Commercial Metals Co (CMC) 2007 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Commercial Metals Company Second 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 conference over to Mr.

McClean.

Thank you, sir, you may begin.

Good morning, and welcome to CMC Second Quarter 2007 Conference Call.

With me is Stan Rabin, our Chairman, and Bill Larson, our Chief Financial Officer.

I'll start with a few comments about the second quarter and then Bill will follow-up with further details and I will summarize with comments about the outlook.

Stan, of course, can interrupt at any time.

We'll then open up the conference for any questions and comments that you may have.

Just on the second quarter fiscal 2007, I mentioned in the Outlook Statement in December of last year that our second quarter, which runs through the winter months of December and February, is typically our weakest quarter.

Yes, we did not hit our forecast range of $0.57 to $0.67 per share, but all things considered, it was a solid quarter for a winter quarter.

In fact, if you add back the LIFO expense, it's actually line ball with last year's second quarter.

Highlights were the great performance of CMC's Zawiercie, our Polish operations, solid performances by our domestic steel mills, recycling and marketing distribution segments.

We did predict that ferrous scrap prices and international steel prices would increase early calendar 2007.

This happened; however, the magnitude surprised us and many others in the industry.

Normally, the steel markets move off the Chinese New Year; that's during February.

This time, it was before.

Our explanation is the underlying demand driven by global infrastructure coupled with a relatively mild winter in many of the northern hemisphere countries plus the early settlement, remember in November of 2006, iron ore contract prices which were effective April the 1st of this calendar year was settled by the Chinese, and all this underpinned the upswing in steel prices which started effectively in January of this year.

Overall, we had a solid second quarter.

I'll now call on Bill Larson to provide the details.

Thanks, Murray.

Good morning to all.

Actually, we are not used to saying good morning on this conference call, I guess.

It's never been held this early.

Let me call to your attention to the detailed Safe Harbor Statement included in our press release and in our August 31st, 2006 10K, 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 third quarter of fiscal 2007 in our press release and subsequent to this call and our meetings in New York, Boston and San Francisco, we will not be commenting further and will not be under any obligation to update our outlook.

Finally in accordance with Regulation G of the Securities and Exchange Commission you're aware of 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.

Our website has additional information at www.CMC.com, but there might be other items that may be outside of our ability for discussion and you need to be patient with us if we defer comment.

Well, with the last many months of stock market volatility in the steel sector, I have been unable to tell whether investors believe, as AC/DC so eloquently put it, is whether the industry is on the "Highway to Hell," or whether to scream out in classic Sally Field Oscar night, "You really do love me!" I've got to tell you that there is a lot to love in the steel industry right now and particularly at Commercial Metals.

We have successfully purchased substantially all of the remaining shares of CMC Zawiercie, our Polish mill.

This reflects our enthusiasm for and strengthens our committment to the Central European markets.

We will shortly close on the acquisition of three decking plants and an additional joist plant that will supplement our existing product lines.

We continue the development of our Micro Mill in Arizona.

Each of these acquisitions is consistent with our philosophy of leveraging our areas of expertise, acknowledging that steel is a world market and look to where taking measured risk may bring superior returns.

Good news sometimes comes in strange ways at times.

Take for instance the phone call I received from my daughter in New York City a couple weeks ago.

The phone rang at 12:30 in the morning Dallas time, and I would ask you as you're listening, how many good phone calls have you ever had after, say 11:00 at night?

So I answered real tentatively as if I, if I was real quiet, somehow the bad news would go away, and Marie says, "Bill, Guess who I'm with?

" And I said, "Well, at 1:30 in the morning in New York City it better be your roommate." She says, "No.

Guess again.

I'm in an Irish pub." I said.

"Marie, you're 19."

"Dad, I'm not drinking.

Guess who is standing next to me?" I said, "Marie you woke me up.

I'm still asleep.

Who is it, and let me go back to bed." She says, "Bono.

Want to talk to him?

He's standing right next to me." And I said, "Well, Marie, Bono and I haven't spoken in awhile.

I think we probably need some more time to catch up."

So once I heard the story, it was pretty neat, and I think if you look at our results for this quarter and you hear the story, you are going to see some good news in some different ways.

