Commercial Metals Co (CMC) 2008 Q3 法說會逐字稿

Hello.

Welcome to Commercial Metal Company's third quarter 2008 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 profit.

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 third quarter fiscal 2008 conference call.

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

This is actually Stan's last call before his retirement in August, so I would like the honor of Stan to say a few words at the outset.

Well, thank you, Murray.

Actually, we got our disclosure statement in early, as a prelude.

Anyhow, I actually prepared a 30-minute speech about LIFO, but given that the market seems to get it, we have a saying, if you have made the sale, don't keep talking about it.

So hopefully now there is some understanding of LIFO, and what an outstanding quarter that CMC had.

I simply want to say it has been a great ride, 38.5 years, and it is been a pleasure knowing many of you, and the best news is the Company is in great hands.

Our succession is in place, we have a very sound strategy going forward, and you can look at CMC with continued optimism.

Thanks, Stan.

I will just say a few words about the third quarter, and then Bill will provide the details, and at the end I will talk about the outlook for the fourth quarter.

As Stan mentioned, the LIFO expense was tremendous.

It was a record.

We never anticipated such a high LIFO expense of $0.71 per share.

If you add that back to the $0.51 per share, you get $1.22.

However, we are a LIFO quarter, and the earnings were $0.51 per share.

Clearly as Stan mentioned, operationally it was an exceptional quarter.

The obsolete ferrous scrap prices during the quarter, depending on grades, increased 40 to 50%, and rebar and merchant bar products had increases of around [25]%.

These huge price increases led to the tremendous LIFO expense.

On a global basis, global demand continued to drive up international prices of ferrous scrap, pig iron, raw materials, and steel, and with our diversified business mix in these global markets, clearly we benefited from these price increases.

Supply of many products struggled to keep pace with demand during this quarter.

When you look at rebar, the Middle East and north African markets led the way.

They were the strongest in terms of pricing.

The demand is just tremendous in that part of the world.

In the U.S., ferrous scrap prices followed international scrap prices, and although demand for rebar and merchant products was good, the tighter supply situation from reduced imports, enabled steel prices to rise, and be passed through.

As well, with international steel prices and a weak U.S.

dollar, there is a continuation of steel exports from U.S.

mills, including our own.

Freight rates have passed the highs of November 2007 during this quarter, and that further demonstrates the strong demand for products, such as iron ore, scrap, raw materials, coal, Coke, and steel.

Also, interestingly enough, in this quarter saw some steel countries imposing export taxes on steel products to try and reduce their levels of exports, and keep domestic steel prices in their home markets in check.

Countries like India and Taiwan followed this trend.

China clearly imposed export taxes, the last round in January, and that had a major effect on global markets.

Year-over-year China steel exports are down 20% as of May, and this is having a significant impact on supply.

In particular billets and slabs in the Asian markets.

We did see a bit of surge of Chinese exports in May.

Many believe this is because of the rumors of China imposing further export taxes on commercial-grade steel products.

That could well happen in the next two or three months.

In the U.S., nonresidential construction overall was steady.

Highway, public works, energy areas were very good.

Clearly there was weakness in areas of steel getting weaker in respect to box retailers, shopping centers, light commercial, and condo building.

Our European operations overall performed very strongly.

Poland had a great quarter.

Considering that they were down for several days prior to the SAP implementation.

Croatia remains a turnaround, our short term focus there is to improve sales and reduce costs.

Longer term we will make significant capital expenditure at that mill to grow the business profitably.

I will now hand it over to Bill to provide some details on the quarter.

Thanks, Murray.

Good morning.

I wrote my own Safe Harbor language, and you know what, I am not going to be denied my time, so I will call to your attention the Safe Harbor statement included in the press release, and in our August 31st, 2007 10-K, that summary that says 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 have given guidance regarding our outlook for the fourth quarter of fiscal 2008 in our press release.

Subsequent to this call we will not be under any obligation to update that outlook.

In accordance with Regulation G of the SEC you are aware of non-GAAP financial measures.

Some of these have derived fairly straightforward from our financial statements, or in common business use can be the subject of our discussions today, and in our investor business on our website at CMC.com has additional information, but sometimes there are items that may be outside our ability to discuss, and you may have to be patient for us.

I remember clearly getting off the plane in Bosnia to attend the meeting to estimate LIFO.

We had to dodge sniper fire, and run into the building.

I was so shaken I estimated LIFO at 20 million, rather than the correct 127 million.

It is either that or big oil is somehow to blame.

Okay, once again I prove myself incapable of estimating LIFO.

This time I didn't even get the correct power of ten.

The price movements were extraordinary during the quarter, as Murray mentioned.

LIFO did exactly what it is supposed to do.

In rapidly escalating price environments it gives you a rapidly escalating expense.

I don't think that is always appreciated, the fact that it also gives aus very large tax deduction.

For the fourth quarter I have gone to the beta version of estimating LIFO.

That would be blue estimate, try again.

The press service did us an unfortunate disfavor this morning, and left out the word zero, in the line that says, we anticipate fourth quarter LIFO diluted net earnings per share of between $0.90 to $1.00, assuming pretax LIFO expense of zero, is the word that was missed.

The noise that LIFO makes aside, it was an exceptional operational quarter.

I want to highlight two areas where our geographical diversity was a huge benefit to us.

CMCZ, our Polish operations, continued the momentum that we discussed in the second quarter, and had a truly outstanding result, it is ideally situated between two strong markets, Russia and the Middle East, with excellent internal demand and neighboring markets deflecting any import pressure, we expect good things ahead for the Poles.

The other area is our international marketing, we have been continually taking advantage of the strong Asia X China markets, Australia, and niche products into Europe.

Even with most factors going against us in steel imports into the U.S., our marketing division in Dallas put together an exceptional quarter, by leveraging it's expertise in multiple products including pipe, tubular, and merchants.

It has always been problematic for us that our marketing operations are undervalued by investors.

They deliver consistent earnings, generate many of the leads that result in acquisitions, and daily provide with us the best intelligence in the steel industry.

