Commercial Metals Co (CMC) 2006 Q4 法說會逐字稿

Good afternoon.

My name is Courtney and I will be your conference operator today.

At this time, I would like to welcome everyone to the Commercial Metals Company fourth quarter and year-end earnings conference call. [OPERATOR INSTRUCTIONS].

Thank you.

I would now like to turn the conference over to Mr. Stan Rabin, Chairman.

Sir, you may now begin your conference.

Thank you, Courtney.

We've actually been dialoguing with Courtney while waiting so we could introduce her to the different accents that you're used to hearing in our conference call.

This is the last you'll hear of me in this conference call except until the Q&A.

We are changing the format, consistent with our change in upper management effective September 1st, so, Bill Larson as usual will do most of the presentation, but then Murray McClean, whom you all know, will give you the outlook and then we'll all be available for Q&A.

And I will turn it over to Bill, simply saying it's been a sensational year.

Good afternoon, everyone.

First let me call to your attention the detailed Safe Harbor statement included in our press release, and in our August 31st 2005 10-K.

That in summary says that in spite of Management's good faith current opinions on various forward-looking matters, circumstances can change and not everything that we think will happen always happens.

In addition, we've given guidance regarding our outlook for the first quarter and all of fiscal 2007 in our press release.

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

In accordance with regulation G of the Securities and Exchange Commission, you're aware of non-GAAP financial measures, some of these are derived fairly straightforward from our financial statements or in common business use can be the subject of our discussions today and in our investor visits, please go to our website at www.CMC.com for additional information.

But there are other items that may be outside of our ability for discussion and you may need to be patient with us if we defer comment.

Senator Bob Dole once said of his election rival that he gives smoke and mirrors a bad name.

There's been some incredulity on the part of various steel industry watchers as to whether what has been happening over the last three years is smoke and mirrors or whether this is the real deal.

We are here to tell you it is real.

There are three solid years for the industry now in the books, with prospects excellent for the projected future.

Certainly the future for our long product lines.

But you don't have to believe us, you have seen it with the results and outlook of our brothers Steel Names, Nucor, Steel Dynamics, Chaparral and [Geardal], which is a side comment based upon how their share prices are doing today versus ours, we'll look for our thank you cards in the mail.

The industry has changed fundamentally.

Now, we as an industry are stronger, we're more disciplined and rational in approaching the markets.

We have global reach and we have global competition.

Let me refer you to two pieces I recently read, one is October 19th from Mike Gamberdella at JP Morgan and the other October 9th from Aldo Mazzaferro at Goldman Sachs, that discussed this new world order at greater length and analysis than I can and I think really frame the discussion excellently.

Well, I guess I suppose this is where I need to make the disclaimer that both of these houses have coverage on CMC and that they voted us best-looking steel management.

That's not true!

Okay.

CMC, listen, just completed a quarter, get this, we just completed a quarter that would stand as its fourth-best-year ever.

We drew earnings power from all of our segments including our significant operations in Poland, our thanks go out to the 12,000 employees of CMC who make it happen every day.

Our end-use markets are vibrant and should maintain.

As a reminder, we have no flat-rolled exposure, I sympathize with my brother who worked at GMAC and I know my mother's not going to like me saying this, but the auto industry's problems are not our problems.

Oh, hey, one housekeeping matter.

For those of you who printed out the press release that we put out this morning, a couple of you sharp-eyed readers have noted a needed reclass in a table in that press release.

You can do one of two things at this stage.

You can simply go to the SEC's website and download the press release that's there because it's got these few mechanical corrections on it.

Or you can grab your press release real quick and cross out a couple of numbers.

This only concerns fiscal 2005, but if you've read it, let me go ahead and just set the record straight.

It's on page 8 and that table down at the bottom under operating profit, the 2005 number for domestic mills is going to show operating profit of 73,101.

It ought to be 78,962.

And for the year it's going to show 216,875 and it ought to be 232,812.

The offsetting entry of equal amount but going to the other direction goes to the domestic fab segment.

So what you got here is a reclass between these two, it doesn't change any of the totals, but the 2005 number, if you do the math, instead of being 25,393 should be 19,532 and for the year instead of being 117,856 it ought to be 101,919.

And essentially what this reclass does is it more equitably allocates cost between those two segments, and again this is a 2005 numbers, the old last year's numbers.

The 2006 numbers are fine.

Hey, look.

Carrying through this in the text, Mr.Rabin has been misquoted in a couple of places.

Now, you know the mainstream media, they're always misquoting somebody.

On page 2 under the domestic mills, Mr.Rabin actually said that domestic mills operation profit was 21% above last year's, not 31.

And that the steel mini-mills operating profit was 2% less than last year, not 6% higher.

And on page 2 he is mistakenly quoted as saying that domestic fabrication decreased 14% when everyone knows it went up 12%.

Again, why don't you go to the SEC's website, download the 8k that has the corrected numbers on it.

And let's talk about what happened during this quarter and the year.

Magnificent results across the CMC spectrum with particular note of CMCR, that's recycling, and CMCZ Poland.

