Commercial Metals Co (CMC) 2007 Q1 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the Commercial Metals Company first quarter 2007 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] Thank you.

I will now turn the call over to Stan Rabin, Chairman of Commercial Metals Company.

Sir, you may begin your conference.

Good afternoon, everyone.

I just have a few brief remarks, and then I'll turn the call over to Murray McClean, as you know, our CEO, and Bill Larson, our CFO.

Once again, we have a situation where our earnings were substantially higher and the stock price is significantly lower.

We're not supposed to comment on that, but I have comment on that.

This was Murray's first quarter as CEO of Commercial Metals, and as I say, a spectacular quarter.

It was with earnings per up 25% year-on-year.

That's earnings per share up 25% year-on-year.

Some very good news today out of China and Brazil.

There are reports that CVRD and Bao Steel have reached agreement of a price increase on iron ore fines of 9.5%.

Assuming that's correct, since Bao Steel was representing all of the Chinese mills, that would mean that the first part of the negotiations are concluded and from our standpoint a very positive development for Commercial Metals and the steel industry overall.

Also, and Murray can talk about this, rebar imports have been down substantially the, last since September and we anticipate that will continue.

And finally, we remain very excited about our growth prospects.

They're excellent, including our recently announced capital investments, and Bill's going to I know give some further information on at least the new micromill project, so the outlook remains very positive.

And I'll turn it over now to Murray and Bill.

Thanks, Stan.

Good afternoon, everyone.

It's actually good morning because I'm ringing from Sydney, Australia where I can smell the sea breeze and can hear the surf in the background, so I'm here with the family for Christmas.

It's very pleasant.

As Dan said, it was certainly a great first quarter, a record first quarter, and some of the features you can see the excellent metal margin that we achieved during that quarter of nearly $350 a ton, but the basics, the fundamentals, the underlying market, the non-residential construction demand remains very solid in all sectors.

The only weakness, which everyone's aware of, is the housing sector, and that obviously impacts CMC Howell.

But every other sector on the non-residential side, as I mentioned, is still very solid.

The shipments you would have noticed for the first quarter were lower than the first quarter of last year.

If you all recall over the summer months there were price increases on flat products and on long products, and as you know, we're only a long products producer, but we do try to market flat products.

And during a period of rising prices buyers do buy more and clearly when prices drop they hold back and buy less.

So there was a build up of inventory over the summer months.

That's well documented on the -- with the service centers, but also some on the long products side with some of the fabrications did build some inventory, so that resulted in some lower shipments during this first quarter.

Stan mentioned on the rebar import side, I mean that was a very good sign, and we did predict that that imports would peak, and they peak early.

It was in September at 335,000 tons based on the census information.

That included some light shipments.

Some of that should have arrived in July/August period and arrived in September instead.

But since then there's been a significant decline in rebar imports and that will continue through right until at least February and most likely March of next year.

You noticed CMC's Zawiercie, our Poland facilities had an excellent first quarter, it's a major turnaround from twelve months ago.

They achieved very good prices, excellent margins, in fact, that part of the world central and eastern Europe and northern Europe in general, have got the highest rebar prices, they're higher than here in the U.S.

They have slipped in the last month or so, but they're still at very good levels.

Our ferrous scrap during the quarter, that declined in the early part of the quarter but by the end of the quarter started to pick up in terms of prices based on very good international demand, and that will continue.

I'll talk about the outlook a little bit later, but into the calendar, first quarter calendar 2007.

In China we saw China pulling back on the non-ferrous side late last quarter, that's the fourth quarter, but they came back into the market on non-ferrous.

We saw a pick up on copper scrap to China during the quarter which was good.

You'll notice that copper prices have slipped slightly in recent times as more supply than there was before, because a lot of these labor disputes are being settled, but the underlying demand for copper is still very good.

Our LIFO, you'll notice American distribution had a big hit on LIFO.

I'll leave that to Bill to explain, but that certainly had a big impact during the quarter.

So with those comments, I'll hand it over to Bill for his comments and then I'll talk about the outlook for our second quarter after Bill's finished.

Thank you.

Thanks, Murray, good afternoon, all.

Let me call to your attention the detailed Safe Harbor statement included in our press release and in our August 31, 2006 10-K that in summary says that in spite of management's good faith, current opinions on various forward-looking matters circumstances can change and not everything that we think will happen always happens.

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

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

Finally, in accordance with the Regulation G of the Securities and Exchange Commission you're aware of non-GAAP financial measures, some of these have 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 Web site at www.cmcs.com for other information, but occasionally 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.

Today I have repeatedly read the words missed and disappointed in reference to our press release.

I'll tell you what missed and disappointed is.

It's when Bill Buckner misses that play at first base in the World Series and the Red Sox go on to lose.

It's when Jackie Smith drops a touch down pass in the end zone in the Super Bowl for the Cowboys and they go onto lose to the Steelers.

It's when in high school I couldn't find a date for homecoming junior year.

That's missed and disappointing, not what we reported today, which was record earnings.

But there was a lot of news on the industry and from us this week.

It was, as you have heard, another strong quarter and the prospects are excellent for more to come.

Capital expansions in Poland and Arizona.

Now, I deferred many of your questions yesterday in order to allow the larger investor group to have the benefit of the answers, so let me tie up the loose ends on a series of topics here and start off with the Arizona micromill.

And these are some of the questions I got yesterday and now the answers.

Where is the Arizona mill located?

It is in the city of Mesa near the Williams Gateway airport.

What does, quote, other suitable locations, unquote, mean?

It means not to restrict your field of vision to only domestic markets.

What you want to do is look for underserved geographies where customers must rely on imports or long distance freight from other mills, look for other areas where downstream synergies can be established with fabrication operations.

What is the current metal margin on sales in the micromill region?

It's in excess of $350 a ton which is well above the assumptions made in our projections.

What are the size and grade ranges of product that we will roll?

Rebar.

Rebar number three through number 18, grades 40, 60 and 70.

What is the expected up time of the mill?

Once we get through the learning curve, it will operate 23 hours a day.

