as a group continue to achieve superior results. I hope that those who doubt what the industry is now capable of doing will set aside their skepticism and look with an attentive eye. I borrow now terms from the high-tech industry, since it doesn't exist anymore. At the steel space and our new paradigm we have world and domestic steel consolidation; we have improving steel demand in major markets; we have the potential for future demand, not just from China but from India, Russia, Ukraine, Brazil. The ability to control significant raw material inputs is of major importance, and this is where Commercial Metals is uniquely positioned to gain from the new landscape as we've expanded our downstream value-added operations, have a solid international presence with our long-standing market and distribution network, as well as our mill in Poland, and maintained the Company's original business as a scrap recycler.

We earned 74 million in this first quarter. This used to take us a year and a half back when we had very good markets, not counting last year. Plagiarizing again from the tech sector, our earnings had tremendous bandwidth. Each of our 5 segments has superb results with a special nod towards our domestic steel mills, our downstream value-added fabrication operation and our marketing and distribution segment. Each of our segments achieved at least a 48 percent increase in sales and at least a 2.5 times increase in adjusted operating profit when you compare it to the first quarter of last year.

Our LIFO reserve stood at the end of November at $126 million. As Stan mentioned, LIFO expense decreased net earnings some 22.2 million or 73 cents per share this quarter versus a decrease of 818,000 or 3 cents per share. Staying on LIFO for just a second and reviewing the footnote that we included in our financial statements, prior to this fiscal year each quarter we estimated the quantities and costs for the year in calculating the annual LIFO effect. So in effect we were looking ahead to what the entire year's expense would be. We then took that estimate and prorated it across the current and the remaining quarters of the year. Now, for greater accuracy we have refined this method of estimating, and now we estimate the LIFO using quantities and costs as of each quarter end. So the resulting effect is recorded in its entirety each quarter as if each quarter were a year end. And therefore, if the assumptions or the prices and quantities -- not assumptions, but prices and quantities stayed the same as they were at November 30th, one would not expect any more LIFO for the year. Of course that's the only assumption that probably is not going to be true, and that is the quantities, the mix and the prices will stay the same. Nonetheless, theoretically if they were the same you would not expect any more LIFO. Under the older method you would have expected the exact same charge for 4 quarters in a row.

Well, we achieved record gross earnings and gross margins in our domestic mills segment. Our fabricators and recyclers and marketing and distribution also had very strong margins, though not at record levels. Poland was solid but with some pull back from the extraordinary levels achieved last year. Stand has mentioned that the strong Zloty has been a negative in the exports from our Polish mill.

Depreciation and amortization for the year was 19.1 million during the quarter. And we expect for the year for it to be about 79 million.

SG&A went up a little over 42 million. The largest components of this were the variable expense items of incentive compensation and profit-sharing; also, the increase in SG&A of Poland and Lofland since we did not own them in the first quarter of last year.

Interest expense for the quarter was 73 million. I would anticipate that for the second quarter interest expense will click up a little bit to a little over 8 million as rates have gone up some. However, our coverage ratios, our EBITDA-to-interest was well over 19 times.

Balance sheet is in good shape. Current ratio is 1.9. Our long-term debt to total cap and total debt to total cap plus short-term debt ratios are all falling. The book value per share was 25.64 at November 30th. The average shares we used in the first quarter calculation on a diluted basis were 30,461, 053. The actual shares outstanding at November 30th were 29,441,391.

Our capital expenditures including a couple of small acquisitions were 20.7 million. And we still believe that the budget for the year should be about 130 million. The largest project in that are a continuous caster at (indiscernible) Texas and a large shredder in Poland.

We did not buy back any shares during the first quarter, which means that our authorization for treasury shares (ph) remains at 972,305 shares.

Let me just talk briefly about the outlook. A couple of comments about investor relations. And one question for those of you in New York, is it really today 14 degrees Fahrenheit in Central Park?