Recycling doubled their best quarterly operating profit ever on the coattails of significant price increases in ferrous, copper, aluminum and stainless.

At CMCZ Poland, infrastructure activity has strengthened a pickup in Germany has distracted tons that might otherwise go into the Polish market and our shredder and fab shop had better than expected startups.

LIFO significant impact, the reserve at the end of August 31st is $189.3 million.

For the fourth quarter, it decreased net earnings $10.5 million or $0.09 per share.

Versus last year, it increased earnings $10.9 million or $0.09 a share.

So you can see it's a heck of a swing here in the fourth quarter.

For the year, it decreased net earnings $50.7 million or $0.41 a share versus last year, it decreased $12.5 million or $0.10 a share.

I mean, look at that $50.7 million, and that's net after tax.

If that had been income that would have been the fourth best year Commercial Metals has ever had.

Gross margins reached all-time highs at our domestic mills and we're strong everywhere.

A couple of numbers here.

Depreciation and amortization for the quarter was $23.856 million.

For the year, that makes it $85.378 million.

And we are expecting that depreciation for fiscal 2007 will be right at $101 million.

So, 101 for fiscal 2007.

If you look at the statement of earnings, SG&A for the fourth quarter increased not quite $44 million.

That was predominantly a function of finally determining the discretionary items of incentive payments, bonuses and profit sharing.

For the year, SG&A went up $70 million.

That's a combination of four things, a couple you just heard, discretionary income, the bonuses, profit sharing, some salary expense, and some professional fees.

I anticipate interest expense for the first quarter to be about $8 million, and the EBITDA, the interest coverage was over 22 times for the year.

That leaves our long-term debt to total cap at 20.4.

That's 20.4%.

And our book value at $10.35.

A couple of numbers on earnings per share, average shares that went into the quarter, diluted was 123,184,476.

For the year then, the diluted shares were 123,459,069.

The actual shares that are outstanding in August 31st, 117, 881,160.

Capital expenditures for the four quarter was $38 million, for the year, that makes it 131.

If you look forward to fiscal 2007, the budget without acquisitions, because you never know how those might come up, is anticipated to be $201 million, say $200 million just for round numbers.

The largest projects in no particular order, some, a cooling tower at CMC Texas, new mill stands in Alabama, one of the larger projects, a reheat furnace in Alabama.

The largest single project would be a wire rod block at CMCZ in Poland.

The relocation of a couple of our fab shops, a new heat-treating plant and a shear here and there.

Stock repurchases, we repurchased 3,469,240 shares during the fourth quarter.

The average cost was $22.67.

And that represented 2.9% of the shares that were outstanding as of the beginning of that quarter.

And as you know, because of our blackout periods, only about half the quarter was available to us to buy shares.

And so in that period of time that was available to us in that window, we bought back 2.9% of the outstanding shares.

Thanks, Bill.

In terms of outlook, we see the nonresidential construction market will certainly remain very strong here in the U.S.

I mean, that's a key driver for our business in the U.S. is nonresidential.

We have record backlogs in our fabrication segment and bidding work for future projects is extremely strong.

Our view is on rebar imports, these will decline through the November, February period.

In terms of rebar prices, our view is that they'll remain relatively stable at the current levels.

They did drop $15 a short time on October the 12th.

There may be a further decline over the winter months, but should be a pickup in the springtime.

In the next three months, we'll be taking our mills down for maintenance.

Bear in mind, their mills we haven't had yearly maintenance since July of last year and there will be also some capital expenditure going on at our mills at the same time.

In terms of the global outlook, we see very good conditions.

These will continue.

Clearly, we're into the four months and then the winter, there's the slowdown.

In terms of pricing, Europe actually now has the highest prices, this is our long products, particularly rebar, followed by the U.S. and then Asia has the lowest prices.

The U.S. did have the highest prices, 2 to 3 months ago.

With respect to china, we view china as what is we would call a creeping policy.

If you look at the currency, which is now at 7.9 to the U.S. dollar, it started at 8.2.

So that's a 3.6% appreciation.

So they're getting very close to the Hong Kong dollar to the U.S. dollar.

The Hong Kong dollar is 7.78.

When it gets to that range, it will be a 5% appreciation.

The other creeping policy they seem to have is on the VAT tax export rebate on steel-finished goods which has gone from 13% to 11%.

And now going down to 8%.

The other creeping area is the consolidation of the steel industry, which appears to be going have slowly in China and also the privatization of steel mills with a limit to 38% of foreign ownership in China.

The other area is environment in china, this also seems to be going slowly, but hopefully that will accelerate in terms of what they do with, particularly the old mill capacity in China.

With respect to Poland, the EU funds and public funds that we can see are now being spent and certainly in calendar 2007, this will accelerate.

So that's very good for our business in central Europe.

And Russia, we saw over the summer months a booming construction industry there.

Clearly it will slow down over the winter, but we think that will reaccelerate in 2007.

Turkey, in terms of rebar situation, the nearby markets are particularly strong.