How will the capital expenditures play out by year? $28 million in our fiscal '07, 76 in our fiscal '08, $26 million in our fiscal '09.

How much will go to our downstream fab shops, in other words, captive customers? 50%.

Are there any mills in existence with this combination of technology?

Danieli has such a mill in Italy.

What is the time from scrap charge to a bundled product? 90 minutes.

Next question, this sounds a whole lot like the North Star mill in Kingman.

Well, no.

Ours is a continuous/continuous process, metal out of the furnace into the caster, through a small induction coil and onto the mill.

One strand, one continuous flow.

Obviously, we never operated nor owned Kingman, and this is just my understanding that it was designed to be a semi-continuous operation utilizing a shaft EAF, a caster feeding cut to length billets to a cooling bed and then through a small reheat furnace before entering the mill.

Aren't power rates a bit steep in Arizona?

Certainly the west is higher than other regions.

Power was obviously a strong consideration in our site selection, and we believe we have a very competitive rate.

A 280,000-ton mill with a cost of $130 million is $465 a ton, and that seems high.

Well, you've got to size the mill to the market, and you first, the cost comparisons being made to full-scale minimills is a little off.

It's highly unlikely, as in it probably would never happen, that one could build a full-scale minimill and hope to market 800,000 tons effectively.

The lower operating rates of that full-scale mill and the deterioration in sales prices required to market that volume of material would destroy the economics and it would make the effective cost per ton way beyond the 350 or so I think is kind of a common benchmark right now.

Also, the operating costs of this mill are projected to be substantially lower than a full-scale minimill, more than compensating for increased depreciation.

We believe that with a conservative set of assumptions we will hit and hopefully will exceed our target IRRs of 17%.

Switching topics, there's a sunset review for rebar on May 10th with the ITC decision due by the end of July 2007.

The antidumping duties involve Belarus, China, Indonesia, Latvia, Moldova.

Moldova, that one, okay.

Poland, South Korea and the Ukraine.

We and the other domestic rebar producers will be making the very simple, but we think powerful argument, that it's just a question of free and fair trade in support of maintaining the duties.

What effect the negative decision would make would depend on comparative market pricing, foreign exchange rates, marine freight rates and a host of other things at that time, and obviously, these factors aren't known right now.

However, if the ITC needs, they feel the need to free one country, we are certainly nominating Poland.

Okay.

I still have the floor.

Let me mention that CMC is in the initial stages of a global process improvement project.

We are using the implementation of SAP software as a catalyst to challenge why, what and how we process information.

The potential benefits of this are huge in upgrading our operating model to world-class levels in all of our areas and all of our geographies.

We have dedicated our best people to this three to five-year effort, and we're ready to fire that thing up come the first of the year.

Now looking at specifically some financial information, our strong operating profits from all of our segments, except for marketing and distribution, there a $14 million LIFO charge undid them, but as we've always said, live by LIFO, die by LIFO.

The more interesting facet of a LIFO expense in marketing and distribution is that it was caused in part by higher in-transit inventories, and if you recall the back to back nature of this business, this is actually a predictor of strong sales to come on top of a very likely reversal of that LIFO charge pretty quickly.

The LIFO reserve is sitting right under $200 million as we speak.

As you see in the press release it decreased net earnings some $6.6 million, or $0.05 a share this quarter.

In the first quarter of last year it was $14.1 million decrease, or $0.12 per share.

Gross margins are especially strong at the steel mills and our fabrication operations.

You've already heard that there's been some retreat in copper and in some ferrous prices and our copper tube and recycling units were affected.

Although they still have historically strong results, they did back off some from the fourth quarter.

It was a smashing quarter in Poland with the infrastructure work, our mega-shredder and our fab operations all coming together for some fantastic results.

Depreciation, amortization for the quarter was 25,166,000, and I predict that the depreciation for the year will be 101 -- I said thousand, that's million.

The depreciation for the year is going to be $101 million.

SG&A went up a little over $28 million, three major causes.

The first are items that run with profitability which is our incentive compensation, our bonuses and our profit sharing expense.

The next is salary expense.

That came from normal increases but also the acquisitions we made in 2006 that were not around in 2007.

They were in various places rebar fabrication in Norfolk, expansion of our plate and long product centers in Australia, north Texas, Oklahoma and Arkansas expansion in recycling and a [four save] expansion in CRP.

We also had an increase in professional fees, some associated with this process improvement that we have going on right now.

Interest expense for next quarter I would predict to be about $8 million.

Our EBITDA to interest coverage was more than 20 times.

Networking capital is over a billion, current ratio is 2.0.

Long-term debt to capital has slipped below 20%.

I show it 18.6, probably a little under levered.

Book value's $11.15 a share.

The average shares for this quarter for the diluted calculation was 121,037,332.

The actual shares outstanding currently is 118,350,644.

We spent $27 million in Cap Ex.

If you tack on the $28 million for the micromill, one would guess that the Cap Ex budget for 2007 is going to move from 201 to about $230 million.

We did not repurchase any stock during this quarter, so that means that our outstanding authorization remains at 3,341,760 shares at the end of the quarter.

I'd like to close on two personal notes.

One is to acknowledge the retirement on December 31st of Frank Dunau of Adage Capital.

Frank has followed the industry forever.

He's been a friend and an investor in Commercial Metals.

He's a great guy to talk with.

We wish him all the best, and hopefully this will give him time to get a decent haircut.

Finally, in the spirit of my own faith and tradition let me wish you all a Merry Christmas and a great New Year.

I will not be here tomorrow nor Tuesday, but I will stay as late as it takes today to answer your questions.

Thanks.

Murray?

Thanks, Bill.

Just going on to the outlook for the second quarter and just looking further ahead, clearly, the second quarter is typically our weakest quarter in the northern hemisphere.

It's obviously the winter months, December, January, February, here I sit in Australia it's summer.

It's just the opposite.

But certainly, as you know, most of our operations are in the U.S., and also in Europe, central and eastern Europe, Poland, et cetera, so non-residential construction does flow at this time of year because of the weather, and also the whole period.

We anticipate typical second quarter with lower shipments.

