Commercial Metals Co (CMC) 2006 Q2 法說會逐字稿

I would like to welcome everyone to the Commercial Metals Company second quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] Thank you. I will now turn the conference over to Mr. Rabin, Chairman and Chief Executive Officer. Sir, please go ahead.

Good afternoon everyone. With me as usual is Murray McLean, our President and Chief Operating Officer; and Bill Larson, our Vice President and Chief Financial Officer, who just told the operator he couldn't count past three, as they were testing his voice, but other than being a typical Bill Larson comment made me a little nervous about our financials. But it was, any way you look at it, just a fabulous quarter in all respects. As Bill has put into our first quarter presentation, which a number of you will see subsequently when we go on the road, the term he used was no winter freeze. I won't steal his other comments, but I will purloin that one.

Essentially, particularly domestically shipments and prices were more comparable to the first quarter of this year, generally speaking, than to the second quarter of last year. But I have to point out too, this was in the face worldwide of what I would characterize as mixed market conditions, and as many of you know who follow the steel industry, nonferrous prices are a different matter, but who follow the steel industry, we had declining prices for a number of the months in a number of the geographies and markets in which we operate. But as we'll talk about in the outlook we are expecting even better markets though now in the third quarter and going forward and as a number of analysts have pointed out recently, it certainly appears that global steel fundamentals are improving again.

Construction spending has been good, getting even better. There's just a periodic comments about construction improving, and it is, particularly nonresidential construction. But I would point out, as we've been saying for quite a few months, after the very significant dip in construction in the early 2000s, following the bursting of the high-tech bubble, we've had improving construction markets the last several years, and 2005 was certainly -- calendar year, was certainly a significant improvement over 2004, and we see continued improvement in calendar 2006, and that includes commercial construction, educational spending, certainly, of course, one of the highlights is the highway program. So there was -- and not a winter freeze. And we're also seeing something of a global -- I would say global economic pickup. There's been concern about the housing market softening here. There has been some softening, but, of course, that's off of historically high levels. But manufacturing is strong, but particularly Asia seems to be picking up. I'll let Murray comment in a minute.

He and I were recently in southeast Asia and China, and, of course China, we always give you our report on what we're seeing in China, but again, the best second quarter in our history for what's typically a seasonally weaker quarter. The second best quarter in our history, incredible quarter for our domestic mills. Certainly steel mills highlighting, but also the copper tube mill. Poland, while weak, was better than the second quarter of a year ago, with much better shipments, still fighting weak spreads. Domestic fabrication just a terrific quarter. Recycling, just consistent profitability. And it was a weaker quarter in the market and distribution because of a fall off in -- particularly in steel volume and prices in Europe and Asia. But again, we believe those conditions are temporary.

And finally, before turning over to Murray to make a few comments, and then Bill to give you a more exhaustive analysis, we increased the dividend, as you know, 67%. Murray.

Just following on Stan's comments, Stan mentioned we're in China and southeast Asia at the end of February, early March period, and we saw a big pickup after Chinese new year of all products, particularly flat products in China that went through a destocking coming period. We saw products like hot rolled coil jump $50 a ton, and cold rolled and galvanized 60 to $100 a ton. So there's been a pickup in Asia and we're also seeing a pickup in prices for long and flat products in Europe. Certainly the outlook going forward looks good, out third quarter even fourth quarter unlike las year where this time of the year there were high infantry right across the board, this year there's basically low infantry levels in most products. So we're very optimistic and as Stan said it was an outstanding second quarter, and we're very pleased with the result. Bill.

Good afternoon, everyone. Let me call to your attention the detailed Safe Harbor statement included in our press release and in our August 31, 2005, 10-K that, in summary, says that in that 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 third quarter of fiscal 2006 in our press release. Subsequent to this call and our meetings in Vancouver, San Francisco, Toronto, Boston, and New York City we will not be commenting further. We will not be under any obligation to update our outlook.

Finally, in accordance with Regulation G of the Securities and Exchange Commission, you're aware of certain non-GAAP financial measures. If these are derived fairly straightforward from our financial statements or in common business use we can talk about them today and in our visits. Our website has additional information at www.ebitdacommercialmetals.com, but there may be other items that may be outside of our ability for discussion and you may need to be patient with us if we defer comment.