Dubai and the Middle East, at this point in time, Turkey is not so interested in exporting rebar to the U.S. at the current price levels.

And as you know, Turkey's the biggest exporter of rebar to this market.

Other factors, ferrous scrap will clearly remain volatile, through our view it will remain on the high side, probably November obsolete scrap like shredded scrap will go sideways, because the demand, international demand, is still very strong.

Some positives going forward, clearly energy costs have come lower, particularly natural gas.

Electricity, oil prices that we all know have dropped to around 58 a barrel.

Inflationary pressures seem to be easing and the weak U.S. dollar is very good for our U.S. business.

So all these things are very positive for us going forward.

Freight rates are quite strong and should remain firm.

So in summary, we've stood on our statement that the first quarter will be a good start for the year.

The winter months, which is our December to February period, that's always our weakest quarter.

And we'd anticipate the spring months of March to May 31st to be strong and then the fourth quarter, which is always our strongest quarter, June to August, we think that pattern will continue.

So we, as Bill said and Stan said, we're very optimistic looking at fiscal 2007.

Stan, do you have any comments?

Just again, congratulations to all the people at CMC.

While we certainly had the stars aligned, we had tremendous execution by our people.

And for that, we thank all of them.

And now we're happy to take your questions.

[OPERATOR INSTRUCTIONS].

Your first question comes from the line of Michelle Appelbaum.

Hi.

It's Michelle Appelbaum.

And congratulations on another blowout quarter, nice job.

And anyone who owns a steel stock today, I guess owes you a thank you.

So thank you.

Maybe EBSCO as well.

Oh, okay.

Okay.

Yeah, I think that there was some nice numbers there as well.

Can you remind us, the market gets very focused on the flat roll side of things.

And I think, you know, can you remind us the volatility in your mix versus the flat rolls like over the last 18 months?

When there is that cycle last year when flat roll prices dropped $300 a ton, how much did your average price realization drop over that same time frame?

And maybe you could also tell us why long prices have been over the last 3 or 4 years, somewhat less volatile than flats?

The answer to the first question is, they didn't drop much.

Our product mix, as between merchants and rebar, stayed essentially consistent and our margins really didn't suffer from that.

The metal spreads have increased each quarter, golly, probably for the last 6-quarters, at least.

And the flat roll just, at least from the market to the end-use market perspective, there wasn't much of a fixed number.

Michele-- as you know, we're a long products producer, but we do try to import flat products so we have some knowledge there.

But hot roll coil -- you're right, more globally and the same pattern followed here in the U.S.

Globally, in terms of metric tons, it got to as low as $180 per metric ton and then took the big spike in 2004.

And the same happened here in the U.S.

It hit close to $700 a short term.

Whereas rebar prices only doubled.

So from their lows.

And in the last 12 months, rebar prices did go down last year and over the summer months they picked up roughly $50 a ton.

So there's much less volatility.

Why is that?

The question, if you go back long enough, which we all do, it was the opposite.

And why has, what are your thoughts on why the long product business has become the bastion of stability that it's become?

A couple of reasons.

Here, the long products follows pretty closely the ferrous scrap prices in the U.S., as you know, the rebar and merchant bar produces raw minimills, not the integrated mills.

So that's one factor, but also the consolidation is a big, big factor.

If you look at between Nucor, Geardal, CMC, and Steel Dynamics, the four of us bar producers, we'll be close to 80% of the market now.

So that's a major factor.

I think another one is a lot goes directly to end users.

And so there's less certainly with rebar, less of the over inventory, under inventory situation with the service centers.

There is some that goes through distributors, but merchant bar more goes through service centers.

But still, I think the fact that a lot goes to end users will, over time, decrease the volatility.

But one other thought is although there's a lot of play and perhaps rightfully so, on the amount of rebar that's imported in the United States, it is in a very narrow range of both sizes and it's almost exclusively 20-foot, right?

70% of the import is 20-foot.

So unlike hot rolled coil, some of the flat products that can come in here across all sizes and ranges, you do not get that in rebar.

The amounts that you do get are fairly concentrated in certain sizes.

So, more consolidation, less imports, and more flexible production scheme.

So do you anticipate going forward, that's nothing is changing there?

You would anticipate more stability?

We believe so, particularly on long products.

Okay, great.

Okay, thank you.

All right, Michelle.

Your next question comes from the line of Michael Gambardella with JP Morgan.

Afternoon and thanks, Bill, for my plug on my rerating report last week.

Okay.

I have a question.

What was your assumption for LIFO when you gave the guidance for the first quarter?

Probably a little bit of expense, but not a whole lot.

I think our thoughts are that, Murray mentioned that ferrous pricing is going to go sideways and that pretty much drives the pricing on the long product, the finished good long products.

So I would say that we would expect a little bit of expense, but not much.

Okay.

This is also the point in time where I tell you that I've never been right on LIFO.

Okay.

And then last question, I notice that on the import data that came out today, on rebar, it was up a fair amount.

Do you know where it's coming from?

Michael, I mean, the rebar imports have been a bit skewed because there have been a lot of late shipments.

