Commercial Metals Co (CMC) 2006 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Commercial Metals Company third-quarter 2006 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Now I would like to turn today's conference over to Mr. Stan Rabin, Chairman and Chief Executive Officer of Commercial Metals Company. Please go ahead, sir.

Okay, good afternoon, everyone. With me as usual is Murray McClean and Bill Larson. I will save the barbs for Bill, although I might have one or two myself.

It was not a good quarter; it was not a great quarter; it was a stupendous quarter, although it appears the beneficiaries of our earnings report were other companies in the steel and metal sector. Our legendary conservative accounting was on full display, for which we were summarily plastered.

Bill will discuss LIFO in some (indiscernible), because you would think in 2006 people would understand LIFO; but there was even one -- in one of the press reports on interpreting our earnings, the reference is to an inventory write-down of some $20-plus-million post tax, which of course is a complete misrepresentation of what LIFO is. So Bill will hammer that home.

But all segments contributed to the stellar performance. Particularly pleased at the continuing progress we are making again at CMCZ, our operation in Poland; and of course, we're doing overall extremely well. It was a quarter in which the metal spreads actually were mixed -- extremely positive in the mills; mixed in market and distribution, of course; good in recycling; and off somewhat in the fab. Bill will talk about that. But strong volume in all of our segments, and overall extraordinarily good performance.

The markets overall were quite good. You have heard me express that. We've been able to talk about markets the last several weeks during our blackout period.

I want to clarify one other thing we got a couple of questions about, and that was the use of the word deceleration in regard to the global economy. I would hope everyone would understand the context in which that is used, where we have talked about a global economic growth being robust, it continues to be strong; what we're simply pointing out is our own government in the U.S., the government of China, clearly are going to make an attempt -- have begun an attempt to cool down these economies.

Our prospects remain extremely good. Our end-use markets look good. We said that. I don't know how to keep saying that. But steel markets are firm around the world, virtually every product. There have been significant price increases since February. Imports did pick up for a number of products. But as we have said, we feel like the markets absorbed the imports rather well.

All the raw material prices are up. Scrap prices have been up, steel scrap about three months in a row. Iron ore prices, of course, are up; and I understand today I think the Chinese have agreed to the same increases that the other purchasers of iron ore have committed. Coke prices have been edging up.

Our alloy prices are up. Nonferrous, there has been a correction off of the record highs; but these are still at very strong levels. July copper, for example, today, closed, Comex closed at $317.50. So while that is a correction, it is still reflective of a very positive supply-demand situation for copper.

We will talk about the outlook at the end, although I have already commented about that it remains quite positive. Bill, you want to take over?

All righty. Let's read the fine print first. Let me call to your attention the detailed Safe Harbor statement included in our press release and 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 have given guidance regarding our outlook for the fourth quarter of fiscal 2006 in our press release. Subsequent to this call and our meetings in New York and Chicago we will not be commenting further and not be under any obligation to update that outlook.

In accordance with Regulation G of the Securities and Exchange Commission you are aware of non-GAAP financial measures. Some of these that [are derived] fairly straightforward from our financial statements or are in common business use can be the subject of our discussions today and in our investor visits.

Our website has additional information at -- okay, now, follow me along on this -- www.CMC.com. We just recently acquired the CMC domain to further our single worldwide identity as Commercial Metals Company, CMC. In the end there are other items that may be outside of our ability for discussion; and please be patient with us if we defer comment.

All righty. While painfully observing the market pummeling of steel stocks over the last month, I was struck by the resemblance to Shaquille O'Neal's free throw futility, shooting often and missing most of the time. Today's activity in Commercial Metals' stock exemplifies this.

Whatever factors one may want to focus on -- end-use markets, the inflationary aspects of metal prices, world economic conditions -- they have similar effects on all steel companies. It just cannot be that the same factors that one interprets driving us down can possibly cause the rest of the industry to prosper. That cannot be. And as a matter that, all of the factors that Stan has pointed out are positive.

You've got your usual suspects in trying to explain this unjustified retreat in steel names. You have got fears of inflation tanking the U.S. economy, higher interest rates tanking the U.S. economy, China doing anything and tanking the U.S. economy. You've got your hedge funds who are having to take higher risk to achieve lower returns with their tremendous cash flow causing havoc on the buy and sell in steel stocks.

But in the end you have got investors shooting often and missing. This type of a movement is probably more aptly termed speculation rather than investing. It is an undifferentiated money free throw, where steel is being equated to gold or oil or copper or aluminum or any other commodity of the moment.

