Commercial Metals Co (CMC) 2007 Q4 法說會逐字稿

Hello, and welcome to today's Commercial Metals Company fourth quarter and year-end 2007 earnings conference call.

I would like to remind all participants that during the course of this conference call we will make statements that provide information other than historical information, and will include projections concerning the Company's future prospects, revenues, expenses, or profits.

These statements are considered forward-looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, and are subject to risks and uncertainties that could cause actual results to differ materially from these projections.

These statements reflect our beliefs based on current conditions, but are subject to certain risks and uncertainties that are detailed in our press release and public filings.

Your host for today's call is Mr.

Murray McClean, President and Chief Executive Officer of Commercial Metals Company.

Mr.

McClean, please begin your call.

Good morning, and welcome to CMC's fourth 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 fourth quarter, and then Bill will follow with further details.

I'll then comment about the outlook.

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

Beginning with the fourth quarter 2007, this was our second-best quarter ever, with $104.7 million in net earnings.

We previously gave a range of $0.85 to $0.95 cents per share and came in at $0.86 per diluted share.

The momentum from the third quarter carried through to the fourth quarter.

Global economic growth rates and in particular global infrastructure and non-residential construction activities were strong.

The U.S.

non-residential construction market overall was strong; however, there was some softness in areas related to residential construction.

Our U.S.

steel shipments were down on what we had anticipated, due to a combination of weather, service centers destocking, and some softer markets -- for example, the truck-trailer industry.

Now, the ferrous scrap markets, as we predicted, were relatively stable over the summer months.

Non-ferrous scrap prices, however, continued to be very volatile, and with the Chinese customs clamp-down on imports, this certainly impacted shipments and margins during the fourth quarter.

Our rebar and merchant bar prices were relatively stable.

There was some discounting due to large volume buyers during this period.

The stability in steel prices was good for our U.S.

fabrication segment, as they were able to improve margins during the fourth quarter.

Our U.S.

rebar imports, as predicted earlier, did fall significantly by August.

This trend should continue, and we'll talk about that later.

Internationally, overall, the markets were good, with some seasonal slowdown due to the European summer holiday period, and also the rainy season in Asia.

Many markets in Europe, including Poland, overbought in the early part of calendar 2007, when prices were increasing rapidly.

This resulted in excessive imports, particularly from countries like Turkey, with rebar and wire rod, and China, with wire rod into Europe.

And as a result, prices dropped sharply in the fourth quarter.

I'll now ask Bill to comment.

Thanks, Murray.

Actually, the old boy stole half my speech by giving you all the Safe Harbor worries at the front, but let me just add to what he said, that there is some guidance in our press release about the first quarter, and once we finish our investor meetings, we're not going to feel as if we need to update that or be under any obligation to update that.

Also, very quickly in a concise way, regulation G may constrain some aspects of our conversation today, and if we get outside of what we can talk about, you may have to be patient with us if we defer comment.

Other than that, you can look into the 10-K that has just been filed and our press release, and enjoy the Safe Harbor statement that's in there.

All right, given the market's reaction to our release, I think now would be a good time to remind everybody that we're not a subprime lender, and we're not even an affiliate of Merrill Lynch.

Our fourth quarter was in line with our estimates.

The first quarter projections -- now let's focus on that -- the first quarter projections compare to the fourth quarter, so sequentially, and for the first quarter of last year, are down because of expected profitability in Poland, okay?

That's in Poland, not due to concerns in the domestic market, okay, where conditions are still very favorable.

Poland suffers, and that probably isn't the best word to use, but it suffers from a red-hot currency and has over the summer had imports flooding in.

We expect it to be profitable, but not at the levels seen earlier this calendar year.

But even then, these conditions will work their way through, and just as quickly, as they had a strong market in March, April, May of this year, and then a weaker one.

It can certainly come back, so I think if there is concern when you look at the forward look, I would not be overly worried about what's happening here domestically, and although we are giving a little bit of a concern about Poland, we have seen this as you have tracked Poland over the quarters we've owned it sine December of '03, you know things that can move rather dramatically up and down there.

So overall, we're still very confident.

A couple of items to note.

We expensed 9.4 million of costs associated with our global investment in SAP during the fourth quarter.

That was lower than the 13.7 million we expensed in the third quarter, so I got that right, but it was still higher than I had predicted.

Conversely, as I'm sure somebody will point out in this call, I had predicted 10 million in LIFO expense for the fourth quarter, and that turned out to be income of 8.8 million.

This was driven by an overall effort to control working capital, but in particular obviously inventories, and you can see the overall positive effect in our cash flow statement.

In particular, our recycling segment drove their inventories down to only seven days outstanding.

I mean, that's world-class.

Really a magnificent effort.

The only other thing I'd comment is that the only thing that went south more than the volumes of their inventory was Notre Dame's football season.

Oh, the quarterly tax rate of 26.6%, you might ask hey, is there some one-off, non-recurring credit or some item buried in there?

The answer is no.

That's just a simple mathematical result of having a higher proportion of earnings from Poland, because it has a 20% tax rate.

So any time Poland makes up, you know, more than its fair share of earnings, the overall tax rate's going to be lower.

And when it doesn't, as we would not expect for the first quarter, I think you'd expect the rate to go up to more like 35% or 36% for the first quarter, because Poland's not going to be quite as represented.

Now if you look at the detailed numbers, sales were up for the fourth quarter, led by marketing and distribution at our fabricators.

In marketing and distribution it's a very strong global steel markets.

In fabricators, it would be due more to acquisitions.

Not organic growth but rather M&A activity.

And for the year, I will continue to highlight that Poland just had a phenomenal year, and it drove, on a percentage basis, the highest increase in sales.

Cash flows were excellent for the fourth quarter.

I have noted the inventory reductions.

You'll note in the cash flow statement that that was 139 million in the fourth quarter alone.

