Commercial Metals Co (CMC) 2007 Q3 法說會逐字稿

Good morning; my name is LuAnn and I'll be your conference operator today.

At this time I'd like to welcome everyone to the Commercial Metals Company third-quarter 2007 earnings results 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).

I'll now turn the call over to Mr.

Murray McClean, President and CEO of Commercial Metals Company.

Sir, you may begin your conference.

Good morning and welcome to CMC's third-quarter 2007 conference call.

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

I'll start the conference with a few comments about the third quarter, then Bill will follow with further details and then I'll sum up about the outlook, particularly about the fourth quarter.

After that we'll open up the conference for any questions that you may have of Stan, Bill or myself.

The third quarter, what a terrific quarter.

I mean, a record.

We did forecast last quarter that the range would be $0.70 to $0.80 per share; at $0.82 a share we're certainly very pleased with the results.

The strong momentum that was building at the end of the second quarter of fiscal 2007 carried through into the third quarter.

In particular, global economic growth rates, global infrastructure and nonresidential construction activities were strong.

The U.S.

market for rebar was similar to last year.

Our merchant bar shipments were down, if you looked at the press release, mainly due to destocking at the service centers here in the U.S.

Ferrous scrap prices, as predicted, did correct in this case $50 a long ton both in April and May; however, since then have been relatively stable.

Rebar and merchant bar prices rose sharply on April 1st, around $55 a ton, and then dropped mid-April rebar by $15 and merchant bar by $25 a ton.

These followed the scrap price corrections.

Steel prices overall have been stable since this period.

International markets overall have been very good including the UK, Germany, Central and Eastern Europe, Asia and Australia.

Our rebar prices in Poland, which were the highest in Europe for a period, peaked in April around $830 a metric ton and then dropped to below $700 a metric ton by the end of May.

At this time in June they're around $670 a metric ton.

In Poland the high prices did attract a lot of imports in particular from Turkey, Germany and Latvia and there was a buildup of some inventory in Poland by the end of the quarter.

I'll now call upon Bill to add some further details.

Good morning.

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 and circumstances can change and not everything that we think will happen always happens.

In addition, we've given guidance regarding our outlook for the fourth quarter of fiscal 2007 in our press release subsequent to this call and in our meetings in New York.

We will not be commenting further and will not be under any obligation to update our outlook.

In accordance with Regulation G of the Securities and Exchange Commission you are 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 discussion today and in our investor visits.

You can go to our website at www.CMC.com for additional information.

But as you know, there may be other items that may be outside of our ability for discussion and if you would be patient if we defer comment.

As Murray said, it was a terrific performance for our company this quarter.

We just missed $100 million in earnings, but in context so did Sir Donald Bradman, the greatest batsman in cricket history who averaged 99.94 runs per at bat over his career.

I think the easiest way to describe the quarter would be to say that in 151 overs we scored 650 runs for five wickets.

Four of our divisions averaged 50 runs per batsman; this isn't certainly Sir Donald Bradman levels but still magnificent.

And only one of our divisions can be said to have taken a wicket, but even then it cannot be considered a golden duck.

Now there are probably some of you who don't follow cricket.

Suffice it to say that four of our operating segments achieved record third-quarter results.

This in spite of several flippers, that's, roughly translated, curve balls, thrown at us this quarter.

LIFO expense of almost $31 million pretax, SAP related investment expenses of $13.7 million, and cardiac arrest swings in ferrous pricing.

Now let me use my ubiquitous four answers to every question that's asked to highlight the quarter.

LIFO, we had price increases at our steel and copper tube mills as well as inventory increases at our mills and our fabricators.

And you know what happens, rising quantities and rising prices gives you LIFO expense.

Product mix -- merchant bar tonnage was down third quarter to third quarter.

Service centers continue to attempt to time the market, a goal from our mill's perspective that seems to elude them.

Weather, you know how much I hate to hide behind the weather, but I have to admit that Texas ended three years of drought with torrential rain over the last two months; Dallas itself has received 27 inches of rain so far this year, that's half again above normal.