Yes, we had a big LIFO expense, but, hey, you know how you get LIFO.

You get LIFO expense because of rising prices and that means better profits ahead.

We had higher maintenance costs.

Well, our mills are now geared to run flat out as the construction season starts.

We had significant SAP expenses.

We are implementing a world class ERP system which will bring us operating efficiencies and a platform for future growth.

China's exporting product that just gives our Marketing and Distribution segment more ammunition to sell.

So we see all of this and more as adding up to a strong and we anticipate record profits in the third quarter.

I do need, for clarification purposes, to define certain terms that our CEO has been using.

Line ball even means dead even, that they are equal, so that's the first one.

Let's look at the, by the way this may very well be the last quarter that you hear from me, if I continue this conversation.

All right, let's look at the second quarter.

Things are red hot in normally cold Poland right now, as discussed in our press release, there's a continuing happy convergence of strong economic indicators there.

This plus other vibrant international markets have been the drivers for our sales increases.

Poland also led all the segments in gains in operating profit.

Our LIFO reserve, as it said, at the end of the second quarter was 218 million and LIFO did what it's supposed to do and appeared of rising cost.

In the second quarter, it decreased our net earnings 12.3 million or $0.10 per share.

Versus last year, it increased to 2.6 million or $0.02 per share year-to-date.

So for the six months, it caused a decrease in earnings of 18.9 million or $0.16 per share.

Last year's six months was a decrease of of 11.5 million and $0.09 per share.

Some other statistics, depreciation for the quarter was 23.855 million.

That means year to date, it's 49.021 million, and I still stick by my prediction, we'll hit right at at $100 million in depreciation and amortization for the year.

I mentioned the buyout of the Polish shares, that cost 59.5 million, and was effective on March 2nd, so that for all intense and purposes you'll see 100% of these operational results flow through in the third quarter.

If you look at selling, general and administrative expenses for the three months, we were up almost $23 million.

$10 million of this, as it was stated in the press release, is directly related to our SAP implementation.

The next largest increase was about 7.3 million for salaries, which kind of cut across all the units, but in particular, we've had acquisitions in Mexico and in Australia and the Yonack acquisition here in the Dallas area that were not in last year's comparable numbers.

The third largest increase was bonuses, Z is having such a phenomenal year versus last year where they accrued nothing at all, so they're 1.6 million up from basically a zero number.

Interest expense, you saw it on the financial statements.

I anticipate about $9 million of an interest expense for the third quarter and our EBITDA to interest coverage is well over 15.

Current ratio is 2.1.

Our long-term debt to total cap is below 20%.

It's at 18%, and this from an operating leverage standpoint is too low.

We will be in the market this summer to raise debt.

Our Treasurer, Lou Federle will be sending out details to the banks shortly.

And therefore, let me quickly add that any bank that starts contacting me will be automatically disqualified.

All right, stockholders equity, value per share -- book value per share is $11.53.

The average shares that we used in the EPS calculation for the second quarter was 121,807,414 million, and for the year, for the six months, the calculation used 121,000 -- 121,422,373 million, but the actual shares outstanding because as you all know, there are dilutive provisions with our stock options which causes the effective numbers to rise , the actual shares outstanding are 118,880,424 million.

Capital expenditures in the second quarter was 48 million.

That means it's 75 year to date.

Tentatively, our budget is set at 240 million.

Historically, we have a pattern of not spending the entire budget.

I'll have a better feel for that as we get to the third quarter.

Okay, stock repurchases, we bought back 699, 500 shares, so not quite 700,000 shares, with an average purchase price of $25.37.

So 699, 500, average purchase price $25.37.

Thanks, Bill.

And also thanks for the clarification on line ball, it must be my Australian, New Zealand English, but when I wrote the outlook, I didn't have one should in there, I should have had should but the lawyers got to it, and the there's seven "shoulds" there.

So to me, seven is either a lucky or a heavenly number, so that's not a bad thing.

So anyway, on the outlook for the third quarter, we commented we believe we're aligned to be the strongest third quarter ever, and we've given a range of $0.70 to $0.80 per share including a LIFO expense of 25 million.

