Commercial Metals Co (CMC) 2006 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Commercial Metals Company first quarter 2006 earnings conference call. (OPERATOR INSTRUCTIONS).

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

Good afternoon, everyone.

Thanks for joining in as the holiday season is imminent, and those of you in New York, where I grew up, as you know, are struggling through another transit strike.

Some things change and some things stay the same.

What I will do -- it's our usual team here;

Bill Larson, Murray McClean and myself.

Bill will really cover the quarter.

What I'd like to mainly do is just take a few minutes to talk about general economic conditions in the markets we are in; not to avoid the quarter, which was another fabulous quarter in terms of earnings per share, actually tied for the third-best in our history; quality of earnings tremendous and great cash flow.

But Bill will cover the quarter in detail.

In terms of the general economic conditions that we're seeing, overall I'd say good.

The closer you get to the United States, the better it is.

And certainly it's reflected in our steel and other markets, being the strongest in the U.S.

With our good global -- good economic growth, we're seeing very good -- continued very good activity in the construction sector, particularly non-residential, but even surprisingly good activity continued in residential, in spite of the high oil prices.

And of course, even the manufacturing sector with -- not to minimize the issue of relocation overseas, the manufacturing sector continues to do well in this country.

So our economy continues to show great resilience.

Europe is quite a bit weaker, very spotty, a lot depending on whether Germany will or won't show some recovery, and certainly a fragile situation there.

And again, that reflects -- our steel markets reflect that difference in economic activity.

Asia I would characterize as being in between, relatively good.

China, of course, continues with its rapid growth.

Japan looking better, and seems to have finally come out of that deflationary cycle that it was in for such a long time.

High-growth in India and the whole East Asia area, I would say; generally pretty good growth levels, probably in the 4.5% range.

Currencies, your guess is as good as mine, but we have had some strengthening of the dollar, though in the last week or so it's retreated some again.

But we would like to see another engine of growth, and hopefully that will be Japan.

In terms of steel markets, a lot depends on whether you're half empty, half full.

For example, we just got the November production -- global production numbers, and American Metal Markets' headline was China drives 4.1% rise in world steel production for November, which is correct.

But it could have said November production declines 4.1% from October production, which of course is, in a sense, a more positive way of looking at the situation.

But the numbers are what they are.

But it would be premature to say that China has -- that we're actually seeing those anticipated, I won't say declines in production, but lower -- a lower rate of increase in their production.

But certainly that is a positive sign, the fact that at least November was down from -- for the global production was down from October.

Prices are high, steel prices highest in the U.S.

I would say weakest in China.

But again, as we have said in previous calls, the Chinese government does not seem to be unhappy with the fact that steel prices have I'd say probably dropped somewhere in the neighborhood of 50% over the last year or so.

The iron ore negotiations have begun, and that will have a significant effect on what happens next year.

But again, I have no prediction on where those prices will end up.

Just finally, the general trends we've been seeing, particularly in the steel industry, also in nonferrous around the world continue -- globalization, consolidation, both production growth and consumption growth; again, led by the increases in China.

Tremendous focus, I think, on the increase in input costs around the world, particularly natural gas and electricity.

And we as a firm of course also focusing on those cost increases, and while we think we've been efficient, how to get even more efficient in terms of usage, because that we do have some control.

So again, a great quarter.

And Bill, you want to --

Good afternoon all.

Let me go over the fine print first.

There's a detailed Safe Harbor statement included in our press release and in our August 31, 2005 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've given guidance regarding our outlook for the second quarter of fiscal 2006 in our press release, and subsequent to this call and our meetings in New York on January 4th and 5th, maybe that's actually the 3rd and 4th, we will not be commenting further, and will not be under any obligation to update our outlook.

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

Some of these are derived fairly straightforward from our financial statements or in common business use can be the subject of our conversations today.

And while we visit (ph) our Website has additional information at CommercialMetals.com, but there are other items that may be outside of our ability for discussion, and you may have to be patient.

Two great stories this quarter.