The prices, interestingly enough in our view, will probably firm by the end of this quarter because of the strong underlying fundamentals which I'll talk a little bit about later.

For CMC Howell their copper tube business, we see it as a similar to the first quarter.

There'll be some pick up towards the end of the second quarter with refrigeration and HVAC picking up.

Also, the distribution business, their distributors are back buying again which is a good sign.

On the fabrication side, excellent backlog and level of bidding work.

Public works, highways, bridges, public buildings, airport extensions, et cetera, all very, very good and private non-residential is also very good.

The only area which is related to housing would be shopping malls.

We see some sign there of the slowdown but by in large overall excellent.

And clearly in the Gulf area the Katrina rebuild has been slow but with all the oil and gas activity, ethanol plants, et cetera, there's just so much activity in the Gulf area and, as you know, we're well placed in that market.

Marketing and distribution we see it steady performance during the quarter.

The global infrastructure growth continues.

China and Asia prices we believe will pick up after Chinese New Year that's in February of 2007.

So that's a good sign.

Overall it's interesting to note that prices like in Europe are $100 a ton for most products over and above what they were this time last year, and that, obviously, the firmer euro helps, but Asian and our steel prices are also much higher, 60 to $90 higher than this time last year.

U.S. prices are higher, so this all goes well for the spring months ahead.

I mentioned about steel imports.

We see a real decline for rebar.

In fact, our CMC dealers trading group did not book one ton of rebar in November and that would be normally for February, March arrivals.

If that's an indication of what other trading companies are doing as well, you'll see very little import of rebar during that period.

Mexico, you'll probably see some pick up from Mexico, but that's about the only country that we see.

In terms of CMC's Zawiercie, they will obviously have a weaker quarter compared with the first quarter because of the winter months, but the strong demand in the construction industry in Poland and nearby with the German markets very good, Russia is very good, so once the spring months hit, those markets will grow very strongly.

Globally, I've mentioned before about China's creeping policy.

They're local currency now is at 7.82.

It was a couple days ago.

It's getting very close to the Hong Kong $1.08 at 7.78.

Export taxes, you know about the export taxes.

They increased 10% on steel semis from November 1st.

There's a strong rumor they may actually go up to 15% during 2007.

The VAT tax situation, tax rebate, it dropped on finished goods down to 8% from 11%, and there's a good chance, well, the rumors are they will drop to 0% during 2007.

So in all the global markets, the Middle East, Dubai, that area, U.K., Germany we see good growth, central and eastern Europe, Russia, India, of course, they're forecasting 8% GDP next year.

China is in the 8 to 10%, we think closer to 10% next year, and obviously, other countries like Brazil are showing great growth.

So all these factors are very, very positive for a strong spring ahead.

In terms of twelve months ago, obviously energy costs here, or in the U.S., are lower than what they were.

Inflationary pressures seem to be easing.

While there's a slower growth in the U.S. forecasted for next year, in the non-residential side, which is where we are mainly exposed, the growth will continue at similar levels to 2006.

We see freight markets to remain firm.

That's a positive sign.

Stan mentioned earlier about iron ore settlement that's the latest news at 9.5% Bao Steel with CVRD.

Our predictions were actually 5% so that just shows you the underlying strength there.

Our net [inaudible] to pin steel prices in 2007.

Overall China is still trying to eliminate all capacity with their energy environmental policy, and we believe this price [inaudible] will take at least another three to four years, but, and a lot of that old capacity is long products capacity which we would be put out of the market, so that's a positive going forward.

So overall we remain very positive.

Bear in mind it is the slowest time of the year for our company, but certainly we're going to be very well placed in the springtime, and with the price levels where they are, don't be surprised to see price increases around that February/March period.

Certainly ferrous prices, scrap prices moved up in December.

Our view is they'll move up again in January and February and steel prices, particularly long products, will follow shortly thereafter.

So those are my closing comments on the outlook, so I'll now hand it back for questions and answers.

[OPERATOR INSTRUCTIONS] Your first question comes from Kuni Chen with Banc of America Securities.

Hi.

Good afternoon, guys.

First question is on the micromill.

Can you just talk about if you're kind of more likely to use this concept to grow more domestically or internationally and give us some insight into your market selection strategy.

I'll answer that.

Bill might want to comment on.

Certainly, there's probably fewer opportunities in the U.S. than there are globally, and certainly, where we are globally in central and eastern Europe even parts of Asia, we see this concept could be a great potential for us.

So Bill, do you want to comment further?

No, I think you just look for those characteristics where a single product, in our case of course, it's rebar, has the demand and that it's currently being served by distant or imported material, and that's where you put one of these things.

And also it is an available raw material.

Right, right.

As far as the decision to invest in the Arizona facility, what gives you confidence that this is the right point in the cycle to be adding more capacity and that it's not going to upset the market?

Well, if you think about how we will place 280,000 tons of rebar when it's up and running, you know, half is going to go to our own sister companies, so that's not a problem, and on top of that, we say half now, we are expanding in fabrication operations in the west, and that number could grow.

Second, we will replace some imported material, and I doubt seriously that anybody's going to do anything but cheer us on from that standpoint.

So I think between our sister companies, imported material, and the growth in the market, we'll easily be able to place that many tons.

Okay.

Great.

And then just last question and I'll turn it over.

Can you give us a sense as to where backlogs are in the domestic mills and what your plan is to run the mills in the second quarter here as I'm sure you're trying not to build inventories in this environment.

The operating rates during this quarter and currently, and it depends upon mill are probably sitting in the 75 to 80% range.

That's due to two major reasons.

One is we brought the mills down for a lot of maintenance, a lot of maintenance.

And some of that maintenance continues on into this quarter.

And the second is to get inventory levels in line.

Now, it's nice to be able to combine both maintenance and cure the inventory problem.

I would say that there will reach a point in time where we're done with maintenance, and the question that we get is whether the product -- whether the producer discipline will take effect.

When we're done with this maintenance and there are also some capital projects that we're undertaking, there's a reheat furnace in --

Birmingham.

