Commercial Metals Co (CMC) 2005 Q2 法說會逐字稿

Good afternoon.

My name is Marvin, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Commercial Metals Company second quarter 2005 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period. [Caller Instructions] Thank you.

I would now like to turn the call over o Mr. Stan Rabin, Chairman, President and Chief Executive Officer.

Please go ahead, sir.

Good afternoon, everyone.

I'm joined today by Murray McClean, our Chief Operating Officer, and Bill Larson, our Chief Financial Officer.

We'll use the format we've generally been using in recent quarters: I'll just highlight a few things about the quarter and outlook.

Bill will then give you a more detailed analysis of what happened during the quarter, and then I'll come back and talk some more about the outlook and the factors that we think are influencing the outlook.

It was record second quarter.

It was a record half.

And this is especially phenomenal for us, since typically the second quarter is our weakest quarter and the second half generally is better than the first half.

Not much effect from LIFO this quarter.

All of our operations did relatively well, as we pointed out in the press release, except for the operation in Poland, where we encountered, as Bill Larson puts it, a hot [INAUDIBLE], cold weather and lukewarm results.

Other than that, it was just outstanding, especially for the second quarter.

The -- as we had expected also, besides the seasonal slowing we also -- as a number of steel and metal companies have reported -- had the situation where certain customers were working off of inventory -- working down inventories during the quarter.

And the main positive factor as far as the turnaround, which we had anticipated, was the excellent results from our domestic fabrication operations.

And as we put in the release, the guidance we're giving for the third quarter on a LIFO basis is $1.10 to $1.30 per share.

Just to highlight a few things from specific segments, in the domestic mills, very strong margins and spreads.

Shipments were lower, primarily the result of an effort, I think, throughout the industry, to control inventories.

Again, Bill will talk about this in a little more detail.

And -- but very, very much higher prices than the previous year's quarter and better spreads, which more than offset the increase in the cost of steel scrap.

That is, second quarter to second quarter.

Copper tube was a relatively low, low earnings; profitable, but not much of a contribution -- but steady.

I mentioned about Poland, and it was another excellent quarter in the recycling.

Ferrous scrap prices actually were down compared -- you know, from the first quarter, well above the previous year's second quarter.

But -- and lower shipments, but very, very good -- very good results.

The marketing distribution just was virtually excellent throughout our diverse product lines, our diverse geography, you know, which has done very well in North America, in Asia, in Europe, just -- Australia, of course -- just virtually anywhere that we operate around the world.

So all in all, just an excellent second quarter.

And, Bill, you want to --?

Well, good afternoon, all.

Let me call to your attention the detailed Safe Harbor statement included in our press release and in our August 31, 2004 10K, that, in summarizing, says in spite of management's good faith, current opinions on various forward-looking matters, circumstances, can change.

Not everything that we think will happen always happens.

In addition, we've given guidance, as Stan mentioned, regarding our outlook for the third fiscal 2005, and a general overview of the second half of the year in our press release.

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

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

Some of these have derived fairly straightforward from our financial statements, or in common business use can be a 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.

You may need to be patient with us if we defer comment.

I believe the steel industry is beyond the Freddie Kruger lurking behind every door syndrome, beyond the thought that it's not if but when the roof is going to cave in.

Now, no one needs to be reminded that we're in cyclical industries, and that downturn will occur; but the highs have been demonstrated, and demonstrated not just by Commercial Metals but by all of the substantial steel domestic companies to be higher, and the lows will prove to be higher, as well.

And the downturn is not imminent.

There are plenty of legs left in this run.

Our 56.5 net earnings and what has historically been our weakest quarter would have been a record year up until fiscal 2004.

As it is, it's now the jumping off point for a very strong second half.

Our results are reflective of our geographic and product diversity.

Domestic mill profits reflect the continuing strong U.S. economy.

Poland's loss, as Stan mentioned, is attributed to a strong currency and to seasonal factors.

The fabrication segment is rolling through its better backlog and achieving expected results.

Ferrous scrap prices backed off a little, as did our profits in recycling; and finally, our presence in global improving markets allowed our marketing distribution segment to again post record earnings.

We have reached last year's total earnings in the six months that are our historic weakest.

If you look at our balance sheet, we have $772 million in inventory.