As I mentioned earlier, this global infrastructure story has really taken off in the markets of North Africa, the Middle East, North Europe, Central and Eastern Europe, Russia, China, many parts of Asia and India, and many of these countries got GDP growth rates of 5% to 10% a year, but there's still consumption and demand is double there.

In other words, it's 5% to 20% year on year.

So there's tremendous demand, particularly for construction steel products such as rebar.

I mentioned about the mild winter in many of the Northern Hemisphere countries and the settlement of the iron ore contract prices.

We saw the -- we saw scrap taking off as early as December.

If you look at shredded scrap here in the U.S, it went up $15 in December, $30 in January, $40 in February, $55 in March in round terms, that's a gross term, and obviously, there's a lag effect with rebar prices.

Rebar prices have followed with $15, this is a short-term February, $30 in March and there will be $55 per ton increase in April.

So the markets are strong.

The prices are moving up, and when you look at international markets, prices for rebar, in Russia, it will go back over $1,000 a ton coming into the spring and the summer months.

Poland we're already at $720 a ton.

Turkey, the prices there are at $630, and [FIB] and domestic are basically the same.

Now, these big price increases are obviously a sticker shock to many of our customers.

It's a little bit similar to 2004, but, quite frankly, they will have to get used to it, because that's the level of the prices and in our view, they've got somewhere to move during the spring months and into summer.

In terms of the level of rebar imports, last calendar-year 2006 the average was 215,000 tons of imports into the U.S.

of rebar.

It's well down on that, currently.

We believe we'll peak probably around 200,000 tons in April, but we believe the average for 2007 will be probably 150,000 tons.

So it's well down on 2006 figures.

And the main reasons were, the weak U.S.

dollar clearly helps, but the main reason is the very high prices in other overseas markets.

Countries like Turkey are a big exporter of rebar and more attracted to selling into Europe, into North Africa and to the Middle East rather than sending it here to the U.S.

Just during this third quarter that we've just ended, clearly, our U.S.

Steel Mills will benefit.

As Bill mentioned, we're really ramped up now.

We've got through the maintenance period.

They will benefit from higher shipments and the higher prices.

We're rolling as much rebar as we possibly can at the moment.

and copper tube mill, we'll have a pick up, both in shipments and better spreads during this period.

A lot of the customers or distributors, their destocking period is over.

Many of these customers only have four weeks supply, some even less, plus the air-conditioning/refrigeration tube demand is typically better this time of the year, in the spring months, than in the Winter.

Copper is interesting.

Everyone had thought copper was going to go away but China has come back very strongly after Chinese New Year and has driven the price up to around $3 a pound.

We think copper will probably try it in the range of $2.60 to $3.20 a pound probably on the high side over the coming few months.

The only segment that we see we'll be squeezed somewhat in the next three months or so is our fabrication segment, that's clearly because of the rapidly rising steel prices.

They can't pass on those increases fast enough to the customers so they will have some squeeze going forward.

Our Recycling segment clearly will benefit from record ferrous scrap prices and also very strong non-ferrous scrap prices.

At the same time, history tell us -- tells us that there will be a correction at some stage.

We don't believe we'll be like 2005 when ferrous scrap dropped $50 a ton both in May and June of that year, but there will be some correction.

When, we don't know, but clearly, when you're at record prices of $3.50, $3.60 for shredded, sooner or later, there will be some correction.

CMC Zawiercie in Poland, will have an exceptional quarter.

The construction market is booming in Central and Eastern Europe.

Germany, the next door market, are having the best construction season in eight years.

All those countries nearby are really very, very strong, so the timing as Bill mentioned was very good, early March we now have 99% of CMC Zawiercie, so we will benefit from those increased profits going forward.

Our Marketing and Distribution segment will also benefit from strong growth in most global markets and will have a solid Third Quarter.

Just about every area that we look at, Australia or Asia, Europe in particular, UK and Germany and the U.S, they're all very good.

So in summary, we anticipate a record third quarter.

Stan, have you any comments?

Thanks, Murray.

I just want to add a couple of things.

One is, I think it's clear, and I have to say, a lot of economists and some analysts have missed the fact that because of globalization and the tremendous growth of the emerging markets, they've simply misread, I think, the strength of the -- down line strength that we're seeing economically and particularly in steel and non-ferrous markets.

