Commercial Metals Co (CMC) 2008 Q2 法說會逐字稿

Hello, and welcome to today's Commercial Metals Company second quarter 2008 earnings results conference call.

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 second quarter 2008 conference call.

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

I'll start with an overview of the second quarter and then Bill will follow with further details.

We previously gave guidance of $0.50 to $0.60 per share with no LIFO impact.

Obviously, as forecasters of LIFO, we weren't particularly good, but taken at face value, if you add back the LIFO expense of $0.32 per share, the result would have been $0.66 per share and that result is actually better than the second quarter of last year.

However, we are a LIFO reporter and the earnings were $0.34 per share, including the LIFO expense of $0.32 per share.

As mentioned previously in our guidance, our winter quarter that's December to February is normally our weakest quarter.

The huge LIFO expense was clearly the dominating factor.

And this was a result of ferrous scrap prices increasing in December by approximately $35.

That's a gross ton.

Then a huge jump in January of about $80 per gross ton.

Following that rebar and merchant bar prices here in the US, increased by $25 a short ton and $60 a short ton in January and February respectively.

The reason for these large increases in ferrous scrap and then steel prices, is the demand which has been driven mainly by China and other emerging countries, particularly in the middle east, we are seeing just extremely strong demand with steel and all sorts of raw materials, clearly iron ore, pig iron, ferrous scrap, et cetera.

Also, another key factor is the global supply of the steel products, particularly semi products billets and slabs has tightened dramatically since China's last round of export taxes increased by 25% for billets and slabs on January 1, 2008.

This led to actually zero exports of billets and slabs from China in February of this year.

And when you consider their exports of semis in 2007 calendar year, where we were around 6 million tons, this is a dramatic impact on the global supply situation for steel products.

And clearly the settlement of the iron ore contract prices at 65% in February and there has been further settlements on pallets just recently in March at 87%, this set off a wave of further increases in scrap prices and steel prices.

In the US, non-residential construction was still good.

Rebar fabrication is strongest in the gulf area, Texas and California, softer in some of the East Coast markets and Florida.

Joist business is the weakest, when you consider that the mine end uses a boxed retailer type company shopping centers, like commercial work, et cetera.

We saw an acceleration of business in Poland in the last few weeks of the quarter.

Croatia remains a turnaround.

The sales were slower than we anticipated, plus higher costs, and we are addressing both these areas in the future.

And on the supply side here in the US, rebar or merchant bar imports were down roughly 40% from the same period last year.

So, overall, it was a good quarter, particularly if you add back that LIFO expense for a winter quarter, we were quite happy.

So, now I'll hand it over to Bill.

Thanks, Murray.

Good morning.

Let me call to your attention the detailed Safe Harbor Statement included in our press release and in our August 31, 2007 10-K that in summary says that in spite of management's good faith current opinions on various forward-looking matters, circumstances can change and not everything that we think will happen always happens.

In addition, we've given guidance regarding our outlook for the third quarter of fiscal 2008 in our press release, subsequent to this call we will not be under any obligation to update our outlook.

Finally, 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 straight forward from our financial statements or in common business use can be the subject of our discussions today and in our visits, our website at CMC.com there's more information.

But there may be other items that may be outside of our ability for discussion and please bear with us.

Well, it's obvious if my life depended on accurately estimating LIFO, I would be 6 feet under.

I feel like that Chicago headline "Dewey Defeats Truman", only this time it would be "Larson Nails LIFO", both of them wrong.

As we've always said, live by LIFO, die by LIFO.

Not all of our steel brethren are on LIFO and it's impossible to flip a FIFO company onto LIFO by way of just pure analysis.

To be comparable, you would have to add the LIFO charge back and put us all on FIFO.

From speaking with many of you over the years, I know that some of you model us with LIFO and others model us without LIFO, which is of course FIFO.

I leave that up to each of you as we've presented the numbers to accommodate both.

What is clear enough is that LIFO occurs in periods of rising prices, rising prices mean that demand and supply are balancing at higher levels.

Higher levels are not the exclusive purview of the American market, as Murray mentioned.

I will now add another word to the pantheon of hackneyed expressions that attempt to rename things that you know perfectly well, words like space, words like paradigm, words like emperor's club.

The new word is decoupling.

Decoupling.

Now, to the point, will steel markets collapse under the weight of a US recession?

I think LIFO and other indicators are telling you rather strongly, no, that the US is not driving this bus and will not be for sometime.

Let me liberally plagiarize from a Merrill Lynch report of February 28 of this year from their global metals and mining group.

73% of global economic demand is driven by emerging markets.

By emerging markets, the US is only 10% and the share of emerging markets for commodities is even higher.

So overall, international steel markets are extremely bullish.

Safety is number one at CMC.