As you saw from the press release, sales are up significantly in all segments, though it is a combination of both volume and price, clearly the major driving factor right now is price.

Adjusted operating profit is a bit mucked up with LIFO, but if you are of a mind to compare us to a Steel Dynamics, or [Dierdow], or anybody else who reports on FIFO, I think you are going to see that we had had an exceptional quarter.

The LIFO reserve is at 422 million.

422 million.

If you tax-effect that, it means that our equity is $2.40 a share lower than what a FIFO reporter would have.

As the press release indicates, in the third quarter, you can't even believe these numbers, they are so large.

It decreased net earnings $82.6 million, which used to be, what, twice the largest year we ever had from an earnings standpoint.

That was $0.71 per share.

Last year it was an expense of 20 million, or $0.16 per share.

So year to date now LIFO has decreased net earnings 118 million, or a $1.00 a share, versus a decrease of 39 million, or $0.32 a share last year.

If you normalize operating profit, you will see that as a percentage of sales we are very comparable to last year, except in Poland where we are still chasing the higher scrap prices.

Depreciation and amortization during the third quarter was 32.721 million.

That makes the year-to-date, 96.594 million.

We are on-track for depreciation expense between 128 and 129 million for the entire fiscal year.

If you looked at SG&A, we were up 33 million third quarter this year, versus third quarter last year.

The three largest components, there are a lot of them, but the three largest are our implementation of SAP, which we have been discussing every quarter.

Salary expense, especially as it deals with new acquisitions and expansions in operations, and also our incentive comp, given the rise in earnings and the strong quarter, the incentive compensation accrual arose.

Our interest, our EBITDA and interest coverage as well over 8 for the quarter.

That is on a LIFO basis.

Clearly on a pure cash flow basis it would be much stronger than that.

Current ratio is 1.7.

From a debt standpoint, we are in excellent shape.

Our long-term debt-to-cap ratio is 27.6, and when you load it with all debt to cap, it is still only at 30.7.

It leaves our book value per share at $14.36.

For the third quarter, the average diluted shares were 116,090,369, or year-to-date the diluted shares are 118,163,737.

The actual number of shares outstanding are of course lower, because of the dilutive nature of the options, the actual number is 114,392,205.

We spent about 76 million in capital expenditures excluding acquisitions during the quarter.

Year-to-date we are at 227.

The budget for the year was just under 500 million.

Due to timing issues I don't think we are probably going to reach that.

We will see, but I doubt we are going to make it all the way to 500.

In the third quarter, we did not repurchase any shares.

Therefore, the remaining authorization stays the same.

That would be 812,547.

Thanks, Bill.

Just a couple of words on the outlook for the fourth quarter.

Clearly it is going to be, in our view, another strong quarter, with the guidance Bill mentioned of $0.90 to $1.00 per share, with zero LIFO.

Ferrous scrap prices, this is obsolete grades, are down in June by about $25 long term.

However, overseas demand plus the big price gap, if you look at prime grade versus obsolete grades, now are over $200 a ton, may lead to higher scrap prices here in the U.S.

That is obsolete grades in July and August.

Our rebar and merchant bar prices increased $40 a short ton on June 1st, and will increase another $35 a short ton on July 1st.

24 rebar prices also went up an additional $30 a short ton in June.

So we anticipate middle margins at the mills here in the U.S.

to improve during the quarter, as steel price increases exceed scrap price increases.

Globally there appears to be no seasonal slowdown in demand in international markets.

Normally there is some slowdown, seasonal slowdown with the monsoon season in Asia, and the European summer holiday period, but at this stage we don't see a slowdown.

The greatest longer term risks are inflation and the credit squeeze.

In the meantime, demand will continue to outpace supply in global markets.

So overall the fourth quarter we see to be very strong.

So it will be similar to the third quarter, and as I mentioned earlier, our global mixture of businesses will be very positive to our results.

With those few comments, I would like to now open up the conference for any questions.

We will now begin the question-and-answer session.

(OPERATOR INSTRUCTIONS) We will pause momentarily to assemble our roster.

Your first question comes from Michelle Appelbaum of Michelle Appelbaum Research.

Oh, gee.

Okay, hi.

First of all, congratulations to Stan.

I have known you for 28 years, and you are one of the best people I have ever worked with, so second, I am the first question, and I have to apologize, because I have an accounting degree, and I took a class called Inflation Accounting in graduate school, and I still am not getting some of this discussion here about LIFO.

Can you explain to me what the difference is between saying LIFO expense was 129 million and you were forecasting 20, and saying costs were higher than expected?

I don't know about the costs were higher than expected, but clearly, as we have rolled into the third quarter, we did not have the $147 scrap adjustment in front of us.

We had looked at adjustments and price increases in the neighborhood of $20 or $30 a ton, consistent with other springs where with the thaw of the material flow increases, and generally there is a correction.

Clearly that didn't happen.

Although you can't quite straight line it, you can see that going from a $30 expectation to well over, it went up almost 200 during the quarter.

You are not going to get it right.

I thought I was asking you, what is the difference between missing LIFO and costs were higher than expected?

Was that answer, I mean, I understand it is hard to forecast LIFO, but what's the difference between not forecasting LIFO correctly, and costs went up higher than expected?

Well, I mean, costs did go up higher than expected.

If you just want to discuss on a FIFO basis, there is no question.

And energy.

Energy, alloys.

I would agree with that, Michelle that LIFO simply reflects the underlying reality, that a lot of the cost inputs went up.

So that is absolutely correct.

Okay.

All right.

My other question was, yesterday we saw Mittal buy Bayou Steel, and it is just interesting how they are sort of a little bit pregnant in North America on the long product business.

I just wondered what you thought their plan might be, and how that might impact you?

Michelle, we don't comment on our competitors.

In general terms maybe, but we don't know what their strategy is, so I mean, clearly it would be better to ask them directly.

We just don't know.