The first is the continuing extraordinary results we achieved.

Though the dollar $1.14 was within our guidance, I was a bit surprised at the level of LIFO expense in the quarter.

But as I've said before, it's live by LIFO, die by LIFO.

I will touch on the details of this presently.

The second great story this fall was the resurgence of Notre Dame's football program.

As they say, what is good for Notre Dame is good for college football.

And I might add our homeboys are playing for the national title, and I personally have no love lost for USC, so I can enthusiastically say poke 'em Horns.

I hope most of you had a chance to read our annual report by now.

The theme is one of differentiation, that CMC is not like every other steel company.

Our earning power is derived from multiple sectors that will work through the cycles at different pieces.

Our presence in the long products, as the IB's say, space has certainly taken advantage of the strengthening construction markets over the last nine quarters.

Fabrication has seen five strong quarters.

Recycling has strung together also nine good quarters.

Marketing and Distribution has not had a bad quarter in at least 15 years.

They are on one long winning streak.

And Poland, well, they're back above water as you saw this quarter, and they hold the best long-term upside in the Company.

Our increase in sales this quarter was led by our domestic mills and fabricators, as the strength of the construction markets continued.

The LIFO reserve, not the expense, the LIFO reserve for the quarter ended November 30th was 133 million.

Now, what happened this quarter, LIFO decreased net earnings 14.1 million a share net, or $0.23 per share.

That's compared to the first quarter of last year, where we decreased earnings 22.2 million, or $0.36 per share.

Now, I've mentioned before that the last refuge in explaining LIFO effects is to attribute it to a change in product mix.

And okay, that was partially responsible, but the more intuitive answer is that the rise in the price of scrap and electricity and natural gas drove up the value of the inventory at the mills because of higher production costs, obviously, which then got passed on in the form of higher prices to our fab shops.

So you have the classic case of rising costs give LIFO expense.

Our gross margins are pretty strong across the board, with a particularly strong recovery at our copper tube mill.

But as you saw from the statistics, it's still a bit of a struggle in Poland.

Depreciation and amortization for the first quarter was 19,270,000, and I would anticipate that the number for the year would be about $83 million.

SG&A went down a little over 3 million this first quarter compared to last year's first quarter.

And to perhaps overly summarize, it's the net of two effects.

One, salaries went up about 3.5 million, and bonus accruals went down about 8.7 million.

So those are the two biggest factors that caused the decrease, mainly the less of the bonus accrual.

During this quarter we had practically no commercial paper of any significance that was outstanding during the quarter.

As you saw from the cash-flow statement, cash flows from operating activities totaled $72 million.

We were very, very positive in our cash flow this quarter.

I would anticipate that interest expense for the coming quarter would be about 7.3 million, give or take some, and our interest coverage was well over 19 times for this quarter.

There were no short-term borrowings outstanding at quarter-end.

We have lowered our long-term debt to cap ratio to 27.8%.

Stockholders equity, 969 million.

The book value per share is $16.67.

The average shares diluted in the first quarter were 61,053,440.

The actual shares outstanding were 58,390,580.

Capital expenditures for the quarter were 32 million, which included about 5 million of mainly a rebar fabrication acquisition in Virginia.

The budget for the year is still around 178 million, including some small acquisitions.

We repurchased no stock during the first quarter.

Finally, if you are on the front-end of the religious spectrum, I'd like to wish you a happy Hanukkah, and if you're on the back-end of the religious spectrum, a merry Christmas, and regardless of where you fall in the spectrum, a safe and prosperous new year.

Thank you.

That completes our presentation.

I'm going to stay away from holidays and I'm going to stay away from sports, because a few years ago I think I mentioned something about Duke basketball, and I got more calls over that than over any comment about our company.

We are ready for questions.

(OPERATOR INSTRUCTIONS).

John Novak, CIBC.

Good afternoon.

Can you give us a sense why shipments were lower sequentially at CMCZ?

Was that mainly a result of the maintenance, or were there other market factors impacting the quarter?

Murray, you want to comment on that?