This has really mucked up our shipments, but my lawn looks great.

China -- let's talk [topless] about China.

The anti dumping duties on rebar are coming up before the ITC on eight countries on July 10th.

China is clearly the poster child for this action.

Prevailing world pricing, freight rates and foreign exchange have moderated the import numbers for the U.S., but let's not kid ourselves, so has the 133% duty on the Chinese rebar.

We've spoken at length that we believe that China will ultimately come to grips with high cost imported raw materials and low value exported products.

The necessity to address scares resources like energy and the environment will certainly ultimately be the catalyst, but in the interim there's always the real possibility that without the duties Chinese producers in desperation will look to the U.S.

as the market of last resort.

This certainly has happened in other products and other countries with much less capacity than China, but just as much incentive and therefore we strongly believe that the duties need to stay in place.

As I mentioned, all of our operating segments increased sales this quarter over last year as well as year-to-date versus last year.

The same holds for operating profit.

This third quarter to last third quarter and year-to-date, save for our fabricating segment with a margin squeeze and we've talked about this for the last couple of quarters.

The margin squeeze due to higher prices is still prevalent.

I know some of you who do understand LIFO are probably a little bit tired of us reminding you about it; however, we have come to learn that on comparative purposes some people have neglected, they have forgotten or in some instances don't quite follow what LIFO is.

And so just to give you the stats for the quarter, the LIFO reserve at the end of the quarter, $249 million.

That means our inventory on our books versus a FIFO based per quarter is $249 million lower.

For the third quarter it decreased our net earnings $20 million or $0.16 per share.

Last third quarter it was $28.6 million or $0.23 a share.

Year-to-date, that's for the nine months, it decreased net earnings $39 million or $0.32 a share and a similar number $40 million or $0.33 per share last nine months.

So these are big numbers.

And we don't apologize for being on LIFO; we believe it's an appropriate inventory method.

And as you know, it takes out the inflationary aspects of profits on the way up.

Depreciation and amortization for the quarter was $26.8 million, so that means year-to-date we're at $75.9 million and I would expect $103 million depreciation for the entire fiscal year.

You'll note SG&A for the quarter up $32 million, $14 million of that is directly related to the investment that we are making into SAP.

A couple of other items -- our profit-sharing accruals which rise and fall without the entire corporation, they are also up as well as travel and entertainment -- mainly travel, not the entertainment -- due to a lot of projects.

You know that we're putting in a wire rod block in Poland, we've looked at a Croatian mill, we're strongly underway in Arizona and there are other opportunities we're not at liberty to discuss, but anyway, we have been spanning the globe.

Year-to-date that SG&A number is up $84 million of which $24 million is the SAP expenses.

The rest of the explanations are similar to the third quarter and that is profit-sharing and T&E.

Interest expense, you saw on the financial statements $9.6 million, I would expect a similar amount for the fourth quarter.

Not to worry about though, our EBITDA to interest coverage is well over 18.

Balance sheet still looking good, probably too good.

We'll talk about that in just a second.

Current ratio is 1.8, long-term debt to cap ratio is 17%.

Long-term debt to total cap and short-term debt is 27.

We are under leveraged -- we've talked about this in prior quarters.

We will be going out for and the expectation would be between $350 million and $400 million public bond offering very likely this summer.

We'll wait and see how the 10-year bond -- you all have been following that.

You know that it's taken a spike up and it's fallen back about 15 basis points.

We'll go when it's time to go and we're certainly not going to speculate on interest rates, but I think there's a little bit more falling back to come.

Finally, book value per share $12.39, the average shares diluted for the quarter was 121,956,000 for the year-to-date calculations for earnings per share, that makes the diluted 121,600,000.

The actual number of shares outstanding was 119,510,000.

We spent $47 million in CapEx this quarter not including acquisitions.

Year-to-date that's $122 million.

Our current budget for the year -- and, yes, I know we're going to have to hustle in the fourth quarter -- we anticipate $220 million of spending, some of that is committed and we certainly believe that we will reach there, but the fourth quarter will be a relatively large quarter for capital expenditures.