As far as the outlook, the guidance we gave for the second quarter was $1.50 to $1.70, and we then commented we then expect earnings to reaccelerate. Typically the second quarter is our weakest quarter. There is some customer inventory trimming going on, particularly for those companies on a calendar year end. But we would then expect some inventory building based on the economy being strong to happen again in the spring. Non-China Asia is developing well. The Chinese New Year always is a turning point, and that will be around February 9. And in fact, I will be -- Murray McClean and I will be in China in late January, just before the New Year. And then we will be in a couple of other -- going to a couple of other countries in Asia.

Australia remains solid. And the business interruption claims are pending. The profits are -- the $1.50, $1.70 for winter months is exceptional. There will be -- we would anticipate some compression of our mill margins. There's been a little weakening of mill prices domestically on long products. Copper tube should be an okay quarter.

The Zloty will have its impact on the Polish operations. One thing that is helping us, or will help us, is the extreme strength in iron ore and coke prices, which those prices -- well, some of the coke prices have been set. Iron ore prices are being negotiated for 2005. But that will represent a significant cost increase for the integrated mills. And in Europe we do have some competition on our product mix from integrated mills. We don't in the US, but we do have some in Europe. So that will help us.

Fabrication will continue to do well and improve further. Recycling should be for a second quarter a strong quarter. And our marketing and distribution order books are firm. So, it remains a very positive outlook.

In terms of investor relations, as we've announced we have split the stock. And David Sudbury, our General Counsel, is here I believe. The New York Stock Exchange has approved the listing of the additional shares. We've increased the cash dividends on the split shares effectively. And that will be 6 cents a share on the new shares. Our stock performance has of course been good. In fact, some would say better than good. But I must tell you on a relative basis, when we look at our peer group, our multiples remain low. And we are a LIFO reporter unlike almost all of our competitors who either were on FIFO all along or several years ago went from LIFO back to FIFO. And we've been building this tremendous reserve in our LIFO inventory.

So, that's it. And then, I hope one of you New Yorkers will give this native New Yorker a weather report, because I'm not use to -- I expect this in Poland, not in New York City. So we will take your questions now.

(OPERATOR INSTRUCTIONS) Barry Vogel.

Wind chill 0.

Okay. Thank you, Barry.

Stan, take your overcoat. I have a question on that insurance claim advance. I was reading your 10-K over the weekend, believe it or not, and it was the best 10-K I've ever seen for a steel company. I don't know if it is Sarbanes-Oxley or you have a very conservative attorney, but I've never seen a 10-K like that.

There's another possibility, and that is management drafted a good one, Barry.

It was just phenomenal. I kept on marking it up because I couldn't believe the information you are giving out. But as far as these insurance claims, there was 2 things I want to ask you about. Was the South Carolina the only mill that had this breakdown or was it also Texas?

Also Texas. Well, it was not quite the same situation, but Texas -- Texas, if you recall, was where not only did the original primary transformer fail, but then the replacement failed. Fortunately we had another replacement that we were able to use, and then we of course -- at both mills we have pre-installed the original transformer. But it's both South Carolina and Texas.

I don't remember that. Maybe I'm getting older, but I remember it was -- was it the fourth quarter that 1 of these or both of these things happened?

The South Carolina occurred over a year ago in September of 2003. The SMI-Texas was in June of this year. Sorry, 2004.

As far as your P&Ls until today, are you saying you have not taken any -- until this quarter you haven't taken any into account, any of these insurance claims?

That's correct. Nor is any additional taken beyond the 4 million is taken into account in the projection or guidance for the second quarter.

Going back to Texas, in the same 10-K that I read over the weekend it says that the Seguin mill had lower operating profits than the year before. And considering the year that you had last year, that was a fairly startling thing to see in your 10-K. Can you tell me why that happened? Was it the transformer problem? Is that why you had lower profits in Texas?

Yes.

Can you give us a some idea of what the insurance refunds might be on that?

We haven't filed that claim yet. We're still organizing it and reviewing it, so we cannot give you that number yet.

You said it was significant in the 10-K.

Yes.

What is significant?

A number that would be important to investors.

As far as South Carolina claim, I guess that's an 18 million claim?

That's the initial filed claim.

What can happen beyond that?

It can go up or down. We are negotiating -- I don't mean to be flippant, Barry, and I apologize. But we are in conversations with the insurance company. There are a lot of factors that we pointed out in the press release that are open to good faith negotiation. And numbers can be refined and the claim can be revised.