We cannot emphasize it enough.

Steel making can be a dangerous profession, if you do not have a culture of safety.

Our mills combined, rank as the safest in North America in 2007.

Congratulations to all of those who make life last by keeping safety first.

Looking at the numbers, sales are up substantially across all of our segments.

It is, of course, a combination of both higher volumes and the rather extraordinary pricing environment we're in.

If you look at our segment operating profit for the quarter, the two segments with significantly reduced operating profit had pretty straightforward explanations.

If you look at the domestic fabrication, they were pretty much trashed by LIFO and the startup costs of CMC [adds] that is Croatia, they are a drag on the international mills.

The LIFO reserve, as it stands at 2-29-08 is $295 million -- $295 million, which equates to around $1.68 a share.

The LIFO effect as shown in the press release, it decreased net earnings some $38 million, or $0.32 per share versus last year's $12 million, or $0.10 per share year to date for the six months, it decreased net earnings about $35, $35.5 million, or $0.30 per share versus last year's first six months of about $19 million, or $0.16 per share.

Depreciation and amortization for the quarter was $32.351.

For the year, that makes it 63873 and the expectation is that we'll probably have about $128 million -- $128 million for depreciation for fiscal 2008.

If you look at selling, general, administrative expense, we're up $20 million quarter to quarter, and about $38 million or so six months to six months.

The explanations are the same for both periods of time.

In the main, they related to our SAP project, combined with two acquisitions that would be our decking operation and Croatia, which are in this year's numbers, but they are not in the comparable numbers of last year.

Finally, a few other statistics.

Current ratio is 1.9.

Long-term debt to total cap, 27.5%.

I mean we're in good shape from a balance sheet standpoint, no doubt about that.

The book value is $13.72 -- $13.72 a share.

The average shares for the quarter diluted were 118,028,571.

And year to date, the average shares diluted were 119,204,022.

The actual shares outstanding are 114,060,280.

Obviously we bought some treasury shares back during the quarter.

In the second quarter, we bought back $3.667093 million shares, an average price of $27.36.

That means year to date we bought back $5.412238 million at an average price of $28 a share -- $28 even a share.

The remaining authorization at 2-29-08 is $812,000 -- roughly $813,000, and I'll just make a comment that, you know, the board has never left us without significant ammunition, so should we in the future use the $812,000, I am certain that they will give us more.

Murray?

Thanks, Bill.

Just a couple of comments on the outlook for our third quarter that's March through end of May period, we're anticipating a strong quarter and we gave a guidance of $0.70 to $0.80 per share, including a LIFO expense of $0.11 per share.

As I mentioned earlier, prices have moved up sharply and certainly after the Chinese New Year, they really have taken off, and we've seen price -- rapid price increases almost weekly during March.

We anticipate ferrous scrap prices in the US to be up significantly in April, based on global demand and also good demand from the US mills.

Rebar and merchant bar prices are increasing $25 a ton.

That's a short ton on April 1 and most likely will increase again on May 1.

The big question is, will there be a correction?

Historically every year there's a seasonal correction on ferrous scrap that's normally around that April through June period.

This year, if there's a correction most likely it will be through May-June period.

Couple of reasons, there's obviously higher flows of scrap during the spring and summer months and particularly if there's a demand pullback globally, this could cause a correction.

But we anticipate any correction prices will stabilize at a higher level than they have in the past and there is certain discussions by the Chinese government to shut down mills in China during that May to August period, with the Olympic games coming up.

And that might have some impact, but as I mentioned earlier, supply is to us the critical aspect on what's happening globally and with the big cutback on exports from China, that's having a huge impact on markets, particularly in the Middle East and also in Asia.

We believe in the Americas our recycling operation -- our mills will have a strong quarter.

Internationally, Poland should be particularly strong, and our distribution operations led by our raw materials business will also be very good.

The one segment we highlighted which will have a margin squeeze because of these higher steel prices will be our fabrication and distribution segment here in the Americas.

With those comments, I'll now open up the conference for questions.

We will now begin the question and answer session.

(OPERATOR INSTRUCTIONS) Your first question will come from the line of Bob Richard with Longbow Research.

Good morning, and thank you for taking my call.

Good morning, Bob.

Bill, I understand the difficulty in LIFO forecasting it can be difficult, but if you had to hazard a guess, did you miss more on pricing or volume as far as your inventories?

Oh, no doubt about it, pricing, absolutely.

We probably anticipated ferrous scrap prices to go up $30 or $35 or $40 a ton at the beginning of the year and cumulatively during the quarter, they were up $97, shredded, so I blew it clearly from a pricing standpoint.

Okay, thank you for that.

And I'll get back into queue.

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

Good morning, gentlemen.

Barry.

Barry number two?