Michelle, the only issue for us is whether Bayou as a mill, behaves any differently than they have up until now, as a result of the acquisition.

And we would anticipate no negative effect.

Okay.

No, that is a good point.

So consolidating, I am not good at geography so you have got this Louisiana, Texas, kind of Mexico thing now, that Mittal is sort of tacking by you on to an existing franchise, right?

So we are talking about more consolidation into an existing plane, right?

We obviously favor consolidation to have a financially strong company in that part of the world, is better for us than a weak competitor.

And you don't want to comment on what you think longer term they might be doing?

It is kind of fascinating that, they may have look at Chaparral, I am not sure 100%, but then right after Chaparral changed hands, they are building in Quebec, which if you know Lakshmi Mittal, he hasn't built a lot.

Do you get any sense that they might be building in other parts of North America, or anything like that?

We honestly don't know, Michelle.

As I mentioned, the strategy we can't really comment on.

Clearly with this latest acquisition it has got port facilities, so the strategy is to export, that is a possibility.

But as I mentioned, you are probably best to direct the question to them.

I have.

Okay, listen, thank you very much.

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

Good morning.

Hey, Chris.

Three questions here.

I guess I will start off with the obvious one.

When I look it at the fourth quarter, LIFO adjusted outlook, it is down about $0.22 from the third quarter.

Now if you are assuming scrap falls that should be a positive margin driver to the F&D domestic business.

I am just wondering what is weaker, where you are more negative sequentially, in terms of your outlook?

I would say that, first of all, in context, the third quarter was an extraordinary quarter, so the $0.90 to $1.00 guidance we gave for the fourth is still a very strong guidance.

I would say it's fabrication, when all is said and done, Chris, and that is with the continual price increases, there is another one that will take effect on July 1st.

The fabricators will continue to have a rough time at it.

Okay.

But are you assuming that scrap falls during the quarter, that would adjust the surcharge down?

No.

Murray will --

Chris, it fell in June for obsolete grades, and if you asked us that question a few days ago, we would have said flattish July/August, but it could be, as I mentioned earlier, could now well be an upward movement July/August.

It is a little bit too early to say, and what you really need to watch is the global markets.

As I mentioned, there doesn't seem to be any seasonal slowdown this year.

It could happen July/August, but we don't see it quite at this stage.

So there is a real possibility that scrap may well increase here July/August.

What would that do to the domestic mill margins then in the quarter?

Well, they always have a catch-up period, of course.

They are not catching up now because scrap only rose obsolete grades, $10 in May, came off $25 in June, and the prices of rebar and merchant bar products are increasing in May, June, and now July.

So the mills will catch up.

As I mentioned earlier, we would anticipate the metal margins to improve at the mills, would mean a big scrap jump say in August, that may jeopardize that but we don't see that at this stage.

Chris, there is still a gap between the import price, which keeps going up, and the domestic prices.

And in fact, given the current prices in Turkey, I mean, there is virtually no way any Turkish material can be sold into this market.

If I back into it, you are expecting a pretty bad quarter for F&D sequentially, versus that number you put out here?

No, no.

We expect another strong quarter, because the F&D, the international, which was our old marketing distribution.

I am sorry, I mean domestic F&D.

That's the delta, so it will be significant?

Well, I would say that given the LIFO burden they carry during the third quarter, they may actually improve, Chris.

But you asked, I would think your question was aimed operationally, and that was our answer.

But LIFO is always the swing factor in this sort of thing.

Okay.

I guess just switching gears real quickly, you are kind of making some positive comments about the underlying demand for nonresidential construction.

And I am just wondering, what is your visibility on that, or how do you feel about the potential of cancellations, considering the cost inflation with some of these key materials?

Where do you get your confidence in that comment, maybe beyond this summer?

We mentioned steady.

Some areas are clearly declining.

You look in our joist business, which is exposed to the box retailers, et cetera, that is down 15%.

It seems to have leveled the last month or two.

In other areas where definitely non residential will reduce over time, with projects being canceled.

As you mentioned, the credit squeeze, the difficulty of getting finance.

There is a big sector out there nonresidential.

I am not saying it is immune, but like the highway work, et cetera, that continues quite strongly.

The energy sector clearly, anything related to energy is very strong.

Maybe we are blessed in this part of the world being in the Gulf, Texas area.

Those areas are really quite strong.

So it is a mixture.

So I guess the word would be steady, and certainly some areas are definitely declining.

Okay.

I will leave it at.

Then Stan, let me just wish you the best of luck.

It was great speaking with you, and I hope you do well.

Thank you, Chris.

Your next question comes from Sal Tharani with Goldman Sachs.

Hi, guys.

Hi, Sal.

Can you give us some more color on the Croatian mill?

In terms of from what I understand, you have a pipe mill which you are ramping up, then you have additional capacity in the mill at at [capacitor], when do you expect you can produce extra billets?

Or if you think that is a viable option before that [inaudible]?

Sal, we have to spend and we plan to do so in the next 12 months, considerable CapEx to improve the mill shop, and also the caster.

We need to modify that caster, because at the moment it produces octagonal billets, and the market needs round billets.

Until such time that we can change that caster, we can't sell billets in the outside market.

So Croatia we have to say is a turnaround.

We were over optimistic early in terms of sales.

It will be well into next year until we are making significant progress at that mill, but we do have plans to aggressively spend the CapEx, and also we have got short-term plans in place to cut costs and improve efficiencies.

But that is going to be slower than we anticipated.

The volume or the capacity for caster right now, what is the capacity you can put on caster?

Is it 300,000 tons?

It could be higher than that.

I think it is approaching 450,000.

It is a big caster, but our furnace can't produce that much steel, so it is kind of academic right now about the caster.

We do have in fact, we have bought a pre-owned, I believe the word is, a pre-owned furnace, with the plans that we have in place, we will be able to expand the melt shop's capacity, and at the same time revisit the caster, so that it is able to cast the more commercially viable sizes.

At $1,000 a ton, or $900 a ton, whatever the billet prices are, that could be a big improvement in profitability in that business.