It was mainly due to the maintenance, but market conditions there are still comparatively weak.

We face quite bit of competition from imports.

The Polish zloty hasn't helped during the quarter.

But the main reason would definitely be the maintenance period.

I guess with fabrication also showing a little deterioration sequentially, was that just mainly getting rid of some not as attractively priced backlog, or were there other factors in there?

No particular factor there.

Shipments are robust, and -- only good things there in terms of orders, backlogs, prices -- just consistently good.

When you talked in your outlook, you talked about fabricated prices increasing as we move forward into the next quarter.

Can you give us a sense of the magnitude of that improvement?

Sorry.

You caught me (multiple speakers)

Fabricated -- the magnitude of the increase.

Let me quickly double back.

Also, the LIFO charges were much higher, too.

That may have been an effect on the sequential -- I'd have to double-check on that.

But that can also affect pricing.

Fabricated pricing -- I would say, what, 5% or --

With the mix of business in there, it's a little bit harder (multiple speakers)

It's a little harder, because -- and the prices, as you know, are just so different for the different products.

Have we hit the low watermark in terms Recycling?

Should we see that stabilize or should we see further contraction on a sequential basis in terms of the profits there?

I wouldn't go out there more than a quarter at a time.

I think our anticipation, as we said in the release, is that the average -- for ferrous scrap, the average price for this quarter will be lower than the first quarter, and that's predicated also on anticipating that the January domestic scrap price will be lower.

But beyond that, we expect good activity.

Right now, a clear part of the draginess in the ferrous scrap market is the international activity has been somewhat subdued.

Turkey has been fairly active, but some of the other buyers have not been as active as they typically have been.

I would expect that to pick up, and some of that may be related indirectly to the iron ore negotiations.

So we'll have to see.

Of course for us, being also in the recycling on the nonferrous side, those markets continue to be extremely strong, as you know.

Although as we mentioned, we think there's some froth in the terminal markets.

Some of that related to fund -- fund activity, and that's reflected in the fact that scrap prices haven't gone up as much as the terminal market prices.

One last question, Stanley.

Have you seen any increased flow from the hurricane zones as of yet?

Or is that still anticipated for more spring, the spring period?

I would say still anticipated.

Michelle Applebaum, Michelle Applebaum Research.

First I wanted to tell Bill, because I think you started with the remarks, that I think anybody working at Commercial Metals ought to know that Hanukkah and Christmas are the same day this year.

True.

Well done.

Thank you.

Second of all, I wanted to ask you, what is the trading side telling you about what's going on in terms of imports into the U.S.?

We've seen some pick up in October/November timeframe.

What is your internal intelligence and what is your sense?

Some pickup, I will let Murray answer in more detail, though it varies quite a bit by product line. (indiscernible) Hanukkah.

(indiscernible) Hanukkah.

I was going to say Christmas Eve.

I don't even know when -- is Hanukkah Sunday night or Saturday night?

You would think I would know that.

I forgive Bill.

We saw during the period June/July/August very low forward bookings for our trading group for steel coming here to the U.S.

And it started to pick up in September, and it really gathered momentum in October and November, and then to this month of December. (indiscernible) arrivals, and if you look at the import stats, they really have started to pick up on November, December.

And certainly first quarter of calendar 2006, you'll see right across the board a lot more imports coming into this market.

Against that there's low inventories, or comparatively low compared with this time last year.

So our view is that, quite frankly, the market needs these imports.

So I think it's a healthy thing for our company and probably the industry.

You don't see enough imports to be causing prices to decline, or --

We don't see it, particularly on long products.

Flat products -- we do import flat products.

We don't produce flat products.

We think there may be some pressure on flat product pricing.

But certainly the long products, there may be a ceiling on pricing, but quite frankly I think the market needs it.

Normally you typically see long product prices decline in the winter, or you used to.

But the last couple of years you haven't really seen that, have you?

No, because I think what's happened is the global markets superimpose on the domestic.

So a lot -- so much depends on what's going on in China and when their lunar -- speaking of holidays -- when the lunar new year, when it falls over there, and their activity before that and after that.