The LIFO reserve, 241 million, as we said at August 31st.

The LIFO effect, it increased net earnings.

I've mentioned that.

It increased net earnings 5.7 million or $0.05 a share in the fourth quarter, and last year's fourth quarter was an expense of 10.5 million or $0.09 a share.

Year to date, though, it did decrease net earnings 33.3 million, $0.27 per share, and last year, it decreased earnings 50.6 million, or $0.41 per share.

Gross margin is fairly consistent in the fourth quarter, and actually, there's a powerful indication of just how strong the current market is.

Steel metal margins are at record levels.

Domestic steel imports are all but gone, and even copper tube, which is our closest tie to the residential markets, showed $1.55 metal spread in the fourth quarter.

Now, $1.55, considering that break even sits around $0.50 and anything above $1.00 would have been considered historically a good metal margin, I mean, that's really encouraging both that the pricing is good, but more so that they have switched their product mix to more higher-value products and are trying to lower, and successfully so, their exposure just to the straight residential commodity water-tubing.

Depreciation amortization, 31.4 million during the fourth quarter.

That made it 107 million for the year.

Because of acquisitions, I would anticipate that there'd be 112 million looking forward to fiscal year 2008.

SG&A for the fourth quarter up 22 million.

About half of that is directly related to our SAP journey.

Other areas that predominantly grew with our increase in mergers and acquisition activities were salaries and rent expense.

Year to date, SG&A went up 106 million, of which a third of that is directly related to SAP.

Other areas, again because of growth in acquisitions, salaries, rent, bonuses, were up for two reasons.

One, CMC (inaudible) Poland had such an extraordinary year their bonus expense is up, and we just have a higher head count.

Because of our $400 million bond offering in July, it raised our average long-term debt rate to 6.29%.

I would anticipate interest expense to be about 12 million for the first quarter of fiscal 2008 and our EBITDA to interest coverage was over 17 times for the quarter.

Balance sheet's in terrific shape.

Current ratio, 2.3; even after the 400 million offering in July, our debt-to-cap ratio is at 30.9%.

Book value, $13.06 a share.

You saw from the press release the average diluted shares for the fourth quarter were 121, 925, 891, to be exact.

Year to date, the diluted shares were 121, 681, 730, and the actual shares (inaudible) lower because of the dilutive effect of the stock options and other equity programs.

The actual shares that are outstanding are 118, 566, 381.

Let's see, let's talk about CapEx for a second.

In fiscal 2008, the budget for investments is around 494 million.

I would, though, kind of give that a bit of an explanation and break it out into four parts.

One, what one might term maintenance and upgrading CapEx, normal CapEx, about 206 million, of which the largest components, a reheat furnace in Alabama, improvements to our South Carolina melt shop, and relocating two or three existing facilities.

The second component would be about 76 million for our SAP roll-out.

The third would be our Arizona micro-mill and the wire rod block, and the flexible rolling mill.

We're putting those last two, we're putting them into Poland.

That's about 116 million.

And then acquisitions are about 96, of which 64 is Croatia, which closed in September.

So I wouldn't necessarily look at the capital expenditure budget as 494, I think you kind of break it out into its component parts.

Finally, our stock repurchases for the fourth quarter were 1,417,475, with an average price of 29.22.

That means year to date, we ended up with 2,116,975 at 27.95.

That leaves a remaining authorization of 1,224,785.

I would mention that the board has never allowed management to be without an authorization, so I wouldn't be particularly concerned about that relatively low level.

We are allowed back in the market in two days.

I would also comment that in the fourth quarter, due to our internal blackout prohibitions, it prevented us from being more aggressive buying than we otherwise would like.

In conclusion, hey, we look forward to seeing many of you in the days ahead.

I would be remiss if I didn't tell you that in rugby land, they say that England met France in the first semifinal, South Africa met Argentina in the other semifinal, and Australia met New Zealand at the airport.

So we'll see you at the airport, and I will close with the longstanding phrase of (inaudible).

Thanks, Bill.

I'll talk (inaudible) that is.

It's not the (inaudible).

I'll talk about the outlook for the first quarter, fiscal 2008.

We're forecasting a good first quarter with a range of $0.55 to $0.65 per share.

As you recall, last year's first quarter was a record at $0.71 per share, and as Bill mentioned earlier, we see the main reason for this is a weaker performance by Poland.

Talk about that a little bit later, in this first quarter.

In the U.S., the non-residential construction should remain strong, in particular public works, which accounts for over 50% of non-residential construction.

In the U.S., steel prices here are amongst the lowest in the world, which is a positive.

This, plus a weak dollar and high bulk freight rates has put a brake on steel imports.

In fact, rebar imports are now down to a run rate of 100,000 tons per month during August and September, and in October, it looks like we'll be well under 100,000 tons.

So that's a positive thing, in terms of where imports are.

So we anticipate shipments in the U.S., both rebar and merchant bar products, to increase.

Rebar (inaudible) the rebar fabricators who will buy more from domestic mills as imports decline, and the service centers are likely to gradually increase their buying over time.

Ferrous scrap prices are like to remain reasonably stable at relatively high levels, based on strong overseas demand.

We're seeing increasing tonnage of ferrous scrap being exported in containers.

We're quite active as a Company ourselves in this area.

Internationally, the market should remain healthy overall.

In Poland, as Bill mentioned, the strong zloty makes exports very difficult at this point in time, and imports from countries such as Germany are squeezing margins.

But we think this is a short-term phenomena, and within one or two quarters this will turn around and Poland will be strong again, because the underlying demand is strong there.

As mentioned earlier, iron ore contract prices for 2008 are likely to increase.

Our forecast is 20% to 30%, and this will certainly put up with pressure on ferrous scrap prices, which will flow through to higher steel prices in calendar 2008.