We did not repurchase any stock this quarter.

Murray?

Thanks, Bill.

The outlook for the fourth quarter, we're forecasting our strongest ever forth quarter with a range of $0.85 to $0.95 per share.

In the U.S.

the nonresidential construction market should remain strong both public works, highways and commercial and industrial work.

The only area of weakness is residential, high rise in certain markets such as Florida, but at the end of the day there's a limited amount of rebar that goes into these markets.

And we as a company have no exposure to the automotive industry and actually very little to the residential industry or markets.

The international market should remain very good.

There is some seasonal slowdown in construction at this time of the year.

Asia with its monsoons and Europe, the Europeans like to take holidays over July and August.

Australia could be a little slower, particularly in manufacturing, although the mining states of Western Australia and Queensland are still very strong.

Asia in general is absorbing the impact of the export taxes on steel exports from China.

Prices are actually rising some in Asia, China itself is -- the domestic prices are actually dropping because of the impact of these steel export taxes.

But overall demand in Asia should remain very good.

Rebar imports to the U.S., we forecast a range of around 200,000 tons per month for June and July and then dropping back quite sharply from August onwards to 150,000 tons or maybe even less.

Even merchant bar products will drop even -- at a greater rate than that.

Ferrous scrap prices are likely to remain relatively stable with some upside possibly later in the quarter.

We're looking for Turkey to probably increase its scrap purchases the next couple of months and in particular if service centers start increasing their buying on the domestic mills, the domestic mills in turn will require more scrap.

So that could push scrap prices higher, as I mentioned, towards the end of the quarter.

Rebar and merchant bar prices we believe will be relatively stable at high levels.

The destocking I mentioned earlier of rebar in Poland should ease by the end of July/August period.

And overall we believe Poland should have a very good quarter, not as good as the third quarter, but the construction industry there is still very strong.

So in summary we're poised to finish fiscal 2007 on a very strong note.

And with that I'll open up the conference to any questions for Stan, Bill or myself.

(OPERATOR INSTRUCTIONS).

Michael Gambardella, JPMorgan.

Good morning, guys.

I'm a little confused; I just want to get something straight.

In the quarter you guys batted 350, right?

There are no wickets or anything, right?

Right.

Just kidding.

I wanted to ask you about SG&A for the fourth quarter.

What do you expect to see in SG&A?

Because obviously you had a big kind of unusually high SG&A, some to the SAP issue, some other issues involved there that may be kind of extraordinary issues.

But what do you see for SG&A for the fourth quarter?

I would think, Mike, that it will drop.

The SAP expenses will probably be cut by roughly two-thirds because we're going to now quarter-to-quarter because we're now in that phase where we'll end up capitalizing the overwhelming majority of amounts.

I believe that we have pretty much gotten caught up year-to-date -- I won't say that there was a hell of a lot of catch up, but these bonus calculations are always -- you always want to square up year-to-date and we had a strong quarter.

Obviously we had a little bit stronger quarter than even we had anticipated, and so our accruals until May were probably a little behind.

I suppose you should always be on record as over accruing bonus expense, but we were just -- and do it based upon the anticipation.

So one would guess that it will be lower by, who knows, $5 million or so at least.

It will be lower by $8 million just by the SAP expenses by itself.

And in terms of nonresidential construction demand, you're still seeing that as being very strong?

Yes, we are, Mike.

I mean, the level of bidding work is really similar to last year.

As we mentioned, the rain delays here in Texas have certainly held up some projects at the level of bidding work actually in some areas like joists has picked up, it's actually better than this time last year.

But overall, particularly rebar we watch closely, as you know, it's pretty similar.

And then the phenomenon that we saw in the marketplace in terms of the surge in scrap prices in the first quarter triggering customers to probably over buy anticipating higher -- prices to keep on going up.

And then the pullback in the second quarter.

Have you seen that pretty much run its course now?

We have, but obviously the service centers with merchant bar are still destocking to some extent.