That's just one example, I think, of some of the other effects that then in turn determine what happens with our domestic.

And of course, a major factor we know from year-to-year are currencies.

No question about that.

If I recall this conference call last quarter, or maybe it was the quarter before, I thought someone asked you the China question.

And you were the first person that I heard articulate the view that the Chinese were intentionally trying to push prices down to force some consolidation, I think.

Am I over-quoting you here, or am I getting it right?

No, I think you're getting it right.

Other people were implying it at the time, and I thought you really stuck your neck out.

And I've heard a lot more -- it's almost become consensus view that that's going on.

So I'd love to hear, since you were kind of the vanguard, I'd love to hear your current thinking on what's happening there overall.

We just saw another merger with Wuhan and -- I forget who the other middle mill is, Murray.

But yes, we think that will continue.

And our sense is the small mills, particularly some of these small long product mills, are struggling badly in China, and something is going to have to happen.

We don't think the provincial governments are just going to keep supporting them month after month.

Because as we pointed out, the Chinese are not low-cost producers.

They have no real inherent, other than a huge domestic market, but that doesn't affect their costs per se, that -- that they have no real comparative advantage.

And when you get prices as low as they are, they're just underwater, a lot of these mills.

And the Chinese government is going to favor Baoshan and the other big state-owned enterprises.

It's consistent with what we've been saying for some time, and you will hear the Japanese saying the same thing now.

If you look at hot rolled coil in Asia, markets have dropped over $200 a ton the last two to three months.

And if you look at the cost of production for the Chinese mills, we understand the lowest cost for hot rolled coil is probably around $300 a ton, but many are 340 to 370 range, and look at the prices now.

So there's a real squeeze on in China (indiscernible) small mills as Stan said.

And we think the government is happy with this situation.

They want the consolidation to occur, and quite frankly they want some of those small mills shut down.

So it's consistent with their policy, and they articulated that to us early this calendar year.

So it doesn't happen overnight, it will take some time.

But the pressure is on.

Do you see that abating at any point?

Because obviously, if the tons aren't coming from China to the U.S., certainly the price is impacting the market here.

Yes, they are.

We don't see hot rolled coil because of the anti-dumping situation, but you see it obviously in pipe and some other products.

But basically, China has been mainly exporting hot rolled coil, not to the U.S., as I mentioned, to Asian markets, some wire rod and plate.

As you know, China has become a net importer in the last five months, so the degree of their exports is fairly limited at this point in time.

Just a final comment on that, the Chinese government has again just come out and pinpointed 11 sectors that they say have overproduction.

And again, steel is one of those.

Aluminum is one.

And our view remains that when they keep pinpointing a sector like steel, they're going to get it under control.

I guess I wasn't specific.

I was just trying to -- I understand that tons aren't coming here.

I understand that.

I don't know that the rest -- a lot of people know that.

I think it's affecting the psychology of the market in the U.S.

My question is, does this just take years to resolve?

What should we look for to see (indiscernible) that they've been a net importer again since I think it was June.

What changes this?

What changes it is, is as we said, that the central government prevails over the provincial governments, and that (indiscernible) that will happen.

And I think in terms of timeframe, I would think you'll see some real progress in the next year or so, because there -- it's pretty clear they're also -- they being the government -- allowing the market to have -- should have the effect of accelerating this correction.

Obviously it's a complex situation over there because of the social issues and unemployment and, as we said also, they're very concerned about inflation as well in China.

And this is a way of dealing with that.

Thanks so much.

Your perspective is terrific.

We will be there again, by the way, in late -- planned a trip there, and Murray and I will be there in late February.

Great.

We'll talk then.

Frank Dunau, Adage Capital.

To clear up the mystery of the holiday dates, from a person who has every conceivable relationship in terms of religions, Saturday night is Christmas Eve.

Saturday -- Sunday Day is Christmas, and Sunday night is the first night of Hanukkah.

And I don't know why one gets the front-end and one gets the back-end.