We agree completely.

It is certainly we have of the driving factors behind the Polish mill, with our current excess mill capacity, and selling billets into that market.

We agree completely.

And longer term, Sal, does it appear that the demand for semis in the merchant market will continue, because countries like Russia, Ukraine, are using more of their own raw materials, Brazil, so presumably there will be this increased demand for semis.

Stan's point, and also with China basically cutting off the exports of semis, we think globally semis, billets, and slabs are going to be in tight supply the next two years, unless there is a tremendous demand pull-back, but there is just not enough mill capacity globally to fill that void left by the Chinese.

Also considering, even if you don't make too much pipe, or are not able to sell it because of the older sort of, whatever happened in the past owners, and they discredited the company, billets can be a very good profitable business, just turning the billets over.

Right.

Croatia realistically, we are 12 months away on having extra capacity out of that caster.

Okay.

And now on the scrap side, I think that the scrap prices in Asia, and you guys have a lot of understanding of this market, do they follow pig iron prices as well also?

They do.

If you watch the trend there, pig iron prices have obviously risen dramatically.

Pig iron is tight, but certainly there is a direct correlation with scrap prices in Asia with pig iron.

I was looking at an old table where pig iron and scrap generally have a $40 delta, and pig iron now is $150 higher than the scrap, so there is a good chance that scrap can even go up further?

We would think so, yes.

I think that is one of the data points where Murray was referring to.

There could be upward pressure in scrap prices in July and August.

That is certainly one of the indicators.

And since, as you know, Sal, we have the scrap operation now in Singapore, that physically, we are very much on top of that market.

Yes and also, on the domestic scrap business, if I strip the LIFO out, you made $73 a ton this quarter versus $37 a ton last quarter.

How much of that is manageable, or you can maintain a sustainable?

Because I know some of that has to be just because the prices are ramping up.

Once the prices are stabilized, even it at a higher level, this delta, or this margin should come down a little bit.

Is that correct to assume?

Yes, it will come down some, but I think it is going to stay well above the historic norms.

Definitely.

It will be higher.

But generally in rising prices, just because you are buying at a lower cost during that time you probably make a little extra?

Yes.

That is correct, Sal.

And the margins, if I look at your margin expansion of scrap down $25, and rebar merchant up $35, that is a $60 delta increase in margin.

Do you think you are conservative on your mill guidance?

Oh, no, we are not, Sal, we are not going to say.

Sal!

Sal, remember too, as you know, the recycling includes non ferrous, and during the third quarter we didn't have the margin expansion in the nonferrous that we had on the ferrous side.

You didn't have any margin expansion on the nonferrous?

Generally speaking.

Those prices were relatively, they didn't have that kind of movement.

Great.

Thank you very much, and Stan, I look forward to meeting you at your going away party.

Thank you, Sal.

Your next question comes from Timna Tanners with UBS.

Hi, good morning.

Good morning Timna.

Just wanted to follow up and make sure I understand some of the answers maybe to some of the earlier questions, if I could.

You notice the gap between global and domestic prices is being able to maintain a domestic price, at or perhaps above current levels.

But maybe could you help us understand why there is a gap on long products, between global and domestic, and can we see the U.S.

price actually kind of revert to more of the global price with rebar globally quoted at 1,200 and above?

I think clearly on the demand side here in the U.S.

it is not as strong as in the global market, so we don't see U.S.

rebar prices reaching the levels in the Middle East and some of these hot markets.

We don't think that is going to happen.

Clearly there is upside potential for rebar prices here in the U.S.

I think that is quite clear.

As mentioned earlier, nonresidential in some areas is weaker.

Rebar was going into condo building, and in markets like Florida, we don't have steel-frame houses because of hurricanes.

You have masonry brick which uses rebar.

I mean, that market is clearly down.

Mind you, a lot of that was 20-foot-length rebar, which was imported.

We think where the markets are now, there will be a differential, rebar prices in the U.S.

are likely to remain lower than international prices, and particularly while the dollar remains weak.

Okay, that makes sense.

But then taking that to the next level, what does that mean in terms of opportunities for export?

How are you positioned, if you can give us an update on your thinking vis-a-vis export.

Our mills are really running flat out at the moment.

We did export one shipment of rebar, and we will probably test certain markets over time, because that is the beauty with a weak dollar, with high international rebar prices, the mills have the ability, and some of our competitors have more capacity than we do to do that.

So even if demand falls off here in the nonres side, you have that ability to export not just rebar, but merchant products and obviously billets.

Such a hot market maybe, as we mentioned for maybe the next couple of years.

Markets in Central and South America and the Middle East, as well as in Asia.

It is just a tight supply situation on billets.

Sure.

Okay, that makes sense.

Finally, I think taking your point on how the mills domestically at least are running flat out, can you give us an update on the timing of some of your expansion projects, you mentioned that CapEx looks like it may be pushed out a little bit.

Do you have any new thoughts on uses of cash beyond current expansion plans?

Actually we have now posted our presentation, so I will no longer be able to surprise you.

But it is up on the website now, and there is a, and I am just going to read from it, because you all didn't have any reason to look for it, and there is going to be a slide, number 9, in the presentation that gives the project overview.

The summarized version of it says, that we expect Arizona to be commissioned in late summer/early fall of next year.

We continue to make progress on our air permit, but the bureaucracy is slow, and we have been delayed there.

The Polish wire rod block, which is the first of the two big expansions in Poland, will be commissioned at the end of this calendar year in December 2008, so that is right on schedule, doing well.

And then the brand-new mill, the brand-new flexible section mill in Poland, is expected to be commissioned in early 2010.

So those are the three big ones.

Right now in terms of uses of cash, I think it is essentially going to be to continue on acquisition opportunities for the most part.

Okay.

Great.

Thank you very much.

Your next question comes from Sanil Daptardar, Sentinel Asset Management.

Thanks, just a clarification on the LIFO guidance for the fourth quarter, in one of the comments you mentioned in the case of Poland you are chasing prices, which means that there would be a LIFO expense in the international arena.