Turkey is still the biggest exporter of this market, but there's quite a lot coming from Asia, like Malaysia and those sort of countries, as well.

And the pricing coming in?

Relative to domestic prices?

Some information on Turkey, 193,000-tons out of the 290 from turkey.

So that's by far the biggest factor.

But the Turkish prices now, on a CFR basis, this is a metric ton, around about 550 say to Houston.

Turkey is around 510, 520.

Fairly high prices, and when you look at that in terms of discount to the domestic prices, there's not much incentive for U.S. buyers to buy imported at the moment

Great.

Okay, thank you very much.

And congratulation on a great quarter again.

Thanks, Mike.

Thank you.

Your next question comes from the line of Barry Vogel of Barry Vogel and Associates.

Good afternoon, gentlemen.

I guess the lines aren't as quick from North Carolina, huh?

You're third.

The lines are slower down here.

Yes, okay.

I don't know who to ask this question.

I'll ask you, Stanley.

What happened?

All of a sudden, after all these years, you step up to the batter's box and you swing your Adirondack?

What changed your mind?

As far as the share buyback?

Oh.

Value.

I don't know that we ever changed our mind.

We keep buying value.

You've had the stock down to 23, 24 prior to that period.

And you bought some shares, but you certainly didn't step up big-time like you did here.

Sort of similar average prices.

Well, certainly over time, as the value of the Company keeps increasing, that same price becomes that much more attractive.

Okay, okay.

Now, as far as additions to capacity, in the United States, am I correct that you currently still have about 2.4 to 2.5 million-tons of domestic steel capacity?

Yeah, that's right.

Depending upon what product we're running.

Do you have an -- are you trying to expand or is your long-term goal to expand that capacity?

Well, Barry, we're almost at capacity at those mills.

So any increase will be pretty incremental.

How are you going to -- how are you going to expand capacity?

I think at this stage, it's totally on the margin on smaller projects.

You would have to either go undergo a significant increase in the furnace and the rolling mills to do that, and right now, I think with the balance of supply and demand, we're rather sensitive to the fact that things are in good shape right now.

And in terms of our four domestic mills and where they sit, I don't see the necessity for increasing capacity significantly.

I mean, we're always, Barry, we're always looking at the, this country and elsewhere, where are the underserved markets?

And if we see one, we would make an investment.

But certainly in terms of generally speaking, bigger, bigger tonnages increases in tonnages would likely be outside of the United States.

Particularly in terms of greenfield or brownfield.

Because in terms of the growth of the markets.

I mean, but we will be increasing our capacity in Poland.

You keep saying you like things the way they are right now.

So why add capacity to the industry?

If we see an underserved market, that's different, it fits our whole vertical integration strategy.

Okay.

Now, as far as consolidation, you've been a maven on this, Stanley.

Can you tell us where you think things are going to go from here?

I'm talking about worldwide consolidation.

Let me let Murray and Bill answer.

Well, globally, clearly you saw the latest news with Carter and chorus, Barry.

So it will continue.

And each Company has its own strategy.

But we are a global company.

So as Stan said, we look at global opportunities not just here in the U.S.

So the consolidation will continue, that's for sure.

Okay.

Now, I have one question for the Chief Financial Officer.

How did you -- how did you earn so much money in copper?

We just let it go up.

No, no, you never -- you've hardly made money most of the time.

All of a sudden you put out these numbers that looks like you cooked the books.

Skilling just got 24 years for that. [laughter] I'm not going to respond to that question.

I mean, the answer is that the copper, you're referring to the copper tube mill, obviously.

Yes, yes.

It is, you're talking about a commodity business here.

It's clearly the law of supply and demand.

And I think the underlying question is, I mean the answer to your question is that copper at $3.50 a pound, you're going to get expanded margins and the corollary to that is can it stay at $3.50 a pound?

And as long as the warehouse inventories maintain their relatively low levels that they are right now, the price is going to stay there.

So I mean, you've had, what you have here is a unique pricing environment, certainly it was not done on the strength of increased quantities.

In fact, the pounds that we sold during the fourth quarter, were actually down for a couple of reasons.

But it's clearly price-related.

And that's just supply and demand.

Barry, I'll add to that, we made most of our money on the copper and the copper businesses in June.

And if you remember, May-June period, there's tremendous volatility with copper prices and not just copper, but commodities, things came off as well.

So clearly some people overbought during that period.

And then it quieted down in July and August.

But that May-June period was extremely volatile.

But Barry, I need to correct your premise, if you will.

And you've known us a long time.

Over the decades, the single business that probably gave us the best return on net assets was copper tube.

And we did have some years where we had excellent, excellent earnings.

Now, at the time, what was then considered a great spread was more like $1 a pound.

Of course, that was when copper was, say, $1.30 a pound, the underlying price.

We've never had a market like this, and it took us a while to get prices up.

Because copper was appreciating so rapidly and for such a long period of time.

But as Murray said, when we were able to do it, we were actually able to get better spreads than we've ever had.

And our people did an excellent job in matching production with sales and also more of the higher value-added products.