In Birmingham, Alabama, and some other work that we're doing, so it's not just all maintenance.

But the question will be, and we're not obviously prepared to answer that right now.

Once everyone is done with the maintenance during the slower periods, you know, whether if there's still a supply imbalance, we continue operating at slightly less than optimal levels.

This, of course, is much more a question of the flat roll producers than it is the long product, so I guess it's more coming from commercial metals more of a signpost to look for for others more so than it might be for us.

Okay.

Thanks.

Good luck.

Your next question comes from David MacGregor with Longbow Research.

Good afternoon, guys.

Hi, David.

David, how are you?

Good.

On the micromill, can you just give us a sense of how scalable this is?

I mean you're talking 280,000 tons, but what if business actually turns out to be better than you expect, and to the extent that it is scalable, how much Cap Ex is involved with doing the --

It will go from 280,000 tons to 280,000 tons.

It is not scalable.

Okay.

So expansion would really involve putting a second unit in?

Right.

If you had the infrastructure, that you would not have to replicate all of that.

Right.

Okay.

And who are your domestic competitors in this market now?

Murray, do you want --

Yes.

That would be, domestic competitors in that market, we buy from the California mill, Tamco, is a major supplier.

We do buy from mills outside the area, and it's more probably the mills from outside the area that we would replace, people like Sheffield, et cetera.

We replace material from them from that mill.

Okay.

Good.

And then just on the guidance that you're providing for the second quarter, the 57 to $0.67, just regarding the domestic mill and the fabrication business, domestic mills, your first quarter volumes were down 16%, your fabrication market, your first quarter volumes were up 11%.

Can you just talk about the volume assumptions that you've used in developing that guidance for those two businesses?

I think overall they would be just slightly lower than where we are right now, and that would be all seasonal related.

Okay.

Thanks very much, guys.

Your next question comes from Michael Gambardella with JPMorgan.

Good afternoon and good morning, Murray.

Hi, Michael.

I guess according to the media you not only missed and disappointed but you've gone from being a steel producer to a metal processor like Worthington.

There you go.

That's right.

So let's just make it clear that you're not a metal processor, you're not in the steel stud business, and you're not buying hot band and converting it and selling it to automotive.

That's fair enough.

Thank you.

Just seriously in terms of this micromill, which to me sounds extremely exciting, what are the licensing terms that you have and do you have a share in that technology expansion when you build other sites?

Oh, I think that's proprietary, Michael.

Sorry about that.

It's a good question, but that's one we can't answer.

Well, can you say whether or not you have rights to the technology, you know, globally, within a certain region?

We can, but we're not going to.

But you kind of said already that you would look to overseas opportunities, so it mustn't be confined to just North America, right?

Apparently not.

That's correct.

Okay.

Well again, congratulations on what I thought was a pretty good quarter and good guidance.

And might I add not that I plug one versus the other, but the facts are what they are, that Mr. Gambardella won the award for our closest to the pin on this quarter estimate.

Thank you.

Your next question comes from Barry Vogel with Barry Vogel & Associates.

Good morning and good afternoon, gentlemen.

Barry, how's North Carolina?

Pretty good.

Pretty good.

Okay.

My first question is for Murray.

Considering you made the comment that you had an operating rate -- tell me if I got it correctly -- in the quarter ending November for your steel mills at 75 to 80%.

Do I have that right?

Yes.

I'm speaking on Murray's behalf.

I am quite amazed that you had a $349 metal margin which is the best metal margin in the history of the Company.

Correct.

How did you do that?

Well, remember, again, speaking on Murray's behalf, remember the metal margin is a question of sales price and cost of ferrous scrap.

It doesn't include conversion costs therefore the operating rate of the mill doesn't necessarily affect it.

But still, but still, despite what you just said, that's an incredible performance.

Barry, it's Murray here.

Bill's got all the numbers there in Dallas.

I'm sitting here on a stool.

Basically the -- also remember that the selling prices increased, you know, during the summer into the first part of that quarter and scrap prices actually declined in the first part, so you do have a lag effect, so that widened the spread.

I mean to be honest, we were quite surprised ourselves at that $349 a ton.

That was clearly an excellent metal margin.

Okay.

Because I remember back in New York a few years ago when you had a $240 metal margin you were dancing on the tables.

Right.

And that's where it was before.

Okay.

Stan, I have a question for you.

Looking at the prospects of the Company in terms of expansion, obviously, you're moving forward on growth prospects, you know, with your micromill, your investments also in Poland to take advantage of what you have there in Poland.

Where are you in terms of more than minor both on acquisitions?

Because essentially other than the Poland acquisition, which wasn't a big deal, you really haven't made any relatively large -- when I say relatively large, acquisitions.

Where are you psychologically now given where we are in the cycle, given what the prospects are, the way you see it in terms of acquisitions?

Barry, psychologically we're fine.

As Murray pointed out in the press release, I think that we've got a situation now where green field opportunities have become much more competitive.

Some of the acquisitions from our standpoint are quite pricey.

And particularly where companies are getting into bidding wars, but I think apart from the ones that have gotten headlines, there's this sections mill which is a very good one, in eastern, well, it's in Germany, a million tons which, Murray, what was that, 590 million euros?

Correct.

Yes.

So, Barry, to answer your question, for us it's a matter of we always compare the advantages of an acquisition, you know, if it's a good business, you're right.

You have immediate returns, and compared with the longer lead-time with a green field investment.

But particularly we're where it fits us strategically we will go green field, but again, as we said, we're very careful in terms of the market.

We just -- whatever we do where we always said it's about people and markets and sourcing, and if we do that right, we'll be successful.

And, Barry, just further to Stan's comments, as you know, we're very diversified.

So our strategy is to not go for one big bang.

If we were just purely a mill player, maybe our strategy will be different, but we see good opportunities, obviously, with this micromill but on the fabrication side and marketing and distribution side, in the recycling side and, obviously, on the global markets that we're in, so we try to be balanced when we look at investments and acquisitions and not just go head long in a major way into one segment.

So that's why you haven't seen and not likely to see one huge acquisition.

I have one question for Mr. Larson.