Safety is number one for our employees. There's no substitute for it no, there's no halfway about it. Our mill in Seguin, CMC Steel, Texas was the number one safest mill of all mills in North America in 2005, as honored by the Steel Manufacturers Association. It's well done, well deserved, congratulations to the women and men in our steel group who go home each day safer than when they arrive. You will notice that everywhere you look at our company there's now a consistency in our branding. On March 1, we implemented our new logo and are now known worldwide as Commercial Metals Company, or by the letters CMC preceding legacy names. For instance, Murray McClean is now known as CMC McClean. Okay, that's not true, but in the spirit of wider education I would call your attention to the fact that New Zealand won the world championship 7s in rugby, I'm not certain what that means, but I think it's good.

In the long run one needs to be a believer in the efficient market theory that the market absorbs all the information available to it and makes the right call about the valuation of a stock, but for shorter periods of time sometimes you've got to wonder just what bozos are making investment decisions. Two weeks ago, as I'm sure you all followed, CMC and others in the steel industry were just hammered unmercifully for no reason. In fact what news was out during that period of time could only be construed as favorable, and certainly with us being in our blackout period there couldn't have been any additional information to add to the investment mix. But as this is lent, and in the spirit of forgiveness, reconciliation and renewal, for those who just don't get it we'll go over the highlights again.

Construction markets which touch about half of what we do domestically continue to be strong. This has fueled consistent demand for ferrous scrap and other recycled metals, supporting price levels, setting aside for the time being the perhaps somewhat unnecessary extreme volatility in pricing. Long product mill capacity rates are running about as close to full out as you can get. Downstream value-added operations have strong current work and backlogs. China has not gone to the dark side. Indeed all indications are that it's looking to act responsibly within its own self interest. So we can only conclude that prospects are good and it would be a bad time to sell.

Speaking of sales, for the quarter were up in all segments except marketing and distribution where as Stan mentioned weaker global steel prices negatively affected us. Operating profits were correspondingly weaker in the marketing distribution, about flat in recycling, but hugely higher in our domestic mills, including the copper tube mill, and in fabrication. The result of the continuing strong construction markets. You all probably have noted that we did use some cash flow for working capital purposes. There is a particular build up in our domestic steel trading and -- in-transit inventory which presages a very strong third quarter. The LIFO reserve at the end of the quarter was at 129 million. The LIFO effects for the quarter, it increased net earnings 2.6 million or $0.04 a share in comparison to last year, pretty easy because that was a decrease of 2.6 million or $0.04 per share. So far for the six months LIFO has decreased n et earnings 11.5 million, or $0.19 a share, versus 24.8 million or $0.40 a share expensed last year.

Gross margins are at or approaching record highs for our domestic steel mills and our fabrication units and are very strong in recycling. Poland, though much improved, as Stan mentioned, over last year as we aggressively attacked our inventory overhangs still is hampered by seasonal conditions and a strong Zloty. Depreciation and amortization for the quarter was 20.4 million. That means year to date it's now 39.678 million and I anticipate that with the onset of our shredder in Poland and the continuou8s caster in Seguin as well as some other acquisitions we've made that depreciation for 2006 ought to be about $82 million. You note that the SG&A for the quarter went up $5 million, and for year to date it went up 1.9. The same explanations hold for both. On the plus side, increasing it were salaries and professional fees. Professional fees for a variety of things, we are looking into a new ERP system, we have SOX fees, of course, the branding project for the name, various other things. So those are on the plus side.

On the minus side, decreasing it is the fact that bonus expense compared to the quarters of last year is down. You'll recall that we had a positive roll-back in the fourth quarter of last year. We have taken that into account, and are being a little bit more focused on the bonus, so you wouldn't have expected it to go up quite as fast as it did last year at this time. Interest expense is down predominantly because our short-term borrowings have been relatively minimal during the quarter. I would expect interest expense to sit at about the 7.5 million level in this quarter coming up. EBITDA to interest was about 21 times for the quarter. That's pretty good.

Current ratios, 2.2. Long term debt to total cap, 25.8. Just great financial metrics. We're very, very strong right now. Book value is at $18.08 a share. Couple of share calculations, the second quarter fully diluted number was 61,915,314 and that left a six month fully diluted number to be 61,429,080 shares. The actual number of shares that were outstanding at February 28, were 59,762,595. Our capital expenditure budget for the year, we originally budgeted 178 million, we anticipate now half-way through the year that it would be 160 million. So down about 18. We did not repurchase any stock during the quarter, and therefore our remaining authorization is the same as it was last quarter which which was 905,500 shares.