I don't know what that all means.

I'll talk to Bill about that later.

What I meant is that the front-end of the spectrum meant the Old Testament and, therefore, the Jewish, and the back-end of the spectrum is the New Testament, the Christians. (multiple speakers)

That's too complicated for everybody.

I just -- actually most of these questions are for Bill.

Your inventories from the end of the year, or from the end of the August quarter to the end of this quarter went down 47 million?

Yes.

Was that mostly volume, or was -- I can't imagine there was much price effect going on.

Or was there?

It would be more volume related and -- allow me one second -- in the inventories, it was mainly in Marketing and Distribution where they fell.

So it wasn't -- it wasn't in the manufacturing business.

No it's not.

No.

Now I can't ask you all the questions I was going to ask because -- all right.

Now I don't know what to do with myself.

Go ahead and ask the question anyway.

If they were in the manufacturing I had all sorts of questions, but they're not there.

You can ask all about the LIFO and how could that have had a big expanse and everything.

No, I think I understand how you have LIFO.

I don't understand how people don't have LIFO in this environment.

There you go.

Other than that, that was (indiscernible) that was the only question I had.

Actually -- no, that's it.

We're fine.

Thanks.

Sanil Daptadar (ph), Bramwell Capital Management.

When you talk about the market as a whole and you look at the end user, do you think that this was more the shipments into (indiscernible) or it was more of a re-stocking phenomenon, or they actually use half the product?

They're using it.

At these price levels, I don't think -- I just think people are buying what they need.

And I think -- our sense is that inventories are more on the low side than anywhere else.

Now, service centers, we do have -- we all have access to the statistics from the Institute, but end users, we don't really.

We do get a sense of things, and that's that they are -- there will continue to be strong demand.

Which means that (indiscernible) from the comments that mentioned in your press release that inventories are low, which means that going into the next quarter and the second half of the year, one can assume that there is going to be a brisk level of activity into the marketplace.

Is that correct?

That's correct.

We think so.

I'm talking about our -- the products we manufacture.

If I go into the second half of your fiscal year, what kind of price assumptions you would make on the products that you sell in the marketplace from the first two quarters of the year?

Is it like price is going to be lower?

Are you feeling that the prices are going to remain where they are today?

I wouldn't make any.

A lot will depend on the absolute prices what happens with scrap, and also what happens in the U.S. indirectly in places like Europe, more directly with the iron ore price negotiations.

As we've said for a number of quarters now, of course we focus more on the metal spread.

That's what's critical.

And we would expect the metal margins to remain quite good.

What was the metal spread this quarter?

You haven't released that number, I think, in the press release at this time.

No, it should be there. 287.

287 a short ton in the U.S.

It was significantly lower in Poland.

That's a big difference.

Using any type of normal translation, it was below 200 in Poland.

With your annual report there was a small (indiscernible).

What's the difference between this steel company and other steel companies?

That's a good (indiscernible) to make a differentiation.

There was a (indiscernible) has been talking about price cuts because of Chinese imports entering Korea probably (indiscernible) 17% beginning (indiscernible).

But if that's -- if the Korean companies are going to protect their own (indiscernible) market, then Chinese groups are going to find buyers into some other markets.

Do you think that (indiscernible) less likely to impact the U.S.?

But still it will.

Do you think that would impact your (indiscernible) altogether in the low-end part, in the low-end area?

Of course Tosco's (ph) flat rolled -- those actions were specifically on flat rolled.

And that's the situation Murray was talking about and Michelle was asking about a few minutes ago.

So there has been globally, certainly, some effect on pricing because of China, more of a -- I would agree with Michelle -- more of a psychological effect, which ends up being a real effect, than actual tons exported.

But one thing I want to -- there's tremendous amount of, let's call it anti-dumping around the world.

And everybody's always beating up on the U.S. for our alleged protectionism.

And we do have some, clearly.

But there's not a country right now in steel that's not taking some action, Japan included, on imports.

