Commercial Metals Co (CMC) 2008 Q4 法說會逐字稿

Good morning, my name is Dennis, and I will be your conference operator today.

At this time I would like to welcome everyone to the Commercial Metals Company Fourth Quarter 2008 Earnings Conference Call.

(Operator's Instructions)

Your host for today's call is Mr.

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

Mr.

McClean, please begin your call.

Good morning.

And welcome to CMC's fourth quarter fiscal 2008 conference call.

Before I begin the call I wish to say a few words in memory of [Sarah Philibin] who passed away this week at the age of 101.

Sara was the widow of [Jake Philibin], as some of you may remember that Jake was responsible for transforming Commercial Metals Company by the Philibin family into a public corporation.

Sarah was a very gracious lady and tremendously kind and caring person.

She and Jake honored principles and values.

In fact, Jake was responsible for the foundation of CMC's core vales which Stan Rabin, our former chairman endorsed and referred to as CMC's eternal values.

Sarah, you will be greatly missed by family, friends and all of us at CMC.

And now on with the call, with me is Bill Larson our Chief Financial Officer.

I'll start the call with an overview of the fourth quarter and call on Bill to provide further details.

Finally I'll comment on the outlook.

With respect to the overview, we gave a guidance of $0.90 to $1.00 earnings per share with no LIFO forecasted.

The actual as you see in the release, was $0.55 earnings per share.

And if you add back the LIFO expense of $0.78 per share, the total is $1.33 per share.

Now this demonstrates the operating strength of the fourth quarter, where we exceeded our range by $0.33 to $0.43 per share.

The global markets peaked during the quarter with prices declining by quarter end.

Ferrous scrap prices here on the US peaked in July and shredded at $605 a long ton before dropping $60 a long ton in August.

Inventory levels started comparably low, particularly rebar in June was low in the US, but increased by quarter end with slowing demand.

Rebar imports stayed low during this period, about 68,000 tons average per month during the quarter.

Ocean freight rates, which peaked in May of this year declined during the quarter.

Around China, it was interesting to see there, still exports actually increased in July and August.

And this was material that was booked by in May and June when global steel prices were at such high levels it meant the Chinese mills could make money even after paying export taxes.

Most of those Chinese exports went to Asia, Europe and in to the Middle East.

The US economy weakened further with non-residential construction slowing; definitely we saw signs of this towards the end of the quarter.

The normal seasonal slowdown did not occur; normally this happens in our May, June period.

It didn't happen this year until late in the quarter, late July, early August period.

And in hindsight, clearly the liquidity issues were starting to impact demand by late in the quarter.

I'll now ask Bill to provide details on the fourth quarter.

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, 2008 10-K, which will be filed today that in summary say 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, as Murray indicated; regarding our outlook for the first quarter of fiscal 2009 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're aware of non-GAAP financial measures.

Some of these have derived fairly straight forward from our financial statements or our uncommon business views that will be the subject of our discussions today in our investor visits.

Our website has additional information at cmc.com, but there are other times that may be outside of our ability for discussion and you may need to be patient with us.

Well this morning's a little different than our other conversations with you.

Surely, yes due to the ongoing financial crisis, but more in terms of who is not with us.

For my ten years doing these calls Stan Rabin has been in the room with me and now he's listening in as all the rest of you are.

And as Murray noted, for 101 years, Sarah Philibin had been with us and now is gone.

May both of them enjoy their retirements.

I was debating about whether or not to put out a fourth quarter press release that had nothing but the first quarter outlook in it.

Though our fiscal year ended about 60 days ago in what you might term economic event years, that seems to be a long time ago.

No need to go over to plowed ground of what got us here; greed, pride, gluttony, wrath, envy, sloth, lust, actually those are the seven deadly sins.

But I think there're elements of each of them in the near death experience of global economies.

What people want to know is where are we now and where are we going?

You know we're going to play the cards that we've been dealt.

We gave guidance for the next quarter as we always have.

I note a bit of a growing reluctance on the part of some managements to make any forecast, even as short as a quarter under the rationale that it's just too hard to see right now

And though I agree with the circumstances we face, it's been my opinion that the market of abhors a vacuum and we'll ignorantly or not fill in the gaps.

So we've been given you our best thinking.

Are we subject to being imprecise, more now than in the past?

Given my track record on LIFO estimates, I think some would argue that that just isn't possible.

But I think the qualitative message is clear.

Prices have collapsed, volumes will be lower, the LIFO, which has taken the economic profits out of our previous earnings will now take the deflationary losses out as well.

A quick note on liquidity, on August 31, 2008 we had substantially all of our 400 million commercial paper program, or the contractually committed revolver that backs it up available to us.

There were a few letters of credit issued under it.

We had our 200 million accounts receivable securitization program available to us.

We continue to have sufficient uncommitted lines of credit available from numerous banks.

Our banking group has had some merger within its ranks, but it is substantially intact.

Our financial condition is strong.

Now what are our financial priorities right now?

Clearly you must play safe with the bank crisis exploding around us.

Financial institutions went to excess one way to cause this problem and they will go to excess the other way to solve it.

So our first priority must be liquidity; saving cash by reducing working capital.

Second be flexible on our CapEx spending.

Our press release outlined our objectives for the year, but we must constantly reassess where we are.

Third balance our cash needs against the compelling value represented by our stock price.

Let me add just a few words about the fourth quarter.

The results were all about LIFO, increases in ferrous scrap prices were still resident in our raw material and our finished goods inventories by quarter end.

In addition our marketing units, at least some of our marketing units, had significant in transit inventories at August 31st.

Not affected by LIFO though, Poland had an extraordinary quarter.

If you add it all up, a LIFO reserve at August 31, 2008 was $562 million, which is $3.21 a share.