But at some stage they'll have to increase their buying.

And we think with a relatively stable price environment, we know July prices are the same as June, it's only a matter of time before they increase their buying.

So we would say, yes.

Okay, last question.

What's the progress on the mini rebar mill that you're planning?

Good progress there.

We're at the permitting stage.

The main permit is the air permit which we should get by the end of this calendar year and then we'll start construction in January of next year.

And we're still on, if all goes to plan to commission it the mill will have commissioning by May of 2009.

Okay, great.

Maybe next time keep it to a baseball vernacular instead of cricket.

Who was the last guy to hit 400?

It was the only 99.9 number I could find, Mike.

All right.

Thanks, Bill.

Barry Vogel, Barry Vogel & Associates.

Good morning, gentlemen.

I guess the phone lines aren't as fast in North Carolina, you're number two this time.

Gambardella is a pretty sharp guy.

All right, Stan Rabin, here we are in a situation where you've set up your structure to be domestic mills Eastern Europe, which has been phenomenally successful, you've got the fabrication, you've got the recycling and of course you have marketing and trading.

You're loaded with cash generation.

You're going to raise money at a very low rate probably, as Bill had said in the introduction.

Strategically, given the consolidations that are happening and given what your current structure is, where are you today looking forward in terms of strategy?

Well, I'd also like Murray and Bill to reply.

Let me say we continue to look at -- given pricing of certain assets we continue to look at greenfields as well as acquisitions.

And as we've indicated and have done, a number of those opportunities are outside of the United States.

But we also of course continue to grow in the U.S.

market.

So I don't think anything has particularly changed there other than -- and I think in some specific cases greenfield has proved to be more interesting than acquisitions.

Murray?

Barry, we look to use that cash wisely and with discipline.

We're not going for any big bang.

But you can see our track record even over the last few months, the investments that we made, Poland with the wire rod block there, with the micro mill in Arizona, with the Bouras acquisition with joist and deck here in the northeast of the U.S.

We're looking also in Australia, we're looking in Mexico, we're looking in other parts of the world.

So we'll continue to do that and invest wisely across all our segments.

We think for us that's the right strategy at this point in time.

Just one other comment, Barry.

Historically we built the Company to withstand difficult times.

That was always an underlying factor in our strategy.

And to do quite well, as we have in the good times.

But I think this quarter demonstrated anew the benefits of the diversification, geographic as well as the different related businesses that we're in.

So that certainly is a driving factor.

Now you mentioned the word greenfields.

I guess you consider the mini rebar mill a greenfield?

Yes.

But beyond that, because we haven't seen any other greenfields for all intents and purposes --?

Well, we've got smaller ones you won't see like rebar fabrication jobs, etc., that we're looking at some larger ones.

We can't make any announcements at this stage, but we are looking at some larger ones.

Are you looking at greenfields for steel manufacturing, steel production?

Yes, not necessarily in the U.S.

Okay, so you're still basically leaning towards greenfields or new plants non U.S.

just like you have been moving towards in the last couple years?

Correct.

Although it's always an analysis.

When all is said and done it's a cost benefit analysis and I think the point you're driving at is have acquisition prices reached a point where trying to acquire somebody is so outrageous that you're better off doing greenfield?

I think we certainly see that case in certain markets and in others, obviously predominantly foreign, we don't see that.

So I don't want to mislead you that we're in our green mode right now.

We certainly will look at acquisitions as well.

All right, now the only weak link out of your five segments, which you have noted, is fabrication.

And we know the fabrication business is very strong.

So would we see more of the same in the fourth quarter because you only reported a paltry $11 million?

But Barry, we expect the fourth quarter to be much better.

When you look at it, the margin squeeze will ease some with the stable steel pricing and the shipments should be better as well.

This is the peak of the construction season.

So we're fairly optimistic, fairly confident that the fourth quarter will be much better for those guys.

Because you earned $31 million in fabrication in the first quarter.

You're right.

So is it possible or is it totally impossible to get to a $20 million to $30 million number in the fourth quarter for fabrication?