Honestly, this is kind of a sad consequence of ignorance, perhaps lazy analysis, and following the lemmings over the cliffs. So in the interest of continuing education and review, let's go over the landscape.

Ferrous scrap and finished steel are not traded on terminal markets. What is bought and sold is done on physical transactions. Real material changes hands. Therefore manipulation in steel markets is very difficult to come by.

End-use markets and demand are strong. They are strong globally in all major geographies and most product lines. Steel pricing has been on the rise. There has been no retreat and no weakness. Backlogs are good. Visibility suggests that there are extended periods of excellent performance ahead.

LIFO, though computationally difficult, is rather simple conceptually. Rising prices gives expense and takes the inflationary profit out of our earnings. You know what the prices of ferrous scrap, steel goods, copper, aluminum, energy, and most other input costs have done this quarter. Though the trend was certainly identified in our estimates for the third quarter, we had no conception that the magnitude would be as large as it was.

Now as one cannot flip a FIFO reporting company to LIFO, we have always provided comparative data for those who analyze our results on a FIFO basis. So let's see if I can clear up a little confusion there seems to be.

We are a LIFO reporter, and that earnings per share was $0.62. On a FIFO basis it was $0.85. We're projecting LIFO earnings per share in the fourth quarter of between $0.70 $0.80.

Now estimating LIFO is an inexact science and really more of an art form. We do believe there will be further LIFO expense. We do not believe will be of the same magnitude as the third quarter. But at any rate, our guess is that, regardless of the amount, our best intentions right now would be that the fourth-quarter results would be stronger than the third on either a LIFO or a FIFO basis.

All right, let's look at the numbers. We had significant increases in sales and operating profits in all of our reporting segments with one exception. We need to talk about that fabrication segment.

Operating profit -- now let's write this down so you can follow me -- operating profit was down $22 million from the third quarter of last year to the third quarter of this year, of which $14.7 million was LIFO. Okay? So that leaves $7.5 million.

Now here there a couple of timing issues I want you follow. Now remember last year end, I told you about the fourth quarter last year we had higher incentive compensation as we trued up to the end of the year. Now this year, we've got a better feel for how bonuses may come out; and our quarterly accruals are higher; so we should not have as large a hit as we did in the fourth quarter last year. So compared to the third quarter last year, which was a little low, there was a $3 million in incentive compensation.

Second of all, inter Company sales profits of course have to be eliminated. But this will simply shift income into later quarters. That was $1.5 million.

So of that remaining $7.5 million, you've got $3 million in incentive compensation and $1.5 million in intercompany eliminations; so that leaves $3 million, the remainder of which is a host of relatively insignificant individual items. But the largest of which -- which is always hard to try and gets your arms around -- but certainly it would be some margin squeeze caused by the rise in finished good prices.

The LIFO reserve at May 31 sits at $173.1 million. This is a valuation allowance. This is not a write-down.

As you saw in the press release for the quarter, LIFO decreased net earnings some $28.6 million, a number that three years ago we would clearly have taken as net income for the year. That was $0.23 a share versus last year it was $1.5 million increase or $0.01 per share income. Year-to-date, net earnings have been lowered by $40 million or $0.33 per share versus last year's $23 million or $0.19 per share.

Depreciation for the quarter was about $21.8 million. That makes it $61.5 million for the year, heading probably towards $83.5 million by the time we reach August 31.

If you look at the P&L statements you know that selling, general, and administrative expense was up about $24 million in the third quarter. In order of magnitude that would be incentive compensation was up; the next largest was profit-sharing. Of course these two things obviously run with profitability. Two other items, professional fees and salaries were the other culprits.

Year-to-date, SG&A is up about $26 million. Here, the culprits are narrowed down to three, the largest of which are salary expenses, pretty much spread all the way across the board, then professional fees and profit-sharing.

Interest expense we expect for the next quarter to be about $7.5 million, a little bit higher perhaps than where we stand right now. CMCZ in Poland brought a little bit of debt down. But the EBITDA to interest coverage is about 21 times for the nine months. That should be sufficient.

We've got lots of working capital as you saw. Our current ratio is over 2. Our days outstanding are in good shape, right now. Our long-term debt-to-capital ratios 24%, pretty low on both the historical and just an absolute basis.