So -- and that's another factor, I think, that's going to restrain the Chinese; no one is going to put up with them dumping huge quantities of steel in specific markets.

We've seen very quick reaction to the Chinese, and it's everywhere.

It is everywhere.

So don't let anyone tell you, me, or anyone that there's -- that no -- every country is protectionist.

The Chinese are also protectionist.

They're looking at imports coming into their market.

And I think the end result of what I'm saying is that that will be another reason why the Chinese are going to have to throttle back their production, because it isn't just going to be able to go anywhere and everywhere, because there is going to be anti-dumping.

One last question.

You did make a reference on the iron ore negotiations (indiscernible) did not want to comment on the price increase.

Could you just give us a fair idea of what you think would be the level of price increase that the negotiations would take this, in terms of for 2006?

Or do you have a rough indication, is it going to be 10% increase (indiscernible)

The only thing I know is what I've heard, which is the range of 5 to 15%.

Murray, have you heard anything?

We've heard as high as 20.

I guess our view is that the prices will go up.

But what, we don't know.

The demand is still there in China and other parts of the world.

Basically the steel markets of the world -- the only country which has comparatively high inventories, and that's only in certain products, is China.

Most other countries have normal to low inventories at this time.

Compared with last year, many countries were building up their inventories.

So the pressure will be on particularly China, Japan, etcetera, to accept higher iron ore prices.

But we don't know, obviously, exactly what they will be, but probably in the range of 10 to 15 would be a fair guess.

The interesting thing to me is, although China plays such a dominant role now in seaborne iron ore imports, is that the negotiations have started again in the very traditional way; that is, the Australian, Brazilian iron ore companies meeting first with the Japanese.

I had thought the Chinese would try and play a much more aggressive role in the negotiations this time around, and I'm sure they want to or planned to.

But it seems to have started in a traditional way.

Based on the iron ore negotiations, you mean to say you had mentioned that the ferrous scrap market international activity has been subdued.

So until that negotiations is completed, you think that the ferrous scrap market (indiscernible) subdued in that case?

I think they'll try unless they simply, because of low inventories, have to come in in the market.

I think a key to watch is after Chinese New Year.

Nothing much will probably happen between now and the end of January, early February.

But I would watch out for end of February, March period.

I think this will be a critical time.

(OPERATOR INSTRUCTIONS).

Charles Bradford, Bradford Research.

Could you amplify a bit on your scrap comments?

What kind of orders of magnitude are you looking at?

And what's driving it?

Is it just lack of demand?

Is it lack of export opportunities?

It's certainly not lack of domestic demand, because the domestic mills are busy, particularly those who are regular scrap buyers.

So I would say it's more related to the decrease in export activity.

With the comments about Chinese and Asian prices being so low, and maybe imports heading in this direction, the implication is, of course, lower steel prices.

But if scrap is lower by the same orders of magnitude, there's no real difference.

That's true.

That's why we say for a mill what matters is the metal spread.

But are the orders of magnitude likely to be pretty consistent?

I would think so.

Jonathan Goldberg, Highline Capital.

Congrats again.

Great numbers.

I had a quick question on the construction markets, and I had to jump off so I'm not sure if you spoke about it already.

What inning would you say we are in now in the nonresidential construction cycle?

And typically in your experience, how long do these cycles typically last?

Several years in either direction.

But I think -- I don't know, I would kind of totally off the wall say maybe we're in the fifth inning.

What we haven't seen is that big pickup in office construction, and that's usually the indicator that we are later in the cycle when we see that.

Of course, we have underlined that there's a lot of this tremendous amount of public construction.

And again, this cycle, depending on quantitatively what happens in the Gulf Coast reconstruction, it could cause the cycle to last somewhat longer, the better part of the cycle, than it otherwise would have.

But we are quite optimistic about where we are in the nonresidential construction cycle.

Have you seen any impact since the transportation bill was signed?

Have you seen any impact of that on your either fabrication business or on your demand at the steel mills?

I don't know (indiscernible) we were at a very high level before it was passed, so I'm not sure how much we specifically would have noticed it.