I've learned in life that nothing is impossible, but we don't really give out that level of detail, Barry.

I'll go back in the line and I'm sorry I can't see you guys tomorrow.

We need a special trip out to the Carolinas.

That's what you've got to do.

I'll have to arrange it.

Duke has a facility; we'll have to arrange some kind of a program with you included.

Well, since my son is an alumnus of Duke, I always have a nostalgic reason to go there.

Bob Richards, Penzar Research.

Good morning.

Thanks for taking my call.

LIFO -- I appreciate your forecast of flat to maybe up scrap pricing.

Is it reasonable to expect a lesser LIFO charge quarter-over-quarter and do you have that part of your forecast for the fourth quarter?

I'm glad you asked that question if for no other reason than I can now say that on the press release we have gone -- and this is fairly new so it's not as if the trend has been going on for a long time.

Last quarter and this quarter is the first time that we put our LIFO estimate in and we're anticipating pretax expense of $10 million in the estimate we make for the fourth quarter.

Okay, thank you very much.

Another question on the ASAP implementation.

What should we expect -- any bottom-line effects on that?

What kind of drove that implementation?

What are you expecting to get out of that?

What you want -- what we had end of life issues.

We had the need to -- we're a very large corporation, we're very spread out geographically.

We had an opportunity here that we needed to evolve our systems one way or the other.

And the question became is this an opportunity to become even a greater corporation and use ERP systems to our greatest advantage?

And we did a lot of homework on this because there are among people a lot smarter than I am different opinions on it.

And our people spent the better part of a year doing the homework and said that, yes, this is -- we ought to go to a single instance.

There are only two -- look, I'm not a shield for the ERP industry, but when it's all said and done there are only two Tier 1 systems, that's SAP and Oracle.

We looked at both.

Actually we have Oracle right now and we're going to migrate to SAP.

The payback on this -- it's not unlike the business cases you make for an Arizona micro mill or a wire rod block in, Poland.

You put the numbers down and you see what the return is.

There was of course a certain necessity, we needed to change and so there was a compelling argument to move with or without a return.

But even on a conservative basis it would say that the payback on this over a five or six year period, because this is not a big bang implementation, it's going to take us a few years, would be in the order of 20% plus.

And I have personally vetted those numbers over and over and over.

Obviously this project has the attention at the highest levels of the Board and we believe these numbers are fairly solid.

And they revolve around obvious things like being able to lower your inventories because you now have visibility across all locations and folks don't have to keep safety stocks at all 200 locations that we have to the ability to lower processing costs because you have centers of excellence across the Corporation.

So we think the benefits would be huge even without such a payback having the Corporation on single instance the ability to roll it out to new acquisitions on a timely basis.

And I know this sounds like a long plug for SAP and that's not my intention, but this project is a very large project.

I do not want to -- and you've seen the expenses that have flowed through here.

We have put some of our best and brightest -- not all of our best and brightest because some of us were left behind hopefully, but -- on this and there are a lot of people that are looking forward to the first roll out and the first go live will come up January of 2008.

I appreciate that detail.

But the big bang for your buck is the inventory reductions, wouldn't it be?

That is the largest, but that is a single instance.

Your point is very well taken.

That is the single largest individual one-off.

The others, when you can reduce processing costs, those become an annuity in savings if you follow what I'm saying.

Yes.

Okay, thanks for that detail.

I appreciate it.

Sanil Daptardar, Sentinel Asset Management.

Just first a housekeeping question on the tax rate.

What have you built in the fourth-quarter assumptions?

And in the third quarter is there any kind of tax benefit?

34% and yes and no.

The benefit is because on a weighted average basis Poland made up a greater proportion of the earnings and with its 19% effective tax rate it drove it down.

Okay.

The second question is on the proceeds -- on the bond offering where are the proceeds going to be used?

Is it going to be the acquisitions or anything else that you have in mind or could you just expand on that or elaborate on this?

I think we're going to leave that open.

It will be every purpose known to mankind whether it's acquisitions, other refinancings and other corporate purposes.