China's action on curbing steel exports is likely to continue, with even higher export taxes on many steel products.

2007 is likely to be the peak year for Chinese exports, at around 60 million tons, and 2008 should see a significant decline in exports.

Currently, they're at the run rate of about three million tons a month, so that means may be 40 million tons or less in 2008.

At CMC, we continue to focus on safety.

Our mill at Birmingham in Alabama was judged the safest in North America, and our steel operations in Brisbane, Australia, was judged the safest site in Australia recently.

Many of our other sites have also received awards, so safety is very important for our Company.

In summary, we're focused on growing our diversified business, both in the U.S.

and globally.

With that, I'll now open up the conference for any questions (inaudible) Stan or myself.

We will now begin the question and answer session.

(Operator instructions.)

Your first question comes from the line of Kuni Chen with Banc of America.

How are you doing?

Hey, Kuni.

Morning.

Good.

I guess just first off, a question on Poland.

Obviously, the market's going through a bit of inventory destocking over there.

Are there any statistics that you can share with us, as far as kind of where you see inventories in Poland right now, and kind of what gives you confidence that that sort of gets back to equilibrium in one to two quarters?

Well, Kuni, inventories are coming down pretty rapidly.

If you look at the information provided by [Europe], Turkey alone, not just Poland, but to the European countries, exported over 700,000 tons in the second quarter, that's calendar of this year, and that's about 350,000 tons more than they did the previous year.

So there's a huge surge in imports.

If you recall earlier this calendar year, prices roses rapidly starting in January, so countries like Poland (inaudible) a lot of imports from Turkey, and some other countries.

But those imports are coming down pretty rapidly.

The more immediate concern is the strong zloty against the euro with, say, some imports from Germany.

And we think this situation will be here for a quarter or two, but come early calendar 2008, it should correct itself.

Okay, fair enough.

And then just a quick question on recycling.

I guess how much farther are you willing to backward-integrate at this point?

Obviously, consolidation in this space is well under way, and if you could just kind of put that in perspective with your comments on shredder overcapacity.

Well, I think that we are complimented by the fact that some of the competitors continue to emulate our own integrated model.

I would say, though, that we believe that at this stage, that recycling is a strategic more so than just a plain economical bet.

We will expand in those areas that will support our mills.

I think for instance you've got to put Arizona at least on the radar screen.

We'll allow the local scrap dealers there to take first shot at it, and if we have good relationships, as we do with our other mills in the United States, we won't feel constrained to make a movement.

But if we feel that there's a competitive disadvantage, we will move in that area.

Same way with mills -- we could use, perhaps, some more flow-through surrounding Alabama.

Your point about the shredder mania is pretty much for us concentrated in the Gulf coast, and even Houston, if you wanted to get a pinpoint on it.

And it is constraining margins in that part of the world.

There's no doubt about it.

But overall, we've been long (inaudible) ferrous scrap for a number of years, so strategically, we've been positioned well in advance of all of this.

The same thing is true for us in copper scrap for the copper tube mill.

Okay, thanks, guys, I'll turn it over.

Your next question comes from the line of Bob Richard with Longbow Research.

Good morning, guys, and thanks for taking my call.

Good morning.

Morning, Bob.

Hey, domestically, record metal margins, but the lowest operating margin in about the last eight quarters.

Is that all driven by the maintenance spend?

Probably less that than -- the maintenance spend and I think the down time is more in reaction to the fact that I think people just took a pause in starting in late July and August to ask themselves just how bad is this subprime, residential -- I mean, we just saw a bit of a hiccup as people were trying to assess what was all the collateral damage.

And subsequent to I think people reading the tea leaves, looking at backlogs, and work that's coming out, I think things have picked up and I think I would attribute the results all to volume.

I mean, you can't attribute it to price and margins, because they're at all-time records.

So I think it clearly was a hesitancy to find out what will the reaction be in our markets, and remember, we're fairly removed from residential.

I mean, the only way that it has a marginal impact on us or those structures that would otherwise not have been built to support a residential neighborhood.

That might be the local shopping center or perhaps some streets or what have you, but much more than that, we really haven't seen it.

And I appreciate all that, Bill, but I guess my point was your operating margin was the lowest in about the last quarters, but I'm talking operating margin itself against these record metal (inaudible) --

Did you take the LIFO effect into account?

Well, that -- I hear you there, but that should be a credit this quarter, right?

No, that's mainly for recycling.

I think if you go to our investor presentation, there's a little bit more information on that, broken out by segment.

Okay.

Okay, guys, thanks for taking my question.

All righty.

Your next question comes from the line of Michael (inaudible), J.P.

Morgan.

Hi, it's Mike Gambardella.

Good morning.

Hi, Mike.

Yes, we recognized it.

All right.

I have a question on in terms of your guidance, what are you assuming for SAP expenses and SG&A in Q1?

Yes, I think it's probably going to be around that 10 million, plus or minus, that we had in the first quarter.

And why --

I'm sorry, the fourth quarter.

And will SG&A go down without the Polish bonuses and things, or is that going to be about flat, too?

They will.

We are going to react on those items -- profit sharing, bonus -- that run with profitability.

They will come down, you bet.

Okay, and just last question, in terms of your comments, I think, Murray, on the rebar pricing, you mentioned that rebar pricing in the quarter was relatively flat, although there were volume discounts by different producers.

Given the fact that you saw import supply coming down, is that just a function of the demand hesitation you're seeing?

It is, Mike, but I think you'll see those discounts will disappear pretty quickly.

The information we've got, there's only 70,000 tons of rebar at the port of Houston, and that peaked about 250,000 to 300,000 tons.

And that's going at the rate of about 7,000 tons a week, so we're seeing even our own rebar fabricators are buying more from our own mill, so I think you'll see the discounts will disappear in the next couple of months, so that, in terms, the trend for prices will increase.