Well, just keep on doing the job you guys are doing, it's just extraordinary.

And keep on, I wish you to keep on using your capital as adroitly as you are using it.

Thank you.

Thanks, Barry.

Thanks, Barry.

Your next question comes from the line of Frank Dunau with Adage Capital.

Hey, guys.

Got a few questions.

For the next quarter when you are taking all the mills and doing maintenance and stuff, do you have an estimate of about how much that's going to cost you?

No.

I mean, it's just routine maintenance.

It's just factored in once a year.

We are putting a new shell in one of the furnaces.

Do you remember what the --

No.

Whatever you're doing, do you normally do that in the fourth quarter or the first quarter?

Yeah, typically we'd be done late in the first quarter or maybe slopped right into the early in the second.

So you're talking about mid-November to mid-December.

That might change a little bit, if you're in Poland, they might start it in earlier October simply because it gets a little cold there in December

All right.

I'm looking at the numbers out of Poland, which were really big a few years ago.

Then they got not so big.

Yes.

And now they're really big again and I know you've done a lot of work there and I'm trying to figure out what normal is in Poland.

I don't know that we know what normal is.

Your point is very well taken.

You had a combination of factors, currency, you had governmental challenges.

During that weak period.

You had some self-inflicted wounds over inventory situation.

But right now, what has caused the upswing is that the government is now getting its proverbial act together and letting a lot of this infrastructure work go forward.

A huge factor is the fact that the German economy is increasing and both giving us an opportunity to send a little bit of material to Germany but more to the point, keeping the German material out of our markets and out of other markets that we can send to.

So the prospects right now in Poland, looking forward, Frank, they are very, very good.

And it's also highly seasonal, right?

It is.

In fact, we're not necessarily putting this thing in concrete for the second quarter, but the general theory is, let's make some decent money through November, early December.

If we can, break even or make a few bucks in January and February, we'd consider that to be, to be pretty good.

It's just damn tough to sell domestically in Poland during those months.

Okay.

Thanks.

Your next question comes from the line of Sal Tharani with Goldman Sachs.

Hi, guys.

Sal!

Hi, Sal.

Congratulations on the good quarter.

A couple of quick questions.

On the Polish operations, good to see that earnings are back to where you had started close to that.

Just wanted to see how much of that has come from the improvements you've done in terms of the fab shop and the shredder.

If I look at the spread difference between -- fourth quarter and metal spread difference is about $20 a ton.

The operating profit jumped up about $58 a ton.

I was wondering if you could quantify the -- difference is it all coming from there or other things which we are missing in there?

I'll give you the number one reason.

And it's this 8,000 horsepower shredder that's sitting right outside the melt shop.

And it's provided, we had predicted this, but of course as my opening statement says, a lot of things that management predict don't necessarily come true.

But we had felt that it would increase our yield and decrease the wear and tear on the furnaces.

I think it's yet to be seen about the wear and tear, but for the months and remember we started that thing up in mid-May, I guess.

So it's only run May, half of May, June, July, August, a couple of those, okay, historically the yield in the melt shop with the type of stuff we were throwing into the furnace was sitting at 83, 84, 85 would have been considered a pretty good month.

They hit a 90-month one month.

And they've been averaging 89 or 90 for July, August, September.

So that's one of the huge reasons, Sal.

The other is that the shredder itself, as you know, there are nonferrous residue streams that come out of a shredder and it not only is providing a better feed into the furnace, it also is providing a pretty good income stream from the sale of those non ferrous residuals.

Okay.

Have you guys looked into the assets which are perhaps being offered in Australia by Sims, I believe?

There are subrogation, sorry, the businesses.

I know you were in the service centers over there.

We are in the service centers there.

There I think we'll have to fall back on the standard line of, we don't comment plus or minus about acquisitions opportunities, Sal.

Okay.

Let us go back to Poland.

Do you guys see any further expansion projects over there?

Do you think besides the upstream, down stream -- any possibility you have more melting capacity versus zoning or vice versa?

Yes.

I mentioned, well, first of all, we got lots of melting capacity.

But that said, the wire rod block that I mentioned, that is going to, to increase our product line.

And broaden it.

And we've also upgraded one of the furnaces and the second furnace is going to be scheduled for maintenance this winter.

And so our yields have improved there as well.

More so the amount of supplies that we've been using have decreased significantly.

What else we got going on there inn.

Wire rod block mill, Sal, that will increase up to 150,000-tons a year.

And what we have the ability to do rebar and coil from there, as well as sell wire rod and two ton coils.

So that will give us and extend our product range.

So that will give us extra capacity on the rolling side.

As Bill said, the melting capacity is very good.

And we got excess there.

So we want to increase the amount of finished goods out of that mill.

Sal, the other thing we've done, which we began after that one rough winter we had, was to increase our capability to produce more merchant bar in the bar mill.

And our people have been doing that and that should also help us this coming winter.

Straightening, straightener for particularly for angles.

And so besides, increased tonnage looking ahead, is also a better product mix.

And one last question.