Because this is not unimportant, because essentially you understated your earnings last year, fiscal year ending August, because of the Texas mill earning less money than the year before when none of your other mills can say that. And so I guess when do you think this will be solved, you know, completely solved between you and the insurance company?

The same time your house is, Barry.

So that must mean in this fiscal year.

I hope so.

As far as the fabrication, I see you earned $24.5 million in this quarter. Did you break out in the press release -- because I was too busy doing other things today, did you break of the LIFO expense by segment?

Yes.

Okay, you have that. As far as the fabrication, was Lofland profitable in this quarter?

Yes.

And the fact that you no longer have any of the old contract, is it safe to assume that you're heading for a record year in fabrication profits?

Barry, as we said, we're quite optimistic for the fabrication segment. Of course we have not given a specific guidance left for the fabrication per se. But again, we also said that most of the older jobs are behind us.

What was the most money you made in any single year of fabrication? Do you recall?

No, because it's only in the last year that we broke it out as a separate segment. It was always included in our manufacturing segment. And it was after we acquired Lofland, if you recall, that we made a determination to report it as a separate segment.

Okay, because if you earn 25 million in the first quarter, it looks to me -- and all these old contracts not only are gone but you probably have some left in this first quarter -- that you can be on your way to an incredible year in fabrication.

We've been quite optimistic about the fabrication.

Now as far as your balance sheet and your cash flow, obviously you're in enormously great shape financially. You are not buying shares back, which you didn't buy any in the last quarter. I know you're a consolidator, even though you have just consolidated only in fabrication in United States. And of course you made this brilliant acquisition in Poland. What is the likelihood that you're going to be doing more consolidating for your shareholders in United States in terms of steel?

At the right price and hopefully through increased shareholder value we will do some.

Thanks. I'm looking forward to seeing you at lunch tomorrow. I can't make it for breakfast.

Okay. Barry, we will see you tomorrow.

Frank Danue (ph).

In terms of Seguin, just on the (indiscernible) business interruption, since it occurred at a time when the market was stronger than when South Carolina had its little problem would it be fair to say that the claim would be larger than the 1 that you have reported so far in South Carolina?

It was over a shorter period, but the market was strong during that whole period. But South Carolina -- South Carolina being over a longer period, that began when the market was just beginning to recover, the steel mill market.

And the Polish Zloty, what is the key currencies I have to worry about in terms of when you get impacted on volume and shipments?

Most of all, it's relative to the euro. But also, because of the globalization and everything, the dollar -- relative to the dollar is important, because -- especially last year in the winter, we were able to export a lot of billets to Asia and right now that just wouldn't be feasible. That can change fairly quickly if the Asian prices were to pick up again significantly in dollar values and if there were some correction the other way, if you will, of the Zloty.

So you have now got this free (ph) capacity over there, given -- if I understand. So what do you do with it? So you just not run it or do cut the price or what?

We try not to cut the price. During the winter months typically it would run lower. Of course we have not operated the Polish mill, because we didn't own it, in the first quarter of the previous year. And last year the situation was ameliorated, if you will, by the very strong export markets. But so typically -- and this is the first time we've operated a mill in the north, literally. As you know, all of our domestic mills are in the Sunbelt. So it's just -- it's not totally different, but to a degree it certainly is different. So the typical thing would be to have lower production during the winter months.

Thanks.

Charles Bradford (ph).

It's 16 degrees in Central Park right now. Don't believe the stories about the snow on the ground; they're not there, at least not in New York City.

A question for you on scrap. We've seen quite a bit of volatility recently; beginning of the calendar quarter anyway scrap was moving up. And then recently it's taken a nose dive. What are you guys looking at for the next couple of months?

To not predict it at all. And I'm not being flip. The volatility is unlike anything I've seen. This month December domestic prices were down 30 to $50 a ton. But of course these are from extraordinarily high levels. And I really wouldn't give you a prediction for January.

There's been some correction, of course, overseas as well. And in fact in this case that correction really occurred first. There seems to be some indication again of a bottoming now after this correction of overseas markets. Turkey has done a lot of buying recently.