That means for the domestic mills, domestic fabrication, there would be a LIFO income.

Is that the way to think about it, or is there something else in that?

Yes, there are a couple of things.

One, we don't use LIFO in Poland, so that would not be affected by it.

The 0 comes from yet another profound analysis, where the argument goes like this.

Pricing may tick up a little bit during the summer based upon factors we have already described.

Should be, now again, this is an assumption, should be offset to a great degree as we drive our inventories down as we head to year end.

There is always a push to get the working capital down, both in receivables and inventory by year end.

So the initial overall framework within which to understand 0, was that pricing may increase some, but we hope to drive the inventory tonnage down.

And that is all domestic related.

As I say, there is no LIFO overseas.

Now, in case of driving the inventories down, you are assuming that the shipments will be down also in the fourth quarter, or the shipments are going to --

No.

We are expecting very strong shipments, and as Murray indicated, the fourth quarter is traditionally our best quarter from the standpoint of shipments and, I mean, we are just about at capacity right now, so we in order to meet demand we will have to ship out of inventories.

Okay.

In case of the demand in the U.S., you tried to break down what areas were strong and which areas are, if you can just recap that, to get better understanding where the weakness may persist, and we can address, affect the shipments in probably two or three quarters down the road?

Well, we mentioned on the nonres area, the areas that are weaker, the box retailers, shopping centers, condo building, even light commercial, those areas are definitely weaker than what they were.

Highway works, most public works, et cetera, remains very good.

So the areas which are, what percentage of your shipments are going to those areas?

Infrastructure makes up in excess of 30% of the shipments here in the United States.

So these areas, can the highway works offset the weakness in those areas, in terms of the shipments, or they can't?

Oh, I don't think it is going to pick up.

I think it is really a question of this is a supply-driven market, and that is the lack of imports into the United States, for every ton that domestic demand may fall, we suspect that import supply will fall as well, and therefore the balance is going to come out all right, and then the alternative, as Murray mentioned, if the markets do fall here in the United States, you ship it overseas.

Providing the U.S.

dollar remains weak and international prices of demand remain strong, which we see, for the next several months anyway, there is the opportunity to export, so nonres would have to really fall away dramatically, we would think, to have a significant effect.

I think the economists have consistently underestimated for several years now the extent of this global infrastructure demand.

It is quite extraordinary.

We were just in Russia.

It is just the BRIC certainly, but emerging companies, that is not to say there aren't issues.

Vietnam does now have a credit crunch, so you can certainly get slowdowns in these emerging countries, but I tell you, this global infrastructure thing is just extraordinary.

Okay.

Just one last question on the Poland side.

Have you seen any kind of changes in the demand pattern there in Poland, or the demand remains pretty solid there, or you don't foresee any kind of changes there for the next three or four quarters?

No, the demand looks very solid.

Steel consumption and the growth rate is higher than the GDP in Poland which is around 5 to 6% a year, and with Poland, I have got the European Cup coming up in 2012, starting to spend the EU funds on highways and infrastructure.

We perceive Poland as a very good market.

The other thing is, this year, unlike last year, there are no imports from Turkey.

Turkey is just focused on the Middle East to north Africa, which is getting the best price.

So the Poles are getting some imports from nearby countries, but it is fairly neutral, and so they are in a good position, certainly for this fourth quarter, and the foreseeable future up until fall time.

Clearly a severe winter slows down construction in Poland, but that is a few months away yet.

Okay, great, thanks.

And Stan, I wish you a very happy retired life.

Thank you.

Your next question comes from Brian Yu with Citi.

Thanks.

Good morning, guys.

Good morning, Brian.

Questions here regarding the Americas mill price realization.

When I look at the spot market prices for rebar, for the quarter ended May, it is averaging about 7.75, and you guys had posted 7.18.

It is one of the widest spreads we have seen in some time.

Can you comment?

Does this relate to some pricing lags?

Maybe product mix related to billet sales, or is something else driving it?

Yes, it is clearly the lag, Brian.

I wouldn't hide behind product mix.

That is one of my favorite, you almost set me up to give you one of my blow-off answers, but, no, it is lagging.

The mills at any one point in time are going to have 30-day backlogs that they have to, it may be a little bit more than that, but anyway, for argument's sake that they do to have grandfather it, so spot prices always, well, the realized price is always going to lag the spot price, whether up or down.

Okay.

And this is not one of those instances where prices are sticky on the way up, but not on the way down, so we should, going forward, just assume there is a 30-day price lag, and use that as a proxy for realizations?

I would agree.

If imports were more of a factor, you might have a little bit more resistance on the way up, but that is not the case right now.

All right.

And on the Americas F&D side with the pace of rebar price increases slowing, can we expect F&D profitability to at least improve sequentially even though it is a loss?

That would, on the LIFO basis that would certainly be my expectation.

Okay.

And then lastly, we have been just anecdotally hearing and reading a lot about demand destruction, and project delays due to high steel prices.

Are you seeing any of that on your F&D business, and what's been your ability to try to hold the F&D margins flat in light of the steel prices?

On new projects?

We are seeing some of it, yes, in terms of margins, I mean, they have a problem obviously, with these rapidly rising rebar prices, and if you are talking the joist people, merchant bar prices to pass those price increases on.

So that --

We will honor the contracts that we have made, and in doing so, you do take a beating.

Now they are going under, they are not taking this sitting down obviously.

They are trying to change the book of business by being more aggressive on bidding one and two-month work, bidding work that can have escalator clauses in it, and by bidding prices that they would feel would be comfortable, in spite of any possible increases.

But it does take a while, and a it lot of fabricators, they are not going to make it during this period of time.

These prices, we see it obviously as it comes off of our own mill.

We have this dual distribution strategy of selling not only to our own sister companies, but to their competitors as well, and there are going to be some people who just don't make it during this period of time.

I think, in terms of the end users, the bigger issue on the commercial side, not nonresidential, the commercial side, not the public sector.