This rebar imports we've been seeing in -- in excess of what normal level is, you best think that the reason for the rebar manufacturers in the U.S. like yourself to cut down production?

You see there's enough, there's too much stuff out there, you can -- maintenance shut down, you can still, you don't need to watch that level at this point.

We don't think we need to watch it, Sal.

As I mentioned earlier, there will be a decline definitely between November and February.

We know that because we're a big rebar importer.

And with these outages and maintenance not just at our mills but other mills, we think supply and demand will be well balanced during the winter months.

And, you know, a concern may be, could be a tightness come the springtime.

That's too early to predict at this stage

Great.

Thank you.

And once again, congratulation on the quarter.

Thanks, Sal.

Your next question comes from the line of Michael Willemse with CIBC World Market.

Mr. Willemse, your line is open.

Can you hear me?

We can, Michael.

Now, Mike.

Okay.

Sorry about that.

The new rebar fabrication plant in Zawiercie, what would be the capacity of that?

The fabrication plant?

Yeah.

Probably between 30 and 35,000-tons a year.

So what would be your total fabrication capacity in Poland?

Between 30 and 35,000-tons a year.

But we are looking, okay, okay, you're going to ask the next question.

But we are looking for shops two, three, four, five, six, seven and eight.

We think based upon the backlog that we have there and the great outpouring of customer support, that this is definitely business as we have suspected, we need to be in big-time.

Okay.

And the comment was made about cooking the books in the copper division.

What about in the scrap division?

Other than higher pricing, is there anything else that positively impacted the operating profit in the quarter?

Well, clearly, Michael, we made an acquisition of Javig and that helped in terms of our ferrous on the ferrous and nonferrous side in terms of the volumes.

When you get high scrap prices both ferrous and nonferrous, the flows are extremely good.

So we benefited, you would have seen, by the increased volumes on both sides.

And the acquisition, how much did that benefit, how much would that benefit from a tonnage standpoint?

Well, on average, about roughly 15,000 a month in ferrous, and 4,000 a month in nonferrous.

Okay.

And the new caster in Zadin any sense of what kind of your cost savings will be going forward?

I guess is it just now that the new one is in place, you think it will be relatively similar cost structure?

Well, from a production standpoint, it ultimately will be lower.

But because you've got the depreciation cost for a while, I don't suspect net net we're anticipating lower costs early on.

It was done, though, not only out of necessity, but the ability to cast better products as well.

So hopefully, the margins off of those products as opposed to the savings in the cost will be what drives the value.

Okay.

That's all I had.

Thanks a lot.

Okay, Michael.

Your next question comes from the line of Aldo Mazzaferro with Goldman Sachs.

Hey, afternoon.

Hi, Aldo.

A lot of my questions got answered.

But I was trying to zero in on the opportunity in Poland a little more.

I had some firsthand experience of seeing what the infrastructure market there looked like.

Good potential, Aldo.

I just wondered.

When you fabricate rebar, let's say rebar sold for $550 or $600 a ton as is.

What do you think a fabricated shape might sell for?

And I don't know if you have any ballpark feeling.

Let's say double the price and maybe half the conversion cost.

You're talking the Polish market?

In the Polish market.

I was trying to get a feel for what kind of impact you might have as you implement more and more of these fab lines.

Bill has got some is data here.

Yeah, keep talking, Aldo.

My guess would be if you had a $600 rebar price, maybe you'd have a $900 to $1,000 fab price, incremental $100 or so conversion cost.

What you have, if you got a piece of paper and a pencil, the sales, now, this is only 2 months.

The sales were 4.4 million zlotys and that was 2 ,178 metric tons.

So if you do the division there that will tell you in zlotys what the least early on.

Now, of course, you got a little bit of those variety of product coming out of there.

But that's the early results.

In the U.S., and of course we're in the early stages in Poland, but the price, a lot depends on how much we're doing.

So, for example, there are states like California where we place the rebar so you sell it at a much higher price, but you also have more costs and more of a function, more functions.

But so it can vary, too, depending on exactly what functions we're performing.

And in general right now, we perform less in Poland, because it's the nature of the business.

Than we do in the U.S.

For example, you know, over time, we would hope we can do more in terms of detailing, estimating, things like that.

And you know, Stan, we were also hearing about very, very strong pricing for rebar in Russia, Moscow area.

Just wondering how you would I mean, how you would think about the import flowing into the U.S. being high at this time.

Do you think there's a lag effect that we're about to see reverse those imports?

It seems like the pricing globally would argue that steel should be flowing away from the U.S. instead of into it.

You're right, Aldo.

A lot of the imports in the last couple of months has been delayed shims, there's been a lag effect.

I think you need to average it over 4 months, as I said earlier, there will definitely a significant decline of end of November to February, we know that for a fact.

And you're right, those markets in Russia and eastern Europe, I mean, Russia, they go up to $1,000 a ton for rebar over the summer.

And we think, those are booming markets.

So continue in the springtime of next year again after the winter months.

And Russia and all those countries are big exporters of steel products.