We're not ready to say right now.

That really is the subject of the registration statement.

Okay.

Murray said in the presentation that in Poland there had been some kind of inventory building at the end of the quarter.

So do we expect lower shipments in Poland in the fourth quarter and then probably lower prices and also a consequent drop in the margins in the fourth quarter?

Yes, on rebar there are reasonably high levels of imported rebar, so that has to go through the system.

But the merchant bar market is pretty good, we're still getting good prices.

But overall yes, the prices will be lower than the third quarter and rebar shipments will be lower.

But it could turn around late July/August period because the market conditions there are still very good.

Have you got any outlook on the metal margins?

Metal margins -- well, scrap prices are dropping.

Margins should be -- will probably be lower because, as I mentioned, the rebar peaked at $830 and now it's roundabout $670 and scrap hasn't certainly dropped at that level.

But you'd expect margins to be lower.

Last conference call you commented on the (inaudible) construction activity.

Have you seen any kinds of changes from last quarter to this quarter, any kind of weakness, slowdown or it's still continuing at the same pace?

In Central and Eastern Europe?

In Middle East countries.

The Middle East, North Africa is still very good.

I mean there was a surge, as you know.

The construction season started very early this calendar year, it started January, normally it starts in earnest around March.

So prices did peak around that April period and have come off, but they're still at high levels.

But the demand in those countries is still very good.

Okay, great.

Thank you.

Sal Tharani, Goldman Sachs.

Good morning, guys.

A couple of quick questions.

The Chinese exports tax bill is expected to impact the exports out of China at least in the near-term.

Do you see any reason that your marketing and distribution will be impacted in terms of volume from there?

Some, but many Asian buyers, particularly the rerollers sell -- they've got really no alternative but to buy from China.

Because CIS, the traditional source for many years, has basically dried up to that part of the world.

So we've seen an increase in Asian prices as a result.

But the volumes, the activity of our Asian marketing officers are still very good, so we think pretty minimal impact.

You guys obviously bring (inaudible) out of China, is that what you do?

We do, but also a lot of finished goods also.

But (inaudible) we sell are mainly obviously into the inter-Asian or nearby Asian countries from China, places like Vietnam.

Okay.

Can you give us some color on Croatian mill, what stage it is in, what do you expect over the next couple of years?

There really is some color now that you have mentioned it.

I'll just tell you what the press release has said.

The Croatian privatization fund was the agency I believe it owns, but at any rate it is the one that controls the privatization process.

If you have been reading Croatian news clips over the last week you'll realize that last Saturday -- I'm not certain it was the entire members of the Board, but most of the members of the Croatian privatization fund were arrested for alleged bribery -- not that it had anything to do with commercial metals.

Let me clear the air on deals that happened over the last couple of years.

We think we still have a lot of momentum going on the deal.

The only question is who it is that we will now close the deal with.

There's no question that we're the preferred acquirer.

We were right to the end; all the business points have been resolved.

It was just a question of getting some what we think were perfunctory approvals.

Right now we don't know the process to get those approvals, but we're confident that if not in the short run at least in the medium-term we'll still get it.

Is that a mill which is running at full steam or is there room to grow in there?

Oh, I'm sorry.

No, right now it's running at about 20% of capacity.

It has very severe working capital problems such that -- and I oversimplified just to make the point that if the customers don't prefund the raw materials they're not able to run.

Okay.

Also, what is the total cost of your ERP system?

(multiple speakers) the P&L?

We only disclose the P&L amounts and the amount we capitalize.

It's one of those moving targets, Sal, that I'm really not comfortable giving out.

But we should expect a declining trend over the next few quarters?

No doubt about it.

You're going to see the expense go down to relative insignificance because we're going to get into the stage where, according to the SOP that's out on the accounting for software implementation, all of it's going to be capitalized.

And lastly, would you like to comment on the (inaudible) a slowdown in (inaudible) or is there something that you have noticed in any pockets?

I'm so tired of talking about Nucor's press release I should get a stipend or a commission about it.