I had a power outage in your wonderful state of North Carolina about half an hour before your call and therefore I was concerned I wouldn't be on the call, so I wouldn't even be number anything.

But they knew that you were going to say that on the call, so therefore the electricity went on.

I thought everybody's celebrating the big victories by North Carolina in the tournament?

Well, that's another story.

The electricity, they don't get right, but maybe they get it right in college basketball.

Yes, but you're overlooking Duke had a -- my Duke had a power outage.

But I don't root for Duke.

Okay.

First of all, I got to congratulate Bill Larson because he finally stepped up to the plate and bought $100 million worth of stock in the quarter.

Congratulations, Bill.

Does that mean that you're going to be more aggressive as your value of your company has expanded over the last few years in terms of your stock buyback program?

Well, I think what it says is, you know; A) the company gets more valuable every quarter and therefore the price that the company might be willing to buy its shares back, you know, rises with the earning power of the corporation, but as far as any future expectations, I think as we've discussed in the past, it's a question of the best use of money at any particular point in time and that call will be made at that time.

Okay.

Secondly, do you have an updated capital expenditure estimate for this year at this point?

It hasn't changed, Barry.

It's just a notch shy of the $0.5 billion that we talked about before.

Alright, so what's that -- so, you say it's, what, 490 million?

494.

Yes.

494.

Okay, and could you tell us about the SAP costs, what do they look like as you speak for this year?

Somebody told me, I don't know who it was, somebody who knew somebody said you were having problems with the SAP installation.

Oh, you've been reading the Yahoo!

message.

Stay away from that thing, Barry!

No, no, it wasn't a Yahoo!

message.

Somebody who is working for one of your consultants happens to know Michael and he mentioned to him -- that to him the other day.

Well, if he did, he's no longer a consultant with Commercial Metals.

I want a name.

Okay.

No listen, we have rolled this thing out at our mill in Texas.

We have rolled it out in payroll for the entire domestic subsidiaries.

We've done it here in corporate.

God willing, on April 1, Poland will go on it.

I mean the rollout has gone about as well as -- and you don't have to take my word for it, IBM, SAP, other consultants that we have used indicate that it's gone as well as any that they have seen.

We're very pleased with the results on it.

Yes, it costs a lot of money, but this system's going to last us beyond my career.

You know, I'll be gone and SAP will still be here.

So I -- you know -- we could not be happier with it, given the way that these projects work.

Now, look, these things are not all straight line.

Anybody who's ever implemented a Tier1 ERP system realizes that it's the two steps forward and a half a step back, but it's the nature of the beast.

And anyone who hasn't gone one of these -- through one of these things and would offer criticism, I've got to tell you, is just ignorant.

Okay.

So, how much is going to be the -- your rough estimate of the costs this year in pretax dollars per share and your best estimate for the decline in costs next year?

I think, Barry, we're going to stay at that $14 million level for the third and the fourth quarters.

It will tail off next year.

I wish I had a number.

I'm not trying to -- well, I guess I am trying to evade you, but not intentionally.

I have not seen the budget.

It changes with the way that we roll out, and that's kind of a -- it would roll out as to who goes when.

So, you know, I don't have a number yet for next year.

I apologize.

All right.

So, the $14, is that a net after-tax figure?

No, no, that's pre-tax.

Alright, so what's pre-tax for the year look like?

Well, let's see, we -- according to the press release, we're sitting at, what, $25 million, so tack on another $25, $26, $27 to that.

$52 million, and next year it's going to be lower?

Yeah, it will be lower, but I don't have an order of magnitude yet, Barry.

Okay.

I have a question for the senior person in this phone call, and it's called Mr.

Rabin.

I'm clearly the senior.

Okay.

We've seen a number of new consolidations in North America over the last few weeks.

One was the, the move by Evraz Oregon Steel to buy tubular assets from the former IPSCO owners, or let's say the Swedish company, and we also saw ArcelorMittal buying the Sparrows Point facilities.

I'm sorry.

They didn't buy.

They sold it to Severstal --

Right.

The Russians are coming and keep oncoming.

What do you think of the consolidation process, and more importantly, what do you think of the fact that the Brazilians and the Russians have been the most aggressive using their very strong currencies, and what impact do you think that's going to have going forward if the dollar remains weak versus those currencies?

Well, I think that -- as we've indicated, that the consolidation will continue.

It's certainly abetted by the currency, and in the case of the Russians, I think it's also been clear they want to get assets in other parts of the world.

So, that will continue as well.

I think not just in the US, but there seems little question -- and it's also clear the consolidation will continue to occur, not just at the mill level, but at the scrap level and downstream in the fabrication businesses.

Okay.

Thank you very much.

You guys did a great job.