Now, they're exporting, I'm talking long products now, very little is being consumed within.

So that trend will continue

Which we think is a factor, too, in keeping up ferrous scrap prices.

Because countries like Russia, Ukraine are exports less scrap because they're using it in their own production and consumption.

Great.

Well, thanks.

And Stan, you should mention to Bill that that beauty contest we were talking about was for CEOs and Chairmen only. [laughter].

Way to go, Aldo!

Your next question comes from the line of Sanil Daptardar with Sentinel Asset Management.

Hi.

Just a few housekeeping questions first.

You talked about -- about repatriation of the foreign earnings.

What was the tax impact?

Let me look real quick.

Let's see.

For the year, it caused the tax rate, the benefit, to be 0.7%.

So 0.7%.

In dollar terms?

It mainly offered in the fourth quarter --

All in the fourth, all in the fourth.

We repatriated right at the end of the year.

So, in terms of the absolute number, what would have been the dollar impact in the --

Oh, I think it was around, I think we rolled back about $3 million in deferred taxes.

Okay.

And there is an item called a new manufacturing tax deduction.

Now, is this a, this is going to be a permanent thing or this is only one time?

No, no, it's permanent.

You recall that because of WTO concerns, the various Fisks and Discs and the last one called the extraterritorial income credit, had been ruled persona non grata that so Congress turned around and re-created something called the manufacturer deduction.

And that's what it is.

It's as permanent as I understand.

So going into 2007, your tax rate would be reduced down to 32%, an average of that?

No, no, no.

You got to remember that the first of all, the repatriation of the dividends isn't going to happen again.

And you have to ask yourself, what percent of total earnings Poland makes up because of its tax rate of 20%, it's going to lower it.

I would say going on into the first quarter, I mean, I'd look more like the statutory rate of 35% because we won't have the 0.7 of the tax repatriation and due to some other things, I think you best rounding it off at 35%.

Okay.

In terms of the business for '07, you talked about positively in terms of the end market and demand.

When you look at the volumes how do you how should we look at the volumes, will they be growing from '06 period or it will be flattish?

And the prices you expect the prices to remain strong?

But Murray mentioned that the imports would start declining.

So prices should be expected to go up if the markets elsewhere are strong?

How should we think about both these things, these two things, volumes and prices?

The volumes clearly, we are in a seasonal business with long products here.

In the fall months and winter months, construction drops away.

We have obviously periods, particularly where we are wet periods and obviously the daylight hours are less.

So the amount of work people can do in terms of construction in daylight hours is less.

So volumes you'd expect to be lower for our first 2-quarters some and prices, we would say, as we mentioned, will remain relatively high.

But it depends on the price of ferrous scrap.

What we're saying in the springtime and summertime, that's when you expect the volumes to increase again and prices to pick up.

Okay.

So, prices you mean to say prices would be higher than what you got prices for 2006?

Well, it's certainly higher than this time last year going into the wintertime.

And so that all goes well for calendar 2007 for the spring and the summer months.

Okay.

Okay, great.

Thanks, Murray.

Your next question comes from the line of David MacGregor from Longbow Research

Hi, David.

Nice job.

I had just a collection of odds here.

First of all, let me move through these fairly quickly.

In Poland, how should we think about fab shop valuations.

If you're going to be pursuing an acquisition strategy there, how should we be thinking about --

I think you need to ask yourself whether that is the right metric or whether it's greenfield.

Is it greenfield?

Yeah, I mean obviously greenfield the first one.

And I don't have an answer for you, David, because I think right now, we're a bit ambivalent as to when we build it or we buy it.

David, in Poland itself, we've looked at a lot of acquisition opportunities.

But there are very few well structured companies rebar fab companies there.

Who have got good equipment, good sites, et cetera.

So as Bill said, we would favor greenfield types.

Okay.

The copper tube business, where does that stand as a priority for expansion?

What we've done there is, that mill is 80 million-pounds a year capacity.

And you can see we're well below that.

But our strategy there is to get into more what we call value-added products.

And whereas a few years ago these were maybe only 5%, they're up to 35% now of our styles.

These are things like refrigeration tube, air conditioning, and line sets as opposed to the basic or the base business, which is water tube for plumbing applications.

So we've done that very successfully and that will continue that strategy.

We like to get to 50/50, 50% basic water tube, and 50% of these value-added products.

David, there's overall, there's adequate capacity for copper tube in the United States, even though there are imports for the industrial type tubing.

We know because we're one of the importers.

But given some of the sub, additional substitution of glass -- and the water tube business, I wouldn't imagine you'd see much or if any, capacity growth in the U.S.

I think you'll see significant amounts offshore.

I'm not necessarily whether we would or wouldn't.

But just, you know, where the growth markets are, particularly countries like, like China.

Okay.

I wouldn't exactly thinking about new capacity as much as you acquiring existing capacity.

Infrastructure, any pushouts on the -- projects that's going to be negatively impacting your mill business?

We don't believe so.

Okay.

And on the fabrication business, as well as on the mill business, how far forward are you booked in each of those two businesses?