No, I don't have anything else to say about it.

Okay, great.

Thank you very much.

Leo Larkin, Standard & Poor's.

Good morning.

Could you give us CapEx for 2008 and DD&A for 2008 if it's available or just some general guidance?

I will in a little bit.

We are right now -- and I don't mean to be coy, but literally we are right now in that process of putting together next year's business plans.

We'll talk about that on August 1st, as a matter-of-fact internally.

So I couldn't even guess.

I don't no, Leo, right now.

We're still developing the number.

Okay, thanks.

Mark Parr, KeyBanc Capital Markets.

Thanks a lot.

Good morning.

I was wondering if you could give us a little more color on the scrap market and the outlook.

Looking at -- I know you're talking overall for your outlook for the fourth quarter, but could you give us a sense of what the U.S.

market looks like relative to the European market?

Well, on ferrous scrap the U.S.

market is -- traditionally the prices are lower here.

If you can take into consideration the currency then the European market -- I mean I think the information we provide on Poland compared with the U.S.

prices say on (inaudible), Polish prices are normally in U.S.

dollars $30 to $40 a ton higher.

So we still have the best or the lowest ferrous scrap prices basically in the world here in the U.S.

And the U.S.

is still a very strong exporter of ferrous scrap to the tune of 10 to 12 million tons a year.

Okay.

Do you see that traditional spread changing any in the fourth quarter?

Not really.

We think prices here are relatively stable.

We think the European prices are probably also stable at this point in time.

So we don't see much movement in the next two or three months.

(multiple speakers) I appreciate that.

Thank you very much.

(multiple speakers) but no $50 a ton drops or increases.

Okay, terrific.

I really appreciate the color.

Thank you very much.

Michael Willemse, CIBC World Markets.

Good morning, guys.

A couple questions.

Sorry I got on a little late if you were already asked -- actually one of the recent questions on the nonres construction cycle.

I know you used to give kind of a baseball analogy on the nonres construction in the U.S.

I guess what inning would you say we're at in the U.S.

nonres construction cycle?

Cricket or American baseball.

I only know American baseball.

Stan, you're the baseball guy.

I'm cricket today.

I would say the sixth inning and we've been in the sixth inning for a long time.

Do you think 2008 would be a flat year for real construction spending on a real basis or do you think we could see growth in 2008 again?

Right now it looks like it would be relatively flat because of some of the indirect effect of the drop-off in residential construction.

But the public spending remains extremely vibrant with no indication of any let up in that area.

I'd say more of the uncertainties are areas like office buildings, hotels -- the outlook is good.

They're not frothy markets by any means.

Mike, the level of bidding work, that's our best gauge and we're halfway through this calendar year.

It's similar to last year.

A lot of those jobs are going to 2008.

So we would say pretty similar and it's obviously a healthy growth rate but it's pretty similar to what it will be this year.

It's an election year, those are usually good years because people don't want to be perceived as (multiple speakers)

And the state budgets overall are in quite good shape.

So as far as the ability to come up with the necessary matching funding, that's been there.

We don't see that changing.

Okay.

And comparatively in Europe and Poland, I guess what inning do you think we're at in Poland?

I think we're at the first inning.

It's early, it's -- the best years are ahead of it in terms of construction.

In Poland, Mike, they've got in 2012, changing sports, I'm a rugby follower, but this is actually soccer, have the European soccer cup in 2012 in Warsaw.

This is huge.

This is number three after the Olympic games.

So there will be a lot of projects -- stadiums, hotels, all sorts of things -- and that's over on top of all the infrastructure spending that's going on in Poland.

So the next few years should be pretty healthy in Poland.

And the construction is spread out, at least what statistics we've seen we're going to put these stadiums are spread out throughout the entire country.

Okay, great.

Thanks, guys.

Kuni Chen, Banc of America Securities.

It's actually Chris Brown with Kuni Chen's team.

Good morning.

The Polish results were strong again this quarter.

Do you see the European (technical difficulty) market increasing pricing going forward?

Not at this stage, Chris.