In the fourth quarter, decreased net earnings, $90.9 million -- I mean these numbers are just staggering -- $90.9 million or $0.78 per share versus last year we had income of $5.7 million, or $0.05 per share.

Year-to-date then the decreased net earnings, and this is an after tax number, $209 million, or $1.78 per share versus a decrease last year of $33 million of $0.27 a share.

The depreciation for the fourth quarter was $38 million $475,000, that then gave the year's depreciation at $135,069,000 because of acquisitions both late in the year and not a full year of depreciation during fiscal 2008, we do expect depreciation for 2008 to be $160 million.

Speaking of our debt, the interest coverage ratio, there's only two covenants on it; the interest coverage ratio is two and a half.

And the debt-to-cap ratio is 60%, neither one of which we are even within sight of.

SG&A for the fourth quarter increased about $53 million, a lot of that had to do with acquisitions; Nike, ABC during the quarter.

Functionally, its resident mainly in salaries and the ongoing cost associated with SAP roll out in the IT infrastructure.

All of that is true also for the increase year-over-year and on top of that you can add CMC, CSAP, the Croatian mill on top of that.

Our -- in some interest statistics, the weighted average of our long term publicly held debt is 6.73%.

This is after the issuance of the $500 million in August.

For the next quarter we'd expect an interest run rate of about $23 million and we had a EBITDA to interest coverage in the fourth quarter of over eight times.

It's interesting on public debt, and I know you all have been following this, and probably don't need a whole lot of examples of how bizarre the circumstances are.

But if you think about it we issued the $500 million in the first week of August and paid 7.3% for it; IBM, which is rated four notches above us and probably has name recognition, whatever factor, 100, 1,000 times greater than we do, went out for tenure money two weeks ago and paid 7.8%.

So they paid 50 basis points more than we did for the same debt.

Book value per share is $14.40 at August 31st.

That's with the LIFO counted against it, so $14.40, and as many of the analysts have pointed out, that is rather significantly above where the current price is, which of course is fundamentally not possible.

But I guess it's a different world we're in right now.

Fourth quarter the average diluted share were 116,251,800; year-to-date the average diluted shares was 117,685,753 and the actual number of share outstanding was 113,777,152.

Next year's capital expenditure budget, I think the working budget's going to be in the 425 to 450 range.

Predominantly there are three large projects that have carried over from the prior year.

That's the micro mill in Arizona, the new flexible rolling mill in Poland and the melt shop and the caster improvements in Croatia.

During the quarter we repurchased 800,000 shares of stock at an average price of $25.98.

We were constrained in the fourth quarter because of our work on the $500 million bond issuance.

We didn't have that many days that we were able to actually purchase.

Year-to-date then for the entire year, we bought back 6,212,238; 6-2-1-2-2-3-8; at an average price of $27.74.

You probably saw the announcement a couple of weeks ago, the Board authorized an additional 10 million shares for treasury stock repurchases, that brings the remaining authorization as we sit here today to be $10,012,547.

Thanks, Bill.

Just a couple of comments on the further to what we put in the press release.

During the third quarter conference call on June the 18th I mentioned the greatest longer terms risks were inflation and a credit squeeze.

Well, clearly inflation is no longer a risk, at least in the short term, however, the global credit squeeze risk has hit with a vengeance as we all know.

And clearly confidence has been shattered.

Demand has been dramatically impacted in the US and globally for ferrous, non-ferrous scrap, iron ore, raw materials and steel products.

As Bill mentioned, our near term focus is on working capital reduction, reducing inventories, focus on [AR] collection and adjusting our businesses to fit the current market conditions.

We saw our recycling segment was hit first.

I mentioned earlier about the scarp drop in August, but if you look at the August to October time period for shredded scrap, it's down over $400 a long ton.

And November looks like we'll drop even further.

Our mills are reducing production to control inventory levels.

Rebar prices have dropped significantly since August.

They're down now $230 a short ton here in the US and merchants are at the lower rate of $160 short ton lower.

We anticipate lower shipments, further lower prices, but metal spreads should remain good in the short term; but ultimately are likely to trend lower.

Our rebar imports, as we see it they will stay low certainly for the next three months and into next calendar year.

Clearly the key will be how quickly confidence and liquidity can be injected into the major global markets.

We anticipate several tough months ahead and have implemented appropriate action plans to meet the market situation.

So as Bill mentioned earlier, it's certainly very difficult to forecast in such uncertain times.

Looking a little further out, we really do focus on what China is doing because China is such a huge player in the steel market.

They represent 37% of the world's steel production and obviously a major player in raw materials.

China is already reversing many of their policy decisions taken back in 2007.

They're increasing infrastructure spending.

They're reducing both interest rates and taxes, including the VAT tax rebates.

They're reintroducing those, or increasing those to help with their exports of a range of products.

All this will stimulate demand for steel within China.

Also we see significant cut backs in steel production in China and that will eventually restore the demand supply balance.

But most likely we won't see anything tangible until after the Chinese New Year, which is the end of January.

So February, March of next year maybe we'll see some positive signs out of China.

And clearly China - their target GDP growth rate of 8% to 9% a year, I think they're on track to achieve that.

So in summary we face several difficult months ahead certainly here in the US and it's clearly -- at this stage it's unclear how bad things will get before a recovery will occur.

So with those closing comments, I'll now open the conference up to questions.

Thank you, sir; we will now begin the question-and-answer session.

(Operator Instructions) And the first question will come from the line of Kuni Chin with Banc of America Securities.

Hi, good morning, everybody.

Morning.

Can you - I guess just to start off can you just talk a bit about the state of the various construction markets and some of the trends that you're seeing in your business.

Talk about what's been holding up and which end markets you see as starting to roll over at a faster pace?

Here in the US or globally?

Both.

Okay.

In the US the weakest markets we see are in the joist area.

And obviously that relates more to retail shopping centers, et cetera, light commercial.