The mill business tends to be spot month by month.

The fab business, we average 8 to 10 months our contracts there.

So we've got good visibility looking ahead.

As we mentioned, we're at record backlogs in some areas.

The bidding work is actually stronger if you can believe it, at this time this year than it was last year.

So I think it gives you an idea how strong the nonresidential market is out there.

Spot month by month.

But -- are you booking December?

I mean, household out of the mills.

The, you basically, they'll be looking into December at this time.

And I mean over the summer months, the mills were booked out 2 months.

They were basically pretty low in infantry but they caught up on their infantry levels.

So you'll be looking into December at this time

Okay, terrific.

Thanks and congratulation on all the progress.

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Your next question comes from the line of Stephen Huang with Pilot Advisors.

Hi, I have a quick question on the scrap market.

You actually a quickly mentioned a couple of things on the scrap market.

But could that market create some upside surprises for the quarter, because we don't know what kind of -- process scrap cost you can get, right?

Can that create some upside surprise for the quarter?

Not really, not on ferrous, because prices dropped in October and we think best sideways in November maybe slightly off November.

So definitely --

So you mean you cannot get lower -- lower scrap price?

Well, we can offset, maybe if the price went selling price went down $5, could we lower our unprocessed costs $5?

Maybe yes.

But when you're talking about a surprise, there's not going to be any.

Because we're already at the end of October.

Right.

Could you update me on the current scrap price run rate versus the average realized price in the fourth quarter last year?

I mean, just finished quarter?

Do you have that information?

I think I would, but I'm afraid I don't quite know how to match up your question with my information.

Maybe -- how much in this month, October, compared to roughly the average price in fourth quarter '06?

You talking shredded scrap?

Yes, yes, exactly.

The scrap price -- you're selling to all the people.

Well, I think you may be focusing on the wrong -- I think the thing to focus on is the metal spread if you're looking at the mills.

Okay, that's fine.

If you can tell me that, that would be fine, too.

Whatever metrics you are looking at.

The metal spreads in the mills, if you look fourth quarter to fourth quarter, they were in last year's fourth quarter, it was 291 metal margin and it's 318 this time around.

I see.

Is that 318, that's the run rate or just for the fourth quarter we just finished?

It's for the quarter.

Okay.

And what's your guess right now, the run rate for -- is that close to 291 last year level or close to --

Oh, no, no.

The rates right now would be well in excess of $300.

Oh, okay.

See, what happened is the rebar, scrap price, shredded scrap fragments, say, went down in October and -- Nucor, the price leader, effectively dropped the price of rebar the same amount, $15.

That had very little impact on your metal spread as a result.

I see.

And in the through price have come down a little bit also the scrap price come down.

Does that mean it's going to a little bit difficult to get a scrap, because maybe the seller is holding onto their scrap and not going to sell?

Not at these levels.

We saw 12 months ago when scrap prices, ferrous scrap, got to $150 a ton.

Definitely the flow slowed up then.

But at these levels, these scrap prices are still very, very good.

Shredded you're still talking about $235 a ton average.

It varies by region, but these are good scrap prices.

And the U.S. generates roughly 75 million-tons a year of scrap, 65 is consumed and had 10 million goes offshore.

So, there's plenty of scrap.

Right.

Okay, very good.

Thanks.

Your next question is a follow-up from the line of Aldo Mazzaferro with Goldman Sachs.

Murray, just to follow up on the scrap question.

I don't know if you guys have given a forecast of what you think is going to happen in scrap, but do you sense that there's less availability of scrap now than you would think this time of year, maybe because exports haven't been high lately?

No, Aldo, we think flow still seems to be good at these prices.

I think people should be aware of the international demand is pretty strong out there.

If you look at the prices internationally, they are strong.

And, Turkey and China and these other countries, they're big buyers.

And Turkey in particular, their rebar prices are very good in the Middle East and nearby in Europe.

So, we think even with the mill outages and maintenance planned here in the U.S., based on the international demand November scrap prices could for shredded I'm talking about, could go sideways, maybe a small drop, but we don't see any big drop in November.

The international price for shredded is roughly about 280 a metric ton, including freight.

Now, some feeling, some people think it might come off 5 or $10, but there's no feeling about a major, major decrease.

And you're right, some significant volumes have been moving off, offshore.

We've seen, Aldo, Turkey, in the last week -- prices have jumped $10 to $15 a ton.

So -- so if anything, the international scrap prices should hold during November.

Right.

I know we've heard a lot of forecasts that basically say scraps should decline through the quarter.

But I'm wondering whether the more precise analysis might be that it's gone down some now but probably not further weakness.

We would tend to agree with that.

Okay.

Thanks very much.

At this time, ladies and gentlemen, we have no further questions.

Mr.Rabin, would you like to make any closing remarks?

Well, we just thank everyone for your participation, and Bill and Murray and I are heading for New York.

We don't want any questions about the Dallas cowboys.

Thank you.

Bye.

This concludes today's Commercial Metals Company fourth quarter and year-end conference call.

At this time, all parties my now disconnect.