Commercial Metals Co (CMC) 2005 Q4 法說會逐字稿

Good afternoon. At this time, I would like to welcome everyone to the Commercial Metals Company fourth-quarter and year-end 2005 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. (OPERATOR INSTRUCTIONS).

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

Good afternoon, everyone. With me is Murray McClean, our Chief Operating Officer, and Bill Larson, our Chief Financial Officer. Our usual format -- I'll make some brief comments at the beginning about what happened, Bill will go into more detail and analysis, and then we'll finish up with the outlook, and my comments will be a little more exhaustive when we talk about the outlook and including some comments about China and India.

As we said in the press release, we thought fiscal 2004 was phenomenal, only to be surpassed by an even more remarkable fiscal 2005. And of course, the fourth quarter was a fitting finish to what we would consider a spectacular year. Our net earnings were more than double our previous best, which itself had been a record the year before this. Diversified earnings and record adjusted operating profit in all segments, except for the CMCZ in Poland, but even there, we finished stronger in the fourth quarter. It was our 28th consecutive year of profitability, with strong cash flow generation.

The fourth quarter -- again, the most profitable quarter in our history, strong results across the board pretty much, including an improving result in Poland. We did have the income item from the settlement of the business interruption claims for the transformers at the two mills. And we did have a reverse in LIFO, as we would expect with the pricing the way it was, but 17 million in pretax income and a strong balance sheet. We’ve managed this in the face of what was a significant inventory correction, I think, in the US economy -- in the global economy, for that matter, and specifically in steel and in some nonferrous metals, as well. And we also managed this in the face of tremendous market volatility, unprecedented, particularly for ferrous scrap. And metal spreads continue to be very good. Shipments were mixed, which makes the result even, I think, more impressive. And I will say, as we put in the release, a very positive vein for our Domestic Mills, August, the last month of the year, was a record shipping month.

Bill, do you want to --?

Thanks, Stan. Good afternoon. A couple of standard disclosures to start off with -- 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, 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 first quarter of fiscal 2006 in our press release. Subsequent to this call, and in our meetings on the East and West Coast in the next couple of weeks, we will not be commenting further and will not be under any obligation to update our outlook.

Finally, in accordance with Regulation G of the Securities and Exchange Commission, there are non-GAAP financial measures. Some of these have derived fairly straightforward from our financial statements or are in common business use, we can talk about today and in our investor visits, and you can look to our website at www.commercialmetals.com for other information. But there are some other items that may be outside of our ability for discussion, and you may have to be patient with us if we defer comment.

Well, the fourth quarter and the year's results -- they are not the result of a simple commodity play, nor is it a case of being in the right place at the right time. If this is the market's perception, then what we have here is a failure to communicate. What has been demonstrated by our extraordinary performance is the result of when preparation intersects opportunity. Commercial Metals is constructed to take maximum advantage of what the markets offer, and not just the domestic markets. Metals are global commodities; we compete against the world, and we are in all the important international markets.

And we are different. Let's go over the basics again. We are not a flat-roll producer. Therefore, whether GM sells or doesn't sell GMAC, whether Delphi cuts its labor costs and how Maytag will fare with Whirlpool have no effect on us. Our largest end-use market is construction. We are a long products producer and the largest rebar fabricator in the United States, with significant presence in joists, fenceposts and construction-related products. We fully expect these markets to be strong for the visible future.

We control our raw material sources. We are 100% integrated in our capacity to supply our Domestic Mills with scrap and with our capacity to supply our downstream fabricators. Our worldwide reach in marketing and distribution allows us to profit from dislocations in supply and demand. We are in China, have been for decades, and believe we understand the dynamics of what is occurring there. We are positioned in Poland for the growth in the Central European markets, and we have the hardest working, best trained and safest workers in the industry. They even may be the best looking. You will hear in a second that a primary factor in higher SG&A costs this year was our incentive compensation. We pay for performance, and our people earned it. Congratulations to all the employees of Commercial Metals for a great year.