The valuation is rather solid when you consider that the LIFO reserve, which is offset against that, is $130 million.

The LIFO, therefore, decreased net earnings $2.6 million, or $0.04 per share this quarter versus a decrease of 6.2 million or $0.10 per share in the second quarter of last year.

For the six months, LIFO decreased net earnings 24.8 million or $0.40 per share versus last year's six months, a decrease of 7 million or $0.12 per share.

Gross margins were seasonally strong, but generally lower than the first quarter.

Fabrication was the exception to this, as more profitable contracts replaced the old ones that are rolling off.

In our copper tube, we were unable to recapture the current rise in copper scrap, and in Poland, as lobby played havoc with our ability to export out of Poland, which we were able to do quite profitably last year.

Depreciation and amortization for the second quarter was 37.8 million.

We would expect depreciation for all of fiscal 2005 to be around 78 million.

If you look at selling, general and administrative expenses for the quarter, we had an increase of 26 million over last year's second quarter.

The bulk of this is in variable discretionary expense items, predominantly bonuses and profit sharing.

The year-to-date, for the six months, selling, general and administrative expenses were up 68.5 million; about ten of that is the fact that Poland and the Laughlin acquisition were not with us in the first quarter of last year, and they were this year.

The rest, again, were the various discretionary items of bonuses and profit sharing.

If you look at interest expense, it was 8.5 million for the quarter and 15.8 for the six months.

I would anticipate for the third quarter interest expense would be about 8.7 million, and our EBITDA to interest coverage is greater than 13 times.

Our balance sheet's in great shame.

Our current ratio is at 2.0.

Our accounts receivable days outstanding are staying very consistent at around 42 days.

And the strength of these receivables are shown by -- many of them are backed by letters of credit or by credit insurance.

We have a very tight credit review policy here at Commercial Metals, and we think overall the receivables are in very good shape.

Our long-term debt to capitalization ratios is the lowest it's been in years at 31.4 percent.

The debt maturity schedule is very favorable.

We have 10 million this July; and then two years from now we have 50 million, and then there's nothing more for two years after that.

At quarter end, the book value per share was 13.87 and at the end of the second quarter our average shares diluted were 62,427,957 year to date.

As for the six months, the average shares diluted for the current year was 61,664,332, and the actual shares that were outstanding on February 28 were 60,321,111.

Our capital expenditures for the second quarter were 22.9 million, making the year-to-date 43.1, and the budget remains, as we discussed last quarter, at around 130 million.

The largest two projects, as a reminder, are continuous caster at SMI Texas, and our shredder in Poland.

We purchased no stock in the second quarter, nor any for the year.

However, our authorization remains at 1,944,610 shares.

Okay, thanks, Bill.

To pick up on a couple of things that Bill mentioned in talks in terms of the outlook, there -- first of all, let me emphasize Commercial Metals, because we've tried to make this point over the years in our previous presentation and conference calls and meetings, to focus on the fact that CMC. is different, our vertical integration product diversification and geographic dispersion are significantly different than most companies.

And at times, we think that gets lost and everybody gets lumped together, even when the premise probably is long of lumping everybody together, but I want to emphasize that again.

There's -- as Bill indicated, there appears to be a prevalent sentiment that China is in a state of near collapse and it's going to overwhelm the world with steel and non-ferrous metals.

Murray McClean and I were in China, Vietnam and Thailand about six weeks ago.

If China is in a near state of collapse, it's hiding it very well, because while the great rate of growth is somewhat lower than the last time I had been there, which wasn't that long before, it's just astounding what's continuing to happen in China and for much of Asia.

I mean, a country like Vietnam with 80 million people, similar in some ways to China in that it's a communist government but a marketing economy industrializing very quickly, so I characterize this like Thailand was 20 years ago, but it isn't going to take 20 years to catch up.

So just what's happening in Asia, we've mentioned India and other countries, is quite -- quite positive in terms of the future of the steel and non-ferrous industries, including, we think, the various moves by the Chinese government to control investment in the steel industry and other industries where they are concerned about over investment and where they think the idea of importing high priced iron or other raw materials and then exporting billets doesn't make any sense.

So we are quite confident that China, you know -- yes, there will be periods where they will be a net exporter, but we see China as being a substantially positive factor for the steel and non-ferrous industries.