It may have more of effect in a way of prolonging the good part of the cycle, because I think all of the fabricators are busy.

And it certainly reflected in the cement business, which of course has better -- in terms of supply demand is really tight.

And again, a lot of that relates to the control over imports.

But be that as it may, everything we hear independently about what's going on with cement would -- no pun intended -- would reinforce our view of a good part of the cycle ahead of us.

Sal Saladi (ph), Goldman Sachs.

A couple of questions.

Can you elaborate a little bit more on what you see at the copper tube division?

You guys made $4.2 million, including (indiscernible) appears to be the LIFO charge, as compared to what looks like about only 5 million last (indiscernible). (indiscernible) prices are high (indiscernible) strong.

Do you guys see a good quarter, a good year -- sorry -- for the copper division this year?

We do.

Certainly a better start.

And this was the first quarter in over a year where we were able to get our spreads up commensurate with where the raw material has gone.

We've talked about the -- for a number of quarters about the ability to absorb -- more than absorb the increase in what had been a big increase in the ferrous scrap price.

And of course we've had this astronomical increase in the price of copper.

So it's very encouraging that we are able now to get the spreads up and to get better profitability.

Of course, the main end use market here is residential construction, but that continues to be good.

There's some softening, and a lot of caution about isn't this some kind of residential housing bubble.

A lot of the markets we are in, I would say, have no bubble, and others do have a potential bubble, and (indiscernible) strictly residential construction now.

But the overall outlook is good.

And particularly, this condominium phenomenon is very helpful.

So we're -- yes, I think the outlook is better.

The clear danger with this whole -- with any kind of nonferrous fabrication right now is what's going to happen with the price of the raw material.

Because copper -- I've always -- you've heard me say for years, a lot of you, that for me it's a barometer of global activity, which is a very positive sign.

On the other hand, copper, with the LME/COMEX, depending on which month you pick, its $2.10 a pound.

Could it drop to $1.70 or $1.60?

It certainly could.

I think it will.

Will it be tomorrow?

Will it be two years from now?

Who knows?

But I think that's the biggest question mark, is the copper -- price of copper itself.

How quickly does these copper scrap prices react to the LME price?

Is there a lag of a week, two weeks, or they immediately --

There is no lag.

What you see though, if there is, as I talked earlier about certain speculative frothiness, what will happen is the differential between the price of -- let's say, number one, copper scrap, and COMEX or LME will widen.

To the extent it's totally based on physical demand, there will be less of this spread.

So that can give us some sense of what's happening.

So there's no lag.

We used to -- I guess we started saying this about 15 years ago, that when things were becoming more and more transparent in the scrap market, that every scrap dealer had at that time -- had a commodity machine knew exactly what was going on with the COMEX price.

So it's instantaneous information.

Now, talking about the transparency in the scrap market, as you know, (indiscernible) I believe they are somewhere in Pennsylvania, is starting a system of aggregating the scrap prices paid by different steel mills in different regions, and planning to publish this data on a monthly basis.

Now you are on both sides of the aisle; you are a steel mill and a scrap company.

Are you part of this data collection?

No.

We have chosen to not participate.

Do you think that would impact the scrap business of scrap across the business at all, if this thing gets a foothold in the industry?

It depends how it's used.

Everyone participating better be very careful how that information is used.

(OPERATOR INSTRUCTIONS).

Leo Larkin, Standard & Poor's.

Could you give us any insight as to what's going on in the aluminum market?

The price has really spiked up quite a bit.

Do you think that's really supported by what you're seeing in the market as against maybe fund buying?

Just my own view is that there is some speculation involved with the aluminum price.

The physical business is good.

We see good activity.

We're of course also involved with the aluminum semis in a fairly big way, and that activity is good.

But yes, I think there is some speculation involved.

Murray?

I think on the physical side, there's comparatively low inventories now.

And I think aluminium is probably lagged behind some of the other metals in the last few months, and it's finally caught up.

So I think 2006 is going to be a good year for aluminium companies.