The book value per share is $9.67. A couple of statistics on shares -- the average diluted for the quarter, this is obviously post split, was 125,085,650 for the nine months. Then the diluted shares on average were 123,550,601; and the actual number of shares outstanding at May 31 was 120,864,211.

Capital expenditures in the third quarter were $33 million. That puts us at $93 million year-to-date, and my best projection right now is we will be at about $150 million. Last quarter I told you it's $160 million. I think we have tooled down a little bit.

We did not repurchase any stock during the quarter; and our authorization at May 31, post split, 1,811,000 shares.

Thanks, Bill. Just actually our outlook is in the release, so I am not going to reread that or restate it. Let me just use one example, I think, of what reflects the market conditions that we are seeing, and that is the rebar pricing in Turkey.

I mention Turkey because Turkey is far and away the biggest exporter of rebar to the United States. It comes and goes, but typically when imports increase significantly, much of that comes from Turkey. I think, Murray, it is running -- like two-thirds have been, as a combination of several things, including their own demand picking up. But scrap price is higher.

The selling prices of rebar have risen dramatically in Turkey. Right now, we are well over $500 a ton. Therefore, that among other reasons, we have been saying this publicly, we would anticipate that beginning in July or so, we would begin to see a significant decrease in imports in the United States of certain products, particularly in this case, reinforcing bar.

So of course as you know we are an importer ourselves, so we know what is going on firsthand with those markets. So we have every reason to reflect the optimism that we do reflect in our guidance and in our outlook. We continue to grow, and we continue to remain very positive, and we will be happy to take any questions.

(OPERATOR INSTRUCTIONS) David MacGregor, Longbow Research.

Could you talk a little bit about some of those metal spreads? Stan, I think in your prepared remarks you said you would come back and talk a little bit further. But particularly domestic steel, the copper tube, the pole and steel, maybe just give us a little feel for where you see those going. Thanks.

Okay, why don't I let Murray? You want to -- why don't you tackle that?

David, you have seen domestically our average metal spread is moving from 293 up to 298; and we expect that will actually increase. There is every likelihood that there will be further steel price increases.

Feroscrap is relatively stable. We expect it may continue to move up but at a measured pace. So we would expect those spreads to continue domestically.

In Poland, we would also expect the spread to widen in the fourth quarter for similar reasons.

On copper, copper prices as you have seen have dropped off. Those spreads may narrow [there], from a very high base. So copper may come off slightly, but still would be very good for the fourth quarter.

I will just add, it's interesting in the copper tube, no question housing starts are off. Single-family are off of their peak level, though still at quite good levels. But in spite of that, the spreads increased and we are able, after a long period of time, because copper moved up so much, the underlying copper, to get our selling prices up. Obviously that reflects strong demand for copper tube, particularly, we think, coming from the commercial sector.

Okay, thanks. That is helpful. Secondly, just more a modeling question. But you had talked in the past about ramping up. I think you’ve got a new caster ramping up; you have got three or four different capital projects that are getting started here. I am just wondering what you should expect in terms of net impact on the P&L over the next couple of quarters.

Okay, we did have the startup of the new caster at the Seguin, Texas, mill. It was this quarter and it's progressing very nicely, although there's still additional commissioning, different grades and so forth, over the next several months. But it was the reason, we did have lower melting and tons this third quarter than we would have going forward. So that alone should have a positive impact on the P&L from a cost standpoint.

Other -- the Poland, we started up the shredder in May, and that is going very nicely and that will be a big help to on quality as much as anything. The new rebar fab operation hopefully will begin operation next month. Murray, do you want to --?

Just on the shredder, you will see some benefit in the fourth quarter; but there will be more into next year. The nonferrous residuals recovery is much, much better than we anticipated. So that is very positive.

Clearly as Stan said, the yield factors will be much better, the melt shop from that shredded scrap than that we have been getting. So all in all, we will see some positive signs during this fourth quarter, but really next fiscal year that we will see most of the benefits.

Okay, great. The last question just was with respect to the domestic fabrication business. You didn't get any pricing there at all this quarter. I wonder if you could just talk about the conditions that resulted in that circumstance. What kind of pricing are you expecting in domestic fabrication in your guidance for next quarter?

Yes, I will let Bill address this one. We did get -- he's looking around. We did get actually -- you know, there's so many different products or product lines in our fabrication that what we had really was a mix scenario. None of them by any means weak, everything is strong. But we are at high levels for all of them. But a couple of the product areas were up in price, and a couple were slightly weaker.