And lastly, where are you on the micro-mill?

Actually, good progress being made.

We still anticipate that ground will be broken in either early January or February.

It will come on stream May of 2009.

Okay, thanks a lot, Bill.

Your next question comes from the line of Brian Yu with Citigroup.

Thanks, guys.

Can you comment on how your order entry rates have progressed since the end of this reported quarter, and where do your mill lead times stand now for the major products?

I think the input has been good.

As I look at the backlog statistics from a pricing standpoint, Brian, they're as high or higher than they were last year at this time.

The volumes are just fractionally lower.

That's, of course, compared to kind of all-time record levels.

So I think the input is, you know, fairly stable at a relatively high level.

Certainly, I'm not going to characterize it as all-time highs, but I think we're very encouraged by the amount of work that's still coming out.

Okay, so order entry rates, maybe a little bit weaker year-on-year, but sequentially, would you say it's much better?

Yes, it's probably a little bit better.

In fact, unlike the normal pattern that one should expect, which is the fourth quarter being our highest volume ship, and then it drops off in the first, I think there's every reason to believe that the first quarter will equal or perhaps even exceed the fourth quarter.

That's another reflection on your question.

And where are mill lead times now for the various products?

Rebar, merchant?

Have they stretched out over the past month or so?

Well, the area that's disappointing has been the service centers.

As you know, for many of these steel products, they're at the lowest levels for the last two years.

So, you know, we view, with not just rebar but any steel products, the imports declining rapidly.

We would imagine that the service centers will need to start buying, or increase their buying, shortly.

And certainly, with all indications for calendar 2008 for steel price increases internationally, it's only a matter of time that their prices will move also in this market.

The domestic mills combined are running at about 90% of capacity, and that's a good level.

It's not the peak that we've had, but it's a quite good level.

Okay, and then just one last question.

In your outlook commentary, you mentioned that you expect the second quarter to be slower.

Is this in reference to earnings being sequentially down versus your guidance for Q1?

No, I think it's just a question of seasonal patterns.

We haven't put out a number for the second, it's just that we are assuming -- who knows, but we're assuming that Poland has one of its usual winters, unlike the Indian summer they had for, well, for a winter, for Poland.

So we're just going based upon historical, and not putting a number on it right now.

Okay, thank you.

Uh-huh.

Your next question comes from the line of Brian Luster with the Abernathy.

Good morning, gentlemen.

Are you all short-scrapped in Poland, and is that the major reason for the metal margin contraction?

We are -- we process about a third to not quite -- yes, we're about 35% to 38% self-sufficient in scrap in Poland.

I don't know that that is a particular reflection on the metal margin.

I think it has to do more with the supply and demand, and the fact that the supply was way too much.

I think it's much more the average selling price coming down than it is the scrap price being affected.

But we will, over time, increase our own self-sufficiency for scrap in Poland.

What's your target rate, in terms of how much scrap you want to supply to the mill?

Well, when they are at their 35% to 40%, we'd certainly want to get over 50%, probably 70% would be idea.

Should we expect that in the next year or two, or is that further out?

I would say two to three years.

Okay.

And you stated earlier that you expect the Poland mills -- I guess you all call them your adjusted operating margins -- to continue to fall for another one or two quarters.

Just looking at your last couple of quarters, it looks like they fell 70% sequentially here.

How much further can they really go?

I mean, are we talking another 70%, another 50%?

Where do you all see this over the next two quarters?

Actually, you may have kind of misread what -- I think we weren't so much talking about margins, it was a question of operating profit.

So we are expecting the operating profit to certainly not be as strong in the first quarter as it was in the first quarter of last year; perhaps the second quarter as well.

Because last year's second quarter, we certainly hope it could be repeatable, but a lot of things kind of went our way.

So we're talking adjusted operating profit and again, we haven't put anything out there for the second.

Okay.

Just for clarification, it sounded like the currency was the issue there?

Do you all have reason to believe that the currency is going to change over the next two quarters?

Is that what's happening?

Well, it's a combination.

The currency is what has brought on the flood of imports, okay?

We don't expect the currency to get any worse, but we don't expect it to get any better.

The point would be that a lot of this Turkish imported material is no longer coming in, that the supply is taking care of itself.

But the zloty, we're not so nave as to believe that it's going back to four, where it was the day we bought this mill.

It's currently floating in the 250 to 255 range, so I think the most reasonable thing is to assume that it's going to stay strong and react from there, which is to say that we need to concentrate on the domestic market, and those markets that don't necessarily, and in Europe that's tough, but not necessarily tied to the zloty, Czech, Slovak.

But the euro zone is -- I mean the size of the U.S.

dollar, the PLN has been strong against the euro, as well.

What adjusts, you have to understand, are the markets themselves, and Poland went from being what was probably second-strongest in the world for rebar, at one point converted back to dollars, to prices that are significantly lower than what that level was.

But of course, just like the U.S.

market adjusted, then there's much less incentive to try and -- for mills to export to Poland.

So it's the markets that correct and take care of that.

Yes, I mean, the Polish zloty in September strengthened 2% against the euro.

I mean, that is a concern short-term, but longer-term, clearly Poland will be in the euro zone maybe in two years' time.

So that'll start to go away.

All right, thank you, gentlemen.

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

Hi, Murray, how are you?

Fine, Aldo.

Fine, thank you.

I had kind of a qualitative question on how you're seeing the overall, non-residential construction markets now.

There's a few pieces of evidence out there that suggests there's some slowing in that market, as well, not just in residential.

I'm wondering if you could tell us a little bit about how you see your backlogs in fabrication, and maybe how you see the overall rebar market going forward, say, six months or nine months?

Yes, I mean, our backlogs are pretty similar to what they were a few months ago, Aldo.

Obviously we have problems with shipments with the wet summers.

Put that to one side.