So in terms of our -- specifically, our own outlook, we said that we expect earnings to accelerate through the second half.

We've given you the -- anticipated our guidance for the third quarter.

We expect end use demand to strengthen in our major markets.

We think the increase, significant increase, in prices for iron ore and coke for us is a positive in terms of scrap pricing and steel pricing.

It appears that ferrous scrap has stabilized with an upward bias.

The outlook for non-ferrous markets continues to look quite favorable, so our domestic mills will be strong.

We expect our Polish operation to return to profitability; still hand strung by the visulahti [PHONETIC] [INAUDIBLE] in a -- what for us would be positive.

There has been some corrections just in the last week or so; and in fact, today, visulahti was about 3.12.

It was -- up is down, that means weaker -- it was about 2.9 just a couple of weeks ago.

And as we indicated, that makes it extremely difficult to export.

So any further correction -- we're not predicting it, but you know, it's quite possible -- would be a real positive for us.

Our domestic fabrication profits should climb further as we execute our favorable backlog.

Recycling not at record levels, but still quite strong, with good ferrous and non-ferrous markets.

And continued excellent results from our -- the marketing and distribution, with industrial products and materials particularly good.

And, you know, just generally good results across the world.

Just a few trends I'd like to mention in concluding: In the U.S., the housing market, new sales remains quite strong, nonresidential construction is improving.

The highway bill is closer to passage.

Jobs are increasing, which should be good for office construction.

And the manufacturing sector, in spite of everything, is still growing.

And some other trends elsewhere -- the emerging countries are emerging.

Western Europe is slow -- slow growth -- but central Europe is growing more rapidly.

And finally, this more rapid growth in Asia.

So our outlook is positive.

And we will be happy to answer any questions.

[Caller Instructions].

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

Please go ahead with your question.

Good morning, gentlemen.

Barry, you're always first!

No, not really!

Are you a little bit -- Stan, are you a little bit surprised, you know, based upon what was going on a couple of months ago, with this drop in tonnage for your steel mill shipments -- yeah, I mean, the extent of it?

A little bit, but we're not surprised -- a little bit concerned, no -- I mean, we are expecting a strong shipping season.

As Bill always chides me, we're always hesitant to talk about the weather, but it was -- you know, it was also a factor.

Plus, particularly in rebar, we have had very heavy imports.

But the most recent figures we've seen published December, January, which should enormous drops in the imports of bar products, particularly rebar.

And anecdotally, based on our import business, we think they will stay low.

So what makes these swings in imports, in your opinion, since you're involved with marketing and trading of, you know, rebar, for example.

Well, it's really arcatraz [PHONETIC].

Material goes to the best market.

Murray?

And we've got to have our global expert here.

And also, Barry, there's [INAUDIBLE] the service standards, but in this particular case the fab shops the were pretty well stocked towards the end of last calendar year and into this new calendar year, so these are factors; but if you look at rebar fabrication, I mean, we are at record backlogs.

So the season is just starting for us, so it should be very good.

In terms of imports of rebar, if the prices move here significantly, obviously that will attract rebar back into this market.

I think -- just -- and I think we have to remember the context, how everything developed, because the fact that in a strong cycle we end up with -- in this case temporarily high imports -- is not at all unusual.

And back, particularly when these -- the way these markets took off last -- earlier last year, with very low [INAUDIBLE] -- I think you can remember me talking about how I thought a lot of buyers of steel had made a terrible misjudgment in not just continuing to buy steel, but totally misread the turn in the market and were caught with very low inventories and therefore, you know there's going to be some double ordering, you just don't know the extent of it; and that was the case on imported steel as well as domestic purchases.

But those, inevitably if the economy is good, the comply is good, they get worked off.

As far as recycling, I know that scrap had dropped in January, February, March, and I think the April buy is also down.

So that's four months in a row of scrap going down.

That's the first time it's happened in awhile.

How were you able to earn the $20 million in recycling?

Because you may be focusing a little bit on the wrong part of the scrap market, which is the -- it was the industrial grades that really took the tremendous drop, and that's a very small part -- certainly very small part of our scrap business, both as a processor and even in our mail consumption, it's just not a big part of our business.

If you look at shredded scrap, which I think is a much better barometer, yes, it went down some, but it's been a much steadier market.