And we've said for long time, particularly barometers like copper, there can be specific events that can push up -- because of supply, could push up the price of copper, but you can't have copper at $3 in a weak economic global situation.

The other thing I just want to emphasize, as Murray and Bill point out, the lag effect in some of our segments from these rapidly rising prices in that our costs go up more rapidly than our realized selling prices, but ultimately we get the benefit and it reflects it in our earnings.

Thanks, Stan.

We'll now open up to any questions, any comments that you may have.

[OPERATOR INSTRUCTIONS]

We'll pause for just a moment to compile the Q & A roster.

And your first question will come from the line of Kuni Chen at Banc of America Securities.

Hi, good morning, folks.

Hi.

Good morning.

I'm surprised how well you did in Poland and obviously you're outlook remains good for the third quarter.

Can you just talk overall about how you expect the back half of the year to play out?

Is there any seasonal impact at all as you go into the second or into the third and fourth quarters or basically runs full out?

Well, typically, our third and fourth quarters are our strongest of the year and this year will be no exception.

Obviously, we only talk about the third quarter but just talking about Poland, I mean, everything is aligned for it to be extremely strong this third quarter and there's no reason why the fourth quarter shouldn't be strong as well.

Is there any kind of downtime that we should be thinking about on the rolling end of the mill as you spent some CapEx over there?

There is some downtime, but we're trying to minimize it.

Obviously, in such strong markets we don't want to put our mills down too long, but we'll put them down for necessary maintenance and get through that period.

Okay.

And a question for Bill.

Just on the SAP expenses, should that continue at fairly flat levels or does that ramp up and can you just talk about how long that continues?

Sure.

One would anticipate perhaps one more quarter at this run rate.

What's happening now is that as we scope the operations, we are looking at the functionality of SAP and deciding what to turn on, what to turn off, doing a lot of education.

So at this stage the Accounting Principles pretty much say everything has got to go to expense.

By May, if we stay on target and we certainly have been through the many months that we have been down this path, we will start actually customizing the software, making the -- not so much in the programming, but making the choices as you may know, SAP allows you a lot of flexibility, we'll narrow down the possibilities and once that begins to occur, those charges will be capitalized.

So there will be some expense even after May but it will probably cut down to perhaps 10% to 20% of what we've incurred right now.

I'll have a better feel for that at the end of the third quarter.

Okay.

And then just lastly on the joist and deck acquisition, can you talk about, kind of, what sort of utilization rates you're seeing with those assets and is there any opportunity to integrate them with the mills or are they already mill customers?

The actual, the business purpose for this acquisition clearly is the decking operation.

They have three deck manufacturers.

We don't manufacture deck right now and as I'm sure you know that when you bid joist work, you pretty much have got to deliver the deck with it.

We've been having to buy that out, and so we make a relatively modest profit margin on that.

So we would anticipate that our profit margins should double or perhaps even triple on the deck side once we integrate this with our existing joist operations.

I don't have the operating statistics of what they're doing right now.

All right, thanks.

I'll turn it over.

Your next question will come from the line of David MacGregor with Longbow Research.

Yes.

Good morning, gentlemen.

David, good morning.

It seems like we're in the middle of an awfully strong rebar market, and I'm just wondering to what extent you think this draws new capital into the category and what are your thoughts in terms of watching the horizon for additional capacity announcements?

I know that you are going to borrow this summer.

Maybe some of these announcements are your own.

Well, David, we have flexible mills where you can roll merchant bar and rebar on many of the mills, so you can utilize that capacity by rolling less merchant bar and more rebar.

In terms of actual new mills, Greenfield, obviously, we've made our announcement with the Micro Mill in Arizona.

We haven't seen any other announcements, but clearly overseas, in a lot of key international markets, there are a lot of new bar mills being built.

What is the freight rate today for bar coming off the Asian coast into the American West Coast?

From Malaysia, China, that area?

Yes.

Sure.

Is it $70 or is it $90?

Yes.

It ranges 60 -- $60 to $75 a ton, depending on the size of the shipment.

From China, for instance Shanghai to Houston, it's $75 a ton.