But after the events of September and then this month of October, a lot of customers are just sitting back and waiting.

We've seen some jobs being cancelled, but most jobs or many jobs are being delayed.

And in some jobs there's a lot of re-bidding work going on.

So it's a wait and see attitude.

As I mentioned earlier, we really need to wait until some form of confidence is restored, until we get a clear view of how things are going to eventuate.

Globally the biggest slow downs we see are probably in Europe and clearly in the Middle East.

There's a lot of unsold rebar in the Middle East, [swiss cargos], et cetera.

And until the inventory works through the system, you won't see a recovery there.

So that could be some time away.

And then on Poland, obviously great quarter there, but we have seen a depreciation of this buy in recent months.

What do you anticipate as the net impact of FX?

Obviously that helps the exports out of Poland but the hurts your translation.

If you could just give us some view there over the next quarter or two.

Yes, well Poland looks reasonable good.

It'll be down like many of the markets.

But Poland's a little bit blessed, they've got EU funds available for infrastructure spending.

So they looked in reasonable shape; clearly their markets go down as winter approaches, but Poland looks reasonable good and it's -- we're probably more optimistic about Poland longer term than some of the other markets.

I would say the strength of the strength -- I wish I could give you a good formula, but it just doesn't run that way because the trade flows start changing.

But I would say it's going to have marginally a small negative impact on us.

As far as Poland is concerned it helps to keep imports out of Poland.

It does help Poland to export as you pointed out.

Here in the United States, you would think that it would be a net negative, but it's interesting the psychology because mills are not running at full capacity, the psychology on typical import buyers is they don't want to take the risk of the time of transit and production and even though the offerings are at prices below what the current mills are offering, nobody want to take a risk.

So some of the typical effects you'd expect, Kuni, with the change in the dollar, they're not happening for other reasons.

And then just lastly on your expectations for LIFO income of $50 million, I guess that maybe seems a bit conservative in light of the big drops in scrap that we've seen.

So I just want to get a better sense as to what you're assuming there.

Clearly you're going to watch the price of ferrous scrap heading down in the inventories and working its way through the finished goods.

The only caveat and the reason why the number may not have been larger is there are always during these periods of volatility, opportunities that spring up for our marketing and distribution areas.

And I can't predict who it will be or when it will come, but there might be a inventory in transit right at November 30th that I don't find out about and it ends up decreasing the amount of income because it just -- we have to pick it up on some FOB basis.

I would agree the trend might appear to be -- that it would be higher than that, but I have to take the information that's available to me and be cognizant that these uncertain times always have these opportunistic shipments.

And I've been known to get caught.

Okay, thanks, I'll turn it over.

Good.

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

Thank you.

Good morning, Murray and Bill.

Morning, Brian

Good morning, Brian.

If we take the prepared comments at face value and assume that LIFO charges of $0.78 with strong operating results of $1.34, then the same logic applies to first quarter guidance suggesting that you're only expecting X LIFO earnings of around $0.10.

What's causing the big earnings fall given the vertically integrated nature of your business?

Did the company get caught on the wrong side of supplies?

Because if I look at the ending inventories of 1.5 billion, add this roughly 600 million LIFO, that's almost two billion of inventories.

Well what you have here is the dramatic effect of ferrous scrap pricing, of course, non-ferrous has gone down as well, but you're seeing unprecedented amounts going down.

And in that period of -- you've got -- because we do have some inventories that are on FIFO, the international operations are on FIFO.

And you are going to have, and hopefully they'll be worked through all this quarter, but you are going to have hits being taken.

There's no question about it.

And as Murray indicated in this period of time you always have what we call market claims.

Material that was perfectly acceptable two months ago, rolled beautifully, was the right color, in perfect tolerance; now customers are finding, at times they're not even trying to find excuses they're just calling up and saying we need to renegotiate.

And you're inevitably going to have that.

So I think what you're seeing is this is kind of the quarter of transition where all of the bad actors are going to be coming out now.

I guess no surprise, and I think you touched on my second question a little bit, which is without the benefit of product mix information, it does seem like the realized prices are closer to the average rebar spot prices for three months ending June, which implies it's about a two month lag.

A bit longer than one month lag mentioned on the last call.

So now that prices are beginning to fall, it does seem like they'll be slippery on the way down so realized pricing will reflect spot instead of this one or two month lag before?

Yes, and you also have -- as volumes go down it takes you a little bit longer.

Your point is well taken about the time period.

But in May, April, June and that time period volumes were very high and it didn't take you as long to get through the inventories.

Now it is going to take a little bit longer.

And going back to part of what Murray's comments were, you best see that and Commercial Metals will be adjusting its production in order to meet the apparent demand.

Thank you.

Your next question will come from the line of Timna Tanners with UBS.

Hi, good morning.

Morning, Timna.

I wanted to ask just conceptually if you take a step back, your CapEx guidance is still awfully robust considering the economic environment we're in.

You point out that the stock is trading below at least the book value on the balance sheet.

What gives you the convictions past what sounds like it's going to be a very difficult first quarter to continue at the CapEx levels that they're at?

What might people be missing in terms of beyond the first quarter, how CMC was able to position itself into what's going to be a challenging 2009?

Well for the first part these projects are not going to come on board until a period of time when the markets hopefully have cleared.

The micro mill in Arizona will not start up producing any significant tonnage until September of next year and it'll be January of 2010 before the Polish mill.

What inevitably comes out is the time to be positioning yourself for better times is now and if you wait until the better times come, you will miss it.

So we will constantly be looking at our cash flow and the ability for the units to generate it versus looking at the long term.

It's clear you can lose your focus in a period like this and there are -- we're in cyclical industries, right?

And yes this downturn is unprecedented in terms of it's depth, but certainly not in terms of the fact that is occurred.

And I think if you play it smart during this period of time, you're going to come out better.