The bigger issue is the credit crunch, I think, rather than rising material prices, and I think that is what will then again turn the market back up again, is when credit availability improves.

We don't know when that will be, but I think that is more the issue.

Okay.

Got it.

Thank you.

Your next question comes from Eric Glover with Canaccord Adams.

Hi.

Thanks for taking my question.

I was wondering if you could comment on the availability of scrap, particularly in the U.S.

There has been some talk that the sharp run-up in prices that we have seen has actually drawn material out, that may impact the supply going forward.

I was wondering if you could comment on that?

Well, there is no doubt, if you look in the last couple of years with obsolete grades, flows have increased significantly, and when you look at industrial scrap, obviously that is not the situation that comes from manufacturing.

So definitely obsolete, there has been more collected, and it is a bigger market than it was.

You would have to say there is a limit to how that market can grow, but at these prices, people are collecting scrap from everywhere.

People are even digging it out of the ground, et cetera.

And there are also some other activities that the police take a lot of interest in, which we won't comment on, that basically, yes, the supply has been very strong at these prices.

I think some of this conversation about whether we are heading into ultimately a scrap shortage, this comes up every decade or so.

You have probably seen it three or four times, Stan.

Yes, we have been in the scrap business now almost 100 years, the steel business almost 50 years, and this is one of these recurring phenomena, which is usually pointed towards trying to have some type of export controls, is usually the ultimate, which of course is a complete fiasco when we get those, but I am not anticipating at all that we would get those.

But usually it is some move to somehow restrict the free market from operating, and there is no, we exported last year 16 million tons of scrap, which was a record.

If the mills, we are on both sides of it, if the mills want to keep it here, all you have to do is pay the price to keep it here.

The mill has got enough scrap and we still exported, as a country, 16 million tons.

Okay.

Thanks for your perspective then.

Your next question will be from Charles Bradford with Bradford Research.

Good morning.

Couple of questions.

First of all, you alluded to shipping costs coming down some, yet the shipping companies are all extraordinarily optimistic, and at the same time, we are seeing the price of moving iron ore in cape-size vessels plummeting.

What are you seeing?

And can you put some numbers on it?

Chuck, we have seen, you follow the freight markets very closely.

They peaked in May.

They have come down on most routes, depending on the size, the vessel, and the destinations.

I mean, we think the markets, the freight markets should remain high, but off the peaks of where they were, and they have come off $10 to $20 a ton.

We don't see it dropping another $20 per ton for argument's sake.

Clearly because the demand is there for raw material, steel, coal, et cetera.

What are you seeing in moving steel specifically, let's say from Europe to the U.S.

or from Asia to the U.S.?

Well, from Asia, southeast Asia to the U.S., it is around about, depending on the ports and the destination, say the Gulf, it is a bit over $100 a ton.

From China to the Gulf, it is around $80 to $85 a ton.

From Turkey to the U.S.

is around $80 a ton.

What kind of volumes are you looking for from the fabricated products?

Would that continue to improve, or pretty much hold flat?

You mean rebar fabrication?

Yes, rebar fabrication.

We think it should be flattish.

Okay.

Some markets are stronger than others in terms of regions here in the U.S.

The Gulf, Texas, further west, they are all quite strong.

The eastern markets, there is a lot more competition there.

They are a bit weaker.

It seems like foreign prices are so much higher than domestic prices that unless you have some constraints, as far as shipping, I am just really surprised you are not shipping more overseas.

Do you have any constraints on what you are able to export?

Well, it is just the capacity of the mills really.

Yes, there are some markets clearly that are metric.

You have problems from that point of view, but our mills are basically full here in the U.S., and our first priority is to look after our domestic customers.

If we had more capacity, definitely we would be exporting more.

Have you broken ground yet in Arizona?

Yes, but not for a full-blown construction.

We have done the grading, and we are building a rebar fabrication shop there, and so ground has certainly been broken on the rebar fabrication shop, and infrastructure for it has been put in.

It seems like it is a very short period of time to build an entire mill, from what you talked about before, as far as starting up next year.

Well, the point there is that the majority of the equipment, even though there hasn't been work done on the mill site itself, all the equipment is sitting in storage in Arizona.

So typically, as you know how these things go, Chuck, there is a ramping up, and you have a delivery schedule that you install it as it comes in, but we now have the case that because of the delay, and the lack of the ability to get started on the mill, we are all pent up and ready to go.

But what would typically have been more of a drawn-out construction period, can be now condensed, once we get the permit approved.

Seems like putting in foundations and the like, seems to take a long time.

We already have all of the drawings, we have got all of the engineering.

It is just that we don't have the permission to go.

So I think we will be surprised, too, about how fast it goes, but people who have been sitting on top of this project now for the last year and a half, are very confident that once we get the green light, we will be able to meet that timeframe.

Thank you, and I look forward to seeing you tomorrow.

Thanks, Chuck.

Thanks, Chuck.

Your next question will be from Bob Richard of Longbow Research.

Good morning and thanks for taking our call.

Good morning.

A lot of our questions have been answered.

Just a quick one.

Overseas shipments, mill shipments down a little more than our expectations.

The gap between melt and roll seems rather large.

Are we looking at that the right way, or were you guys maybe a little disappointed in your mill shipments there over in Poland?

Was the SAP outage, was that the whole bridge to it?

That was a major factor.

We were out for over a week, so it was pretty significant.

And if you look third quarter last year was a phenomenal quarter in Poland.

Their prices peaked in April, and they really had a very strong quarter, so we are really building into our third quarter this year, and unlike last year, when the Turkish imports started, we saw it at the end of the third quarter last year, it really impacted our fourth quarter results, it won't have an impact this fourth quarter.

So anticipate this fourth quarter in Poland to be very strong.

You also saw the melt shop running flat-out because of billet sales, both that were realized during this quarter, and ones that will now ship in June.

So yes, there was a discrepancy between that.

The reason is we were selling, and will sell more semi finished.

Okay.