I appreciate it, and hopefully you'll be on another call, Stanley.

One more anyhow.

Okay, thanks.

Your next question will come from the line of Greg Fortune with RBC Capital Markets.

Hi, how are you guys?

Just continuing the consolidation theme, can you discuss where you stand, which side -- will you be on the buy side or the sell side, or where are the opportunities for you?

Thank you.

Well, tough to say if we're going to be on the -- on the sell side.

You'll have to ask somebody else that.

Right.

Well, Greg, I mean we see it's not just the mills, but there's a lot of consolidation going on.

As you look at rebar fabrication, we'll still -- be one of those consolidators.

I think the three of us now -- Nucor, [Gadowl], [Murray Steel] and CMC, we have probably 50% of that market.

There's been a lot of consolidation in joist and there's a lot of consolidation going on globally.

So, we hope to be part of that.

So, you think you'll be a buyer possibly?

We are.

We continue to be.

We want to grow our company and, and, you know, we have a certain strategy that we're following.

Okay.

Thank you very much.

Your next question will come from the line of Brian Yu with Citi.

Good morning, Murray, Bill.

Good morning, Brian.

How are you?

Good.

I have a question regarding the fabrication segment.

I know inherently there's a lag in there just with the timing issue.

Can you remind us what the lag is?

Is it six months, if we can assume that steel prices stabilize at current levels, or --

Yes, I would say it's -- it's two quarters worth and the first quarter's always -- the first of those quarters is always the worst, because then some of the backlog at higher prices begins to seep into the average statistics.

But they will hurt this quarter and then a little bit more into the fourth quarter.

Okay, and then the second question, can you provide us with some color on your order books, order entry rates and what the mill lead times look like here?

Yes, our backlogs are still very good, Brian, not as good as they were, you know, in 2006 period, but still very good.

And our rider bookings are very good.

Obviously, a couple areas are down, like joist is down and clearly the steel import business (inaudible) into the US, is down.

But overall, it's holding up -- holding up well.

Okay, and what about the lead times at your mills, where are they at now, seven, eight, how many weeks?

Well, the mills are running, running flat out.

So, anything that you book on the mills March, I mean you would have to wait for May's rolling on a lot of products now.

All right.

The only area that's a little weak here is merchant products and that -- some of that's to do with the joist business and service end is also -- as you know, their infantry levels are pretty low, and they're only buying what they need.

We don't see any surge and the service end is buying, you know, as they do typically in rising -- a rising price environment.

They tend to increase their infantry.

We don't see it this time around.

One other thing to keep in mind is the ability to sell billets in this market.

(Inaudible) as Murray mentioned, with the global pullback in availability, and even Poland with the strong currency, we're able to profitably sell billets.

Alright, great, thanks.

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

Hi, gentlemen, it's Aldo, how are you?

Hi Aldo.

Good morning Aldo.

Hi, Aldo, how are you?

I just had a question on Poland specifically.

I'm wondering, you know, that $16 million that you mentioned for earnings was actually pretty surprisingly positive given the seasonality and I'm wondering, could you tell us how the monthly trend went in profits?

Were you in the red for a couple of months and then made it all in the month of February, or how, how would you say you exited the quarter versus the average?

I don't have it right in front of me, but I suspect it went 15% of the earnings, 20% of the earnings, you know, 65% of the earnings.

The second half of January and all of February, and February of course was a short month, were very strong.

The prices went up -- we gave several -- every other week, for four weeks, we were presenting at various conferences here and we had to update that, the current pricing schedule every week for those conferences.

It's just -- and even today, unfortunately the prices that I put into the presentation that you all will see tomorrow, you know, they are going to be a little low.

So, it unquestionably, February made it the bulk of that.

That's why we're so optimistic as we go forward into March, April and May.

Based on what I hear, the pricing is likely to be quite a bit higher, right, February, March, April, May?

That's right, Aldo.

You know, looking now, Poland rebar price is around $950 a metric ton.

They're not the highest.

I mean, Russia and the Middle East are like $1100 a metric ton.

How does that compare with the average for the quarter?

Well, that's well up.

I mean we're talking US dollars here.

We obviously -- normally look Poland and zloty's-- Bill was just looking at the, what that number is up, but it's probably up in US dollars close to $200 a ton.

Okay.

Anyway, Bill, how about a question on LIFO.

I don't know if you got it -- but what do you bet, over or under $0.32 for the next --

Yes, I boldly predicted $0.11 and 20 million pre-tax, and if I had to guess, I'll be too low.

But that's my best shot at it right now.

So, what's your assumption in the quarter, is -- $0.11, $0.12?

$0.11, yes, based strictly upon higher prices.

There's no volume inherent in that.