Along the same lines if you could talk about how -- give us more information about how CMC managed through some of the past down cycles.

Maybe past some of our memories or going back in CMC's history further?

I think we managed our costs very well and being vertically integrated is a big plus.

For instance, this point in time, out recycling, we're basically shipping all our scrap internally.

We're not taking from the outside.

So that -- when you have that sort of control, you keep the cash within.

Just to Bill's point on working capital, we think we can reduce our inventory substantially and that will generate a lot of cash.

So we think -- we know these cycles, we went through the Asian cycle that wasn't as wide spread as this one of course.

We know what to do.

We've taken a lot of action already to reduce cost and we'll continue to do that.

And being a many mill operator, you're a lot more flexible than say a blast furnace operator.

You can take downtime, you can -- worse case scenario you can work just weekends when you've got the very low power rate.

So there are a number of things you can do.

That's really helpful.

And then finally I just wanted to ask about the drags on earnings from SAP and Croatia.

If you could give us an update on your thinking about the SAP completion timetable and the Croatia turnaround process.

Sure, 2009 will be the last substantial year -- not that we won't continue to have SAP expense, but by the end of fiscal 2009 between two thirds and 75% of the earning power of the company will be on SAP.

The units, the substantial units that won't be are in market distribution, which are already on tier one, Oracle Systems for the most part.

So there isn't quite a burning platform there to consider.

Croatia, we anticipate and of course things can change, but we anticipate about break even for this year mainly on the strength of these melt shop and caster improvements that should begin in the second half.

They're starting now; the benefits should begin to be seen in the second half of 2009.

So I think from Croatia you're going to see continuing but declining losses and hopefully then a turn around in the summer months of 2009.

I might add, and we only answered half of Kuni's question early about products that are doing well.

Obviously the oil country tubular goods the seamless pipe that comes out of Croatia is the best market that we have right now.

So in Croatia, it's not a question of price in terms of sales.

It's not a question of volume; it's all a question of production.

Fulfilling the orders.

Thanks very much.

Good.

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

Good morning, gentlemen.

Barry, you used to be first, now you're second.

Now you're losing your touch in retirement.

You've got to remember, first of all I'm not retired, but I'm getting older.

No, my hand is not as fast as it used to be.

Well, Mrs.

Philibin lived to be 101, so you're going to be with us for a while.

I hope you're right.

Going back to the issue of production, obviously if you look at the iron, American Iron and Steel Statistics Weekly, since the middle of August every single week production has been cut and again this is in the United States, by approximately 50,000 tons a week for that period.

And production is now down during that period by about a little bit more that 20%.

Can you give us some color on your production cuts in rebar and merchant bar since the end of August?

Let me speak to what we anticipate for the first quarter and Commercial Metals, because there are fewer billet opportunity, export billet opportunities, our melt shops will probably be running, and it varies by melt shop and location, but just in general we'll be operating at around 75% capacity and our mills in the United States will probably be running at about 70% capacity.

Again that varies tremendously if the mill has more merchant shapes on their product line, they would be operating less.

If they're more exposed to rebar, they're operating more.

Poland interestingly will be running at 85% to 90% capacity, especially as our new Morgan wire rod block, which will allow us to make higher quality rod in larger coils is being commissioned in fact as we speak.

So basically are you saying that the first quarter that you'll probably in your US operate at around a 70% operating rate, in Poland at 85% to 90% operating rate?

Yes.

Now can you tell, notwithstanding those figures, what production flux has happened since August in terms of where you were in August and where you are now?

We don't break it out that way, Barry.

We prefer to just kind of keep it for the quarter.

Okay, and as far as, I want to go back Chin and his comments or question about the SAP expenses.

Can you tell for fiscal '09 what the P&L expenses are going to be for SAP?

And can you give us an idea on capitalized $83 million that you had in your press release what the schedule would be for that to hit the P&L?

In terms of the expense, it ought to be plus or minus 10% or 15% lower for the year than what it was in 2008.

The capitalized cost is already being amortized as units roll onto SAP; they begin to amortize the expense.

So it's going to be -- giving you a number is going to be a little bit of a moving target because there's another roll out that occurred in October.

Other ones, there are two more scheduled throughout 2009, so it's a little bit of a dart throw.

Well, let's look at it this way, if you -- I'm surprised that it's as much as you say it is.

Maybe I didn't -- my ears weren't clean when you and I talked about it, but based on what you just said we're looking at 45 million P&L expense for fiscal '09 versus 54 million in fiscal '08.

Can you give you give us your best guess at fiscal '10 for the P&L effects on the SAP?

I don't have a guess at that yet.

Okay, can you give us -- what you're tax rates could be for this year?

I'm going to assume that it'll be fractionally higher; maybe another percent or so higher than the effective rate for this year only because Poland probably will not have as dominant a percentage of the earnings.

Okay and, what are your working capital reduction goals for the year?

I know it's a tough number, but you have all that high priced stuff in your working capital account and that is a great source of cash.

So I'm sure you looked at a goal for this year.

We're not publishing that, but it's a very large number.

I'm not asking you to publish it, just give us -- can you give us a range?

It's a very large number.

100 million, 200 million?

It's in the hundreds of million, Barry.

Really?

Hundreds.

Hundreds of million?

Hundreds.

Conceivably if it were $300 million to $400 million, and again, that's hundreds of millions, $300 million to $400 million, that could turn into to cash?

It better.

Now as far as your share repurchase program, I have to commend you with your discipline over the years.

And now of course, the way I calculated it, if we add the LIFO reserves to equity on a fully capped basis, we're looking at a tangible book value using the 113 million shares at the end of the year at $17.17 a share.

Now I know you have a lot of things to spend money on, but is the mindset of the company, and this is a question for you Murray, not for Bill because he's been answering too many questions here; that if you can buy your stock for low tangible book, why would you consider really buying -- doing any acquisitions this year other than your stock?