I will point to Murray here in a second. But as far as what we are considering looking forward, I think we are looking for relatively stable to increasing prices. Perhaps not as dramatic as the increases you're going to see in the mills, because it takes a certain period of time to factor that through the new contracts.

So the assumption is that pricing will get a little bit better, but it is not going to be as dramatic as some of the other increases you're going to see.

Yes, it is sort of a mini-2004, when you get rising steel prices, rebar, merchant bar. And our downstream operations, the rebar fabrication and the joists, fence posts, etc., they take a while to pass on new prices. They've got to obviously bid on new work and establish the new prices. So there is always a lag.

Their period of most benefit and opportunity is obviously when prices stabilize and then start to fall. So you will see the margin squeeze we saw during this third quarter; you will see it in the fourth quarter as well.

But we believe steel prices will probably peak during this fourth quarter and into next fiscal year. The fabrication units -- I mean, the shipments as you can see are excellent -- will start to benefit by having better margins.

We are still expecting very nice profits in this fourth quarter from that segment. It is just like our guys are saying, those peak when the underlying steel prices have peaked or actually start going down some.

One last -- I don't think anybody will come across the table with me if I say that the anticipation is that the fabrication will have better profits in the fourth than they had in the third, if for no other reason than -- okay, knock on wood -- but with LIFO. But there is not an anticipation that we will have as large a LIFO charge, if nothing else, in the fourth as we had in the third.

Okay, just last question is, what percentage of contracts under that fabrication business actually have escalators and de-escalators linked to the price of steel? Or are they are all fixed?

The contracts, most of them are fixed. But they have small escalators, the highway work and some of the contract on the joist side as well.

They're fairly modest, David.

Okay, good. Thanks very much, guys. I thought it was a pretty good quarter.

It was a great quarter. Stupendous.

[Sunil Dapthardar], Sentinel Asset Management.

Could you talk about what kind of volumes you are expecting for the fourth quarter? In your press release you talked about all the sectors being strong, but particularly [lately] public and institutional building and high reconstruction.

You did not mention about non-residential commercial construction activity. Could you talk about that, how that is shaping up? Or is it [speaking] somewhere? Or what kind of things you are seeing in that marketplace?

You mentioned about backlog is good. Could you talk about the length of the visibility that you have, going beyond fourth quarter? Or traditionally weaker off the peak in the fourth quarter, and then first quarter of the next fiscal year tends to be traditionally lower than the fourth quarter?

Okay, the commercial nonresidential construction also is good; in some cases, very good. We have not seem quite some of the let's say percentage increases that we have seen for example in the highway work, but it is certainly good.

The only area in the non-residential -- well, it is residential, actually, but in that type of construction are the condominiums, where one would think in some of the markets that the condominiums are being or will be overbuilt. But that is the only area at least that I see where there seems to be any excess.

The other areas in the nonresidential construction are so good that I just don't see that affecting the market overall.

The backlog visibility, it varies by segment. But in order to give you a little bit of color on it, I'm sure the mills, they are good for a couple of months, maybe for the quarter they can see out; and things are excellent.

Fabrication would probably have more like six to nine months on average; and again, business looks very good there. Marketing & Distribution has probably the most solid visibility, and it is three, four months?

Six months.

Up to six months; and so I think our predictions there are -- they are based on some pretty solid information.

The ones which are more spot-oriented, no doubt about it, CMC Recycling, they are spot and there is no backlog given that they churn the ferrous inventories three times a month and the nonferrous twice a month. There we just take what is given us.

Okay, if I may ask one more question. You talked in your release about aluminum, copper, and stainless steel (indiscernible) low volumes. What are you seeing in those markets? Is it those -- low volume is particularly being affected by pricing or something else is going on in those markets? Could you talk about that, if you don't mind?

We did not say low; we said lower, lower. We didn't say low.

Lower volumes, yes.

Because there is a difference. What we are seeing is very cautious buyers, I think, when you get prices up at the levels we have had them for all. Because brass, not just the copper, but the zinc market being as strong as it has been, nickel of course affecting stainless steel, that you get hesitation on the part of buyers. [Assume] we are right about end markets, at a point that disappears; the buyers then have to come in and buy.

We have seen that with all the products we handle over the last several years. There have been times where the buyers just pull back because prices are historically high, and hoping -- either they are expecting or hoping for lower prices, and they might or might not come. But if their demand is there, they can end up buying.