But I mean there is some softness, clearly, in the areas related to commercial, which is indirectly related to housing, such as the slowdown in the box retailer expansion chain stores, etc.

And obviously with housing, when you (inaudible) new housing in the States, there's a lot of local roads and infrastructure that goes with it.

So there's some slowdown in those areas, but overall, those segments look pretty strong, certainly where we operate.

There's some, clearly, that were spoken about before in Florida, the condo-building, and those areas which do use rebar have clearly slowed up.

But by and large, we would think non-residential.

The growth is certainly down slightly on last year, but 2008, from what we see, should be fairly similar.

In terms of the marketing and distribution, in terms of China, if you see them exporting a lot less going forward, does that negatively impact your overall business in that marketing and distribution area?

And also, a question related to that, too, is is part of the near-term slowdown specifically because of the low imports into the U.S.

that you wouldn't be seeing?

Well, just the first question, Aldo, we see it becoming more regional.

I mean, the Chinese will still export, but it'll be more regional.

They'll still export quite a lot into the Asian area.

As you know, we've got quite a big presence there, so we look and see that positively.

We clearly see less Chinese exports coming to the U.S., which on our steel import side, that is a negative, but on the other side, it's a positive for our mills.

And there'll be less Chinese exports going to Europe, as well, so, I mean, it's probably more of a positive than a negative for us there, because it'll clearly help Poland and some of our other activities.

So it swings around about, but clearly, China, in our view, is peaked, and it'll decline in terms of its exports.

And certainly with the iron ore price increases predicted, the current high freight rates, it's just becoming more and more difficult for the Chinese to export and, you know, it's probably 50-50 whether or not they'll increase their export taxes.

But chances are, they will increase those further, particularly on commodity-style steel products.

Great.

And then Murray, the last question, on the scrap market, as you see it, I mean, some people were saying they see higher, some see lower, I think you see flat.

That's not really my question.

My question is going over the next couple of years, as you see the iron ore price rise and some of your other scrap processing players in the U.S.

market get consolidated, I'm wondering, number one, how do you see yourself remaining independent in three to five years?

Or do you see yourself as part of a bigger entity, and I wonder if you could just say whether you've had any discussions recently about that issue.

Aldo, Aldo.

What you really want to know is will Goldman Sachs lead it if it happens.

Come on, that's what you're asking.

We clearly can't answer the second part, but the first one, Aldo, yes, we see scrap, like iron ore, becoming a more valuable commodity as time goes on, and certainly a lot of these emerging countries who were being exporters of scrap, like Russia and Ukraine, will be consuming more at home, domestically, so that means less for international export markets.

Here in the U.S., we're still the lowest scrap generators in the world, and that's likely to continue for some time.

But when you see dynamics with freight being the way it is, and we can and many others can export scrap in containers to markets, I mean, the markets, not just China, but all these markets in Asia, emerging markets like Vietnam and clearly India and others, they've got an enormous appetite for scrap.

So in our view, it's just going to become more and more valuable as time goes by, so it's a very good situation, to be long on scrap.

Great.

So you don't see those mills that are not long in scrap increasing their urgency to become long.

I mean, when you look at the consolidation that's just happened, if you take yourselves, OmniSource, and Metal Management, you're talking in the neighborhood of 13, 14 million tons out of a market of, what, 55 or 60 that's essentially just changed hands.

I'm just wondering if you see this as a major sea change in the scrap market, or do you think the -- I mean, is the scrap market going to be very different going forward than it has been?

We'd say long-term, yes, we would think there'll be more consolidation as time goes by.

Aldo, a big uncertainty are these tremendously high freight rates.

Historically high, because as Murray said, what led to this phenomenon of shipping ferrous scrap in containers, which is still, let's say, not a huge proportion of the scrap being exported, but it could well increase significantly, certainly based on current boat freight rate.

But we don't know -- that will have some effect, I'm saying not on the scrap generated, but on the flow of scrap over the next several years, depending what these ocean freight rates do.

Yes.

Well, Stan, you should be congratulated on your foresight over the last 20 years of seeing the benefits of the vertical integration.

Well, it's been our highest cost all along, so.

All right, thank you, I'll pass it on.

Thanks, Aldo.

Your next question comes from the line of Michael Willemse with CBIC.

Thank you.

Just going back to the imports into the U.S., if you were to look at your sales from your marketing and distribution segment, say, you know, 3.4 billion, how much of that sales would you say would be derived from imports into the U.S.?

You're talking steel imports?

Yes.

At the peak or at the run rate now?

Maybe both, at the peak end, at the run rate now.

At the peak, you're probably in the order of 500 to 600 million, and at the run rate now we'd be less than half of that.

Okay.

And there's certain products that are imported because they're not produced in North America or there's a big shortage.

Like that distribution segment, it imports a lot of tubular products.

Is there any products, carbon steel products, that are imported that there's a shortage in the U.S.?

Well, it depends when you say a shortage, Michael, because clearly, even like rebar, there's always been imports of rebar depending on the local demand.

So I can't think of any other areas, can you, Stan?

I can't.

Okay.

But tubular is a pretty decent size of the imports there into the U.S., correct?

It's a reasonable proportion, yes.

Okay, okay.

And then the other question I had was on the comment on too much shredding capacity in North America.

That was the first time that I'd seen that.

Did something happen over the last few months that resulted in too much shredding capacity, or has this been something for a while, but it just happened -- the impact didn't really hit until the last quarter?

Well, we'll be talking about it for maybe two years, but it's fair to say the impact is more in the last few months.

Because many particularly private scrap companies, as they made a lot of cash in the last two or three years, have reinvested, and many have reinvested into shredders, and we just think in certain areas, there's way too much capacity.

And what happens, obviously, people compete to buy the shreddables, and then you have the margin squeeze.

Okay, so this is something you're waiting for competitors to exit before the margins improve there?