Well, Barry, good question.

Clearly it's a compelling investment, but the M&A activity, yes for this point in time with uncertain times regardless of the share buyback program; we've put on hold unless it's some compelling acquisition.

But we want to preserve our cash and use it wisely during theses times.

So you're right M&A will be a lower priority and we'll certainly look at the share repurchase.

And as you know we just announced last week --.

As far as fiscal, Bill, this is for you and I know it's way out, what would be your maintenance CapEx for fiscal 2010 assuming those projects got finished, this big ones this year?

First of all, I shouldn't even answer anymore of your questions, Barry, after you just kind of -- don't ever call me again alright?

I don't know to be honest.

I have not run that number yet, Barry.

We've been, as you can imagine, we've anticipated what -- the market appears to be lurching from hour-to-hour, so we've been trying to gather information day-by-day answering questions about what's happening this minute.

And really haven't looked at 2010.

I'll be honest; we obviously have business plans that go out farther than that, but given the market circumstances that we have right now, I think talking about anything beyond 2009 is -- it's treacherous.

Thanks, you guys are doing a great job, and I have tremendous confidence in you taking advantage of this problem.

Thanks, Barry.

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

Good morning and thanks for taking our call.

Hi, Bob.

Murray, if I heard you right, metal spreads compressing -- that's kind of surprising to me.

Is that on a quarter-to-quarter basis or did I interpret that wrong?

No you didn't interpret it wrong.

They obviously are holding up well at this point in time.

At some point you would think they would compress.

It depends on how quickly the finished good prices drop and we anticipate they clearly will drop further following the scrap prices down.

yes, but that's a $64 question, I guess.

With scrap prices the way the sawed off as hey have, we certainly haven't seen that at least yet --

I agree with that.

Would you say the metal spread outlook is better in Poland or domestically or can you answer that?

It's better here, domestically.

Prices, finished good prices in Poland have actually fallen faster than scrap prices.

So here in the US the middle margin outlook is much better.

Bear in mind shipments are going to be lower overall.

So we're more optimistic about the middle margin here than in Poland.

Okay, understood and do you think are we close to a bottom on long product pricing in Poland?

That seems to come down every week.

Yes, time will tell, but I think you probably won't see a bottom until towards the end of this calendar year, maybe early next calendar year.

As I mentioned earlier, you're going into the winter season shortly in Poland and that always slows things down particularly on the construction side.

So we'll wait and see.

Thanks, and last question, your LIFO income, is it safe to say that most of that will be coming from your Americas Fabrication or Distribution?

No, I think, Bob, it's going to be spread -- there's unquestionably it's going to come from recycling to begin with given the price drops in all the commodities.

Then we'll filter through to the mills next and the fabricators will be last because their operations at this period of time -- their still working off backlogs of six to seven months.

For the most part, and I don't want to over-generalize, but for the most part you don't get renegotiation on those projects, so they are going to hold up fairly well, so I'm thinking that their pricing at least as far as their inventory quantities won't drop quite as dramatically as recycling in the mills.

So I would say -- now recycling is not as big a segment as the mills so I'm just kind of giving you from a percentage standpoint one would expect recyclers to be -- given the size of their pool to be first, then the mills and then finally the fabricators.

That's very helpful.

And great quarter and best of luck going forward.

Alright, to all of us.

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

Thank you.

Just want to ask on the fabrication division, how long do your pricing contracts usually kind of go out for?

Has the market changed so much that we can't expect fabrication pricing to hold up for the next couple quarters while your costs come down?

Or do you think you might get some more stickiness on the prices going down there?

Unquestionably on rebar, you're going to see it pretty much; it'll probably stay fairly constant.

The backlogs are that strong and there's enough tonnage in those that I don't think you're going to see much deterioration there.

I don't think that'll necessarily be the case though, Michael, on joist work as -- remember that this fabricated number that we give is a -- it's kind of a potpourri of rebar and structural and joist and I don't know how meaningful it is.

I can always back out on the old product mix argument, but if you look segment by segment, rebar should probably hang in there pretty tough.

But I think the joist, which is of course comes from angles and merchant shapes, probably is going to drop on us.

In the quarter is says you had a LIFO expense of 100 million, could we see that turn into a LIFO credit of 100 million in the next couple quarters?

If prices and -- okay, remember how good I am at LIFO just before I answer this.

But if prices were to bottom out and stay where they are now, I would anticipate more LIFO income in the second quarter.

Now how big, I'll need to rerun the calculations.

But the trend this year is clearly going to be LIFO income absent any recovery in prices in the second half of the year.

And then going back to international markets, if we looked in the spring of this year, there was a lot of talk in the press and commentary on the demand in the Middle East being very robust, very strong.

Did that end up just being an inventory bubble or what do you think happened in the Middle East?

I think in the Middle East, Michael, clearly liquidity issues caught up.

It didn't happen obviously over here on the US.

Just buyers started to stop buying and I think new projects are being postponed; Daubi is being sighted as a case.

I think everyone knew that that was getting over built.

Really there are a lot of traders there speculating in the Middle East building up inventory in rebar.

As prices jumped very sharply from that January, February period through to May, June period there was clearly a lot of speculation and there's a lot of unsold rebar in the Middle East even now.

Distressed cargos, a lot of banks are now owned and shipping companies own rebar that they prefer not to own.

So that'll take a few months to sort through, but I think the underlying demand for most of those countries, Saudi Arabia, the United Arab Emirate in general, North Africa, is still pretty strong, but it's just going to take a few months to sort out these problems.

And I don't see -- I don't think it'll go back to those robust and obviously as it turned out to be a bit of a bubble time.

But the underlying fundamentals are there and I think the Middle East will come back and it's just -- you get -- they'll need a few more months to sort themselves out.