Just a quick recap of, again, of our outlook and then we'll take your questions. The guidance we've given, $1 the third quarter -- $1.25, to $1.40 per share which would head us toward a record third quarter and possibly an all-time best quarter. Domestic steel mills are entering the spring construction season, although as we did point out in the press release there was an unusually dry period in the southwest during the second fiscal quarter. But pricing and volume both look strong entering this period. The new castor at the CMC steel mill in Texas will be commissioned during the quarter and one of our challenges given relatively low inventories is strong demand will be to match our production and inventories to meet the anticipated strong demand, and in the copper tube business, we're, of course, also at the start of construction and air conditioning season. In Poland, it's been a typical -- what we've learned is a typical, very cold winter, so -- and the thaw has not even really set in yet. Hopefully any day as far as the weather. So it will be an improvement but not terrific.

But we are anticipating continued good shipments, better prices and hopefully better margins. The Polish mega shredder and -- is near initiation in the fab shops under construction. Domestically, as we've indicated, or more than indicated, said, backlogs are strong with lots of commercial and highway work. And that's without any catalyst from the effects of the hurricane, recycling, nonferrous markets just remarkably strong. Copper, holding above -- to -- on the terminal marketing holding above $2.30 a pound. Aluminum is strong, zinc at record levels, nickel relatively strong. Ferrous markets look firm. The volatility appears to be unavoidable but hopefully not as extreme as it has been, but again, very good outlook for recycling.

In the marketing and distribution, solid results. We are seeing a pickup in imports, into -- of steel into the United States, but as long as demand stays strong we feel that that will be at a reasonable level and reasonable prices. As Murray said, international prices are going up. So the imports, that continue to come will be coming at higher praises. Nonferrous business should pick up in terms of marketing and distribution. So a good quarter there.

Just a final comment on a couple of comments on China, Murray might want to add to this, that it's clear again, after our visit there, that now the central government is -- will remain vigilant in attempting to control increases in capacity and production, and they're particularly going to use environmental regulations and energy to control this, and this is good for everybody because they -- as many developing countries, their environmental problems are pretty severe. They need to do something about it. And if the greenies really want to go somewhere and look at a tough environment, that's a part of the world they can go. But the Chinese appear determined to do something about that, and they need to. They absolutely need to.

That will further increase their cost of productions, it will shut down inefficient operations. And this doesn't apply just to steel, it applies to copper an anywhere else and most of it relates to this issue Murray and I keep mentioning of importing -- they have scarce raw materials in most cases, importing expensive raw materials and then exporting low value added products. Again, it just doesn't make any sense. The Chinese are just too smart to let that go on in significant amounts going into the future. High ore negotiations are underway. I think symptomatic of the situation here the Chinese I think are in a real dilemma and are seen to be -- at least the government backing off because as long as their steel production is high their are no imports requirements are high and that's a tough position to be negotiating, with the seaborne iron ore market where three companies have a pretty dominant position, three selling companies internationally. So we continue to have the same view on China. Murray is there anything you'd want to add on that?

Well, I think, John, what we've seen on copper products it was just announced they've raised, or were introducing an export tax of 10%. From mid April. This is on sheets, wire products but not on copper tubes, so they're taking action in certain areas, and certainly by controlling things environmentally that's going to make it tough for the private steel owners in China. They will have to meet the regulations or they will be forced to shut down or they pay the cost of the -- putting the environmental equipment in. As Stan said, that will raise their production costs. So the Chinese are definitely domestic focused, particularly on steel and are not export focused.

Okay. That's -- concludes our presentation. We'll be happy to take any questions.

[OPERATOR INSTRUCTIONS] The first question is from Barry Vogel with Barry Vogel and Associates.

Congratulations.

Thank you, Barry. Glad you're first again.

Stanley you're the Oracle of Dallas. That's your new nickname.

All right.

You've nailed it against all the controversial negativism and I've got to commend you. You get an A plus plus. As far as going forward, you're obviously generating tremendous amounts of cash, you're incrementally adding good capital expenditures to get you more cost efficient and of course you' been very quiet on the acquisition front while there's been tremendous amount of publicity on all these big deals going on globally. Can you give us your feeling of where you are given what's out there, that might be, in general terms, the kind of acquisition that makes sense to you, given your footprint right now?

Well, we have continued to make certainly some acquisitions in the downstream. We continue to look, without getting specific, along the whole supply chain for us, upstream, downstream, at strategic situations. Essentially it's just a matter of valuation, if we -- right situation with appropriate valuation we can do something. Meanwhile, certainly in Poland, as we've mentioned, we've embarked on our downstream and are strengthening our position there upstream as well. Murray?