Yes, either that or more consolidation.

Right.

Okay, okay.

And then just one more time to go over Poland.

The sense that I'm getting is the construction activity in Poland is still very good.

We just had inventories increase to I guess unsustainable levels over the last -- in the early part of the year when demand was good and currency, you know, similar to the inventory problems that happened in the U.S.

in the later part of calendar 2006.

So it's a situation of the service centers that need to reduce their inventories.

No, that's correct.

I mean, for argument's sake, if Poland has a mild winter -- we're not saying it will be mild, because chances are it'll be cold and tough like it normally is, but if it was mild like it was last winter, Poland and that part of the world could turn around very quickly.

Because we know their inventory levels are running down, and the buyers -- the prices will turn pretty quickly, and the market will turn.

So we're basically predicting a tough winter, and then any market (inaudible) won't be till probably around March of next year.

And how much market share does Commercial Metals have in the fabrication-distribution business in Poland right now, would you say?

It's fairly small, it would be -- what is it, Bill, 15%?

Yes, 10% to 15%.

It's still, the statistics aren't particularly accurate.

I mean, we're just going on some published data about, you know, we include our East German fab shop in that because it can supply the western Polish market.

Yes, we've got another fab shop, Michael, will be built in Warsaw in the springtime of next year, it'll be operating.

I mean we'd like to be around I guess 30% plus market share.

And we'll be building towards that.

Okay.

And how would you evaluate some of the current fabricators now?

Are they quite a few years behind the level, I don't know, of sophistication in North America, or would you say your competitors are pretty decent in fabrication over there?

Well, most of them are behind on rebar fabrication.

Antiquated equipment; some are just add-ons to service centers, etc.

We think over time they'll become more sophisticated, and certainly the equipment we put in is as good as you find anywhere.

On the mesh side, it's a little bit different.

There are two or three good producers of mesh in Poland who use wire rod.

We're looking closely at that area, as well, maybe more in terms of an acquisition that the rebar fabrication side is fairly unsophisticated, apart from our two shops.

Okay, thank you.

Your next question comes from the line of with Sal (inaudible) with Goldman Sachs.

Morning, guys.

Hey, good morning, Sal.

Morning, Sal.

Couple of quick questions.

You mentioned container shipments of scrap.

Are you guys participating in that?

We are, Sal, yes.

So you are actually exporting some scrap.

A few thousand tons a month.

Okay.

Yes, that's ferrous.

That's ferrous, yes.

And we've been exporting non-ferrous in containers for a long time, but yes, this ferrous is a fairly new deal.

Is it because of the containers you can do that?

Well the two things -- the availability of containers and the container shippers want to reposition their containers to get them back to Asia, so they offer very attractive rates.

The other issue is loading of the containers.

You need special equipment to load the containers, so those are the two main issues.

But the demand is certainly there, and the freight differential now between containers and bulk shipping is substantial, so this is likely to continue for some time.

What is the difference, do you know, by any chance?

Depends where you're shipping to, but it can be as high as $50 a ton.

That's the differential between the two.

Right.

Okay.

And have you made some investment in the equipment to load containers, or did you have it already?

We're making some, and we have some equipment already, but we're making investment in additional equipment.

Okay.

The other thing is the recent change in the political structure in Poland, does it benefit anything to you or to the economy in Poland overall?

Well, we think it's a good thing with the twins -- particularly one being ousted.

I mean, even in Poland there were a lot of jokes about him, but this new government is positive, all pro-business, so time will tell, but it should be good.

They also have a more commanding majority than the old party had, so they don't have to align themselves with all of the kind of political flakes and end up having no agenda whatsoever because you're having to pander to every extreme.

So that's pretty encouraging.

I think they're going to link up with one -- I don't know if it's the (inaudible) party or something, but they only need one constituent party in order to be able to have the majority to rule.

Okay, and lastly, can you give us some idea of what the price differential on rebar is between the U.S., Europe, and Asia right now?

Rebar prices?

You want to answer that, Bill?

Go ahead, I don't want to steal your thunder.

Okay.

Well, rebar prices here in the U.S.

are probably around the 570, 580 mark.

Okay.

That's a short-term.

In Poland, it's about 580 a metric ton.

And where else did you want, Sal?

Asia.

Asia is, what, 560 a metric ton?

Roughly.

Yes.

What is Turkey shipping at right now?

Turkey, we heard they quoted -- we think their offer might have been withdrawn at 595 cmf metric ton to Houston.

But most of their offers are around about 620 metric tons, cmf, but no one's buying at the moment.

What is the freight rate on -- is it $100 a ton from Turkey?

It's about $90 a ton from Turkey.

(Inaudible.)

We heard as low as 70, but we don't quite believe it.

But most shippers are talking about 90.

Thank you very much.

Your next question comes from the line of Chris Olin with Cleveland Research.

Hi.

Hi, Chris.

I just want to dig down a little bit deeper in terms of your commercial construction outlook.

I'm wondering if -- you talked about Florida.

Can you get a little more detailed in terms of what you're seeing regionally, or by geography?

I'm just wondering if maybe you're in a little bit better position in the south and maybe that explains some of your bullishness in terms of demand?

In Florida, Chris?

Anywhere.

Oh.

Well, in Florida, clearly that market's really been impacted, you know, by the housing slump and the condo slump, because rebar's actually used with masonry brick over there in housing, and obviously in condo building.

So that has really slowed up.

In other markets, in terms of housing, except in California, there's some rebar used, but elsewhere, we don't see much impact.

But rebar in general, the demand is good.

You know, when you look everywhere from the public works, schools, and housing through to commercial work in energy, a whole host of different industries, it's still good.

So you're still seeing some pretty good order trends in the Midwest?

I guess that's the area I was most concerned about.

Yes, we're more -- (inaudible) in the Midwest, more in the south and the Gulf states right through to California.