Thank you.

Your next question will come from the line of Sanil Daptardar with Sentinel.

Thanks.

Murray, could you just give us a little color about public sector spending in the US given the constraints or given the kind of scenarios states are having about spending, the highway program, the bridges construction and other things?

Yes, the highway program, particularly here in Texas is still quite good.

But clearly there's some state funding in other areas we're concerned about longer term.

To mention -- we want this election to be over and do with and some guidance.

So there's definitely going to be some issues in the short term.

With the Texas highway program, so far so good; we've got good backlogs and there doesn't appear to be an issue.

There's more of an issue in some of the eastern states.

Bill, have you got any comments on it?

No, I think in terms of geography if you rate it from best to not best, Texas is clearly still very strong.

I would say that the Desert southwest is next and that the southeast is clearly the weakest market that we have right now.

What is your exposure to the public sector build out basically, in terms of the company?

Is it like 20% or so that you're exposed to that public sector there?

It's probably more than that if you include all infrastructure work; it's probably as much as a third as what we do here in the United States.

On the fabrication, American Fabrication, if you just back out LIFO effects, when you look at the year-to-year, there was a drop in the margin about 10 basis points.

Is there something going on internally in the operational -- are you having operational issues?

If you look at the price realized, they were far ahead on a year-to-year basis because of the strain of the market, but operationally there were some issues, looks like it.

Is it possible to get some color on that and are those going to go away in the next year?

Yes, I'll tell you, Sanil, I think the number one cause was as prices fall, customers renegotiate a lot of things.

Now it doesn't happen necessarily on the infrastructure work as I said earlier, but on every other form of work you end up getting concessions, you get out right balking at pricing and so you end up with what are know as contract loss reserves.

And a substantial amount of that came flowing through in the third and fourth quarters.

Also the case where -- so you have non-compliance on the one hand and on the other hand as prices go up, those projects that are continuing, they expect you to deliver and we bid a lot of these jobs back when rebar was, not now, but we bid them when rebar was a lot -- where we anticipated that the prices would stay the same and they actually went up.

And we had to fulfill some of these contracts at a loss.

So you've got two things, you've got losses on noncompliance and you've got losses on contracts that we do have to comply with where the selling prices throughout the year.

That's hard to believe right now given what's happened over the last couple of months.

But nonetheless in the summer we took a lot of loss reserves on contracts that we had underbid.

So, in the future, do you foresee then you might have to increase the loss provision on your accounts receivable?

Bill Larson; No actually, if there's a silver lining and there's not -- it's not that it's a bright silver lining, but the fabricators as we've said forever in periods of declining prices, this is when their ship comes in because now especially on the contracts that were pretty much the end use customers and government entity, the pricings not going to change, yet the rebar that they'll be able to supply against those jobs are obviously dramatically falling in cost.

And so those reserves are going to be reversed now.

Just one last question on international operations, you just talked about that metal spreads in Poland are going to be lower than the US.

How much of the effect is because you use the FIFO accounting there?

How much is the effect because they are a higher cost material where that's going to flowing through the P&L over there?

Well, it's kind of a wait and see.

We don't have a -- the prices are moving around so much that we don't really have a good number yet, but it'll be substantial, Sanil.

Anyone in Commercial Metals who's on FIFO will not have that cushion that the LIFO reserve provides.

And depending upon where prices end up at the end of the quarter, but we're not going to deceive ourselves.

We have put in that first quarter projection a significant hit because of that.

So you mean to say that the -- probably the operating margins what you realize of 14% the fourth quarter may drop down to say somewhere around 7% or 8% in the next quarter?

I don't know exactly.

They're going to decline.

Where they'll decline to, we're not ready to predict, but they will decline.

We were selling a lot of export billets, billets to the export market and typically the Middle East at very good margins.

That's all dried up for the time being.

So, it's not a factor.

Thanks.

Alright.

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

Morning, guys.

Morning, Sal.

You're supposed to be traveling and not on this call.

I am traveling.

Couple little quick questions on scrap.

I thought you moved your inventory very quickly and I remember it was sort of 30 [times].

Are you still caught up now on inventory?

Not a lot.

We're probably -- we're turning it at between 12 and 15 days.

But But the problem is the volume that was being able to be sent out dropped so dramatically that every ton we had, even though it doesn't appear to be a lot.

Every ton we had was taking a beating because we're having to hold onto it a little bit longer, which is what Murray indicated.

We've instituted CMC First policies on scrap will go -- the mills will source from CMC first, the fabricators will source from CMC first.

Is there a chance that you may have to take a write down on inventory?

No, that's what the LIFO reserves for.

It'll cushion that.

Sal, the volumes have fallen off dramatically because the mills are basically trying to consume their own scrap that they have.

So they're trying to reduce the buying from the outside recyclers.

In turn the flow has continued into the recyclers and many recyclers including ourselves are very selective where we buy now.

A lot of the peddler business has been dropped, the dealer business has stopped and mainly buyings in a lot of the place is just industrial scrap.

So it's quite a dramatic turn of events in the last few weeks.

On the scrap side, what's the backlog look like right now?

In terms of the highway work, it's huge.

Depending upon plants and locations it can be as much as a year's backlog.

But overall I think the backlogs are -- they're at normal levels as we speak, which would put them at about five to six months.

But I suspect they're going to begin to tail the kind of tangential evidence is that the jobs that are being bid right now are generally smaller.

They may be in the 200 to 700 ton range as opposed to the 1,500 and plus area.

So I would suspect there's going to be a bit of weakening in that, Sal.

And do you have a -- I know that you have a lot of plants coming back and renegotiating or canceling orders.

Is that in the fab shop also happening?

A lot of re-bidding work's going.

Particularly if there's the second phase to a project and then the bigger jobs that Bill alluded to, a lot of customers, contractors are just sitting back, waiting to when price drop further.