We saw that particularly in certain steel for construction, where probably about a year ago I remember getting calls from developers. Should we hold off? Should we hold off? I have to tell you, I told them don't hold off, the steel prices are not going down, at least the steels we were talking about.

Eventually, not because I told them to, because the projects made sense and they just moved ahead. So getting back to the copper and brass, aluminum, and stainless, I think that is what we are seeing. It is not a reflection of the end-use markets.

Okay, so they're just pushing out the demand in outer months, basically; just wanting to take benefits of lower prices, (multiple speakers).

Let me -- and I think Murray wants to comment too -- I will just say the one exception to that is there has been some, and we have talked about this for a number of quarters, there has been some relocation of demand overseas. For example, air conditioning manufacturers building; the new facilities have been built in China, as an example. So that is not a cyclical thing.

What we have done in reaction to that -- and that business is an example where we are buying and selling those items in China. So we can't -- we are not going to influence the relocation, but we can respond to it and try and keep that as a viable business and a very profitable business. Murray, do you want to --?

Also, a couple of other factors. A lot of the suppliers we buy from are European based. Their markets that have improved in recent months. They get better domestic prices, so that is certainly a factor.

Also the comparably weak U.S. dollar with the strong euro, it has more attracted the European market. So that certainly, compared with a year ago, those factors have played into the lower volumes as well.

Okay, thanks a lot.

John Tumazos with Prudential.

Congratulations on all the great results and accomplishments. In the wood market, there is a relation to construction, obviously, but some different dynamics. Hedge funds can't buy plywood futures and oriented strandboard is not in the Goldman Sachs commodities index. Wood prices usually rise in the first quarter every week, but this year they fell sharply in the first half of the year. Lumber is one-third below the second quarter '04 high; and plywood is about 45% below; and oriented strandboard is about 60% below.

Wood distributors and builders have the opposite expectation set of steel distributors and steel makers. Are you seeing any signs of anxiety in the various fabricated construction products and materials you deal in? How would you explain the difference in expectation set?

Well, we are not seeing anxiety. Of course, for us, particularly our Company, the biggest construction market by far is the non-residential construction, and most of those -- many of the projects we are involved with, or even if we don't get them, are going to use either reinforced steel in the concrete or structural steel.

I'm no maven, as we say, on wood, but I am guessing a lot of theirs would be more similar to our copper tube in terms of the end-use markets.

It's 40% new construction, 40% remodeling, 20% non-res. And the volumes are down 3%, 4%, 5% (multiple speakers) by product category.

Yes, that is the difference, John. I think it is more analogous, would be more, to the copper tube. Now interestingly, we continue to see strength in the copper tube. Of course, a lot copper tube is also at least going into air conditioning, refriger -- well, obviously, a lot of that is renovation work as well.

But I think that would be a better analogy than the steel markets, where -- the steel end-use markets, the ones we are involved with, where we are not seeing that anxiety or pull back.

John, we don't see a correlation there. But it is interesting in the steel market; we always say the Chinese New Year period is a very interesting period to watch. If you look at the last three years, after 2004 Chinese New Year the steel prices went up. We all know what happened in 2004. In 2005, steel prices dropped, starting from April of last year.

2006 prices have gone back up again. So it's becoming like a mini-2004. So I think the two markets are quite separate from our point of view.

Yes, that is another thing, good point, is the geography. In terms of a lot of the -- certainly since over the last few months, we have talked about steel price increases since February, and it has been more pronounced -- I don't know (indiscernible) to say outside of the U.S. than in the U.S.

Now we were, as you know, John, we were ahead in pricing, which was part of the reason why the imports were picking up here. But now a lot of that has been arbitraged, and there is generally speaking high prices globally on steel.

In terms of recent business activity, M&A activity, Tenaris agreed to pay $2.7 billion for some welded tube businesses with $420 million in tangible book. Are there any pieces of your Company that the going rate of 5 or 10 times tangible book might attract you?

Well, we are hitting on eight cylinders; so it would have to be -- obviously, in a sense, anything is for sale. Look, we are all -- we have talked about this before. It is, for the Company overall, it is a free market. But I mean, one would have to pay a very fair price for any of our assets.

Thank you.

Sal Tharani with Goldman Sachs.

Sorry for the background noise. It is difficult to find a quiet corner in the steel conference. The first thing is, Bill, just on LIFO, and I don't want to sound like I don't understand LIFO, but do you generally mark-to-market LIFO every quarter? Or do you generally take a yearly view?