The two times ago when you were buying back shares, meaning not the last time when you were very adroit at buying shares in the low 20s, you had bought a couple million shares, if I remember correctly, around 24.5, 25, and that was quite a while ago, and stock was trading at around 25 and a fraction before your call.

If I look at your prospects for cash generation this year, after spending $230 million on Cap Ex and before working capital changes, you're going to generate a lot of cash.

Would it be -- is it too optimistic of me to think that you'll step up to the plate again at the 24 and 25 level and not wait for $20?

We will step up to the plate when it's opportunistic, and the first opportunity is Tuesday morning.

That's a good answer, Bill.

Thank you very much.

Your next question comes from Frank Dunau with Adage Capital.

Hey, guys.

Be still my beating heart about all those nice things you said and I am going to get my hair cut tomorrow.

Right.

Right.

Don't be too radical.

I like your long hair.

I was going to say now Murray's got to get one if I get one.

Back to just following on the share repurchase, can I just -- I think review your rules just more or less about when you do and don't buy shares?

You're out of the market from, like, two weeks before the end of the quarter til two days after the conference call discussing the quarter.

Is that right?

That's exactly right.

So if were, I heard some people complaining you didn't buy back any shares in the last quarter but you had a window that, if I apply those rules which was like October 26th to November 15th, would that be about -- am I right?

That's correct.

So it wasn't a lot of time where [you] could buy anything anyway.

That's correct.

As you know, if you track the stock, it was behaving relatively well at that point.

And the year-end quarter, as you point, that's always a very short window.

Right.

And then just on the matter of inventory, because if I look at it it's just the way I do numbers, you have, like, 60 or $70 million too much worth of inventory at the end of the quarter, but then you alluded to a being on a boat or boats.

Yes.

And so I'm just trying to figure out how much of that is on boats and how much is elsewhere?

I can tell you that.

I've got to flip through my schedule but let me--

Of the increase in the inventories, $78 million of it resided in our marketing and distribution segment.

You can pretty much figure that's the amount on the boat.

Okay.

Much of that business is back to back, Frank, so we don't hold it in warehouses.

Right.

So is that $78 million sequentially or year-over-year?

That is sequentially.

That is from year-end.

Okay.

What Murray said, basically if I remember correctly, that stuff's flushed out within two or three months, right?

Right.

So anything that you held at the end of the quarter is going to be sold in the subsequent quarter?

Right, yes.

So you should have a pretty good quarter in marketing and distribution.

And to the extent you have LIFO charges this quarter and the price doesn't go down between whatever it is between now and then, you should have that much sort of inventory profit in the next quarter?

All things being equal were this exact amount of inventory exact product be sold, yes, that thing would reverse in total.

Okay.

I think that's all the questions I had.

I just wonder what you're stock would have done if you had had a bad quarter.

Bear in mind, Frank, as I said earlier, our view is steel prices and scrap prices will be on the move early next calendar year, so our next quarter ends the end of February.

So LIFO, as Bill always says, is very hard to predict so it depends on how those prices do move.

Okay.

Thanks.

And Frank, we're hoping we can see you in Boston even if --

You just call me up, and I'll show up.

All right.

I'm planning a consulting firm that's going to decide once and for all who is the handsomest CEO in the industry.

What about longest hair?

I know who wins that.

Actually, I'm not sure.

There's another person here.

Okay.

Never mind.

We'll get into that later.

Frank, when does Hanukkah end?

Tomorrow night.

Yes.

All right.

Good.

Happy Hanukkah to everybody who wants to hear that, too.

Thank you, Frank.

Thanks.

I was waiting for equal time on that one.

Your next question comes from Sal Tharani with Goldman Sachs.

Hi, Sal.

How are you?

I just wanted to ask you about the scrap availability in the Arizona market.

It's a very tight market with a few players.

What's your game plan?

Are you going to be buying scrap for someone or are you planning to put a processor yourself over the processing unit yourself?

I think the initial strategy is to buy from the local markets, and wherever we have mills we have been shown to be a consistent buyer month in and month out, and a good customer to deal with, and I think the Arizona folks are going to say -- are going to find us to be the exact same way.

And assuming they behave, it'll be fine.

Okay.

Also there has been a lot of talk in scrap industry on the extraction of non-ferrous scrap from the ferrous scrap.

There's a lot of technology people are applying and trying to extract it because of the price difference.

Have you done this in your scrap yards or you just sort of sell it as a ferrous scrap also?

Are you referring to shredder technology or other forms of separation?

Post shredder, you have these gamma tax and different other technologies.

Yes, right, we do that, Sal, at all our shredder operations.

So that is a very good market, and you're correct, that the non-ferrous side is very attractive prices.

Do you include that in your price per ton?

Do you give out for your scrap business?

No.

It's elsewhere.

Okay.

And also do you have any idea what kind of LIFO you have in your estimated given guidance you've given out?

I'm assuming it's going to be lower than what we've got this quarter.

Now, I know that only gives you a range from 0 to $10 million, but, well, it doesn't count $10 million, so I'm expecting it to be lower.

Okay.

And obviously the expectation is that the marketing and distribution reverses.

I'm going to start off with a credit to begin with, so it's not, hopefully. that's not too much of a bold statement.

And how are the prices behaving?

I mean if you look at the average price you have versus what you're selling right now, the rebar, has there been a consideration deterioration or you've been pretty stable?

Well, Sal, it's Marty, it's been pretty stable.

Nucor, as you know, is the price leader, and they dropped prices in October $15 a ton for rebar and merchant bar, and when they dropped prices it's effective immediately, but prices in December were stable, and in January they're stable, so they're stable at high levels, they're much higher than they were this time last year.

So as I mentioned earlier, ferrous scrap prices are likely to increase.

It will be very interesting to see what happens with those prices, merchant bar and rebar, say, around the February period.

I guess our predictions is that they'll go up because the underlying demand is very strong.

And certainly merchant bar goes into the service centers and we think by February/March period, certainly, on long products like merchant bar where they have infantry, that will be sorted out by then, maybe on some flat products it might take another month longer.