Well, it was an extraordinary performance this year, to be sure. I would draw two conclusions from this. First, there has been a permanent transformation in the steel industry, which will allow continued success, not just for Commercial Metals but for other steel companies, as well.

Second, a closer look at the source of our earnings reveals the strength and diversity of Commercial Metals. Our Domestic Mills rode the demand curve to new heights. This is in the main spot business. Our fabricators are only now in the midst of their rising contractual values. Recycling came home about even with last year, but suffered a bad case of pricing whiplash. Marketing and Distribution capitalized on the strength of world markets, and all of these record results occurred while CMC Poland was at breakeven. So I think our earnings balance and our ability to set off one segment against another was on full display.

The LIFO reserve at the end of the year -- therefore, August 31, 2005 -- was at $111 million. The LIFO effect in the fourth quarter increased net earnings $10.8 million or $0.18 a share versus a decrease of 25.3 million or, on a pre-split basis from last year, as was in the press release, $0.83. Probably as a clarifying factor, it should be $0.42 on a split basis, just to give you the whole picture. Year to date, though, LIFO was an expense of 12.5 million or $0.20 per share versus last year's rather significant decrease of 48.6 million after tax. That, again, pre-split, as was indicated in the press release, was $1.63. And after split, which was compared to the $0.20, would be $0.81.

Stan has already mentioned -- I hesitate sometimes on summarizing LIFO; it is always a dangerous proposition. But generally speaking, in the fourth quarter, the income was derived from lower input costs, which caused lower manufactured product at our domestic steel mills.

The fourth-quarter gross margins were pretty consistent at our Domestic Mills and our fab and Marketing and Distribution segments with the third quarter and previous quarters. Recycling was lower. Poland, though, was much improved over the third quarter, still was very weak compared to last year's extraordinary year. Copper tube margins have been cut in half, with sales prices unable to track the rather mercurial effects of copper scrap.

Some statistics -- depreciation and amortization for the fourth quarter was 19,854,000. Year to date, then, it totals to 76,610,000. Looking forward to 2006, we would expect depreciation and amortization to be in the range of $84,700,000. Stan mentioned the business interruption claim; it was 11.6 million pretax in the fourth quarter, which totaled, then, for the entire year 20.1 million pretax. Just as a matter of interest, the regular audit fees this year were $1.5 million, and our SOX compliance -- this is just for the outside audit effort and doesn't count internal costs -- were 1.3 million. I'm sure that was money well spent.

SG&A decreased 3.2 million in the fourth quarter. There were several ups and downs. The ups were generally on salary expense and strengthening our bad debt allowance. The downs were we reverted to the final numbers our bonus and our incentive compensation, and so we took the accruals down. Also, in comparison to last year, there were two write-offs -- one in Alabama, and the other of our safety railway unit, which obviously didn't occur this year.

Year to date, SG&A went up 57 million. 10 of that 57 is attributed to the fact that Poland and Lofland were not with us during the first quarter of last year. So we had four quarters of this year and three last year, so that was 10 million. The other two were incentive accounts, one bonuses and the other our profit-sharing plan.

Now, if you look at interest expense, our EBITDA to interest coverage was well over 17 times for the year. Looking forward, I would anticipate interest expense to be about 7.3 million in the first quarter. We have very little short-term borrowings outstanding, and what we have are pretty much in Poland.

Networking capital, 809 million at August 31st, realizing the current ratio of 1.9. Long-term debt to total cap, below 30%; we are at 29 flat. Book value per share at year end was $15.47. Some quick share calculations for the fourth quarter -- the average diluted were 60,695,859. Year to date, then, the average diluted was 61,690,087, and the actual shares outstanding at August 31st was 58,130,723.