Aldo Mazzaferro, Goldman Sachs.

I was just wondering on the Poland outlook if I could ask just on a longer-term view -- compared to what you pace (ph) the mill, can you outline a little bit about what you think your longer-term return on investment might be and what -- some of the plans you might have to vertically integrate and grow that operation?

I'll let Murray do most of the answering.

Let me just say in terms of the vertical integration, as we pointed out in the press release, we anticipate starting up the shredder, the megashredder, the middle of next month.

And for us, we think that will be a major step forward.

It will take a while to get the full benefit, but that will be very helpful, particularly in terms of scrap quality.

And then we're undertaking our (indiscernible) which is Greenfield, in Rebar fabrication, also to be located at the mill site.

And we would anticipate that operation starting up in May of 2006.

Let me just make one other comment, then Murray will go into it.

I think what we've learned is it's -- even the vertical integration will be at least as crucial in Poland as it is in the United States or anywhere else, but particularly to get -- and it will help us significantly in the long run to have better control, both in terms of our marketing of the products and the procurement of the scrap.

It's really important in Poland, and we're really happy that we have begun these steps.

Murray, you want to --?

I think, as Stan said, certainly the key for us is to control the supply side with the scrap.

So we're doing that with the shredder, which will help tremendously.

The downstream, we think the returns will come there mainly in the future, where we'll have much better control in the marketplace with rebar fabrication facilities and mesh.

We tend to go in that direction as well.

So the first nine months, as you know, we relied totally on the mill, and it was fantastic market conditions.

But we've come to realize we can't rely on that in the future, and we believe by controlling the market -- when I say controlling, having a significant say in the market -- we'll get our returns.

And also, we're optimistic that the Polish government will start utilizing EU funds for infrastructure spending, so that will clearly help us at the mill end as well.

Murray, let me ask you -- besides the currency penalty, right, would you think there's anything that's really structurally changed about that mill's operations that would have impacted the earnings, in terms of the potential to get back to those old type returns that you saw when you initially bought it?

Is there anything that's changed, other than currency, that would have hurt you?

I would say what's changed -- the market definitely has changed in the respect that we have more competition for (indiscernible) weren't there for the first few months when we bought that mill.

They came in -- we bought it in December 2003; they came in in March of 2004, and then they had to spend money to upgrade the mill.

So they were effectively out for the first few months.

So they're a major competitor in that market now.

And also the somewhere nearby competitors, like the Germans, for argument's sake, weren't there in the first few months.

And they've been supplying recently as well.

So there has been more competition and some changes in the market as such.

Those we have to face for the future.

So we're changing our strategy to do all those things.

But I would say we remain quite confident that we will have satisfactory returns over a long period of time.

In terms of -- one other question, if I could follow-up quickly, on -- the natural gas price, we know, is very directly related to the reheat furnaces.

I'm just wondering what you think about the potential for the natural gas price to eventually spill over into the electricity market.

Depending where you are in the country, what the feed is, if you will, for that utility -- whether it's coal-fired, natural gas, nuclear, hydro, which unfortunately (indiscernible) too many areas that have Hydro -- that there's already been some spillover.

And the indications we had given in our presentations at the end of the last fiscal year, both in electricity and natural gas, reflect that.

So we are -- again, there's certainly seasonality to the natural gas.

So we would -- if we were looking ahead towards, let's say, next late spring, summer maybe, we would -- we don't know -- anticipate not $14, but $7, $8, $9 but 1000 cubic feet.

But what we're not anticipating is it's going to be $3 or $5 or $6.

I'm just more worried about the fairly good advantages you still have versus the Chinese in electricity, the possibility that that might narrow a little.

But the Chinese don't really have high electricity either.

Thanks, Stan.

I really enjoyed your comments on the economy up front.

Thanks.

At this time there are no further questions.

Would you like to have closing remarks, Mr. Rabin?

Just to wish everyone a happy new year, and just most of all a healthy one.

And we will start traveling again early in the new year.

Thank you.

Thank you for participating in today's conference.

You may now disconnect.