I appreciate that.

One quick follow-up.

Bill, your earnings release, ferrous scrap exports were limited to 45,000 tons.

Just the semantics, but were you just earning a better buck here, or was it shipping assets availability?

Can you provide some color on that?

Yes.

As Murray said, we always prefer to satisfy the local demand first.

Most of that scrap, if not all of it, went out in containers, and for ferrous export, containers are beginning to get a little tight, both because of demand, and because shippers are finding out that ferrous scrap isn't necessarily the most friendly commodity to go banging around inside their containers, so I think that is the answer.

Also with the container tightness, we prefer to send nonferrous scrap in containers, and ferrous scrap we make more margin per ton with nonferrous.

So nonferrous gets first priority, and then ferrous gets second priority.

Okay.

And just a quick one.

If you had had the assets you would make a better buck overseas than domestically, wouldn't you?

Or would you?

I am not sure.

On ferrous scrap.

On ferrous scrap, yes, if all our ferrous scrap were by ports that we could export at this point in time that would be true, but a lot of our collection, a lot of our yards, in fact virtually all of them, are not close to ports.

So clearly we support the domestic mills, including our own mills here in the U.S.

And all of them are close to domestic mills, literally.

Understood.

Okay.

Thanks very much for the color.

Great quarter.

Thank you.

Your next question will be from Don MacDougall of Adage.

Good morning everybody.

Stan, let me add my congratulations on your retirement.

Thanks.

Just a question on the comment that you had made about highways being quite strong, the public infrastructure part of your demand.

I guess first of all, how much of that, of your business does that represent?

And then I am wondering if you have a view on where the budgets will come out for next year, given the inflation in asphalt, steel, cement, et cetera.

It seems like we would need a pretty big increase in the budgets to kind of keep the volume of steel consumed at comparable levels?

Do you guys have a view there?

It does make up, if you add both our fab operations and the mills, it makes up almost a third of what we do here in the United States.

I think you have done the math absolutely correct, and not that that means I want a Democrat in The White House, because we are more, but yes, I mean, the funding is going to have to go up, but it is one of those projects, one of those calls on the taxpayer that seems to have a little bit more bipartisan support, but I can't disagree with where you are heading on that.

And it is true, obviously we focus on steel, but when you look at all of the construction materials, including the diesel for these guys to run their tractor-trailer rigs, it is extraordinary.

Now just getting back to another question, if I wanted to assume that, or let's just say that we get a much more steep drop-off in nonresidential, commercial, public, whatever combination thereof, how quickly can you guys ramp exports?

You said that you were exporting this quarter, but are there any physical constraints?

Could you in a three-month period export 20% of your volume?

You need a quarter or two.

There are some limits, depending on what markets you are trying to sell to, but 20%, it is possible in a couple of quarters, but we would really, you need to do things like change mill rolls, and all that type of thing.

But certainly if the billet export markets remain strong, those we can ramp up pretty quickly and export them, and with international marketing and trading organization we are in a good position to take advantage of that.

And although imports have dropped dramatically in rebar, we still probably run 800,000 to ns a year.

In the scenario you are describing, those would presumably go to 0, or head towards 0.

Got it.

One final one.

On the scrap business, obviously it is a great market to be selling scrap in.

How long does it take before the higher cost of scrap that you are realizing filter through to the acquisition costs that you have with your collection network?

Is that real-time, or is there a lag?

I would say within an hour or so.

Okay.

Everybody, even got the guy who is driving his pickup truck, checking his Blackberry as he walks in.

So we obviously buy very favorably, and we have longstanding relationships with smaller dealers, although we give them a fair price, they also realize that in periods when scrap goes down, that we will be there as well to buy their volume.

So we still think we have a bit of an edge, but playing hide the ball on what the pricing is, is not possible any more.

Industrial scrap does have more of a lag because it is generally on a formula basis, so there is more of a lag there.

But it works it's way through.

Great.

Well, thanks for your help, and good quarter.

Thanks, Don.

Thank you.

Your next question will be a follow-up from Michelle Appelbaum with Michelle is Appelbaum research.

Hi.

This is a fabulous call.

Thank you for all of the illumination.

This is great stuff.

Can we talk just more specifically about the global versus domestic price?

Because in January we saw this bizarre arbitrage happen, where billet prices for export out of the U.S.

hit $1,000 a short ton, and rebar prices were 20% below that or something like that, then all of a sudden like a rocket, you saw the bar prices come up.

If you wanted to export today, and I understand you are not going to jump in export, you have got customers here, you have got commitments here, but if you wanted to export, can you give me some benchmark of what that price would be into the export market?

For what products, Michelle?

Billets or rebar?

Whatever you want in your food chain.

Whatever products you think are relevant to you.

Well, for us it would be billets.

Okay.

So from here in the U.S., if we could get ex-mill prices of, and assuming we had spare capacity in billets, which he we really don't, we are exporting some, as you know, but you would be looking at probably a metric tons around 950 to 1,000 a metric ton would make it attractive.

Okay.

You are saying that it would be attractive to you to export at $950 or 1,000 per ton?

A metric ton, yes.

I am asking a different question.

What could you get today, do you think?

You're in the trading business, you should know this, right?

I am sorry, I am asking a different question.

Right.

Well, if you look at the, I guess Turkey is the best example.

If you look at the best markets in the world, which are in the Middle East and north Africa, the current Turkish FOB price is $12.20 to $12.40 a metric ton.

They supply clearly the Middle East and north Africa.

The freight is not much there, maybe another $30 a ton or so on top of that.

SVB had a $1500 on quote yesterday.

On billets?

On bar.

You are saying 1200 for billets?

This is billets, yes.

I thought you were talking about bar.

No, no, we have seen rebar prices at $14.60 a metric ton CNF Dubai.

So that is an indication of what your quote would be less freight.

You would have to support the freight on top of that for those regions, right?

Right.

Is would that be before freight from those regions?

That is cost and freight, Dubai.

And a comparable price for billet in the United States would be what for metric ton?