In fact last month, in many cases, shredded prices were unchanged.

So -- well, that's this month now, but the month of March.

So it's -- that market's held up pretty well.

So all I'm saying is, you know, the -- this focus that the metal papers seem to have on industrial grades is -- can be fairly misleading.

And the stuff you use in your steel mills is exactly what kind of grades?

We use shredded.

We use number one heavy metal.

We use turnings [PHONETIC] -- those are the main -- some grades that we used to use we tend to shred now.

Okay.

And as far as capacity for your steel mills, obviously with this decline in the second quarter, you probably can make up some of that in the third and fourth quarter; but other than what your internal expenditures are for the caster, et cetera, where are you in terms of getting additional output for the shareholders in steel in terms of, you know, either acquisition, theoretically?

Well, within the last year and the quarter -- the last year a half, I guess -- no, year and a quarter, we had over one million tons in Poland.

Right.

I'm talking about domestic.

Well, I don't know.

There may -- I'm not going to get -- it may be -- it may be elsewhere.

Okay.

Now, one other question on the fab operations, the fact you earned $25 million in the second quarter, which is the weakest of the year, and you have better backlogs probably at this time than you had at the beginning of the second quarter going into the third quarter, is it reasonable to think that, you know, your operating profits in fabs will go up in each of the next two quarters to be the highest and will end up being the highest in the fourth quarter?

Well, let me say -- if we're -- you know, the indications we're giving for the third quarter are higher than the second quarter.

And, you know, we don't break that out.

But when we presume some of that would come from the fab, Bill, you want to?

No, I think you've adequately defined that one.

Okay, great.

Keep up the good work, and I'm looking forward to seeing you next week.

Thanks, Barry.

Your next question comes from [INAUDIBLE] with Brownwell Capital.

Please go ahead with your question.

Hi, thanks.

Can you give an idea of what was the capacity utilization this quarter compared to last quarter?

Well, lower -- probably -- if we had been in the probably 90, 91 percent range, what we had done there was scheduled maintenance in all four of our mills during December, both because it was time to do it and second of all because of the seasonal downturn, there was no need to be running flat out.

So I would say we probably were dropping somewhere into the -- maybe the low 80 percent combined.

Okay.

And in your presentation, you mentioned that the shipments are lower due to [INAUDIBLE] controlled inventories, and yet you still expect that going forward the future looks to be bright.

There was some disconnect here -- if interest rates are going higher, where do you see the drivers here?

There's no disconnect.

That steel goes into nonresidential construction.

And I mean, in terms of the increase we've had in interest rates, I don't foresee that being much of a factor at all.

I mean, we know from our fab business what's going on in the construction area.

We sell other customers and other markets, but a lot of that steel goes into construction -- certainly the rebar, you know, the angles that go into joists and, you know, various other products.

So we have significant visibility.

And we've been saying, in fact, for well over a year that the business we were seeing in our downstream businesses was even better than the improvements we were seeing in the statistics for construction, which have shown improvement.

And while housing, single family housing, is not a big factor for steel, it is -- it's a good factor for copper tube -- you know, the fact that it's so strong is indicative of a strong economy.

Okay.

Do you plan to take the utilization up to 90 percent range in the fourth quarter or do you plan to keep the utilization around 80 -- ?

It will be significantly higher in the third quarter.

Okay.

And if the demand doesn't materialize, then do you plan to sell those goods which may go into the inventory in the export market much more at lower prices or -- ?

No, we -- look, in the third and fourth quarter we always -- it's the prime building season.

So our shipments are always strong in the third and fourth quarters.

Okay, thank you.

Your next question comes from Ivan Sachs with Institutional Equity.

Please go ahead with your question.

If I could just ask questions as opposed to question, how have you guys all been? [INAUDIBLE] questions, please.

The three leading indicators in order -- the indicators [INAUDIBLE] in order to know that you've reached a peak or anything else like that, you've had full employment for six consecutive months, or construction that, where are we at that stage?

Are we anywhere or have factors changed that we need to be looking at other things to look at where the top is for the see.

I think we need to look at other factors as well.

You know, we half jokingly say that when office construction goes into a boom, then we're getting towards the end of a particular cycle.

We're a long way from that.