That is an excellent question, Sal. It is calculated as if every quarter is a year-end. So if we ended it all at May 31, that would have been our best guess.

Now, truly, the rest of the answer is at year-end, because now you've got tax consequences, we do the full-blown calculation all the way through upwards and downwards. We are probably 75% or 80% of it at any quarter end. But the idea is we give it our best shot, and it is what it is.

So by the end of next quarter or next (inaudible) you will start the quarter after there with a clean slate. It will be a (multiple speakers). Okay.

Another way to look at it, if quantities and prices stayed exactly the same as they are today, at August 31 there would be zero LIFO.

Yes, I understand that. So the price increases apparently were much higher than what you had expected at the beginning of the quarter. It obviously shows in your revenue number also. But with that -- is there a reason that you were not able to predict such a large LIFO expense?

Exactly, within a reason, I think we had the quantities close enough; but no way that we predicted the pricing.

Okay.

(multiple speakers) the nonferrous, copper, those were products went up by over 50% in three months. There's no way you can predict that.

Understood. Next thing on Poland, actually I think that (inaudible) great turnaround (inaudible) you are doing very well. But there is some excess capacity or some more capacity I would say coming along with [that]. Like recently they have (indiscernible) which is being (indiscernible) by Arcelor, and then a wire rod mill by Mittal. I was just wondering what kind of market situation is over there to build this new capacity?

The wire rod, I mean, our understanding's they are going to produce the higher grades of wire rod. We are actually in mesh quality basically at our mill. So they will be competing with other mills.

The Arcelor mill, our understanding is it is not coming onstream until late next year. So they are anticipating -- and the Polish market is improving, construction [wire], and will continue as more infrastructure is being built there. So they are anticipating good demand for rebar in future, which we are as well.

And construction is starting to break loose in Poland. While the government has been as much a hindrance as a help in terms of getting that going, there are projects now that have broken loose. Construction, the big construction companies have moved into Poland and that part of Europe. So there's definitely more optimism on that happening.

Okay. Also one thing, in the past, before this cycle started in (indiscernible) [2003], sort of the sense of Commercial Metals was that you guys were sort of [helpless] in steel and scrap prices, and scrap prices used to go higher.

You would make good profit on scrap; you would perhaps see a margin squeeze on steel and vice versa. Obviously, it has all changed because the scrap surcharge mechanism, and you make a decent profit or very good profit on both types.

Do you think it will ever -- that you will ever apply to, or you will be able to have a pricing mechanism into fab versus rebar price, where you can actually tie all your contracts to the current market value of the rebar price, and reprice it during the life of contract?

Sal, I don't know. It is conceivable. I know in some -- like the UK, I think, on structural steel they are trying to either talk about or implement some kind of mechanism like that to deal with the significant price increases there on, I guess, wide-flange beams.

So it is possible. It just would require -- everyone would just have to go along with it on both sides, and that is a huge change.

The rebar fabrication market is still very fragmented,. (indiscernible) There are some independent fabricators who buy mainly imported products, so it is difficult.

I think, consolidation will happen; and when that happens more and more, I think that may be possible in future years. I think it would be pretty difficult at the moment.

Okay. Lastly, I know you guys don't make any (indiscernible) but you do import and export a lot of this from countries to countries. Any view on where the prices are in Asia? I understand that the export price at the Gulf Coast is very high. But what I meant is the actual domestic price ex mill over there; is there enough premium from there to here right how?

The domestic prices in Asia have moved up substantially. In fact, they have moved up nearly $200 a ton since February. So we believe they will probably peak during the summer months.

So the price differential Stan mentioned earlier on [scrap] products as well as long, international prices compared with the U.S. has narrowed dramatically. In fact some products we are seeing prices on a [land] basis are higher than they are domestically here.

Great. Thank you very much, guys. Great quarter.

Michael Gambardella with JPMorgan.

I have got a question. You know, your stock is down, and stock is about -- it was almost 50% higher I think on May 10 than it is today. So for most of the quarter you just reported your stock was going up; it wasn't till the end of the quarter that the stock started to go down.

You did not buy back any shares in the last quarter. Can you talk to us? Obviously, you feel that the market is not reacting properly to your stupendous quarter that you had, and I agree with that. But what is the window that you have to buy back shares? What is that like? What are the opportunities? When can you buy shares? When can you not buy shares under your program?