Capital expenditures in the fourth quarter were 51.7 million, including some small acquisitions. Year to date that made it 122.5. Looking forward in fiscal 2006, the capital expenditure budget is anticipated to be 178 million. The largest components of that will be the continuous caster, the final expenditures for the caster in Seguin; purchase of new rail cars; the completion of the shredder in Poland; some ERP systems work, predominantly in Poland; some relocation of some facilities in both Australia and in our Recycling division; and some research and development work that we plan to do in our steel section.

Finally, stock repurchases -- during the fourth quarter, we bought back 1,094,500 shares. The average cost was $24.12. That means for the year, then, we bought back 3,039,110 and we paid an average of 25.36 for each of those shares. It leaves us at August 31st with 905,500 share authorization.

Thanks, Bill. In terms of the outlook, we believe that positive factors overall will continue to drive our strong performance. The guidance we have given for the first quarter for LIFO net earnings was $1.10 to $1.25 per share. Our end-use markets remain firm, particularly construction. We believe, based on actual orders, that the excesses in the steel supply chain have generally been worked through. In terms of the ferrous scrap market, for the quarter, we are kind of looking at an overall sideways because we had a significant increase, then a significant decrease. I mean, it's very substantial both months.

The early reading on November is that it will be up some domestically. Our Domestic Mills performance will continue to be strong in the first quarter, despite higher energy costs. The Polish operation should be modestly profitable. We do have a couple of major maintenance projects in Poland in this quarter. Domestic Fabrication profits -- constant, good, just an excellent outlook there. Our Recycling good, in spite of the volatility. Slightly lower results in Marketing and Distribution but still, of course, where we have been quite good.

In terms of the effects of the hurricanes -- the first two, that is. Wilma we don't know yet. This is an extraordinary situation. But no significant effect on short-term earnings. We did have a couple of fab shops and one construction-related products plant idle for several weeks, now back operating part-time. Scrap volume will increase regionally. We don't think there will be any likely long-term effect on scrap pricing. Heavy demand on construction-related steel rebar and structural. And the rebuilding, we believe, will be protracted. Certainly, overall, realistically we think positive for our business.

In terms of the US, the economy remains resilient. Again, public construction holding at very nice levels. The highway bill did pass, and with substantial increases in the nature of 30% plus over the life of the bill. And of course, we still have to be cautious now because of the inflationary effects from the energy increase and any impact it has had on consumer confidence in the US.

But as I say, the resiliency has been pretty remarkable. I mentioned about China and India, both in terms of -- we'll talk a bit, at least for a moment, in terms of near term and long term, because of the sustainability issue that just seems to never go away. We continue to believe in China that central control will prevail. There will be periods of oversupply. The main exports are coming from commercial grades of particularly hot-rolled coil. Wire rod seems to have picked up in export activity. Murray can comment later on these items.

It's rather apparent very quickly that the universal response to any significant Chinese exports will be duties, tariffs and quotas -- any of the above or a combination. You can quickly see, whether it's Thailand or anywhere else, that the reaction is going to be very quick to any surge in Chinese exports of steel. And we believe that more Chinese export regulation will be on the way, and that the substantial decrease in steel prices within China is actually desired by the Chinese government, because it deals with their inflation problem and also with the issue of how to get rid of the small, inefficient mills.

Bill Larson was just in China and can answer any questions you've got. Murray and I were just in India, which in some quarters is being considered the next China. To some degree, we think it is; but the development, we believe, will be much less rapid, primarily because it's a democracy. And therefore, a lot of things happen in fits and starts, but one thing very obvious that continues since my last visit there is tremendous need for infrastructure, just incredible in these countries how much infrastructure is required. There is a lot of investment projects that have been announced, but primarily flat-rolled. And largely on the basis that, because the Indians have the iron ore, what we call vertical integration they call linkage, that they think they can be, a number of these mills, the low-cost producers in the world for hot-rolled coil. So we shall see.