Okay, and then finally, on the global scene, you know, you're looking at -- this might be more for Stan and Murray, but on the -- you know, the surprising development for me is while you're seeing extremely strong demand and high record prices around the world, you're seeing lower supply from a lot of traditional exporters.

And I wonder if you could just maybe take a stab at what you think some of the reasons for this might be.

Well, Aldo, clearly the China's cutback in steel exports, and it's not just semi products.

They have cut back probably 50% on rebar and wire rods, you know, and other lower commodity type finished goods.

Most of that was going into the Asia markets, and to the Middle East and also some into Europe -- a little bit here and to the US, so these are dramatic cutbacks.

And we're seeing a lot of supplies in Asia.

The rolling mills who were buying billets and slabs from China and then re-exporting say like plate to markets like the U.S., well, they are completely out now.

They are no longer exporting those products.

We see countries like Taiwan, there's a temporary ban on the exports of rebar and billets, et cetera.

That's very unusual.

The supply side is quite tight and obviously demand is strong in these emerging countries.

So, you add those two factors together and that's why I guess the iron ore producers were pretty bullish on what they could get in terms of their iron ore price increases, which those contract price increases are still maybe $30, $40 a ton below spot iron ore prices.

And the Australians still haven't settled with the Chinese.

Also, the only thing I would add would be about Taiwan -- is there are a number of governments particularly with state-owned mills who are putting a lot of pressure on these mills to keep their steel domestic.

So -- because of the inflationary pressure it causes.

And that's something on the tape today about India doing that as well.

Yes.

Yes.

It's incredible, Aldo, the demand in the Middle East.

There's a rolling mill there.

That could take a million tons of billets a year from us if we had them available at these extraordinary prices.

So, demand is there and I think you'll see a trend in Asia with China cutting back on their exports.

I think you'll see more melt capacity go in Asia outside China, and, you know, a lot of this mini blast furnace technology which comes from China, you'll see that type of technology will go into countries like Vietnam and Malaysia, Thailand, et cetera, but, you know, that takes a couple of years to put that, you know, those -- to put a new mill in -- to put a new blast furnace in and so the supply side could be interesting for the next year or two.

So, how quickly can you start your micro mills?

Well, as fast as we would like to.

We are just having, you know, some issues on the permitting.

Obviously it's pretty tough.

Arizona's aligned with California.

There have been some delays there getting our air permits but we're figuring on the end of summer of next year.

I guess you enjoy the pricing in the meanwhile.

Right.

Well, thanks very much.

Okay, Aldo.

Your next question will come from the line of Chris Haberland with Davenport & Company.

Good morning, guys.

Good morning.

Good morning.

Good morning.

Got a couple of quick questions here.

First, could you talk a little bit about the international fab and distribution segment?

We were a little bit surprised to see sequential decline in revenues, given the high global demand and high steel prices.

Yes, what you've got is the discontinued operation and there's two operations that had been in there formally.

One is the domestic import business.

The other is the one that's in discontinued operations, and so that, that's going to be the majority of it.

I think it's just more of a reclassification question than it is -- because clearly, the operations that are still in there, particularly the raw materials operation, you know, which is dealing with the iron ore and the floor spar, and coke, and all the other projects, I can tell you they are going gang busters and the other ones, the service centers in Australia and the intra Asian business is still strong as well.

It's probably more of a classification question.

Okay.

And then correct me if I'm wrong, but in the last call, I believe you all had said that you were expecting the Croatian mill to be break-even this year.

Are you still expecting that?

No, it's going to take longer than we thought.

It will be into next year.

A couple of reasons.

Sales have been a lot more difficult than we anticipated, particularly on seamless, and also costs have jumped up there with labor costs, synergy costs, et cetera.

But we have a plan to address these two issues and, and, you know, the losses we make, we're making there will decline.

I mean you have to bear in mind, we only acquired it in September of last year, we think we acquired it at a very good price.

There is a lot of negative goodwill associated with the assets and it will take us longer than we anticipated.

Okay, and then last question here, can you just give us your share count at quarter end?

The actual number that was outstanding?

Yes, sir.

Yes, 114.

114, is that fully diluted?

No, that's the actual shares that are outstanding.

Okay.

The fully diluted for the second quarter was 118 million.

Okay, thank you very much.

Okay.

Your next question will come from the line of Michael Willemse with CIBC World Markets.

Great, thank you.

Good morning.

Good morning.

Good morning, Michael.

Good morning Michael.

Just, Murray, you mentioned $950 per metric ton in Poland, $1100 in Russia, Middle East.

I think in North America, we're still at around $780 per metric ton.

Right.

Do you think there will be a convergence between pricing, or do you think North America historically was at a premium to the global market?

How long do you think we'll be at a discount?

Well, I think we could be there for sometime.