We have been in a blackout period for a while. Bill, do you want to --?

Thursday.

The window opens Thursday, but --

Thursday morning, 9:30 New York time.

When was the last time it was open, where you could buy shares?

May 15, give or take a day. What it comes down to is the last two weeks of the quarter, and then two days after we issue the press release. That is the blackout period. Excepting whether -- if there is some event that -- you know, some large acquisition or something that we know of. But the standard blackout period is two weeks before and two days after.

So really for the last six weeks that your stock has been going down with the rest of the group, you have only had the ability to really buy back shares in that first week that it started to go down?

That is correct.

That is correct.

Okay. I guess since you are generating significant free cash flow, is it a good assumption that you will become active in the program?

We have known to be opportunistically aggressive in the past.

Enough said; thank you.

[Jesse Alon] of CIBC World Markets.

You have touched on most of the questions I had, but if I could just come back to the rebar business. Just to make sure that I have this straight, you mentioned before that your booking outlook is pretty good. It's like six to nine months. You mentioned that most of your sales were on contract basis, and they were all pretty much at a set price with a small elevator, but nothing too major.

So that kind of makes me feel that you've got a really good sense of what transaction prices are going to be maybe like a quarter out. But if I read your press release, it kind of seems a little bit vague for next quarter. So I am not sure if I am misunderstanding it, or just maybe if you could like explain that to me a little bit better.

I think you are misunderstanding it. It is on the fabricated, though, where it's in terms of the pricing more certain. At the mill level, those prices have been changing. As it turns out, they have been changing every month, and in an upward direction. The last increase was $8 a ton a couple of weeks ago, and now it's a couple of weeks ago effective I think 3rd of July.

So those prices are not per se fixed from the mill. But as we said, we're quite optimistic about certainly the level they are at, but also the direction. We have been able to pass along all of the price increases as a result of the scrap cost increases. We don't use a surcharge mechanism, but we do adjust the price based on when scrap does change. We have done that. We have been doing that and done that.

That price adjustment, that is more on a contract to contract basis, though, right?

Yes, yes.

Okay. That clears it up for me. Thanks, guys.

Sure.

Another question was -- actually that's good for me; thanks.

Barry Vogel with Barry Vogel & Associates.

Good afternoon, gentlemen.

Barry, where are you?

I'm in North Carolina.

All right, go. Go Devils. You know who the Devils are, Blue Devils are?

No, go Canes.

You're a hockey fan.

Stanley Cup, baby.

Right. So much for the Rangers and the Islanders.

Given what has gone on in the last few years in terms of worldwide consolidations, Stanley, this is a question for you. What is your feeling about either the continuation of it globally, the continuation of it domestically, and the impact that you see on your business because of consolidation?

I believe it will continue in all segments, in all the business segments we are in, which is what we have been seeing. So from scrap on through the downstream businesses, the trend of consolidation continues. I think, also in other businesses as well, as we are seeing, that will also be correct on a global basis, that there will be more consolidation. In the long run, the impact will be positive.

Okay. As far as this new caster at Seguin, what kind of effect financially do you see from that next year versus, obviously, no positive effect this year?

Well, it will come from several different sources. One, it will allow us to roll certain higher-value products than we roll now. That is not a huge part of our product line, but incrementally it will be worth a few bucks.

As one offshoot of it that was kind of an unintended benefit, it will increase the production. That wasn't why it was built, but we should get more -- again on the margin -- a few more tons. So it will come down to the additional profit margin on a higher-value product and a few more tons that we will be able to roll.

All right. Now as far as capital expenditures, you talk about $150 million this year. Of course, you have been doing some major projects with this mega shredder and the caster. Even though you may not have gotten together to plan for next year yet, are there any major CapEx issues for next year that you can think about here?

Well, we're planning right now, Barry, and we will -- as always, our Board will -- we will typically in July set our capital budget. So we can't. I don't want to comment till we do that.

Now as far as your comments that you made about marketing and trading, in terms of solid visibility, does that imply that your profitability in marketing and trading could be pretty close to this average that you have had (indiscernible) $20 million, excluding the second quarter of fiscal '06?

I would anticipate the high teens to 20 million, in that range. I don't think in the next couple of quarters we are going to get back to that 22, 23; because last year, remember, we had some business of very high margins and high selling price, particularly ferroalloys and products like moly concentrates, etc.