I think Stan summarized it pretty well. There are a number of opportunities we're looking at. Clearly we can't discuss any of those at this stage, but as Stan said, a lot of it comes down to valuation and strategically we look obviously here in the U.S., we look at countries like Australia and Asia and Europe. This is our main focus.

Now, as far as the highway program, which you mentioned briefly, from what I gather, it really has -- the new authorization has really not taken effect yet, and, of course, Texas is very important state as far as size and highway spending and it's right in your backyard. Have you seen any impact so far in the new authorization of the new highway bill, and if you haven't what do you expect starting next year in terms of that impact on your Texas mills?

Well, we're as busy as we can be.

So you're operating flat out on the stuff that goes into the highway?

On the fabrication side, yes.

Okay. That's fine. Thank you very much.

Sure.

Your next question is from John Tumazos with Prudential.

Congratulations on tremendous results. Great to see you making all that money.

We agree with that, John.

I bet you do. In terms of the percentage gain of the nonres construction market this year, public, institutional, private, I don't know how to figure this out, but I respect that Stan and the team are a lot smarter than we would be. I was in Arizona last week, and some locations it hadn't rained for 140 days. So in that particular market there might have been zero days lost to weather in the March quarter as opposed to several weeks of torrential rainfall last year. Are you able to determine whether the favorable weather variance was greater than your tonnage gains, or maybe give us a little primer on Texas weather, for example, which might not have been as blessed as Arizona weather.

Well, we're also active in Arizona and California and all those -- we had, I would say relatively good weather. Can't specifically quantify it, John, but it's pretty clear, as we said in the release, from the level of -- second quarter we have Christmas holidays, new year holidays, a short month in February, so there's a lot -- normally be our weakest quarter, certainly from a shipping standpoint, and the fact that we were in a number of product areas more like the first quarter of this year than the second quarter of last year, tells us that that effect was significant. But we're still going into what's -- typically, again, that wasn't uniformity case in all of our operations, and we're still going into what is seasonally the strongest. We've been saying for quarter after quarter now for probably two years, based on the -- jobs we see, active work, that the construction markets were good and getting better. And I would almost turn the question on its head and say I don't -- I don't know who's -- whether it's been these consistent doubts about the construction market, and I just flat don't understand where they're coming from.

How much do you think public construction expenditures are up this year?

Well, statistically, they were up probably -- I would think, maybe about, on an unadjusted basis, 11 to 15%, in that magnitude.

So a 5% gain in the use of construction steel without any contribution from the private sector is plausible?

Yes.

How much would you think the private sector might be up?

I would think, more like -- I would say in the -- depending on the type of construction, 5 to 10%.

Are your joist backlogs -- I know you don't go into fabricated products individually, but for example, would the joist backlogs be 10% better than a year ago?

Well, let's just say demand -- pricing and demand for all of our fabricate areas is good.

That's good.

Just across the board.

If I can ask another question, and this is a little bit of a minutia question, world copper demand was up just a little bit last year, maybe 1.2%, while aluminum was up 4, and steel output was up 5.9%. And Phelps Dodge at their program last Thursday suggested thinner wall copper tubing and aluminum air conditioner tube in addition to PVC and some cold water applications was occurring. Are you seeing much of a change in the behavior of your customer base in the copper tubing, and are you shipping center more elegant copper tubing, for example?

Well, we don't ship -- we don't produce and ship the grooved tubing or the thin tubing. I think that's where there's been more of a shift toward what you're talking about for most air conditioning applications, heat exchangers, that type of thing. The answer there is, yes, that's been I think a trend over several years. I don't think there's anything very recent about that of which I'm aware.

So at $0.70 copper people were making thinner wall tubing.

Yes.

Last year, Wolverine tube was reporting 10, 20% negative volume comparisons in some quarters in pounds. Is your copper tubing essentially steady?

Yes, and spreads are better. It just seems like the supply/demand situation, not seems, it has clearly improved for copper tube the last several quarters we've seen this improvement. I mean, part of it was, John, the copper -- the underlying price shot up so quickly and in such prolonged fashion, there was a significant lag in getting up the semi finished prices in general. But certainly in our case for the copper tube. But that's occurred now.

Thank you.

Sure.

Your next question is from Frank Dunau with Adage Capital.

Got a few questions.

Hi,, Frank.

How are you doing, Stan?

Good.

And Murray and Bill. I'm not going to ask any religious questions. I think I understood all the allusions this time.