I mean obviously on the demand side here in the US, it's pretty flattish, Michael, so, you know, the prices are likely to move here somewhat in the US, but I don't see US prices getting to the level that they are internationally.

So, most likely the international prices will come off at some stage.

Right, and if you look at -- if you're to look at your North American mills, you know, what percentage of the production is going to export?

Is it still, you know, pretty low single-digit?

Yes, it's very low.

We are really only exporting billets.

You know, we do have some extra melt capacity and with the very attractive prices, we have been exporting billets.

But it's highly unlikely that we would export products like rebar and merchant products.

We can sell those within the US market.

The exact statistics for the six months, we exported 78,000 tons of billets and only 14,000 tons of finished goods.

And the finished goods went to Canada and Mexico, so it's not kind of -- well, I mean that's export, but it's all NAFTA-type stuff.

Okay, and sir, could you just go over again your outlook for scrap.

Did you say up in April and then maybe down in May-June?

Well, we -- the indications are strongly that they will be up in April.

We don't know what will happen May-June, but the last two or three years, if you track scrap prices, they have come off because flows do increase and then you have seasonal factors come into play as well.

So, even globally, normally in Asia you have the monsoon season, construction slows down from May through the August period, and Europe, obviously they have holidays, particularly July-August period.

So, there's often some, some slowdown, a seasonal slowdown, but who knows, this year may be different.

But the trend is definitely up.

You know, based on those very high, those big increases in iron ore prices.

So, for April, are we talking, you know, $40 per ton increase, or --

I don't know, Michael.

If you asked us a week ago, we probably would have said $20 or $30 a ton.

Now it would be more like over $50 a ton the way the market's going.

Right, yes, okay.

And then just one last question on the Croatian mill.

What were the shipments from that mill -- I guess what have they been for the first six months of the year?

Oh, you're going to force me to add two press releases together.

Okay, we can just do the last -- this quarter.

The press release has got -- we rolled 12,100 tons and we sold 9200 in the quarter.

And then what would -- what's the loss there?

Is it a couple million in the quarter?

No, it was 6.4, I believe.

Let me just double-check that.

Yes, 6.4 was our operating loss.

6.4, okay.

So, if we took the 9200 annualized, say we're around 35,000 to 40,000 shipments, what do you think you could get shipments up to, you know, once you kind of got it at your desired level?

Yes, you know, annualizing these numbers could be real dangerous right now because I think we're on a ramp-up and I think you probably come up a little short, mainly because when the seamless kicks in, it's not going to kick in with 500 here and there.

The orders, when they typically come, they come in the 1000 and 2000 and 3000-ton orders, and we've got a lot of irons in the fire and, you know, we are anticipating that to pick up.

Right now, I'll be honest, Michael.

I wouldn't give you a prediction other than I think if you annualize where we are right now, you're going to be too low.

Okay.

Just if you can remind me, what was the rated capacity when you bought the mill?

300,000 metric tons spread over all the product lines.

Okay.

The good news, Michael, is March will have a record production month out of that mill.

So, it is improving from obviously a very low level.

Okay, great.

Thank you.

Your next question will come from the line of Wayne Atwell with Pontus Capital Management.

Thank you.

And good morning.

Most of my questions have been answered.

One or two quick questions.

Do you ever do portfolio reviews and think about what's underperforming that you might think of disposing of?

Wayne, we do.

We look at all of our business units and we obviously look at the, where we can grow those businesses in the future.

So, we do that on a pretty regular basis.

And remind me, there's nothing on the launching pad that I'm aware of, is that correct?

On the launching pad, I mean--

The discontinued operation of our semi finish import business in the United States, that's been in the press release the last couple of quarters.

Okay, but that's really the only asset?

Right.

And in terms of acquisitions, you have done a great job building the company in recent years with what you've done in Eastern Europe and such.

It seems like the easy acquisitions and the obvious ones are pretty much behind us and obviously you're not going to give us any names, but can you sort of talk in generalities, is there much left out there to buy?

There's plenty of opportunities, but obviously the valuation of the assets is much higher than it was.

So, I would say any easy pickings are now gone.

But there are still good companies out there and there are still opportunities.

And any strategic area that you might be interested in?

I mean we obviously look in the global markets where we are strong and we're continuing to make acquisitions and also invest in green fields in Poland.

We're going to invest quite a lot in Croatia.

In Asia, particularly Southeast Asia, we're looking pretty seriously, and here in the US, particularly recycling upstream and fabrication downstream, we continue to look.

Would you ever think about building anything in either Vietnam or India?

Possibly, with a partner in Vietnam.

Maybe not India at this point in time.

Right, okay.

Thank you very much.

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

Good morning.

Good morning.

Good morning, Charlie.

Hi.