But certainly, merchant bar will be sorted out.

So our feeling is that prices will increase February/March period.

The other thing is, Sal, there's significant still upward pressure on ferrous scrap prices internationally, in fact, the last couple of months, really, the markets abroad have been leading, I'd say the price increases in ferrous, so mills in Turkey and elsewhere are pretty much across the board going to be looking at higher scrap prices.

You guys process or sell scrap to M&D also, the marketing and distribution division?

We utilize them on the non-ferrous side more, Sal.

For instance into China we work with them that helped also sometimes into Europe and other markets on the, with copper scrap and et cetera, so, yes, we're working together.

But there's a lot of news that scrap out of Russia has declined considerably.

Correct.

They keep it at home, and also the Ukraine they tend to keep that at home.

A lot of that used to go, as you know, to Turkey and now that's being consumed in their domestic markets in Russia and Ukraine.

That's where there'll be an underlying pressure or demand for scrap from the U.S. and other parts of the world for Turkey and these, and Asia, so the outlook for ferrous scrap, as I say, in our view is positive.

That we think the prices will increase in the next two or three months.

But if Turkey's buying all the scrap and making rebar, does this concern you that they may send too much as rebar over here?

Not really because, I mean, I've moved their rebar prices again on an FOB basis.

They're getting better prices in Europe and quite a bit of that's to do, obviously, with the currency, the strong euro, the weak dollar is not so attractive to them, and also their freight [rate's] clearly to Europe and the Middle East.

They are really the key domestic markets, export markets, if you like, as well as their domestic market's reasonably good.

The U.S. at this stage is not so attractive to Turkey, and you can see that in the import stats in the last three months.

That trend will continue in the next two or three months at least.

Thank you very much, guys.

Great quarter.

Thank you.

[Inaudible] John Tumazos with Prudential.

Congratulations.

And I just wanted to comfort you when Nucor warned last week Allegheny with aerospace materials fell $7.

So I'm just assuming that Worthington's guidance about steel framing is what caused your stock move today.

Good analysis, Jim.

Congratulations on the micromill, and it would seem like there would be many opportunities for pocket-sized steel mill around the world.

Do you need to have the first one run for six or twelve months before you announce the second, and what's the most of these should build at once, three or five?

Well, I'd say, it's Murray, John.

I think, yes, we would feel more comfortable, obviously, to see it up and running before you jump into a second.

Whether we went to three or five at the same time, I think that's questionable, but certainly, the concept is good and certainly there are a number of markets around the world that, as we can see, that this concept could work quite nicely.

So we normally pace ourselves.

I don't think we'll likely go overboard and commit too much too early, so it'll be what we'll see [have] the success of the first one first.

Bill, do you want to comment?

No, I think that's right.

I mean we are, of course, facing a 24 to 36-month construction and start-up period, so we do need to give it a little time to see how it works.

Does your design differ in any material ways from the prototype in Italy?

Not to my knowledge, John.

The key and where we want to be sure is linking everything together.

All the individual parts, the melting, the casting, the rolling, the bundling, all those, you know, all those parts of the process are well proven.

It's the linkage together to make it continuous/continuous, and we think it's a great concept, but we, as Murray said, we just like to feel a little more comfortable.

Okay.

Thank you.

Congratulations.

John, are you ever going to come see us?

Oh, I'd love to.

Okay.

Well, quit sending the second string.

You have a good one.

Thank you.

Your next question comes from Sanil Daptardar with Sentinel Capital.

Congratulations.

Murray, you talked about the rebar imports coming down significantly in the next few months, probably Turkey is not the prices in U.S. are not favorable for Turkish exports.

Right.

Now, in that case why don't, if I look at Europe's shipments, it went down this quarter, why don't you think that it would be better for Commercial Metals to export rebars to other markets where the prices are higher and increase the utilization rates of your factories?

That's a possibility.

We haven't done that.

But quite frankly, we view this market, the U.S. market, as still very strong.

As I mentioned, we're going into the winter months, but we most likely will need to start to build some infantry to supply the underlying demand, and you need to do that by February/March period.

So, and as you know, to export by the time you book the business and arrange shipment or produce and then arrange shipment, you know, you're two to three months.

So it's highly unlikely that we would export rebar at this stage.

And then you're up against, obviously, people if you're exporting to go Europe, you're up against the Turks, et cetera, so I don't think that would be a strategy that we'd pursue.

The product that tends to get exported the most on an opportunistic basis around the world are the semi finish, which in our case would be billet, so, but that becomes a matter of economics.

And also, the major rebar item that's exported tends to be 20-foot lengths and most mills, particular U.S. mills, don't like producing a lot of 20-foot lengths for productivity reasons.

So that's another reason why it's not so attractive for us.

Looking forward to your thinking that by the end of the second quarter probably March period the prices will start to pick up, and --

That's our view at this stage.

We have been wrong in the past, but obviously tend to be more right than wrong.

I mean that probably the demand is going towards [inaudible] supply, and looking to appraise news of CVRD and Bao still about a 9.5% increase in iron ore prices.

The Chinese guys, when export [inaudible] were reduced from 11% to 8%, it took the hit to the margins.

What gives you comfort that 9.5% into the non-roll prices will cause them to raise the steel prices?

Will they not again take a hit to the margins and still export at the prices what they're exporting today at?

Well, I think what will happen is that plus the VAT tax we think, as I mentioned, that could go down further on semi, well with the semi products, with an export tax going from 10 to 15, we think all of those things when you add them up adds more pressure to the domestic price in China and more pressure to that old capacity.

So I think that's part of Chinese government strategy is just to pressurize a lot of this old capacity of these mills to shut down or to consolidate.

But the iron ore price will underline, I mean obviously, it's not just semis and low commodity steel price products, but it's the high quality products as well.

It will increase prices, export prices in Asia in general.

Asia at the moment's the lowest priced market in the world, U.S., depending on the product, would be next and the higher prices are in Europe at the moment.

So what it means is Asia prices will come up, and I think prices here in the U.S. will probably come up, and even in Europe during the spring and summer of next year.