I think I've got lead nailed, ash Wednesday to Easter, I've got that one.

We also have our repatents, Frank.

That's September, October, right?

Right. I'm going to stay off of that, Teshuva. I'm not going to get into that one.

All right, so you said, on the market end of the distribution, explaining the results -- disappointing results, mostly due to what we believe were temporary factors. Is that what you're talking about like lower prices and volumes overseas or is there something else going on?

No, that's it.

In defense of the bozos.

Frank, don't tell me you're speaking on behalf of the bozos.

Well, not as a shareholder, but as a professional bozo, I guess, your stock has doubled in the last nine month. As far as I can tell, it's up a little over 55% in the last year. So if you can't take a little volatility, which I guess we have nowadays, have you ever thought -- and you want to go private and get rid of the bozos?

Frank, wouldn't you be disappointed if we were satisfied?

I guess I would be, yes.

It wouldn't give me a platform to rail on about.

He needs to have something he can--.

All right. Just in terms of trying to figure out your guidance, you just earned $1.29, and I know we had a seasonally great weather quarter -- a great quarter for the weather, but it still is slow seasonally. I ran through all the segments and I donn't see anything really getting worse from the second quarter to the third quarter. And it was implied that marketing and distribution and Poland would get better. One would think that your guidance might be a little higher than 1.25 to 1.40 off a 1.29 quarter. Or are you just being a little conservative? Or what am I missing?

Well, there's range in there.

Okay. That's all I need to know. That's it. And I won't ask any more questions.

Thanks, Frank.

Your next question is from Michelle Appelbaum, with Michelle Appelbaum.

Great quarter, great conference call. I'm always thrilled to have a conference call where someone is talking about Teshuva. I don't think -- you've done that a lot, really, I don't know, anyway even with Phillip Brothers. That's where I learned it. Two questions for you. One, the bayou steel thing, do you want to comment? We haven't had a private equity firm buy a steel company in awhile. Just wanted to get your thoughts on implications for other things you might be doing and the industry.

Well, I think, Michelle what we're seeing is kind of some segmentation in the sense of most of the acquisitions that have occurred even recent ones I would characterize as strategic, but there seems to be a couple of cases, and this is more in the area I think of firms that have been kind of, let's say, working their way out of what had been a troubled situation where the financial buyers have come in. So I just think there's -- there just seems to be, with all the consolidation, some part of the market which is kind of separate, separate from that, or acquisition market.

Okay. So you're saying this is kind of specific to some distress situations?

Yes.

Okay. Do you want to comment on valuation? You could throw in Connecticut Steel. We won't tell Domico what you say about that.

Well, I don't want to comment specifically about Connecticut Steel. I would simply say, a lot of -- of course, a lot of the valuations, almost all of them, are much higher than they had been. Now, you do have to look at specific situations. So for example, in the case of a company like Dofasco, what is the value of the iron ore, that type of analysis. So the straight valuations -- and we've run some charts or gotten some charts recently which, some will be in the area of like $1,000 a ton, but there can be, to some degree, extenuating circumstances, but I think as we said, in response to an earlier question, the valuations generally are significantly higher than they have been. Of course, depending -- if it's a stock for stock, then it clearly depends on the relative valuations.

Okay. A second question, there's a point of view out there that is not mine, it's coming from Asian or Australian sources that the operating rate of electric furnaces in China is relatively low and so the implications are positive for scrap prices, that incremental production in China would come from scrap prices and that power may be more plentiful in the next year in China. Do you see anything happening along those lines? Even with a relatively small electric furnace industry there could that have some impact on scrap prices on more of a structural basis this year?

Michelle, we don't think so. The Chinese, they tell us straight that the cost structure for electric equine is much higher than here in the U.S. That's obviously scrap plus their energy costs, so we don't see that. We think the trend in China with their production rates slowing, but they'll still be integrated mills. Unless, of course, the iron ore produces a successor with extremely high iron ore prices, but we don't think that will occur. We think if anything the iron ore prices will be settled, particularly finds and lumps in the 10 to 15% range and pallets maybe -- there may be no change in that because demand has dropped off a bit in China. To answer your question, no, we think the cost structure for the electric arc furnaces in China is quite high by world standards.

Michelle, we have an expression here, I guess it came from me, nothing grows to the sky. And while we're quite optimistic about scrap prices, particularly in the long run there's a definite limit. What you see particularly with mills in the country like China, this applies to iron ore as well, is there's just so much they can absorb. In the short run if prices jump up, they might have to pay it. But that's -- that's one of the fallacies with some of these analyses that in the long run, you've got -- the spreads have to be reestablished, and if they're not reestablished, mills will shut down and the demand for raw materials will decrease. So that's a paradigm that hasn't changed.