But the number of consumers is increasing in India. They are reducing their poverty levels, and the per capita consumption is just so much lower in India than it is even in China, which in turn is much lower, still, then the Western world or most of the industrialized countries. So we have been saying for some time we think this is a major driving force in the sustainability. That's in terms of the macro factors. And for us, our diversification, our vertical integration, our global presence in Marketing and Distribution and our track record will, we believe, make our earnings picture long term continue to be a very bright one.

And we'll be happy to answer any of your questions.

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

You guys have continued to do a great job, and I must commend you. First question is on your stock buyback program. I will give you a B+ in the fourth quarter, because you only bought half of the shares that I think you should have bought, but then again, I don't know what your blackout period was. And on the issue of stock buybacks, it's obvious that as your working capital and your net worth and everything is going so well, that you have decided to take a portion of your excess cash generation to buy back stock.

If conditions continue the way they have been -- meaning, as Stan would say, firm conditions -- and if you have continuation of significant cash generation, should we expect that you will continue to buy back the kind of dollars that you bought back unless the shares are over a certain price point that you don't really want to pay for? Because you bought these shares very well within the 24 to 26 area for the year. So that's the first question.

If you had given us an A, I would have answered the question. But since you only gave us a B+, Bill will answer the question.

As the loser on this, I would say this. You know I am not going to give you a brightline answer about at what point we are going to buy and at what point we're not. We will continue to be opportunistic. I think something inherent in what you said is that we believe that with the prospects of the Company, the value of the franchise is worth more than it was six months ago, and certainly more than it was worth a year ago. And therefore, I think you could reasonably expect that we believe that the prices at which we think it's opportunistic are probably higher than what we have bought in the past. But again, we don't set a particular level.

Now, as far as growing the Company, obviously, based on your capital expenditure estimate for the new year of $178 million, you are increasing spending a bit. But Stan and you have talked about acquisitions, and of course you have not been a wallflower. You have been very judicious about picking your spots, namely the Polish acquisition and the continuation of buying up fabricated operations which fit right in to your Domestic Fab operations.

So the question I have for Stan is, where do you think consolidation is in the United States, number one? And where do you fit there, in terms of your entire business? Where do you think consolidation is internationally? And what is your opinion of Steel Dynamics acquiring Roanoke Electric, which happens to be a competitor in joists, and what that means as far as you guys are concerned?

The last one -- I won't ever comment on a competitor's acquisition, simply to say that we will continue to compete against Roanoke Electric in whatever form that they are in. I think, at the steel mill level, consolidation and long products, particularly barbed wire (ph), has advanced significantly in the United States. So there is not a whole lot left that hasn't been consolidated. Globally, it's a whole different picture. So, while there has been a lot of consolidation, we're still talking about globally a very fragmented industry.

At the fabrication level, while we and Gerdau Ameristeel and Nucor have all been active in rebar fabrication, of course, we made, as you know, a joist plant acquisition during this last quarter. It's still -- particularly rebar fabrication is still relatively fragmented. And in Poland, we're adopting the same -- we've said this before. We're going ahead with it, the same model that has worked so well for us in North America, in terms of the vertical integration. So we clearly will be actively downstream in Central Europe.

At the copper tube mill level, we haven't talked about that. There’s been a lot of consolidation over the years, but probably likely to be more. There's only a half-dozen or so companies left. Scrap -- again, you're seeing consolidation again but still, overall, a pretty fragmented industry. So more opportunities, I would say, domestically, where there is still significant fragmentation and globally as well, where that exists. So it’s -- consolidation moves ahead but it's got long way to go, but it will continue. You will continue to see consolidation.

Now, as far as the Poland model, other than the spectacular earnings within the first ten months and then, of course, disappointment in this fiscal year, do you think there's a good chance that you'd be willing -- or do you think you would be willing to acquire another Polish type operation in Europe?

Yes. We're still very positive about Central -- not Western Europe, Central Europe.

Bill, I have a little question for you. On the $11.9 million of Domestic Mills LIFO credit, could you break that down into the copper and the steel mills in the quarter?