Yes, I think, too, that the -- in a number of these cases the Chinese mills, because there's a time factor, didn't necessarily take the hit.

What they did was accelerated shipments to avoid taking the hit.

And that, but the Chinese mills, as well, reach a point where, and Murray also mentioned earlier the creeping currency, that just, there's just a limit to what they're not competitive to start with, and there's just a limit to how much they're going to absorb and lose before they quit producing.

Okay.

Nobody's immune from that.

Okay.

In terms of the service center inventories, although you don't ship to the service centers, are there any product categories that CMC manufacturers, produces, where there are excess inventories currently and they may take some more time to deplete?

Well, I mentioned we like merchant bar products, some of those they definitely go to service centers, but the inventory levels from our understanding for those, they're high, but not as bad as some of the flat products.

So our view is by February that'll be pretty well balanced supply and demand.

So there's some flat products definitely in the mills in the U.S. have been fairly disciplined with their outages, and so that should sort of sort itself out overall, I guess, March and April period for flat products, but yes, merchant bar products are about the only product that we would sell from our mills to the service centers.

Okay.

One last question on micromill.

You mentioned a target IRR rate of 17%.

It looks like it's much more higher, it's higher than the corporate average for rate of return basically.

Is there any way that your assumptions are too optimistic in terms of prices or your assumptions on cost [basis] are quite optimistic that they are lower than what the corporate average is or what are the assumptions [going] here?

Because you're looking for margin in excess of $350 per ton.

I don't think we're overly optimistic.

We have, obviously, Sanil, culled through this thing over and over and over, the metal margin being the single, I mean, after the cost of construction, of course, but I mean that being the single largest assumption, and we're pretty comfortable with it.

But our assumption that we use for metal margin is significantly lower than the current market.

Maybe we didn't make that clear.

The assumption we use was significantly lower.

Okay.

Great.

Thanks a lot.

Happy holidays, guys.

Thanks, Sanil.

You, too.

Thank you.

Thank you.

Your next question comes from Michael Willense with CIBC World Markets.

Thank you.

On the micromill, can you give us a sense on the cost advantage on a conversion cost basis relative to your other U.S.-based minimills?

Better.

No, we can't, Michael.

You know, first of all, it's just on paper, and we think it's pretty solid, but I think once we get up and running we'll give you a better case, but right now I don't know that we're ready to say.

Okay.

Publicly.

Okay.

In the outlook for your scrap division you indicate that you expect some margin pressure from unprepared scrap.

Is this just basically saying you're expecting to take a LIFO charge in your scrap division next quarter?

I'll let Bill answer that, Michael.

Bit it's more, there's more competition for buying the shredables unprocessed.

As you know, some of our competitors are reporting additional shredder capacity and that type of thing.

It just means people are bidding up the price to when you buy the scrap it's higher than it was.

So that means your margins are less than they were of all things being equal.

So the price of unprepared scrap is going up relative to the price of, I guess, what you call processed scrap?

Yes.

Yes.

Right.

Yes.

Correct.

Okay.

That's a regional thing, too.

It depends where there's more processing, more capacities being put in, so around the Houston area, those sort of places.

Okay.

Could you talk about your backlog right now in fabrication versus last year, is it up 5%, flat, up, down 5%?

Bill, have you got that?

Yes.

It's as good as it's been.

I don't have that exact figure, Michael.

At least not right in front of me.

But the answer that the backlogs are good.

They are the best that we've had over the last three months, certainly, and so I mean it looks pretty favorable.

Okay.

And how far out can you usually see in your fabrication division like how many months out is that typical of?

Six to nine months.

Six to nine.

Okay.

Okay.

And in your marketing and distribution, you indicate you've got inventory overseas, or inventory built up in this quarter which suggests good sales in the next quarter, but you're predicting lower rebar imports.

I'm just wondering what kind of metal trading activity are you seeing an increase in and is it coming to North America or is it kind of Europe/Asia directions?

Well, I'll answer that Michael.

You're correct on the rebar is going to be substantially less, but as you know, as an importer of steel, we import really the full range.

So there's a lot of pipe and tubular products, plate, some beams, et cetera, so rebar is just a small component of that.

So it's these other products and also there were some price increases, some of those products have been fairly firm like beams, plate, et cetera, and some of the pipe and tubular products in the quarter, so you add all of those things together, and it's that goods and transit material that's still on the ship hasn't arrived, hasn't been invoiced that causes that LIFO impact.

Okay.

And Stanley, you mentioned the iron ore price increase this morning.

Have you heard anything on the pellet price, what's going on with the pellet price?

No, we have not.

Our feeling, Murray, on pellets would be more like unchanged or --

Or even negative, yes.

Even negative like last year.

Okay.

So even with fines up 9.5% you still think that might be the case?

We view that the pellets, as Stan said, will be zero or maybe minus 1 or 2%.

Our view was fines up 5, so 9.5 just shows you how strongly the demand still is, and China hasn't got too many options where they can get their iron ore.

And also, the information, which our people in China heard again recently is the, to the extent they've increased domestic iron ore production, it's low grade.

I mean, Murray, wasn't that like 30% I think?

30%.

Then they're going to [beneficiate] it and it's very high cost to mine it and, obviously, to bring the quality up, and it's also, they've got environmental issues with that lower grade iron ore.

So there are big issues with it.

But it sounds like the Chinese, from our vantage point, were much smarter this year in that decided to move quickly, faced reality that there was going to be a significant increase in iron ore imports and just deal with it and deal with it quickly.

I think they learned their lesson from last year.

They did.

I mean it wasn't surprising when you see where the spot price of iron ore is, you know, for Indian iron ore and others, much higher than the contracted price that prices were only going one-way, and that was up, but 9.5 is certainly a healthy increase.

The Chinese might be dumb, but they're not stupid.

They learn quickly.

Thanks, Michael.

Your next question comes from Joseph Wyman with Joseph C. Wyman Company.

Hello.

Congratulations with the results.

I have a question on the micromill.

Ken Iverson wants [spread] to do that in Darlington, in fact I saw it, but he had to abandon the continuous/continuous operation because he couldn't handle the size changes well enough.