There's a lot of wait and see attitude going on by buyers.

Most of the contract renegotiation though historically has occurred in marketing distribution where the lead times are a lot longer and the exposure to market changes is greater.

And can you give us some color on your Arizona mill especially with -- I think you were announcing that they were going open the tender mill.

Is that an issue or is that part of your calculation in terms of the market size of that area especially with the economy coming down over there?

We expect that mill to be up and running as I said in September of '09.

We had looked at the market trends and you have to look at these of course long term.

There were averages over three to four years.

And the idea was, and I think the premises is still valid that what we are displacing there is predominantly imported material and material that our own fab shops purchase so that -- [New Port] can do what it wants, we don't speak for them, but most of the tonnage that's going to come out of our Arizona mill is going to be sent to our sister fab shops.

We could theoretically sell only production from that mill with our own fab shops now in the west or southwest.

One more question on the imports of rebar.

Rebar prices in the US have fallen but if you compared to the global -- or if you look at rather scrap prices you can make effective rebar at $50 a ton right now.

How long do you think prices can hold up?

Or how long do you think the imports will not show up although we have huge difference among the global prices?

Clearly rebar prices will come down here in the US, Sal, but this point in time, no customer wants to buy three to five months out, except from Mexico rebar exports, you'll see those continue.

So the times are just too uncertain, so we're pretty confident through probably February, March of next year you won't see any increase in rebar imports.

At the moment, what you saw last month are only 30 odd thousand tons and the month before, 50,000 tons.

As I mentioned, the average for the fourth quarter was 68,000 tons, so well under 100,000 tons per months.

And where we see this through the next, probably at least six months.

Now clearly if that differential stays there, the markets bottom, the customers get more confidence back, yes, the imports could be a threat.

But we don't see it in the short term.

And has the -- the credit crisis has actually a little silver lining or will that uncertainty domestic months can actually keep the prices higher over the global prices since people are afraid to wait four or five months to bring something and plus maybe they have issue that credit is not available to bring all the steel over here.

Is that correct?

Yes, if you look at a company like ourselves, we were importing rebar, selling to our own fab shops, but now we, we're buying all our rebar from our own mills.

And that will continue indefintetly.

So I think you would be -- and other point is some of our competitors on the trading side speculate as they take long positions and those trading companies have got big problems.

Not certainly here in the US but certainly in Asia and the Middle East to unwind their position.

So I think their credit lines are being stretched.

And while the distressed cargos and other problems that they have, I don't think you'll see many of those in the market place for some time.

Thank you very much.

Your next question will come from the line of Michael Gambardella with J.P.

Morgan.

Hi, good morning, Murray and Bill.

Michael, good morning.

Got a question.

In this environment where we have this global credit crisis, people can't get credit and all your customers having problem with credit.

How do you deal with the issue where your customers may start, if they haven't already to look at you guys as a bank?

And how do you keep control on your credit exposure to your customers?

I'll let Murray answer the first part of that because that's a trading question and very well taken, Mike.

On our part, with the exception of fabrication jobs, which generally are bonded and you got lien rights, most of our receivables are either backed by letters of credit or credit insurance.

And the counter-party on the credit insurance is still pretty financially stable, so we feel good about that.

So we've been following the lead from the credit insurers staying within the limits that they give us and so hopefully we will not be subject, and of course there are always going to be surprises, we know that.

But we believe between the LCs, the bonding and lien rights and the AR credit insurance, that we're in pretty good shape.

Now as far as them using us as a bank.

Yes, in the credit business that's very straight-forward, but it's more on the open account business where you have problems, Mike, and you have to be tough in these times and certainly our traders and our sales people are well skilled in this area.

But you're right, there's a tendency that customers if they can get away wit hit, they will use us as a bank.

So you just have to be alert to that fact.

We have more problems quite frankly in these falling markets, which have fallen quite dramatically as we mentioned with these so called market claims and it's really just price renegotiations, which impacts your margin and that is an issue.

When you see the magnitude of the price drops in the past at $200 to $300 a ton price was huge, but when you look at the Middle East, some of those trading companies, fortunately we're not exposed, but when you saw rebar prices peaked at $1500 a ton now they're at $500 a ton.

That's a $1,000 drop in a matter of weeks, it's quite dramatic.

So we are skilled, we've gone through these periods, but it is an issue and we are obviously constantly monitor it.

My guess is that your customers out there are just taking whatever they have off their shelf when they need it and trying to rely on you as kind of their shelf; their extended shelf in terms of running their inventories to basically nothing and only ordering when they absolutely need to.

So it seems like when the credit loosens up, it could be a snap back because you have the demand from people able to get letters of credit, get working capital financing and all of the sudden you see this snap back almost as violent as the snap down.

Yes, probably, maybe more modest.

Certainly here in the US.

The demand is no doubt slower in the non-risk side.

But certain markets, I think you're right.

We look at Poland and inventory level there are really quite low.

So there could be a snap back there and some other markets once they sort out the problems with unsolved material, distressed cargos et cetera.

Those markets, once they sort those issues out there could be a quick snap back.

Here in the US I think will be slower.

Are you seeing a lot of examples of guys having a hard time getting letters of credit?

Yes, in Asia and certain markets we do.

Okay.

Thanks a lot, Murray and Bill.

Thank you.

Alright, Mike.

Your next question comes from the line of [Lloyd O'Carroll] with Davenport.

My questions have been answered, thank you.

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

Good afternoon.

Morning, Chuck.

Question about the infrastructure issues.

I'm sure you've been following all the comments from the various politicians and congress about a massive infrastructure spending program to stimulate the economy.

In your experience, how fast or how long maybe I should say, does it take between congress or whomever funding these kind of projects before they actually involve the usage of steel.

Chuck, I think it's a year minimum.