We don't really -- we're not strong up in the Midwest at all.

Okay.

And secondly, I just want to get a little bit more info on the trading business, the marketing business.

To the extent that you see some weakness related to reduced imports coming into North America, is there an opportunity for you to bring increased raw material into China?

Don't you have some exposure there?

Well, we're very big with raw materials.

We do sell some into China, we do sell iron ore and some other products to China.

We're also big buyers out of China of raw materials, ferroalloys and others.

So yes, I mean, that business is still going very strongly for us.

That's good.

Shouldn't that business improve, then, with more scrap and raw materials coming in and offset kind of the issues with the North America market?

Yes, we handle them in two different divisions.

The North America steel import business, as you rightly said, is well down and will be down for the next few months, but we also use that division, we're doing some steel exports because of the weak U.S.

dollar, so we utilize them there.

So while they're losing on one hand, they're gaining a little bit on the other hand.

Fair enough, thank you.

Your next question comes from the line of Charles Bradford with Bradford Research.

Good morning, or maybe it's almost afternoon.

Hi, Chuck.

Hi.

Couple questions.

First of all, what is it costing you these days to ship product from Asia to the U.S., or vice versa?

Finished product per ton.

Okay.

Well, it's costing us, from Asia, I mean, as a general rule, about $110 to $130 a ton.

So that's up quite a bit.

It's up a lot.

It's double what it was a few months ago.

Okay, what are you seeing on the domestic market side in things like highway construction?

We all heard about the bridge in Minneapolis and there've been bridge problems elsewhere.

Are you seeing any pick-up in highway construction activity?

I mean, in terms of highway where we are, bear in mind we're in the south, I mean, our backlogs for highway work are the strongest they've ever been, and that seems to be picking up pace.

So the market sentiment, you only need one or two more bridge collapses and I think politically there'll be a lot more focus on infrastructure spending.

So that's a positive for us.

And only one bridge collapse is --

Right, and Chuck, Canada just also had a tragedy, and they're going to increase their infrastructure spending.

But it's amazing how fast people forgot about the bridge collapse in Connecticut a few years ago.

Yes.

On the cost side, what are you seeing as far as electrodes and refractories?

Especially the early discussions for next year, anything much you can tell us about?

We have already tied down our requirements for next year, and depending upon size, Chuck, the increases are going to be between 16% and 18%.

And I know it varies by furnace but about how many pounds do you use per ton of steel, on average?

I'd have to dig that up for you.

I don't have that.

Okay, well, I'll see you at breakfast tomorrow, but thank you very much.

Thanks.

Okay, I got a homework assignment, I hear you.

Your next question comes from the line of [Ted Bates], 150 LLC.

Hi, guys, how are you?

Hey, Ted.

Good, Ted.

Yes, I just have two quick questions, the first being roughly, what percentage of your guys sales is related to this piggybacking of residential building?

Do you guys have a rough estimate what that would be?

Piggybacking -- what do you mean by piggybacking?

You're saying, well, if a housing development is built, well, then, you need infrastructure, new office buildings, and whatnot to support that.

Do you have an estimate on sales that are related to that type of activity?

No, but it's relatively modest.

Besides our copper tube mill, I don't even hear internal discussions about that sort of thing, mainly because we are so focused, and our strength is in infrastructure work on public works and others that it really has never been --

Okay, and this is the reason I ask, because I just saw the word residential I think more times in this press release than any other, and I was just wondering if there's been a change in that.

I'm just trying to get a sense of the magnitude -- is there any slowdown.

Could you repeat that?

You were saying new core, or?

No, no, our.

Our?

Yes.

You know, Ted, I've got to tell you that the reason why you're seeing it more is people expected to see the word in there more because they wanted to know the answer to the question, you know, how has subprime and residential construction affected you?

So really, it's more trying to anticipate what the inquiries were than the fact that it's a significant part of our business.

Okay, and just to quantify it, it's less than 10%, is that safe to say?

That would be pretty accurate, yes.

Oh, yes.

Okay, guys, thank you very much.

Okay, Ted.

Your next question comes from the line of Bob Richard with Longbow Research.

Thanks, guys, my questions have been answered.

Thanks very much, and best of luck.

Thanks, Bob.

(OPERATOR INSTRUCTIONS) We will now go to the line of Michelle Applebaum with MAR.

Hi.

Thank you.

I think I must have been pressing (inaudible).

Hey, I have a couple questions.

First of all, on the integration issue, someone asked you if your long or short scrapped, and I've studied the scrap business not particularly well for a long time, and the more I study it, the more confused I get.

The way I was taught to look at it is you be long (inaudible) scrap in terms of home scrap, right?

But then the rest is sort of long scrap processing or distribution assets?

Being long scrap, I mean, you're still subject to scrap prices, right?

So you really -- there's no long scrap position, unless you have in your possession a lot of old cars, or something.

Am I looking at that right?

Not exactly, Michelle.

When we say we're long scrap, we're talking about the amount of scrap we process.

The difference is, we're buying unprepared scrap, as you know, from a lot of different sources, so that is a big difference.

Yes, we're still subject to the scrap market pricing, but there's always been a difference between buying unprepared scrap and buying prepared scrap.

Which is the margin that the guy who would be doing the processing would be getting otherwise, and that margin gets very big at times.

But also that whole ability to have a network to obtain the unprepared crap, I mean, you've got to build that over the years.

It just doesn't happen.

So it's true you're still subject to market pricing, but it's a great resource, to have that network and capability to obtain and process the scrap.

Okay.

So basically when you're processing it yourself, it's a partial integration, I understand that, because you're taking out what could have been a very profitable middle man, right?

But you're not really long ferrous units the way you are steel (inaudible).

Not in the sense that you own the underlying source from which the metal comes.

And presuming the iron ore that you're mining has a fixed cost.