Now, I believe, as you said, you're going to operate that mill 23 hours out of 24.

Does that mean you're going to run one size for 23 hours and then you take one hour to change your mills phases and then if you are ready to go again?

Yes.

Yes.

That's exactly right, Joe.

And Joe, since, I'd forgotten that about Nucor a long time ago, but since then tremendous progress in casting speeds, certainly quick change mills, tremendous progress, so there have been technological improvements which make this much more doable.

Also, I've characterized it as if that one hour occurs in a continuous period of time.

I'm not dead certain that given that all we're running is rebar that the changeover couldn't happen twice a day in 30 minutes segments to roll different products.

I don't know that for a fact, but the number of stands that have to change given that we're just changing sizes are not that many.

Yes.

So it just depends on your order intake as to how quickly these things will have to happen.

Now, the mill in Italy, how long has that been operating and is Danieli giving you any kind of guarantee on this mill?

Well, we can't talk about the contractual aspects with Danieli, and Murray, I'd have to punt to you.

I'm not at all certain how long the mill in Italy's been running.

I think it's been going at least two to three years, and I haven't personally seen it, but Ned Linedecker, I mean our people in, our steel group people have actually visited there.

Thank you.

Congratulations.

I think it's a terrific concept, [that] should be enormous opportunity for that, my guess.

Thank you, Joe.

Your next question comes from Aldo Mazzferro from Goldman Sachs.

Hi, gentlemen.

Aldo.

Thank you for taking all of these questions.

I know it's getting late.

I just wanted to ask a question on the micromill if I could, a couple little ones.

It strikes me that 110 people on a mill that size would be about half the manning requirements you have in your existing mills on a per-ton basis.

Would that be more or less accurate?

Yes.

This concept does require people to multi-task, and, again, that's in terms -- which is why when we say we want to, we'll be more comfortable once we've actually demonstrated it, but we're confident we can demonstrate it.

Okay.

And then Stan, with the continuous process I would bet your natural gas consumption's a lot lower, too?

Yes.

Is there any natural gas consumption?

You have a tunnel furnace, right?

It'll be an induction furnace.

And if I don't touch the other topic, let's see, in terms of the scrap fee, is that a continuous feed also?

Into the furnace?

Yes.

Yes, to the extent it can be.

I mean, obviously, it still uses the classic technology of melting one heat and then casting it and, but the understanding is the next heat is done by the time the caster's empty.

Right.

So it's a conventional electric furnace on the front end, then?

Yes.

Murray, has --

On the scrap side the way we handle it is slightly different the way we handle it that normal mills, so it will be a value type concept.

So if you like, it'll be -- if you view it as a continuous feed, if you can look at it that way, but it's certainly different of how we do it, say, at our other mills.

Yes.

Okay.

Well, that's great.

I appreciate all of the data.

It seems like a tremendous little project.

One other question.

What's the, when you buy rebar in Phoenix, on that area today, what's the delivery cost from the West Coast?

From the West Coast to Phoenix?

Or the area where you're going to put the mill?

Bill, have you got the transport costs there?

I think he's asking about our fab shops in the Phoenix area.

Yes.

I'm just trying to get a sense for what their cost is absorbing on delivery as well.

Well, let's see.

That, some of that, Murray, would be coming from Utah, right, I guess?

Yes, but a lot of that, well, the rebar for the moment for the outside mills is more from the east like Sheffield and those types of mills into that area.

And from the west, obviously, Tamco would be the biggest supplier from southern California and not so much from Utah, that goes more into Las Vegas type market but there is some in Arizona.

So that must be a good 20 or $30 a ton, wouldn't it be?

Differential from.

Just thinking -- [overlapping speaker]

We'd have to check with our steel group.

Aldo, let us check on that.

That 20-year cost savings, I would think, right?

Right.

It certainly is -- we view in eliminating, well, maybe not completely, but as Bill said, half the tonnage will come from our own rebar fab shops, but the other half will be more from those outside mills, not, which are more of the mills in the, what we'd call the east of Arizona.

As an example, Aldo, our biggest fab shop in southern California is literally contiguous to Tamco.

Okay.

So they'll continue to buy from Tamco and can buy, obviously, some from the Arizona mill.

That will be hard to beat that freight rate, they just go over and throw it over the fence.

That's right.

Well, the railroads are peculiar.

All right.

Well, thanks.

That's all I had.

I appreciate the call, and good luck.

Thank you.

Your next question comes from Sal Tharani with Goldman Sachs.

How [inaudible] your rebar that's used in the public works?

Do you have any idea?

Say that again, Phil?

How much of half of your rebar goes to public works?

I just told you 50% total public works.

Okay.

And how big is the Arizona market?

How much of your do you think you supply in the Arizona market?

From our fabrication shops?

Yes.

In other words, what percent of that Pacific western market do our fabrication shops have right now?

Exactly.

I don't know.

We'll have to get back.

We have that.

I know neither Murray nor I have it in front of us, but of course we've done a lot of market research, so we have those numbers.

We'll have to get back.

Great.

Thank you very much.

Okay.

[OPERATOR INSTRUCTIONS] And we have no further questions at this time.

Murray, do you want to conclude from sunny Australia?

Thanks, Stan.

It is bright and sunny here, and it's getting earlier, obviously, all the time, so I just conclude that we clearly had an excellent first quarter, the start of this fiscal year, and depending on how the next three months go, we still view this is going to be a good quarter.

We're well positioned for the spring months and the summer of 2007, so we see at this very early stage 2007 being very similar to 2006 our fiscal year, and clearly, we're off to a great start, and we believe there will be -- we'll have a great finish.

So I wish everyone a Merry Christmas and holiday greetings from down under, and thank you for your interest in Commercial Metals Company.

Let me just finally say that, and I thank all of you for all the comments about the perverse reaction of the market today because that saved Bill from having to mention, and I'll conclude on that both [inaudible] and morons and so he was able to be very well behaved.

Thank you and have a great holiday and a wonderful new year.

This conclude's today's conference call.

You may now disconnect.