And you have to wear two hats as a tax payer, I think all of us should be appalled at these ideas; as a producer of steel, if they're going to waste the money, at least waste it on steel.

But it would take at least a year.

Between trying to sort out what it is exactly that they had wanted to stimulate and then getting projects up and scoped and bid and then actual production.

They'd be better off, obviously I'm not running, but they'd be better off continuing the highway program and saying look, we're going to supplement the federal gasoline tax receipts, because that program's in place.

There are jobs that are lining up in the queue.

I fear though that this is going to be every state for themselves and all kinds of pork going on.

Chuck, that's an interesting question.

And if you asked that about China, I would say a quarter.

China's government can get things moving pretty quickly there.

I noticed that they've done a couple major projects recently.

R&B for railroads and all sorts of things.

And the big railway project that they had started but they're really increasing or expanding it's scope tremendously.

When it comes to imports, I recognize what you said about the lack of desire for domestic consumer to buy imports.

But what are we seeing in regard to the freight costs of moving imports?

That must have come down dramatically in the last few months.

I know the old capesized has fallen almost 90%.

Yes, it has come down a lot.

Some routes, not so much.

The current -- from Turkey is the big exporter to the US typically of rebar it's about $55 a ton.

That's down from about $75, $80 a ton.

Southeast Asia peaked about $130 a ton and that -- it's half of that now.

So some have come down 50%, but you're right the big capesized, that's dramatic.

As you know from Brazil to China is now $11 to $12 a ton.

I think it peaked at $100 a ton.

And Australia to China is about $8 a ton and that peaked at close to $50 a ton.

So the big capesized vessels has gone down dramatically.

I know you follow the iron ore business and you see the Chinese are basically withhold buying from Brazil at this point in time and just buying from the major supplies in Australia BHP and Rio by contract and virtually no spot buying because of their infantry situation at the port.

So freight rates have come down significantly.

My understanding of imported rebar is that it's mostly in 20 foot lengths and that you guys don't want to make the product that small.

There is some obviously in 40 foot and even 60 foot lengths for the fabricators.

The 20 foot length mainly goes into the distribution business.

Obviously that was really strong when the housing was strong, particularly in the markets of Florida and California.

But there's still -- the main imports now are coming in not just 20 foot but the larger lengths for fabricators.

But I say, the imports are well, well down and we just don't see those increasing anytime soon.

Thank you.

Thanks, Chuck.

You have a follow-up question from the line of Brian Yu with Citi.

My question has been answered, thank you.

And you have a follow-up question -- I'm sorry -- your next question will come from the line of Wayne Atwell with Pontis.

Thank you.

If I could follow-up on Chuck's question.

I was under the impression New York City, for instance, had half a dozen or a dozen different projects that were ready to go.

No I don't know maybe there's a difference between ready to go and actually buying steel and installing it, but I -- and I'm not expert on this area, but I had the distinct impression they had projects designed, permitted and ready to be spending money.

Do I have that wrong, or is that the case?

I don't know Wayne; we don't sell into that market.

Bill, do you know?

No, I don't know either.

To the extent, Wayne, that the stimulus program targets projects that are already -- it would have an accelerated effect.

But something tells me they're going to come up with all kinds of new stuff.

If it happens.

Right, now I would guess you're right, but I had the impression that these are projects, and I guess if you don't sell to New York, you wouldn't know, but I had the distinct impression they had projects that they had designed and had permitted and just didn't have the capital for.

But that bridges and such they could crank up pretty quickly.

But that's not true in other parts of the country?

They haven't been that anticipatory?

I think they have.

I think there are a lot of government projects that have been put on hold.

We certainly see a lot of bidding activity, Wayne, in fact it was interesting, the comment from our divisional head is that the bidding activity is as active as it's ever been.

But the contract awarding is -- has tailed off.

So I think the pipeline's there, once the cloud passes over.

Thank you.

And your next question is a follow-up from the line of Sanil Daptardar with Sentinel.

Thanks.

Just to hit on China, in fact, just had increased their tax tariffs on exports of the steel material.

Would the industry -- in China being particularly operating at a lower capacity almost 30% to 40% capacity is offline now, and steel industry being one of the largest in China.

What's your perception, will they lower the export tax tariffs and reinstate the rebates that they were doing so before, or you think they'll stay put on that?

I don't think they will.

For a couple of reasons, I think long term they're still concerned about energy and pollution, those issues.

And also at the end of the day, they don't have any competitive advantage particularly on lower quality steel products, they have to import at a high cost time and all.

So I think they will hold.

As you know for higher quality products, some of them particularly pipe and tube they still have the VAT tax rebate system and there's no export taxes on those products so the billets and rebar, wire rod, those sort of products, I think they will maintain the regime.

And focus on -- if you look at the VAT tax rebate increases, they're on -- and used products some of them do consume still of course.

So they're wanting to encourage their export industry.

Another interesting fact is that the Chinese really have paid their currency to the US dollar over the last two months.

It hasn't changed from a range of 6.83 to 6.85, so they really have stopped the appreciation of their currency and are really trying to stimulate exports in this environment.

But as I say we -- steel label favor -- high quality steel able support those products, but those products I think they will keep the export taxes on for the time being.

So your not concerned about the flood of imports in the US in that case from China then?

Not really.

They still export a lot of the higher value products like pipe and tube for this market, but rebar they can't because of the anti-dumping duty.

Wire rod, they still sell some into this market.

We don't see any flood coming out of China.

Okay.

At this time there are no further questions.

Okay, well thanks very much for your interest.

Obviously we are facing some difficult times but we've got through these times before and we're confident we'll get through them again and we'll be even stronger at the end of the day.

Ladies and gentlemen, this does conclude the Commercial Metals Company Fourth Quarter 2008 Earnings Conference Call.

You may now disconnect.