Only if you promise this is your last question.

I promise.

All right. Let me see what I have. Okay, the fourth-quarter LIFO expense was -- these numbers are pretax, Barry.

You mean the credit?

Yes, the credit. The income was roughly 16.7 million. And it came this way -- in Marketing and Distribution, it was a $2.2 million credit. At the domestic steel mills, it was a $12 million credit. In the fabrication operations, it was a $2.5 million credit, and the copper tube was modest; it's a rounding difference.

Michael Gambardella, JPMorgan.

Good afternoon, and congratulations on the quarter and the year. I have a question in regards to your demand. You are fairly well-positioned in the steel mills and, certainly, the fabrication operations to pick up some demand coming out of the reconstruction along the Gulf Coast. Have you seen any of that yet? And is there any way to estimate the magnitude of that for you?

Murray will take a shot at it.

It's a little bit too early at this stage. We should see it towards the end of this calendar year. I guess the first indications we’ve seen is some rebuilding of the casinos that were destroyed on the river; they are going to be rebuilt on land. So we see some demand from rebar for that. But for the rest of the rebuilding program, it's a little bit too early. I would say by November-December, certainly by December, we will start to see some signs for next calendar year.

Any way to estimate the magnitude of that?

I don't -- quantitatively, no. Qualitatively, as I said, we think it will be significant. For us, the underlying premise is that New Orleans -- included in the rebuilding will be New Orleans, and that will happen. Of course, the second hurricane -- it was mainly centered around Beaumont, Port Arthur, Lake Charles. It did some terrible damage, but much less, I would say less populous area than Katrina.

Frank Dunau, Adage Capital.

You might have the best looking workforce. You've also got the best looking investor base, too.

Good point.

Good point.

Just on the guidance for this quarter, what are you assuming? Are you assuming a LIFO credit, a LIFO charge, or what are you assuming for LIFO in the quarter?

I usually assume flat.

That's it. That's the only question I've got. It was a good quarter.

John Tumazos, Prudential Equity Group.

Congratulations on great results across the board. In terms of your expectations on China, a few years ago, people thought that their small, lousy aluminum plants would generally close. And a lot of them got access to capital and help locally and expanded tenfold, fully modernized. Could you explain why the steel -- the small, old, little, dirty steel plants would be any different than the 5,000 or 10,000 ton aluminum smelters?

And could you also elaborate as to the factors that are making the -- your other businesses performed outstanding in a very tough climate in the August quarter. Could you explain what's different in Poland, if it's the absence of integration, the presence of competition, cost factors, et cetera?

Taking Poland first -- I'll let Murray chip in -- the spreads are just -- I think it's starting to really -- just have been much lower in Europe than they have been in the United States. And it's a result of several things, but I think certainly, one -- several factors. One is the pickup in the infrastructure spending in Poland, which is inevitable and will happen, has been slower than we would have hoped, in large part, I think, because of the political change -- I don't want to call it turmoil -- the political change that has been going on in Poland, in the Polish government. The relatively strong zloty has been a negative factor for some time, and while it's come off of the high point, it still makes exports other than the region very, very difficult. And the weakness, particularly of Germany, and weak construction in Germany has been a negative factor for Poland.

China -- I'll come back and let Murray add or subtract. The Chinese central government in steel has said as a matter of policy that it intends for the industry to consolidate. It intends for those small mills to disappear, either through just closing down or, in some cases, through acquisition. They have made policy move after policy move or, let's say, tactima (ph) which have confirmed that, whether it's removing export incentives and consolidating the iron ore purchases -- there have just been a number of steps that they have taken that, contrary to aluminum or copper -- they have made steps also with certain nonferrous metals, with ferroalloys, where they think the situation is not to their liking. And that's a fundamental difference, for better or worse, with the way China is developing compared with a country like India.