Let me just ask you for a second the Polish mill, now that you've got virtually 100%, I guess, what can you do there now that you were precluded from doing when you did not have this level of interest?

Operationally, we really weren't precluded from doing anything.

I might add that the Polish government were really rather good partners.

They supported us in all of our endeavors, but there are some things that we might have just talked about on our side that we didn't even bother to bring to the table because the Polish government had made its intentions clear for quite a period of time that they wanted out and they wanted out at a reasonable accommodative price.

I think now, you would -- whether they wanted to expand more in down stream fabrication, I have my doubts.

I think they wanted to monetize.

So I think we can be more aggressive now in downstream and more aggressive in the coordination between that and the mill, as just a single example.

We're at 26% shareholding and they did have certain blocking rights and they used it once when we were trying to finance the mill in the early days after acquiring CMC Zawiercie.

They didn't really understand the issue, but that really demonstrated to us that there could be some thorny issues in the future, so clearly it's much better to own it out right.

I'm just wondering if there are restructuring opportunities there that might have been politically awkward, now that they're removed from the situation, you're free and clear to pursue?

No.

We never had any concerns about that with them.

Okay.

And the last question, just your business is here, many of them with the exception of the fabrication business are doing awfully well.

Where do you deploy the incremental dollar at this point?

Well, Murray has made it clear, I think over the last six to nine months that we are going to target greater growth overseas than we're going to in the United States.

I mean, we love the United States and, obviously, with our decking operation in our Arizona Micro Mill, we're going to continue to invest here.

But as was seen by our offer of the Croatian mill and the fact that we continue to look at expanding in Australia and looking for the first capital project in China that we just haven't quite seemed to be able to find the right one yet, I think those are the markets more likely than not that -- the overseas markets, the markets outside of the United States where you'll more likely than not see a more bold move.

Great.

And how much borrowing power do you actually think in terms of looking at the borrowing summer?

How far are you willing to take the leverage on the balance sheet?

Have not decided that number yet.

Thanks very much.

The banks will suggest some to me.

To Lou, not to me.

You guys are doing a great job.

Keep it up.

Thanks, David.

Your next question will come from the line of Barry Vogel with Barry Vogel & Associates.

Hi.

Good morning, Barry.

Barry, you're third.

Do we want to talk to the guy that comes in third place?

Well, there's an expression about who wins the race?

Okay.

I have a question for the senior guy, Stan Rabin, who has been, you know, very, very correct in all his pronouncements about China over the last three or four years, and I was wondering, Stan, if you can give us your current reading given recent pronouncements and things that are going on in China, which we constantly see in the Wall Street Journal.

So if you can give us your current outlook for what's developing there and how you think it's going to continue to go?

Murray and I were just there again recently, Barry.

My sense is the they're saying -- the Chinese government is saying -- continues to say all the right things.

They need to step up some of their implementation though, and I think you'll -- it may even require a little more pressure from the outside now to -- for example, they need to move ahead on these export rebates so they immediate to take some action.

I think they're doing the right thing on the currency, they are letting that appreciate slowly and we don't see any evidence that they are going to do otherwise, but they do need to take some steps, specifically, on steel and some other products to reign in the imports of the lower value-added products -- I mean, exports of the lower value-added products.

But it's clear that their policy, though, is to just continue to develop their domestic demand and to ultimately deal with any overcapacity issues in that way, that they just, including in the -- we were in the inland areas again, they're trying to push up the development away from places like Shanghai, Beijing, Wan Jo, and that they're doing.

That they're doing.

They just have tremendous growth continues.

All right.

So you're saying the only thing that's bothering you now is that they aren't moving ahead aggressively on curbing export rebates?

Right.

They need, you know, they had taken some steps.

They need to take the rest of the steps on that.

Now, do they do that because they want to consolidate all the myriad of mills into larger entities?

That's related to that.

They want to consolidate their steel and other industries.

What does make China different, still, is there is still a tremendous percent of ownership of the State owned, when you look at steel, aluminum, copper, any of their industries, and will be in the foreseeable future, significant percentage of State ownership.

And so the State, Barry, provincial, or local governments even the so-called private steel mills are quasi private that they have linkage to government.