But I think that because of the globalization -- and certainly we do this -- we have to stay very focused on what is happening in Asia and in Europe, or in Latin America -- you know, a country like Brazil is an important factor, Russia.

But you know, particularly, these emerging countries, we have to stay very much on top of what's happening there.

Uh huh. [INAUDIBLE].

We talk about a lot of the time on a day-to-day basis, you know, with the market, you have people commenting on Nucor and all these other different steel companies at some point will have an effect on the price of commercial metals, which might not even be related at all.

I know you that made a distinction between your company and the other companies.

But as far as like -- who competes directly with Commercial Metals, if there is a direct competitor or are you a lone -- you know, a lone steel company with your unique qualities?

I mean, there's no one -- I'm not familiar with a company similar to yours, but if you could comment on that?

Probably the most similar would be Gerdau Ameristeel, steel, bigger than us at the mill level with some flat rolled, proportionately not as big on the down stream businesses, because for us, you know, that's a big difference.

For Nucor, too, Nucor has downstream businesses; but of course, proportionately, it's just not as big a factor to them as it is for us.

Nucor is -- much bigger than us in bar, with nine domestic bar mills, but -- you know, so obviously we are competing very much against them.

And then there are other competitors, as well.

But in terms of the -- and the marketing and distribution business -- there's just no -- no one else who has the same mix of businesses that we do.

And then -- second last question -- I noticed you got authorization to buy back stock.

Is there any point in which time would you consider buying stock?

I mean, is it is there a certain threshold or --?

Well, we don't typically give out any type of mechanical test on that, but whenever we feel that the stock is undervalued we will go after it.

Well, I just thought that your results were so good that you guys might lighten up and just let us know.

A final question for you, Stan, if you wouldn't mind, I believe we always speak in terms of LIFO, and I think a lot of people don't understand the benefits of LIFO and what we've lost with LIFO in terms of earnings currently but of the benefits of LIFO.

If you wouldn't mind putting on your teacher's cap just for two minutes, or for a minute, and just explain the benefits of LIFO and what it means to shareholders.

Well, what it says is that what is left behind in inventory is the oldest stuff, and therefore it's at the lowest value.

It doesn't mean that the material is substandard.

It doesn't mean that there's anything wrong with it.

It's just from a cost standpoint.

It is a cost fly assumption, it's not a physical flow assumption; that you end up with the oldest in inventory, Just to give you an idea, I mentioned that the LIFO reserve was 130 million.

If you want to calculate that and take it after tax and spread it over the number of shares outstanding, it's $1.40 per share just in inventory reserves.

And then how does that benefit a shareholder?

How does he -- how should he look at it that he knows that actually we're short on earning but it's actually beneficial to the company from a cash flow point of view?

How do you --

Well, obviously, you do it because there's a better matching of revenue and expenses.

There also happens to be a tax benefit as well.

However, where you will see it, Ivan, specifically is when as prices go down, there will be a cushion on the way down and that the inventory values and the reserve will begin to rotate out, and you will not take as big a beating as those who are on FIFO.

You get the reverse effect, of course, as prices go up.

We tend to be more conservative in the earnings.

I mean, it's just a natural hedge and something that Commercial Metals is very comfortable with.

Excellent.

That's what I wanted to here.

Thank you so much, and congratulations.

Go for the third quarter, see if you can beat it.

Thanks.

Thank you, [INAUDIBLE].

Thanks, bye-bye.

Your next question comes from Aldo Mazzaferro with Goldman Sachs.

Please go ahead, sir.

Hi, I had a short question for Bill an short one for Stan.

But, Bill, how about on the maintenance spending that you may have done in the December period, is that a big item in the mill's numbers?

I'm having a little trouble trying to trace all the variety of costs going through there.

No, it's not, and it would be recurring.

We typically during the second quarter do our, you know, standard maintenance.

It's heavier maintenance than at any other time of the year, but it's obviously the time to do it in the weakest period.

But -- so is there anything in that quarter in the domestic mill sector that would have jumped up on a sequential basis from the previous quarter?

From a cost standpoint?

Yes, on a cost basis.

Well, other than -- well, obviously, I've mentioned as far as SG&A is concerned, the discretionary items; but from a -- if you look at the input costs, it was not the price of scrap.