The other thing is the exports of steel from China are a flashpoint, and the Chinese government recognizes this. But even if they didn't recognize it, other countries -- I'm telling you, they are not going to let it happen. It may happen for a month or two, and then the you-know-what hits the fan. No country is going to wait for exports to build up. The slowest will be the United States, in terms of reacting, because historically we are -- despite all the garbage you hear in terms of the protectionist thing, the fact is the United States is no different. If anything, I'd say we're more tolerant of exports than many other countries -- of imports than many other countries around the world. Murray, do you want to --?

I would just confirm what Stan was saying. First of all, in Poland, there's been a lot more competition this last 12 months than there was this time last year. A couple of main reasons -- Selser (ph) invested in a mill in Poland March/April of last year, and they ramped that mill up. So you had more local competition but, more importantly, as Stan said, a lot of import competition from Germany and nearby, countries like Czech Republic, et cetera. So that really put pressure on selling prices in Poland. And, as Stan mentioned, the zloty basically has been very strong all year. So that has been a negative to the mill. You would have probably read that production in Poland overall -- not just our mill, but PHS (ph) was down around 20%. So that's quite significant on 12 months ago. But we think Poland is certainly long term. Our operations there, as Stan mentioned earlier, we're going downstream. We think it's a very good investment, and we just need to be patient for the long term.

With respect to China, I agree with what Stan was saying. The government is certainly putting pressure on these smaller mills to consolidate, but this is going to take time. This doesn't happen in 12 months; it's probably going to be a two to five-year period. But certainly, we know that the Chinese mills are high-cost mills, and certainly the prices where they are now for hot-rolled coil and even long products puts tremendous pressure on many of these small mills. Some will continue to be supported by the state governments, provincial governments, and will survive. They need them for infrastructure purposes. But others will consolidate, and others will go out altogether. So to me, it's just a matter of time.

Aldo Mazzaferro, Goldman Sachs.

I had two questions. One was on Poland, and one was on China. I think you may have answered 90% of both of them already. But let me just ask, on Poland, if you take your -- the year-to-year numbers on the per-ton basis that you have in the press release, you look at the selling price down, the spread versus scrap down about $54 a ton, and then the profit down year to year about 78 per ton. So that difference there of about $24 and the difference between the spread and the profit being down -- would that be the currency effect on labor, or is there something else going on? Because your volume was up year to year. I'm just wondering why the all other cost base would have gotten so much worse per ton after the spread, you know?

Well, these numbers, of course, are in US dollars. The currency would be the main factor; you are correct.

And then the other question, on China -- this is more theoretical. I'm sure you know what I'm talking about. If you look at the production numbers being record highs, you look at the fact that they have gone back to being a net importer in the last three months after being a net exporter, those two numbers suggest either much higher consumption or much higher inventory in the country. We hear stories about both, that consumption might be higher than you think or inventories may be a little build. And yet there is the pricing situation right now, where pricing seems to be falling within China. So that would argue more for the inventory side.

My question is, assuming the government does what they say and they limit the exports and prices in China do come under a lot of pressure, with that export limitation, how much of a global impact do you think that might have?

I think that -- and we're already hearing of it -- you'll see production -- you've got to see some production cuts in China, that the market is -- because everything is relatively high-cost there except labor, which, as you know, is not such a factor in making a ton of steel, they just can't make it at the current price levels.

In terms of the exports, of course, and imports, there is a differentiation by product and also, I think, in terms of consumption. For example, we think rebar -- they are continuing to consume huge amounts of it. And Bill was just there and he said the construction continues at just an astounding level. Murray?

In terms of inventory buildup, there's definitely some on hot-rolled coil. They have got overcapacity there, and we're seeing situations where imports of hot-rolled coil to China are being resold to other parts of Asia. So that's an indication that inventory and hot-rolled coil is built up there. But if you look at the imports, the big drop -- exports, should I say -- the big drop on exports has been semi (ph) products. And you recall, in April, they removed the VAT, the tax rebate. So that took some time to kick in, but that has been the huge reduction in terms of their export. Their main products, finished good products, are exporting, as I mentioned earlier, hot-rolled coil -- these tend to be the commercial grades, plate and wire rod; these are the three main products that they are exporting.