Could you talk a little bit about non-residential construction, because there's a lot of mixed stories about the federal government maybe running out of gas tax revenue -- highway tax revenues and maybe having to cut back next year and office building construction turning down in the second half.

What are you seeing these days?

Well, Chuck, we're seeing the market, as we mentioned, pretty flattish, but still quite good.

It's a little bit mixed.

Obviously on the joist side, as I mentioned, it's definitely weaker there, which you would expect.

On the rebar fabrication area, depending on the markets you are servicing, it's still very good in the gulf states, Texas, and right through to California.

In Florida obviously with the downturn in residential and condos, it's weaker.

Some of the East Coast markets are weaker.

Heavy commercial still looks pretty good overall, so it's a bit of a mixed bag, but certainly the public works is still quite strong and, you know, there's some states, there's talk about funding problems into next year.

But at this point in time, we don't see it.

Chuck, one thing that's clear, you will see a change over time, it's already begun in how transportation projects are funded.

They will be more with bonds.

You'll see more tow projects, a lot of private investment and even in states which are fighting it for political reasons, and we've had this in Texas that, no, we don't want a Spanish company coming in and being able to buy a particular highway project.

That's just going to change out of necessity.

And it's clear, it's starting to happen already.

Is there any way to split your shipments to non-res between highway and commercial or office?

Yeah, in fact we have a slide in our presentation now that has that.

It says that 30% of what happens here in the United States, and that's both mills and domestic fabrication, you know, deals with the infrastructure, Chuck.

And, you know, after that, about 15% is heavy commercial and 10% is the light commercial.

That's particularly the joists.

15% is service centers, what -- 5% is agriculture, there's another 5% in residential, that's our copper tube mill, and the rest, which if I've added it up right, is 20% goes to OEM's and others.

Thank you.

See you tomorrow.

All right.

Look forward to it.

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

Good morning, guys.

Good morning.

Good morning, Sal.

On the scrap prices, you have seen scrap prices moving up almost $60, $80 in the export market over the last few weeks.

Is that what you're hearing also?

Yes.

Do you think that the rebar prices you gave out, especially from Turkey, reflects that higher scrap price or do you think they still have some room that they will have to process this new scrap, or higher cost scrap prices can go up even further?

Well, Turkey's been pretty aggressive -- the mills in pushing up their rebar prices.

If they continue to get their prices even higher than $1100 a ton, yes, they will have an appetite to buy scrap at a higher price.

And the billet prices, which has gone up, what's the billet price right now in the export market?

Well, on a C&F basis it's like $900 a ton in some markets.

Were you able to get billet prices as closely to your domestic rebar merchant rebar prices when you sold in the export market?

Sorry, say that again.

Your billet export prices, were they close to the domestic rebar prices?

Well, I mean it depends where you're -- from the US mills, no, they would have been lower.

But from Poland we've been able to get, particularly selling to the Middle East, very high billet prices.

As high as the US rebar price, you would say?

Yes, well, higher.

I mean the last prices we got, you know, close to $900.

If you take that back to close to on an FIV basis, a bit over $800 a metric ton, which is, you know, 727-30 a short ton, so, yeah, at this point in time, a bit higher than the domestic rebar prices.

And the scrap costs in Poland, is that also going to be up, you think, over the coming months, as you see in the US?

Yes, it's slightly higher than the US price at the moment.

But we don't anticipate a huge jump in Poland.

Okay, and another thing is if the scrap prices do go up $50 or so next month, do you think that domestic mills, including yourself, will have -- there is enough room out there to raise the steel prices of rebar, merchant bar, et cetera, by that amount to cover the costs?

Well, as you know, Sal, we're not the price leader.

Nucor would make that decision, but it will be interesting.

I mean when scrap prices went up $80 -- $80 a ton in January, rebar prices went up $60 a ton.

So, they may not increase the price to the same level.

We don't know.

I mean there will be a concern if you increase prices too much, and then as I mentioned, the possibility of a scrap correction over the summer months and then you have to reduce your price shortly thereafter, which happened in April of last year.

That's not a good signal for the market.

Okay.

Thank you very much.

Your next question will come from the line of (Rajewl Agrawald) with Marathon Asset Management.

Hi, thanks for taking my question.

I was looking at the operating profit for the Americas Recycling segment and there was a tremendous increase in the price (inaudible) ferrous scrap side, but somehow it doesn't flow down to the operating profit.

I was trying to figure out as to what happened there.

Yes, LIFO.

I think you released that 5 million of LIFO expense?

Which segment?

Americas Recycling, the scrap side.

That's right.

So, but for LIFO, the operating profit would have been up $5 million, that's all the benefit you get from 33% increase in realized price on scrap, is that --

Well, you got to realize that you don't get all 33%.