Agreed. Thank you very much.

Your next question is from Thanil Dentarter with Cinty Asset Management.

You talked about China and saw some improvement in the prices. Do you think those kind of price improvements are sustainable mid to long term or they are just a blip right now in the trend?

Well, we think they're sustainable maybe until this summer. What happens after summer we're not sure. The second half of the year, you could see some price weakening in China and Asia, but certainly the fundamentals are much better than last year because of the infantry situation. We think until certainly June period those prices will be sustainable but thereafter we'll have to wait and see.

Okay. Another question is on the domestic construction market. While this has been going on for some time now, when you consider what innings it should be in, or it might be in right now, what's your thoughts on that, the nonresidential construction market might be peaking in domestically some point of time, maybe around six months time frame or maybe it will continue longer term?

I mean, right thou we don't see any evidence that it's peaking. I don't know what inning we're in, but, because it's been a nice, steady growth. Yes, there's a few specific areas of excess, like, condominium building, particularly in certain markets being excessive, but certainly the usual signal to us that we're getting later in the cycle is when office building really surges, and office building has improved but it hasn't surged. So -- and again, the public market looks quite strong in the years going out, and that's without taking much account yet of the impact of the hurricanes. So, yes, I wouldn't write it off yet.

Okay. And in terms of the public construction -- in terms of the highway bill, the question was asked, but maybe do you think that that might be kind of offsetting any kind of declines if suddenly that happens in the construction market, that may be able to sustain your trend, growth trend forward?

Well, yes, I mean, the -- as I say, the -- the outlook for the public construction led by the highway bill for the next four or five years is good.

Okay. So which means that the steel pricing is likely to remain favorable, if I assume for next year or two in that case, and you won't be seeing any kind of a depression or reduction in your steel prices.

We can't be that categorical in our forecast, because there are lots of -- there's always uncertainties like what's going to happen in other countries, in terms of their economies, are they going to -- are they going to export more than they have been, so there are factors that make it -- I would just be hesitant to say what's going to happen specifically two years from now. The long-term outlook in general that we see is good, and particularly if we get now this continued economic pickup in Asia, and then we get a turnaround, which is more and more feeling that Europe is going to show at least some improvement, that would be a huge plus. And, you know, one -- it's interesting, I guess, and we're guilty of this, too. 45 minutes into this and we haven't mentioned Japan. There's a lot of evidence of that Japan has turned the corner. It's the second biggest economy in the world. We don't want to forget about Japan. It's a major factor, and if their economy is good, it's good for all of us.

Okay. One last question on your Polish operations. In fact, the operating loss now compared to last years, and some remarkable job has been done here. Hopefully in the third quarter, next quarter, should we expect that you return to profit in net operations even though the spread has compressed?

Yes, definitely. We're seeing much better prices from this month, March, and that will continue through summer so the prices are improving and the margins will improve, so, yes, the third and fourth quarter should be reasonably good.

And can it persist in that?

Well, we hope so, certainly up until next winter.

Thanks a lot.

Sure.

Your next question is from Michael Willemse with CIBC World Markets.

Good afternoon.

Hi, Michael.

The new caster in Seguin do you have an estimate on the annualized cost savings now that it's operational?

Well, it's not actually operational, it's due to be commissioned March the 25th, which is getting pretty close, the end of the week. So we don't that have as yet.

So, sorry, next quarter, any sense?

No. We still have every project has a start-up, and so normally it takes a few quarters before we can begin to get a sense of that. A major factor though for us on this project was improved quality. But, yes, I would say, maybe a couple of quarters from now we can give you the sense of that.

And it ought to be a couple of quarters before we'll start to see the benefits then?

I think realistically. One good thing about this project is it's contiguous with the existing caster, so there's not a prolonged -- a lot of times these projects have prolonged shutdowns, which always cost a lost of money. That's not the case here, but there's still a little bit of a transition and then just the normal startup. It just depends how quickly that goes.

Okay. And any sense on scrap prices for April? We're getting close to the end of the month. The direction.

I don't know, -- Murray. I would think maybe up a little bit. One thing the international markets are pretty steady. The U.S. dollar's been a little bit on the weak side, which is usually good for international scrap prices, so -- and with production high in the U.S., I would think up some.