Part of it, too, of course, relates to where the mills are relative to access to exports. For example, a lot of the rebar mills are inland and have tremendous costs to get to -- and the lack of logistics in terms of being able to export. That doesn't mean you aren’t seeing some exports of rebar but it makes it much more difficult, whereas some of these mills with hot-rolled coil, wire rod, are right on the water, so it makes it easier.

And if I could follow up on one other one, regarding this Mittal Steel acquisition of Kryvorizhstal in Ukraine, stories are that they were one of the more aggressive price-cutters on the long products market. Would you have any feeling whether that's true or not?

In which part of the world?

I think they go all over. Mostly Southern Europe and into Africa, the Middle East. I don't know whether you see that market.

Yes, to some degree. Murray, do you want to go?

I don't know, to be honest. We haven't experienced it in recent times, but it depends. Mittal's plans are to obviously increase production there significantly, so they -- I've got no doubt they'll have to export. So they will become a significant player in the future.

Actually, were we saw more of it, I think, specifically, was when scrap went way up and tended to make us, let's say -- not in this country, because we're not competing against integrated mills, but in central Europe that was a bit of a problem for a while. But scrap costs are not that high now where that's an issue.

Jonathan Goldberg (ph), Highline Capital Management.

I had a question on the fabrication division. It looked like there were some charges for some incentive comp and some profit-sharing. And I was wondering if you could just quantify how much all those expenses were?

The bonus and its associated payroll tax -- these are all pretax numbers -- was just under 8 million. The profit-sharing was about 2 million and the allowance for doubtful accounts was about 2.7.

And should we treat those -- is that kind of a one-time charge, or how do those work?

Yes, I’d love to tell you the bad debt expense was a one-time charge. But I think you wouldn't believe me. I would say this, that as far as the bonuses and the profit-sharing, those are recurring. The question would be could we get a little smarter about spreading that out through the entire year? The difficulty with that is that there is a process, both internally and, of course, with good corporate governance with our own Board that we have to go through. And it's not final. I don't want to refer to the Board as fat ladies. That would be inappropriate. But until -- it's just an expression -- until they sing, it's not over.

So, yes, it's not a one-off deal. Could we have gotten a little better about doing estimating? Well, probably so, and we'll try. But I don't think you can take the full-year results and say I can roll these things back, and we would otherwise have been more profitable. That would not have been the case.

But going out in the future, like if I look at Q1, what were you guiding to Q1? And it looks like things are expected to continue to go up. Is that coming off of what you reported in Q4 in that division, or do I add back some of those expenses?

I took that into account when I was estimating the first quarter that the fourth was probably disproportionately low by some of those numbers.

Generally, can you talk what you're seeing in the Fabrication division as far as backlogs and demand and how far out you're booked?

Good, good, good. Murray, do you want to --?

It's been very good in every sector. The good news is, as we heard earlier, inventories at this time -- well, this year are much lower than they were last year. So that's very good for our company and very good for our fab guys. So, yes, it's good right across the board, not even considering the effect of the hurricanes. So we really haven't factored that in as yet. So it's certainly good.

One thing we haven't talked about -- actually, we talked about it some when we reported last quarter. And that was whether some of our customers in fact would overshoot, so to speak. It was pretty clear that in trying to decrease their inventories, particularly the distributors, that they haven't screwed up twice, they might do it a third time. And that's quite possible, that they let their inventories get too low, which might account for a little bit of the pickup that we've seen in the last several months.