I mean people, you know, with the exception of the peddler who came by, and well he almost stole my lawn mower, I did chase him down and then got it back, but they -- even the small dealers are pretty sophisticated right now and they realize what the pricing is.

So, you do not get that increase in margin, so.

That's what -- I'm trying to see as to how much do you get.

Is there an easy way to figure that out given what you've disclosed or is there something else you can tell us?

No, it's -- purchasing is the art of making money in ferrous and in non-ferrous recycling and every purchase is a negotiation each day.

So, no, it's not -- it's not possible to tell that.

Got it, and one last one on that one, you made a comment in the release saying that the freight costs had some impact.

Could you give us an idea as to what kind of impact the freight costs had?

Which segment?

In Recycling?

Recycling, yes.

Oh, I'm sorry, yes.

Yes, the exports, okay.

I'm sorry.

I'm with you now.

Yeah, it's a question of -- this goes back to the container exports in -- with ferrous scrap and the fact that when we talked about this last quarter, it was still kind of in this cottage industry and things are kind of picking up.

Well, the freight haulers caught onto that and the prices, although there is still a bit of a premium to be able to ship by container, it has shrunk some.

That was the reference.

I'm sorry.

Got it.

How much of a change was there from a year on year basis, on a per ton basis -- if I look at per ton metrics?

In terms of costs of exporting?

You know, I don't know, because -- the container exporting, it just wasn't being done last year at this time.

It was just starting.

It was just starting.

Okay, and just one last question, in your prepared remarks, you made a comment that China might shut some mills from May to August and there were some implications you thought that would have.

Could you just expand on that?

Thank you.

Yes, the Chinese government has announced, not just steel mills, but that ferro alloy plants and others that tend to pollute the environment, pollute the air, will be shut down from that period.

So, that will have an impact on the, you know, on the local market in China.

There will be clearly less steel available.

We know -- we were in China just two weeks ago.

And infantry levels, depending on the product, are actually low and you obviously had the disruption period, the end of January, you know, with those snow -- heavy snowfalls in Shanghai and the southern China area.

All of those factors sort of indicate to us that, you know, on the demand side is still good and supply could be reduced for a short period of time.

And we're seeing even the stats, on products like rebar, their actual production capacity increases are flat.

I mean they used to be increasing at 15% plus a year and it's flattish the last three months.

So, that's an interesting situation.

So, I think China, certainly on some products is getting their act together and there's more of a balance between supply and demand.

Okay.

Thank you so much.

Your next question will come from the line of Robert Spivy with the Abernathy Group.

Actually all of my questions have been answered.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question will come from the line of Eric Privy with Canaccord.

Great, thanks, guys.

Just going back to the scrap side of the business, can you make any comments -- there is a lot of talk out there that scrap levels are, you know, getting more and more constrained.

Are you guys as confident this year as in previous years that when the snows melt, there's going to be an adequate supply of scrap out there?

Well, scrap, you know, in the US comes from three sources.

The obsolete, which is the biggest source, 50% odd.

Demolition, about 13%, and industrial scrap.

So, the obsolete we're seeing grow in the last two or three years because of these higher price, but there is a limit, you're right.

There's a limit to how much scrap can be collected and generated.

But certainly in the Northern states of the US, there will be a better flow once the snow's melted.

And there are still some snowstorms up north, we understand, but from April onward, the flows will improve, they'll improve right through to the October-November period.

And keep in mind, the US, you have to look at it region by region.

The US had record exports of ferrous scrap in calendar 2007.

So, that's not an issue for the domestic mills.

The mills just -- it's only a question of if they need more scrap, paying a higher price to get the scrap.

It could be an issue perhaps in some parts of the world that are more dependent say on Russian scrap, Ukrainian scrap which are decrease -- you know, year by year, they are decreasing their exports and using it more in their home markets.

But again, Poland is a scrap exporter.

So, you have to look -- in terms of the global situation, country by country, region by region.

Great, thanks.

And then maybe just a quick comment, a lot of consolidation in the scrap industry.

Some of your competitors stepping up and integrating also.

Have you seen that impacting at all pricing, availability, et cetera?

Has that changed the dynamic out there at all in the scrap industry?

No, we don't see any change.

It's maybe a little bit too early to say.

But we don't anticipate a major change there.

Great, okay.

Thanks a lot.

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

Mr.

McClean, I will turn the call back to you for some closing comments.

Okay.

Well, thanks very much, everyone.

As we mentioned, the third quarter looks to be a good quarter based on these higher prices that are moving through and we certainly anticipate the third quarter to be strong.

So, thanks to everyone for participating today and that's it.

Ladies and gentlemen, this does conclude the Commercial Metals Company second quarter 2008 earnings results conference call.

You may now disconnect.