Okay. And then fabrication group. It looks like you said that operating profits improving. I'm assuming that's due to higher pricing. Any sense of when we'll see fabricated pricing level off, or is it still kind of stay tuned?

Well, I think you are going to see the average prices go up if, for no other reason, than the mathematics of the contracts that were let today are at slightly higher prices than they were three to six months ago. I don't know that there is as much a trend in higher prices as there is just sustained quantity, unlike the mills which do reach a certain capacity, the fab could add a shift and put out more quantity if it need be, so I think the growth may come more from quantity than it would price right now, Mike.

As you know, the steel we use in our fabrication, most of that has been at a pretty stable price level now, I would say, for several quarters, so that hasn't been a wild fluctuation.

Right. On the import side you mentioned global conditions improving. However, imports into the U.S. look like they will be coming up over the next few months. Any sense of when we might see imports peak into the U.S.?

I would say, Mike, over the summer months, based on, as you know, we're quite a large importer of a range of products to the U.S., and there's a very strong order book coming through. But you'll see it, certainly this third quarter out, third fiscal quarter, and then to the fourth fiscal quarter. So I would say peak around the summer months.

Any product categories specifically, in your press release you mentioned bar products. I know last quarters you've mentioned flat products. Is there any imports that have a bigger share of the activity, or is it just across the board?

Right across the board. All major product categories.

We tend to mention bar products more often simply because we're a manufacturer of them. I think that's the reason. And we probably need to be more careful to not create the impression that that's a particular one.

The weakest product is wire by far. Everything is strong otherwise. Flat, we're into pipe and tubular products, bar products as Stan mentioned, we're strong in terms of imports.

Okay. Thanks, guys.

Sure.

[OPERATOR INSTRUCTIONS] There is a response from Sal Ferronti with Goldman Sachs.

Congratulations. Good quarter.

Thank you, Sal.

Thanks, Sal, and welcome again to the A-team. Tell that other guy nice knowing him.

I just want to get back to the question of Poland. It's been more than a year and a half, almost a year and a half that we have seen depressed earnings, and I just was wondering what -- I mean, Zloty, we know the story, it's there, it's not going anywhere. Weather comes and goes. But as the weather changes, you think that there has been some other fundamental improvements which can -- where we can see better earnings? I'm not saying $30 million a quarter, but at least in teens?

I think there are several. One, we have qualified our product in numerous other EU countries which allows us even during the winter months to be able to ship. You notice that the shipments were, even though the pricing and the metal margins were pathetic, still nonetheless we found outlets for a lot of our products, and it was our ability to qualify our product in other countries, Portugal comes to mind, first off, so, I mean, that's one thing. Obviously our continued push into downstream to give us captive customers for our supply will also help in that respect.

And a more diverse bar -- more diverse product line in our bar products will help.

The fundamentals, we mentioned earlier are improving, like the German markets improving, and countries nearby, so the spring and summer months coming on, as I mentioned we've already increased our prices so we're fully optimistic, at least for the next two quarters.

The other thing Sal, as we've mentioned before, we've been very disappointed, as have others with the Polish government in their inability to move as quickly as they could and should be moving on their infrastructure program, and we're hopeful they're going to start to make some progress there, but that's also been a major impediment.

Okay. Next thing, I just want to ask, you guys have quite a bit exposure in China. You do a lot of imports and exports from there. You also have a very good standing in scrap market over here. Have you ever looked into or thought about sending scrap out of China? It has been -- the other companies have earned good margins on this business. Is it something you may want to get into?

Are you talking about ferrous scrap?

Yes.

What it is, it's a geographical thing. Our scrap operations, by and large, are surrounded by domestic minimills. So that the natural market is domestic. Many, many years ago it was different. We used to be huge exporters from Tampa, from Jacksonville, from Beaumont, so there was a time. But conditions having changed significantly since that. You contrast that with, say, big scrap operations in the New York area, in the northwest U.S., California. There's simply not enough mills in California to absorb that scrap. So then natural market is export. So that's as far as our own scrap. And years ago, too, we used to broker a lot of scrap, including for export, and that's what I would put in the category of it's a lousy business. So, no, we're not going to do that.

That may be a little different if you're exporting 90% of your -- the scrap you generate in the U.S. into other countries, if you broker some scrap along with that, that may be okay, but just as a separate business, it's not a very good business. Because when the market goes against you, you get killed. I'm not saying take a positions, I'm just saying people defaulting on either side. So nonferrous scrap we continue to be a significant exporter, including to China.