And there's too much of that going on. I think that's creating some of the volatility, beginning with scrap, that is just -- for example, on the international scrap market, the Turks -- not to pick on the Turks, but to pick on them because they are such big importers. Turkey imports something like 12 million tons of ferrous scrap a year. And it seems like their pattern has become they will try and buy virtually nothing for two or three months and then come in and buy 1 million tons. And in terms of volatility, this is never, never going to help. And I can't tell what to do, if that's going to continue, that kind of buying we're going to continue to have these volatile markets. But I think a lot of it is throughout the chain, people just trying -- instead of just buying what they need against their sales, just trying to outread this market, which is impossible.

And then, my last question is on the Domestic Mills. Where do you see your metal spreads going? There's been a lot of talk about -- just a lot of movement in the surcharges over the last couple of months. And where are you assuming your metal spreads are going to go in the first quarter and as much as you can see after that?

I think first quarter -- I don't know if we copied you on it. Well, relatively steady, I would say. I couldn't tell you second quarter, third quarter. But I will say -- longer term, we think spreads will be higher because of these various factors contributing to increased global demand.

(OPERATOR INSTRUCTIONS). Sunil Dathodar (ph), Bramwell Capital Management.

When you look at the visibility beyond the next quarter, what is the outlook that you have seen in the marketplace currently?

We haven't given anything beyond the first quarter, other than to say the outlook generally for us as a company is positive.

You mean to say the order books tend to be better in the second quarter (multiple speakers)?

We haven't commented on that.

The second quarter is typically our weakest quarter because of the winter months, but our backlog, our orders, are very good. So we anticipate for a second quarter it will be a good second quarter.

In terms of the metal pricing, if you look at the pricing has been declining somewhat in the markets that you saw also. Now, going forward, do you think that the excess capacity that's available in China is going to dampen the par prices overall in Asia, and that's going to reflect in the US market also?

Well, it already has dampened prices certainly in Asia and virtually around the world. Again, you can't -- you have got to be very careful to look at it product by product. And we have enough of a problem with everyone lumping us together with other steel companies and then lumping all the steel products together. They are different and have different supply/demand situations. Generally speaking, the prices have come down.

Murray, do you want to --?

Well, particularly in China and international prices or the Asian prices you mentioned will impact this market on flat products. There's no doubt, as Stan said, they have. And I think there's still some movement to go down on flat products. But we don't produce flat products; we do trade them here in the US. But rebar and merchant bar, which we produce here in the US -- there will be virtually no impact on those prices. There are other factors involved there. So the demand here is still good for those products, so we don't expect any major changes in prices there.

And one last question, on your Polish operations -- what kind of changes do you plan to make in those kind of operations? Are you satisfied with those changes that you have made in the past quarters going with the pricing trend in that market? And since that the spreads are going to be contracting here, can you give some color on that? Can you throw some light on this?

I think the outset of the operation of our shredder is going to be a very significant impact. It will begin operations pretty much full bore at the beginning of the calendar year, which should improve our spreads and should improve our yield. I think it will also send a note of discipline to the secondary metals operations in Poland, which currently are about one step removed from the Wild West. The other thing that we have mentioned publicly and are going full steam on is our downstream fabrication operation, which we will locate on the premises of the mill. At least operation number one, as a rebar fabrication, will be there. So I would say that, no, we are not standing pat, that we are attempting to make Poland look like our successful model here in the United States.

In Poland, we are also -- close to half of our production is wire rods. So we will also go downstream with wiremesh, as an example.

And one other positive thing about Poland -- they have a new government there, of course, and it's a coalition. But we believe they will be more pro-business than the old government, and we believe all those funds that really are available for Poland, from the EU, that will be spent on infrastructure, and things will start to move along. But this will be a few more months yet. But we are more optimistic now that things will happen, in terms of infrastructure spending, more quickly than we were a few months ago.

At this time, there are no further questions. I would now like to turn the call back over to Mr. Rabin for closing comments.

Thanks, everyone, for your provocative questions. I hope we answered those to each of your satisfaction. We will be hitting the road again, and hopefully we'll see a lot of you in the next several weeks. And have a good fall.

Ladies and gentlemen, this concludes today's conference. You may now disconnect.