But as you know, that, too, will vary over time as you go through reserves.

Yes, that's a very good point.

That's a very good point.

And also, the costs of mining.

Yes.

And transportation, you know, has all risen.

So integration isn't what it used to be in general, as we've seen.

So my second question was regarding the commentary earlier on consolidation in the business.

The Metal Management [sims] situation doesn't change availability of scrap in the United States, does it?

No.

No.

Okay, so that's just scrap players getting together globally.

And if you take the Omni combination and your growth -- I know GNA has bought more through time IPSCO's bought through time.

How much of the domestic scrap supply would you say is owned by domestic mills?

Is there a number?

Don't know.

It'd be interesting probably to muck up the statistics if Schnitzer says they own Cascade, if you want to include all their tons.

I don't know, it's a statistic that I guess we really hadn't focused on much.

And Michelle, from all that Steel Dynamics is saying publicly that they intend to run the business essentially the way we've run our scrap business, which is to not make the railroads rich, to treat the units as being fungible, and that you take scrap to the best market and buy where it's most efficient.

Theoretically, not much has changed, then, if they really do that.

Where it is valuable to them, Michelle, is Steel Dynamics are putting on quite a bit of new capacity, and to control your scrap for that new capacity we would think would be pretty important.

Okay, okay.

Well, that makes a lot of sense.

And your strategy has been around for a lot more than 20 years, hasn't it?

Well --

You guys have been integrated and had this combination --

Well, we started, yes, because we started in scrap.

Right, right, you were in scrap before you were in Steel.

And got into the manufacturing in a small way, as it were, in the sixties.

That's when we first had a mill, acquired a steel mill and a copper tube mill, which were much smaller then, that's right.

So the scrap preceded -- for us, it preceded the mill business, and the fabrication, of course, was also small and we grew that dramatically.

All the downstream businesses.

Which brings up the point that I learned early in my career about scrap and steel integration, which is when the scrap guys buy the steel mill, that works.

It's when the steel mill has bought the scrap guys that it has not worked as well, correct?

We're not going to comment.

You don't want to say that.

We're not going to touch that one.

No.

Well, we'll wait and talk to [Danny Rifkin] about who bought who.

We'll let that settle for a little while.

But I think the Blocks would agree with you, and the Schnitzers would agree with that point.

One more quick question.

In terms of imports, you guys have -- your hidden asset that I don't think the world sees is what I would call the intellectual capital you have out of all your businesses, and that's really one of the strengths of the Company.

So what does your import network tell you right now?

There's some people who are saying that we're at a structural low of imports, and it can't get much lower than -- the imports that are being bought right now are the imports that people need.

But September was over 2 million tons, and we've been as low as 1.8 million in this recent cycle.

Have you looked at that question?

Do you have a thought on how that works?

Well, Michelle, we would think it would probably even get lower the next six months, but as we mentioned earlier in the conference call, we're reasonably optimistic that international steel prices will rise next year, probably after Chinese new year, based on these increased iron ore prices.

So we would think that prices here will move, as well.

Certainly the service centers will need to start buying at some stage, and so once things start to move, the only barrier, quite obviously, is the weak dollar to this market and the high freight rates that product will become, in our view, maybe a bit more regional.

Export is closer to the U.S., we'll start to sell into this market, assuming prices rise here.

If they don't rise comparative to international prices, imports will stay low.

But our view is that we think prices will rise next year, so.

Yes, I mean, I'm on the same page, and kind of fascinated by the resistance that these service centers seem to be exhibiting.

It reminds me a lot of '86, which turned into a shortage.

One more quick comment -- what was the language we were talking earlier, Bill?

That would be Afrikaner, because South Africa won the World Cup.

Oh, got it.

Okay, well, can we just be true to the industry and kind of stick to the Yiddish here?

Okay?

Stan?

I got you.

Am I right?

Well, with my looming retirement next year, the Yiddish will disappear.

Well you're going to have me on the call for a lot more years, so let's just try to keep it kosher, okay?

All right.

Thanks, guys, great presentation, as always.

Bye.

Thank you.

Your next question is a follow-up question from the line of Sal (inaudible) with Goldman Sachs.

Hi again, guys.

Have you ever looked at what percentage of your business in rebar or actually steel and fabrication is tied to the public works?

It borders -- if you kind of expand that to the greater infrastructure, it bears at least 30% to 40%, maybe even 50 if you throw in the fabricators, because they're probably, more so than the mills, huge in highway work.

And that's 50% of the domestic mill and fabrication revenue?

Right.

Okay.

And lastly, I thought at some point you had mentioned in the past that you will rearrange your segment details by taking the scrap yards out of the mills (inaudible) you have some attached to them and bringing them to the recycling unit or division.

Have you done so in this quarter?

No.

In fact, that was the opening comments I had until the market decided that, you know, we were in the subprime business.

Well, actually, I have a slide on that that we'll be presenting at the meetings tomorrow and the rest of this week, and we will restate -- I know several of you have given me a call and asked, you know, if your life is over because your model no longer matches up against our segments.

We're going to restate as many quarters and years as we can to give you all a running shot at it when we put out the first quarter numbers.

So what we'll have for you for conversation's sake is just the who moved what where, and in the first quarter, when we report in December, we'll have as much of the restated as we can get.

And (inaudible) in fact the operating line or the bottom line?

We'll try to do it every line we can find.

Okay, great, thank you so much.

Uh-huh.

Once again, if you would like to ask a question at this time, please press star, one on your touchtone phone.

At this time, there appear to be no more questions.

Mr.

McClean, I'll turn the call back over to you for any closing remarks.

Okay, thanks very much, everyone.

Well, we look forward to seeing those of you in New York.

Bill and I and Stan are leaving this afternoon.

We'll be there for the next three days, and then off to Toronto and Chicago early next week.

So thank you.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.