Lastly, are you seeing, ahead of the iron ore negotiations, are you seeing that some excess imports going to China, people wanting to protect themselves against any price increase? Have you seen bigger in flow?

There has been a bigger in flow, a bit like what happened last year, the positive side is the Chinese government seems to have backed off of their stand, so I think the market forces will apply in this situation. As we mentioned earlier, we don't know. No one knows for sure, but we think our lumps and finds will be an increase, and maybe pallets very little if any increase.

Thank you.

Sure.

Your next question is from Chris Brown with Longbow research. Please go ahead.

Good afternoon.

Hey, how are you?

Good. Can you give us an update on when the positive impact of the post-hurricane rebuild will be realized? And how much of a cost benefit are you expecting in your recycling business because of this?

I don't think much in the recycling, Chris. I think in terms of a major impact on the fabrication side, I would think more like calendar 2007, 2008. We've seen some projects already, but -- Murray? Do you have anything? Bill?

I would agree with that. It seems to be, and we thought it would be a pretty prolonged situation, Chris. We don't see much activity this year. Maybe a little bit second half. We saw some emergency work immediately after the hurricane, but they're still sorting out building codes and all sorts of things. So we think 2007, 2008 will be the time when you see a major or significant impact.

That's it. Thank you very much.

Sure.

The next question is from Leo Larkin with Standard & Poor's.

Good afternoon.

Hey, Leo.

Could you give us any guidance for CapEx for '07, or is it too early?

We're a little early.

Okay. You mentioned earlier that you cut back the estimate. Might that be -- transferred to 2007 that 18 million?

Probably not. I give you the one single large project, which I think we've discussed in previous calls, but I'll just show you how it ends up in a very tangible factor, and that's we were going to purchase $10 million of railcars for use with our own scrap and our finished good procurement, but the railroad rates to pull those cars are so excessive, and they have -- it was more than doubled that it didn't -- there was no economics left in it. Instead, we'll look to our own fleets, and thank God we made that decision many, many, many years ago to have a significant portion of our own product trucked by our own fleets. So I would say, for instance, in that one, Leo, until such time as the railroads come back to wanting customers such as ourselves, that won't be spent.

Okay. What do you estimate your base CapEx is now?

If you include Poland, we're probably 80 million or so.

Okay. So maybe just a little bit under depreciation?

Yes.

Okay. Thank you.

Sure.

The next question is a follow-up from Thanil Dentarter with Cinty Asset Management.

Thanks. You mentioned about -- I just wanted to know what operating rate was in the second quarter, did you operate at full capacity, or you operated at 90% or so?

Well, I think it's the latter, because, I mean, 100% capacity is probably in the low 90s, because you have to bring the mill down for maintenance. There's no such thing as 100% up time.

Okay. So you intend to operate at the same rate in the third quarter because given that, you had mentioned in the press release that shipments would accelerate during the third quarter, so if that's the case, how are you going to compensate for the increased shipments? Are you going to import more in that case?

Well, you have that ability, but you also have inventory.

And what's effectively a little bit of a longer quarter.

Okay. Last question, I was wondering about imports and cruising around summer months across all major categories. I did not get a -- was it across the industry as a whole, or for you at CMC in general?

The imports? A lot of our rebar imports will be for our own fab shops, but the other products go to other customers, end use customers, et cetera.

So that's just really the rebar and some merchant bar goes to some joists plus. On the pricing, what's the price differential between the imports and the ones which are manufactured here? Is it like $200?

No, not that high.

It's much closer than that. In fact, and right now, of course, the -- with prices going up overseas that differential really narrows.

So it's about 100 to $150 per ton.

Well, no, depending on the product it would be less than $100 a ton.

Okay. Great. Thanks.

The final question is from Frank Dunau with Adage Capital.

I just have to ask a question because can only respond to front page articles in the Wall Street Journal. Do you guys still own -- at least I think at one point you had bought some junkyards. Are you still in that business?

Yes, the auto -- yes, we have a few of them. Schnitzer has been better at this than we have, and our experience with them hasn't -- we can only go by what we know about our own experience but it hasn't been as great from a profit standpoint.

I take it it's not an area you really want to expand in any more?

I don't think so.

Just making sure. Thanks.

Okay.

At this time I would like to turn the conference over to Mr. Rabin for any closing remarks.

Thank you. We're going to bail out of here to hit the road. We'll see you in Vancouver, San Francisco, Toronto, Boston, New York. Thank you very much. Bye.

Thank you for participating in today's conference. You may disconnect at this time.