But again, when I say correction we're still talking about quite high prices. Domestically in December on average mean price we probably were selling ferrous shredded scrap at $220 a short ton, FOB. That's after taking freight out of it. So the levels are still quite high. But the underlying fundamentals are also quite good.

We're hearing that pig iron out of Brazil is running at about 310 for second quarter delivery. That would seem to put a ceiling on some of the busheling and scrap like that.

It won't put a ceiling on it because what will happen is pig iron -- if busheling goes past 310, pig iron prices will go up.

I thought busheling was about 390 right now?

I'm saying -- whenever the hell is, and we don't sell that much. It will just make pig iron go up.

I guess the Chinese have been traditionally big importers of shredded scrap from the US. Do you see them back in the market?

We're not the best ones to ask about who is specifically buying since we're not an exporter. We certainly avail ourselves of certain information. Yes, after the Chinese New Year I would certainly expect them to be more aggressive in the scrap market.

Aldo Fazzaferro (ph).

The question I had is on the steel mills. When you look at the increase in selling price versus scrap, the metal spread up about 3 or $4 on a sequential basis from fourth quarter into first, and then the profit per ton rising enormously, about $46, I can trace about 15 of that per ton to your insurance settlement. But I'm wondering if you could help us understand where the incremental $30 a ton or so came out of the conversion cost?

We will get back to you on that, because I want to be sure of those numbers. It's not that we're sidestepping it, but I want to be sure we're on the same page on that one.

The LIFO comment you made, I shouldn't interpret that to say that if you were doing it the old way the LIFO charge would have been 4 times, right?

No, I don't know what the charge would have been because we didn't predict what the prices and quantities were going to be at 8-31-2005.

On the old method, if we would have, let's say, predicted that it would be 40 million at the end of the year, it would have been 10 million then for the quarter.

Okay. That was really my question, was on the conversion costs. It seems like the mills are just getting tremendously profitable on kind of (indiscernible) volume. I was just wondering if there's something going on behind the scenes there.

Certainly the metal spreads were better, but I want to be sure, as I say, we're on the same page on the conversion costs.

Okay. I'll see you guys tomorrow.

(OPERATOR INSTRUCTIONS) Mike Christadulu (ph).

There was an article in American Metal Market a couple of weeks back that talked about NuCore (ph) and Bayou trimming some prices and some merchants in rebar. I think just because of the seasonal downturn in construction. What are your observations on that and where is CMC positioned with regard to those prices?

This (indiscernible) there about a $30 a ton decrease in prices?

Yes, that's the one.

That's taken effect.

And we went along with it.

What's your timeframe for that? You're totally talking about commercial construction reaccelerating in your second half. Is there a finite life to that pricing that you're anticipating?

There will be -- if we're right about the pickup in the spring -- and we're not only one. There's generally, I would say, fairly widespread optimism for the spring. And another factor was there was -- more so in some products than others -- there had been a significant increase in imports, for example, on reinforcing bar. Our sense is that that has decreased significantly, the level of those imports, and that that will be the case during the winter months, and then we will see what happens in the spring. But I think there is, as I say, a fair degree of optimism for the spring.

Just in terms of your earnings guidance, you used the phrase you're going to -- you anticipate reaccelerating in the second half. And I presume that you're referring there to reaccelerating above the 150, 170 for the February quarter. I just want to make sure I'm looking at the numbers right. But it looks like in the last seven years you've never had a third or fourth quarter lower than the seasonally-low second quarter.

Right.

So if we took the 160 midpoint for February and say that May and August quarters equal that, we're looking at an earnings number north of 7, possibly $8.

That is what the math says. I guess we're kind of hesitant to confirm or deny that.

We're like you because you're conservative guys, but the math is the math. I understand you. Thank you gentlemen.

(OPERATOR INSTRUCTIONS) There are no further questions at this time.

Thank you. We wish everybody a happy holiday and most of all a happy and healthy new year. And Barry, by definition you are growing older. Thank you.

This concludes today's Commercial Metals Company first-quarter 2005 earnings conference call. You may now disconnect.