Now, how do you think they will extricate themselves from that?

What is your opinion on how they change that?

I don't know if they will change that in the near term.

Like I say, I think what they are most determined to do is build domestic demand.

Okay.

Murray, as far as your strategy going forward, obviously with your announcements of that brilliant coup for buying the minority interest of the Polish entity at the price you paid, I must admit it was just brilliant, and your attempt to go into Croatia and those acquisitions you've announced in Europe, that obviously overseas is definitely your emphasis.

Can you tell us where you are domestically as far as what would be the logical place to add further downstream operations which you've been consistently doing, and I have to commend you on that, because you are helping the consolidation there, but are there any -- could you conjure up building a Greenfield mill in the United States given where you're going today?

Well we have, obviously, the Micro Mill in Arizona and it's possible, but we look at underserved areas in the U.S., and there's not so many left, but we also look very close to the U.S., in fact, right next to our border, Mexico, we consider Mexico part of, obviously, North America, so that interests us.

We have a joist plan, as you know at Juarez there, we bought that two years ago from Can Am, so we've got an interest there.

You're right.

We'll continue to consolidate in the fabrication side, rebar, joist.

The mill side we will selectively look at areas, obviously, we'll judge how successful this Micro Mill is going to be and that's not just the U.S.

we'll look at that, we'll look at that concept in international markets also.

Okay and I have a couple questions for Bill.

You said that your net debt-to-capital ratio is 18% and you admitted that it's too low.

You obviously have your parameters that you set as a Company and of course that's always changeable, but basically, you're very disciplined in how you run your Company.

Can you give us some idea, all things being equal, what the outer limit, all things being equal, would be for net debt-to-capital ratio in the future?

I think once you start getting into the mid 40s, you need to have -- let me put it this way, you probably could go to 50 if you had a plan within a year, if the cash flow indicated you'd knock it back down into the mid 40s and then had a plan going from there.

So I don't think that anything in the 48, 49, 50 range we would want to sustain, but I think one might allow it to go up there knowing that you could knock it back down on a pretty quick basis.

But the thing that would probably knock it back -- make it go up dramatically from here, and correct me if I'm wrong, would be an incredible acquisition opportunity.

Or a series of opportunities, that's right.

Yes, because you wouldn't do it on capital spending because it takes time to do that and while you're doing that you'd be generating cash.

Correct.

Okay.

So the mid 40s is basically an outer limit, all things being equal?

Correct?

You're on the right track.

Okay.

And what made you step upped beyond $25 a share for your share purchase program?

You kept yelling at me.

Okay.

Thank you, very much.

I'm sorry I'm going to miss you guys in New York, but my partner is going to be there tomorrow.

Thank you.

Thanks, Barry.

[OPERATOR INSTRUCTIONS]

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

Hi, guys, can you hear me?

Hi, Sal.

Hi.

I just wanted to ask you a couple of questions on rebar.

The conference, SunTrust coming up in April, I think China is involved.

What do you guys think about that?

What are your thoughts?

You know, that's the update, Sal.

I think it's May-June period.

Our thoughts are that it will continue the way it is but you never know in these cases.

China's down there and they got 133% antidumping duty and we think, Stan alluded before, the pressure on China to do something about their exports are still, it's not just here in the U.S.

the Europeans complain, the Asians complain and I think there's a lot of pressure building on China to address that situation.

So obviously from our point of view, we hope to stay this quite remains.

Okay.

And also, on the demand side -- demand from -- most of the country's demand, we are getting right now was already there I think last summer, Russia was sort of for rebar was about $1,000 Turkish rebar.

Has anything changed?

I mean, has anything changed globally?

Do you think it's just the contribution of that and how long do you think this can last?

Well, we think it's just a continuing story.

We think many countries can last for many years.

Obviously there will be ups and downs.

I guess the greatest risk is probably, well apart from macrorisks like wars or terrorists activities is some financial risks and you must be aware, ten years ago we had the Asian crisis.

We saw what happened in the Shanghai Stock Exchange recently and going around the world, there's a lot of bubbles, in India, Vietnam, China, Russia in the Stock Market.