But you can see the rebound from that $12.9 million operating profit to $19 million. Stan mentioned last quarter that it was only a temporary situation. So I think you see that 19, 18, 19, $20 million going forward for the next couple of quarters.

Yes. And I would add, we did have -- which is the hardest to forecast for us internally -- a $4.6 million increase in our LIFO reserve in the Marketing & Distribution. As Bill said, that might or might not occur during this quarter. That is the hardest one for us to forecast.

Is there any reason, switching to recycling, given the markets are very strong right now, the scrap pricing and the scrap activity, (indiscernible) looking at the next few months, that as far as visibility for recycling it is pretty good?

It’s good, yes.

Based on the demand, the ferro side from the domestic steel mills you can say that has to be good there. The nonferrous, well prices have come off, but still it is good. The underlying demand in Asia including China is still very good. So, yes, we would be fairly positive looking ahead.

Now as far as Poland, we knew you would turn it around. Of course we did not know the magnitude, and I don't think you knew either. Given the time of this season and given all the currencies and the mega shredder and everything going on there, should you have a decently better quarter in the fourth quarter than the third quarter in Poland?

First of all, to correct an earlier miss -- we knew, we just didn't tell you, Barry.

I know that, Bill. I know that.

The answer to your question is I think we have every reason to believe that the fourth quarter should look like the third quarter.

Thanks. Sorry I can't see you guys tomorrow.

You could commute up for the meeting.

That's doubtful. It's not cost efficient.

That means I am going get an extra hour of sleep so I don't have to meet you early.

But I am sending an emissary. Thanks a lot.

[Don MacDougall], Adage Capital.

Actually, my most important question was asked by Gambardella, which is share repurchase; and I like the answer.

I did have a follow-on question, though, I guess on Poland, where you did see some nice improvement in results. But I am guessing you did not really see much of an impact from the mega shredder; and I guess you have also get a rebar fabrication investment that comes online there later this year. What kind of impact can those Poland investments have, say, six, 12 months from now?

They could -- you take the shredder first, that could easily move our melt shop yield from its current -- not to be disparaging to Poland, but on a comparative basis to our domestic mills, a relatively weak and pathetic 83%, 84%. I don't expect them to get up to the 89%, 90s that Texas, South Carolina, and Alabama do.

But Dan, you got to figure you're going to gain 3, 4 percentage points right there, and that is great. There are other benefits that come with that on lower use of ferroalloys, electricity, of wear and tear on the bricks and the furnace. So overall, there is a lot.

The rebar fabrication, we hope -- we really haven't budgeted any results for the fabrication plant in our fourth quarter even though it is going to start up. I think one would have to suspect that whatever start-up costs we have may be offset by the profits that we intend to earn.

But our expectation -- we have built it to look like a good, medium-size fabrication plant here in the United States, and we would expect it to have the same profitability.

And to help the mill. When we get a network of these wire mesh as well as rebar fabrications, we know it will help our own pricing from our mill in Poland.

Okay. Just following along the lines of an earlier questioner, I guess they were talking about wood and steel and residential and non-residential. Is it fair to say that your residential exposure is in the 5% to 10% of sales range?

Yes.

And very concentrated in the copper tube mill, as opposed to any other segment.

Yes.

Thank you. Good quarter.

(OPERATOR INSTRUCTIONS) [Tripp Rogers], Carlson Capital.

Congratulations on the results. My question on Poland is largely answered; but can you maybe talk about the prices you have seen? The price increases you have seen announced there recently in that region? Would we anticipate seeing more of that in the upcoming quarter?

Yes. As Murray said, prices have been moving up; and I will let him answer. The one observation I would make is it will depend too on what happens with scrap. Scrap prices actually have been I would say slower to move up in that central Europe area.

But I think if those move up more aggressively, then steel prices I think also will move up more aggressively because the market can sustain that. Murray, do you want to --?

We think the price levels in Poland will move up similar to here in the U.S., in the magnitude of, if you convert it back to US dollars, between $10 and $20 a ton for the next two to three months.

What happens thereafter in the four months, normally in Poland as you know there is a seasonal effect going into winter. We think the prices would probably stabilize around September, October period.

Good, great. Thanks a lot.

At this time, there are no further questions. Mr. Rabin, are there any closing remarks?

Just I'm going to head to the airport. I guess we are all going to head for the airport. At the risk of offending some people, since Barry you give a cheer for the Canes, go Mavs. We will see you in the coming weeks, and thank you for your participation. Bye.

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