We think there's a pause over some of it that could increase again in the fall time, autumn time.

Okay.

And are there any additional opportunities to take advantage of the Russian rebar market?

We tried, but there are people in between us and the actual end-user that tend to make the bigger margin, so we haven't been successful.

And when you do complete the second acquisition, how quickly can you ramp up production?

And what are some of the other milestones you hope to accomplish over the next six to 12 months?

In Croatia we can -- obviously Bill mentioned the working capital situation.

We can change that overnight but they do need some essential capital expenditure, some projects there and those will take longer, one or two years.

But we can make a difference in the next few months, but this is a turnaround.

We don't expect anything out of the first 12 months but into the second year hopefully things are starting to turn around nicely there.

We've heard recently that some construction projects, at least domestically, have been postponed due to high raw material costs including steel.

I just wanted to see if you've heard anything out of your fabrication group and whether you see this as a possible trend going forward?

No, I mean there was talk about that or a discussion about that a few months ago.

But we haven't seen any evidence of it.

In fact, in some cases in places like Florida which you'd expect to be pretty weak because of the residential market, some of those projects are coming back like some of the condo buildings there.

So no, in commercial work, public work we don't see anything.

It's probably a case, Chris, and I don't mean to be overly flippant -- people are just going to have to accept that we're at a new level and it's not just steel.

Cement, all construction materials are more expensive now than they were and I think people just have to rebid and prebudget.

But it's not like prices have jumped the last two, three months.

In fact with the decrease in scrap causing decreases in -- I mean it's just that that would have made actually more sense about three or four months ago than today.

Great, thank you.

Sam [Westoff], Paradigm Capital.

I just have a quick question about the recent bid for the second Croatian mill.

Are we going to see similar issues that we are seeing with the one we already have?

We were unsuccessful with the split, the second Croatian mill but we have heard indirectly that that may come up for tender or may come up to be reviewed again because the so-called successful bidder has issues with the government.

So that is possible that that may come up again.

Okay, I missed the fact that we didn't get that.

No, we didn't.

Okay, great.

(OPERATOR INSTRUCTIONS) Barry Vogel.

Stanley, on the metal margins, according to my numbers you had a metal margin of 349 in the first quarter, 326 in the second-quarter and 308 in the third quarter.

If my numbers are correct they peaked out in the first quarter.

What do you think is happening with metal margins and do you think the peak has been reached and that you may see a subsiding in metal margins?

Speaking on Stanley's behalf, your stats are absolutely accurate as always, Barry.

But what you have here is you certainly have a mix, a product mix, and I know that is usually one of my blow off answers but I mentioned in my opening comments that you do have with a falloff in the service centers -- the merchant products carry higher margins than our rebar does and it can significantly affect the margins.

We would anticipate that margins probably have some upward bias.

In other words, if we shift, which we did, proportionately less merchant bar, that will typically have the effect of making the average metal margin lower than it otherwise would have been.

Okay.

And on the Nicholas Bouras acquisition, Bill, they probably were not in the quarter, am I correct?

They were there for about a month or so.

Were they accretive in that month and will they be accretive in the fourth quarter?

They shipped about 19,000 tons altogether.

They were certainly a positive cash flow, made probably a little bit of operating profit.

But who know how you had startup expenses, takeover expenses, what have you, and those kind of ate up whatever we had in that first month.

The answer to your question is, yes, we'd expect it to be positive from here on out.

And where are they going to be, in fabrication?

Yes, that's where they are.

Exactly.

Thank you very much.

There are no further questions at this time.

I'll now turn the call back over to Mr.

McClean for any closing remarks.

Thanks very much, everyone.

As I mentioned, we had a terrific third quarter and we're in very good shape to have a very, very good fourth quarter.

And who knows, we may break Sir Donald's average and go over the ton, that's 100 -- I'm talking about the share price now.

We may hit to $1.

But anyway, we're saying $0.85 to $0.95, it should be a great fourth quarter.

So thank you again.

Thank you for participating in today's conference call.

You may now disconnect.