So things like that could slow development up, but basically, the underlying global infrastructure story is there and we think there for maybe the next 20 years in countries like China, Russia and Central and Eastern Europe, those countries have got many years of development ahead of them as well as in certain Middle East countries and North Africa.

So this is a long-term event.

Are you seeing any pushback on demand on people and corresponding projects in Eastern Europe where you sell a lot of rebar through your Polish mill?

Not yet, but clearly, it will come at some stages.

There is a limit to what people accept in terms of prices.

Here in the U.S, there's a few grumbles about the level of rebar prices, particularly the announcement by new core going up $55 a ton in April.

So no doubt there will be some projects will be delayed, but if prices keep moving, people still have to build.

Sal, keep in mind, of course, that bean prices have gone up dramatically and are substantially higher than rebar.

So in terms of competition from structural steel, certainly people who are going to use structural steel, I think, will still use it but it's not that there's a simple alternative.

If they want to go ahead with projects and that's what we're seeing and again in countries like, not just these Asian countries but Russia, there's just tremendous development going on, tremendous infrastructure and ,of course, Ukraine.

This is also keeping a lot of steel at home that they otherwise would have exported.

I'm actually at a conference in Chicago and here, I hear that all the steel from Ukraine and surrounding countries is being sucked up by Russia and a tremendous amount of demand over there of steel and plate and rebar and so forth.

Is it fair to say that most of the price increases in the global arena's demand in the U.S.

is a combination of cost pressure and demand hold?

And what was that last --

In the U.S.

It's like a cost going up and demand --

Yes.

Is most of the reason that?

Well, the rebar prices in the U.S.

now, Sal, as you know, are lower than what they are in Europe and we see that situation continuing, maybe through the Summer.

But clearly the market here, the non-residential construction market is still very good here.

but overseas is as we mentioned the spring and summer months are going to be extremely strong and we've got predictions up to $1,300 a ton in Moscow for rebar this coming summer.

Whether it reaches that level or not, time will tell, but that is the sort of levels in certain markets that you're looking at.

But there's also, Sal, a cost push overseas in the sense that Turkey, for example, they're paying what say $3.60, roughly, I think a metric for scrap, and that's not delivered, I mean it's higher than that delivered to wherever the Mills are located, and so it's that same impact on them in terms of, I mean it's not going to be selling rebar at $5.50 when they're paying that kind of price for scrap.

There's a lot of rolling mills have to buy in billet and billet price is well over $500 a ton.

There's also a tightness of pig iron for several reasons, and that's also, of course, put tremendous pressure on prime grades of scrap.

And lastly, Bill, in the last conference call, you mentioned that Marketing and Distribution may not have any LIFO, maybe a credit.

But I don't have the press release in front of me, but I think you had LIFO in Marketing and Distribution, didn't you?

I lied to you last quarter.

It reminds me of you remember that classic line by Bob Aram, the boxing promoter, he said, "Yesterday, I would lie to you.

Today I'm telling the truth."

I mean, my prediction was that it was going reverse but it didn't.

In fact they tacked on another 6 or 7 million.

The 25 million that we have discussed in the press release and I mean, look, when you're talking about LIFO, the only sure fire thing is I'm wrong so it's only a question of by how much.

But just to give you a feel for the way the factors are going, I think what will happen is that those who are more affected by the ferrous scrap prices so the mills and the fabricators may very well be at 35 million, and I will now boldly predict for the second quarter in a row that the Marketing and Distribution will reverse at least to the tune of about 10.

That's where the 25 comes from.

Got it.

And last question is, the demand in the U.S, how are you seeing in terms of on the non-residential side, I mean compared to general demand pick up in the seasonal pick up, are you seeing a better demand or is it slowing down?

Well, Sal, what we're seeing, and I guess it's best to look at the level of bidding work, it's very similar to this time last year.

The only areas where there's been some indirect effect is with housing, obviously when you put a new housing, the strip malls and shopping malls and all those sort of things follow.

So there's some slowdown there, and, obviously, the rebar that was going into the housing market say in Florida, they used some rebar, straight lengths and housing there, obviously, that slowed down from 12 months ago.

But apart from that, the public works, commercial is very good, obviously and there was oil and gas is very good.

Hospitals, schools, all that sort of work is still very good.