Yes, we had a little bit of an electrode in some alloy increases.

Let me just --

Not much there.

Yes, I would say it was relatively stable, Aldo.

It seems like the metal spread sequentially went up about $13 and the profit per ton went down.

It could be a mix question.

Lower volume -- you know, lower volume.

I know, so really was the impact of fixed cost and lower volume.

Yes, lower volume tends to create in general, you know, higher costs.

That's why it's got a real -- when we get those operating levels and shipments up, it's a very positive effect, always. [INAUDIBLE SPEAKER].

Yes, yes.

As Murray just said, that was particularly noticeable in Poland.

I was going to ask.

In Poland, do you expect the shipment numbers to come back to the levels of the prior year once they do come back?

I mean, you had about 350 or thousand or so going in the quarter towards the ends of last year.

I wondered whether that was -- had included some inventory shipments or whether that was all straight from the mill?

Well, Aldo, we had some excellent shipments -- export shipments -- to Asia last year, which was -- the [INAUDIBLE] and also had the prices in Asia.

That's just not going to happen again.

Also, as Stan mentioned, I mean, eastern Europe has had a record -- I think, the last twenty years -- record snow fall, so construction even into March is difficult.

So certainly this neck quarter, won't match the quarter, is difficult.

But we are hopeful over the summer months, yes, that there will be definitely an improvement.

Okay.

And then one last one, Stan, on the stock itself, do you have any comment on the extreme volatility that occurred in the stock over the last couple of weeks?

The only thing we know -- of course, the whole sector had a lot of volatility, but a lot of the trading we'are getting is -- Bill, how would you classify it?

It's just program sales stop orders, and they kind of feed on themselves, as you probably no better than I do, Aldo, and that is, when one gets fulfilled it knocks the other one into contention and it gets filled and it knocks the next one, and there's just a snowballing effect down.

I was in contact with our specialist on the exchange each day, and several times each day, over the last couple of weeks.

And you know, I -- what I wanted to hear is that there were some human beings standing at the post doing something really stupid; but instead, what it turns out to be is that somebody stupid at a computer sits someplace putting in these sales stops.

So that's about the best explanation, which is not much I can offer.

Aldo, I think, too, in terms of sort of an external factor, this whole business, particularly with China, that lots of times is based on nothing in the sense of that there really is no new development in either direction.

And all of a sudden, someone says you know, there are -- their consumptions could be up 10 percent, their consumption is going to be down 20 percent, and I just -- you know, it's somewhat dismaying in the sense that a lot of it is not based on anything, you know, that we know about.

It's based on certain suppositions.

But in terms of what's actually happening, I'm talking about -- you know, a year and a half ago, I think it was -- maybe [INAUDIBLE] -- I guess it's a couple of years ago now -- you know, there was a real -- in the steel industry, it wasn't in China -- a major correction in about six weeks particularly in flat rolled --

Right.

-- which was somewhat predictable at the time.

It happened -- actually happened very quickly, and then the growth resumed.

I mean, that was a real development.

You know, you can almost see it coming, as I say.

It happened.

It was fairly dramatic.

I mean, at the time, the price dropped like $150 a ton in six weeks.

And there was a real development.

[INAUDIBLE]

Yes, to you.

Some of this stuff is just -- it's just -- you know, it would be better just to disregard it in both directions.

Okay, thanks.

Thank you.

All right.

Your next question comes from Jonathan Goldberg with Highline Capital Management.

Please go ahead with your question.

Hello.

Hey, good afternoon, guys.

Hey, how are you?

Good, thanks.

Hey, just had two quick questions on the domestic mill side.

Maybe first we could talk about metal spreads; and just given that steel scrap has fallen off and, at least from what it sounds like, long products pricing has been relatively flattish, you know, can you speak to your metal spreads going forward and how they should compare, both sequentially and year on year?

I would say sequentially I would expect them to expand, Jonathan.

I don't have last year's in front of me.

But I mean, we certainly have at least as favorable environment today as we had last year at this time.

And then, the second question is just maybe you could add a little bit more color on your sense of the inventory situation for long products at the service centers, and you know, inasmuch as you can compare that to maybe the sheet side, what you're seeing there.

It's very -- it's different to begin with in one major respect on the sheet side, and that is, of course, with rebar, you know, the service centers are not a factor, period.