You asked the question on exports.

We would be looking at that 950 to 1,000 a metric ton.

Would make it attractive to you?

Yes, if we had extra capacity.

But you are saying that the prices are 1200 a ton?

This is from Turkey, yes.

Okay.

So you are saying that it is in the money by $300, or something like that?

No, you have got a lot of freight.

How much is the freight?

Well, you have got probably over $100 in freight to those markets.

Okay.

So it is in the money by $200 a ton.

We are talking billets now, yes?

Yes.

The billet price we mentioned was say 1,200, 1,240, in that range.

So that is 100.

And your indifference is going to be 950 to export a billet out of the U.S., so that would be --

That is ex-mill, you have got to add the internal costs, et cetera.

You can see that if you had extra capacity it would be attractive.

What I am trying to point out to people that are so worried about demand destruction, is that there is a cushion out there in the export market.

Right.

And the fact that we are such huge net importers in the United States, puts us in this extraordinarily vulnerable position here, about not just your demand destruction.

You may have, if you lost 20% of your market, because prices go up so much, with what global prices are doing right now, you could end up making more money exporting, and there are profound implications not only for profitability of steel companies, but also for what is going on in the U.S.

economy, because I don't know how you stop, you guys are choosing to arb negatively.

You are choosing not to export when, and there are a whole bunch of reasons.

I am not saying you should be exporting, but there is going to be that pressure there, and so if we have demand destruction here, not only would it be made up by export, but it would be actually maybe a better thing for margins, because you are paying the cost that Turkey is paying, right?

They are pulling scrap out of the U.S., and so you're being taxed essential on that.

You don't have to pay the freight, so your costs are much lower, but they are getting those higher prices.

You're not necessarily going to be able to see those because the U.S.

market is in this very position.

Does that make sense?

I am just trying to get the granularity of right now exports are in the money a couple hundred dollars a ton.

You are not doing that for a whole bunch of good reasons, but that opportunity will be there.

And that is what happened in January, wasn't it?

Why prices in the U.S.

kind of skyrocketed on the long side.

Michelle, we will answer it another way.

Clearly if our view was the U.S.

dollar is going to remain weak forever, the nonresidential construction market was going to dramatically drop here in the U.S., that the north African and Middle East markets are going to remain strong for the next five years, Yes, you could change your strategy and export 50% of what is produced, but clearly we are not going to do that, and we will support the domestic market here, but it just highlights the fact, with the big reduction in imports into the U.S., the very strong international marks that our Company and other steel mill long product companies here in the U.S.

should be in a very good position for the next quarter or two.

You need significant demand destruction, pull-back from overseas to change that scenario.

So in summary what you are saying is correct, but we will export where we can.

We are going to support this market, even if there is a big price differential overseas.

A related question is, on the macro side, do you see more of these export controls?

We kind of touched on that.

The Russians, Putin went out not too long ago, and kind of threatened the Russian steel makers, supposedly at the behest of Gazprom with the export tax, do you see more of these export taxes coming along, and if you do, there are some people saying China also.

And if you do, well, do you see more of these export taxes?

Do you see more Chinese export taxes and stuff?

Our view would be yes, the tendency, you will see more government intervention, you will see it for a couple of reasons.

One, it keeps the domestic prices under control for inflationary reasons.

But that further highlights the problem on supply.

As we mentioned during the call, certainly on semi products, billets, et cetera, with the lack of melt capacity in the world with China pulling back on its exports, it is going to be a real issue for the next two years.

We see India now imposing export taxes on iron ore of 15% to remove, they are only there own a temporary basis, flat product export taxes and have increased long product export taxes.

We have seen Taiwan ban scrap rebar, wire right exports for a three-month period, and talking about putting on export taxes.

Yes, this trend, Russia and other countries are talking about it, China most likely will increase export taxes on commercial grade, so it is there, and so it will further highlight the problems with supply.

(OPERATOR INSTRUCTIONS) Your next question will be a follow-up question from Sal Tharani of Goldman Sachs.

Can you give us some insight into rebar imports?

The licensed data from the Census Bureau, which is sort of a backward looking data, shows that April/May imports are down about 60, 70% from April.

But are you seeing any activity for June, July, August going forward?

Sal, no.

Very interesting question.

We see June, July, and August at very low levels of imports.

In fact, the port in Houston is a good guide to check that.

Their inventory levels are only 70,000 tons.

Historically they are it at 150,000 to 200,000 tons.

They do get shipments in by rail from Mexico, as well as the bulk shipments mainly from Turkey.

They have got no shipments on the horizon for the next three months.

That is June, July, August, from countries like Turkey.

All they will be getting in is from Mexico.

So rebar shipment imports are going to be very low June, July, August period.

That should make it even tighter.

It will, yes.

And summer months, construction generally is, remains very active in the U.S.

Right.

A seasonally strong period.

Assuming June imports are similar to May, in June, as of today, the licenses are at 26,000 tons.

May was 47,000 tons.

For the first six months of this year, the average will be 97,000 tons per month, which is down 40% on the first six months of last year.

So that shows you the magnitude of the drop-off of rebar imports.

And that will continue now through summer.

The only thing, Sal, that might mitigate that a little bit would be since many of the bar mills left in the U.S.

can roll both rebar and merchant bar in the same mill, on the margin, you would guess the mills will roll more rebar, given the way the market is.

And another thing, are you taking any downtime in any your mills in the U.S.

this summer?

Yes.

Our Birmingham mill, we are putting in a new reheat furnace in there.

It will be down a couple of weeks in July.

We are building out finished good inventory in the meantime.

But the melt shop will continue, so we can still sell billets there.

So that is the only one that we are taking down, apart from normal maintenance.

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

Mr.

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

Take care.

Thanks very much.

It has been a long call.

It is an hour and 15 minutes.

So all of us are going to jump on a plane now, so thanks very much for listening to the call, and we look forward to a very good fourth quarter.

This concludes today's conference call.

Thank you for participating.

You may now disconnect.