Okay.

Thank you very much, guys.

Okay, Sal.

[OPERATOR INSTRUCTIONS]

Your next question is a follow-up from the line of David MacGregor with Longbow Research.

Yes, guys, can you just talk a little bit more about the scrap market and the scrap business and are we seeing people hoarding scrap?

I know there's an export demand function, but I'm hearing more now about tightening domestic demand, and I'm just trying to get a sense of whether this is just mills ramping up production or whether we're seeing people hoarding material and just trying to dig a little bit and give us a feel for what's happening there.

David, on the ferrous scrap side, there's three major categories.

You've got the industrial scrap, which mainly comes from manufacturing, you've got the obsolete, which is end of life scrap, typically car bodies, household scrap, that type of thing, and then you have the demolition scrap.

On the prime scrap, the industrial type scrap, we think there's probably most certainly a limitation to the amount of scrap flow you can get from that and certainly with with the automotive industry being down and manufacturing somewhat, there's obviously strong demand supply pressures there.

On the obsolete scrap, we've seen the flows improve at these levels we've seen more tonnage become available.

I mean, we're not saying there's an unlimited supply of obsolete, but there's more out there and whether people have been ordering scrap or not that's hard to say, but I think people just collecting more of this obsolete scrap are making it available to our facilities and other people.

So there's definitely more obsolete flowing at the moment, and demolition scrap, well that obviously depends on buildings, etc, plants that have been knocked down.

Does that answer the question?

And your text question is also a follow-up from Sal Tharani with Goldman Sachs.

Murray, can you tell us what in your ferrous scrap, what percentage you're doing -[INAUDIBLE] and what percent is the others?

Oh, Bill, have you got that?

Oh, you stumped us.

I'll get back to you, Sal.

Let me ask another question then and you can get back to me on that, is that are you, there has been a tremendous number of -[INAUDIBLE] shares coming in and there has been a pressure on the unprocessed scrap in terms of buying and are are you seeing change in there?

Are you seeing or getting scrap into the yard much more difficult or you have to pay more, and these rising prices, we have $60, $70 increasing scrap prices.

Are the margins doing better or do you think you have to pay more now?

Well, the answer is yes, it's getting more difficult.

We can get the scrap.

We have to pay more, so the margins are less than what they used to be.

That's correct.

Is the absolute in dollar margin or is it a percentage margin you're talking about?

Well absolute and dollar margins instead of you were making for argument's sake $30 a ton on scrap that could be reduced to $20 a ton.

So you think that, the beneficiaries are the scrap collector?

Probably.

It's certainly not the operators.

Those people put in the new mega shredders, we can't understand them unless you put them at a steel mill, you're just putting pressure on people in the marketplace to pay more and ultimately the steel mills have to pay more.

Okay.

Great.

Thank you, very much.

And your next question will come from the line of Michelle Applebaum with MAR.

Hi.

Question for you.

Just remind me.

I know that scrap prices and steel prices correlate almost perfectly, and I know all the steel companies right now with scrap prices escalating are saying this is actually good for our business, we make money when scrap prices are rising.

To my recollection, the only time I recall a divergence more than a month or two was in the back half of '03, if I recall there was -- and that was only on sheet actually, and that was when ISG was restarting their sheet mills.

So can you just tell me, go back, you go back further than I do.

Has there ever been a period of time where you haven't been able within a month or two or three even to collect on the incremental charges in scrap?

Not to our knowledge, Michelle.

Okay.

Great.

I mean, in some cases, obviously, we're not the price leader on steel, New Core is, but sometimes our views might be different to theirs in terms of recovering it faster.

Okay.

So it would be a timing?

Yes.

Yes.

Within that three-month window?

Yes.

Cool.

Okay.

Great.

Thanks.

At this time, there are no questions.

Mr.

McClean, are there any closing remarks?

Well, I'd just like to say thank you for your attendance, and we look forward to a very strong third quarter, and we look forward to meeting people in Chicago, New York, Boston, and elsewhere.

Any comments, Bill?

No.

We're done.

We'll see you all.

This concludes today's Commercial Metals Company Second Quarter 2007 Earnings Conference Call.

You may all disconnect.