They are in certain merchant bar products and light structurals, for sure.

You know, but with rebar -- and that's why we emphasize the imports and the fact that, you know, there were importers or end users who, you know -- who had built up their inventories too much, we're confident a lot of that's been worked off.

And on, you know, the merchant bar, too, from what we can see, the supply demand situation is good.

Great.

And that's, again, another -- of mixing product areas.

I know, of course, flat rolled went so much higher in price than the -- than our long products.

So it was to a certain extent more vulnerable from those higher pricing levels.

And as I indicated much earlier, we do -- while we don't produce flat rolled, we do market it -- market flat rolled around the world.

So we are very much involved in those market.

And, Murray, you want to comment?

Well, Stan is right, I mean, flint product, as I [INAUDIBLE] on the call, is $200 a short ton off its peak.

So the long products, rebar, et cetera, is -- the figures are much lower than that.

And you know, we are very optimistic going forward that prices, particularly long products, are likely to increase rather than stay where they are or drop.

So --

Yes.

And investors have to understand that for better or worse, we do not manufacture flat rolled.

If some analyst -- steel analyst -- somewhere is talking about flat rolled prices, that is not going to affect the profitability of the Commercial Metals steel business.

And then just the last thing would be, you know, if and when we actually get the transportation bill passed, what's the typical lag, or -- you know, how big of an effect on demand for your -- for the steel products could that create?

I think realistically , probably -- which may be more in 2006 2007 as we go further out, because a lot of what's going to happen, certainly this fiscal year, to a fair degree, the deed is done.

But particularly in -- you know, one other of course positive factor is generally, which we mentioned in the last quarter on our conference call and meetings, is that the estate budgets overall are in much better shape overall, so the states are in a better position to help with the funding for these projects.

And a lot of projects have been delayed, but certainly there's nothing like a multi-year bill, and we are presuming five or six years.

That would be in terms of giving people more comfort in terms of going ahead with projects, particularly those that are on the margin.

Sure.

Okay.

Thanks again, and congratulations.

Thanks.

Thanks, Jonathan.

[Caller Instructions].

Your next question is a follow-up question from [INAUDIBLE].

You had some indications for the next quarter, I think it was $1.10 and $1.20.

What kind of price assumptions are you making in that, and is there any kind of a mix shift which is going to play in that quarter?

I would say that -- although we don't give specifics on price increases -- I think the general trend is that they will generally be positive, that they will be up.

Much more than that, I really -- really don't talk.

I mean, it's the combination of, you know, good spreads and good shipments.

It's not a lot more complicated than that.

Okay.

Thanks.

And one more on the LIFO expense particularly, you talked about [INAUDIBLE] of 30 million.

What, in fact, if I look at input prices and [INAUDIBLE] coming down, so what drove this expense out here and was it something else that affected it?

Well, it's -- LIFO is either a fifteen-second answer or we're going to be here all day.

Absolutely.

Yes.

Generally speaking, I think what you saw is that the price of ferrous scrap, you know, kind of drifted a little down.

Finished goods prices were supported somewhat by the rise in input cost of other supplies and alloys.

And so you saw the relatively benign $4 million LIFO expense, because prices just didn't do anything dramatic.

The answer to the question that you haven't asked yet is, you know, what did I presume in the third quarter?

I presumed about four, 5 million of LIFO, kind of similar to the same that we had this quarter.

There are mix issues involved.

I got to tell you that predicting LIFO is a very imprecise art.

It's definitely not assigns.

Okay.

Okay.

Thanks a lot.

You bet.

Sure.

There are no further questions at this time.

I will now turn the call back over to Mr. Rabin.

Okay.

Thanks -- just thank everyone for participating.

Because of the holiday, we have delayed our trip until next week, so we will be in New York and Boston.

And for those of you not in New York and Boston, we will get to you as soon as we can.

And for the NCAA, you can call in your winners.

I'm a Duke fan but, Murray?

[INAUDIBLE] I got for Rugby.

Bill?

Well, Notre Dame.

We're going for the women, that's the tournament.

Forget the men nowadays.

All right.

So good luck -- wherever your team is, good luck in the NCAA -- and we'll see you soon.

This concludes today's conference call.

You may disconnect at this time.