Commercial Metals Co (CMC) 2009 Q1 法說會逐字稿

Hello and welcome to today's Commercial Metals Company first quarter 2009 earnings conference call.

All lines have been placed on mute.

After management's remarks, we will open the call to the question-and-answer session.

Your host for today's call is 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 first quarter conference call.

With me today is Bill Larson, our Chief Financial Officer.

I'll begin the call with a brief overview of the first quarter and then call on Bill to provide further details.

Finally, I'll comment on the outlook.

For the first quarter, as mentioned in the press release, we gave a guidance of $0.35 to $0.45 per share.

Assuming a $50 million pretax LIFO income.

The result was $0.54 per share with pretax LIFO income at $114 million.

The quarter started well with a good month in September.

However, our markets turned down sharply in October and November with both prices and shipments dramatically falling.

The global financial crisis led to both a lack of confidence and a lack of demand.

Liquidity became the major focus for most companies during this period whether they be customers, supplies and was no exception for ourselves.

Extensive destocking occurred in most markets across the supply chain from raw materials and scrap to steel at the steel mills to end use customers, fabricators, et cetera.

In the US we cut production significantly at our steel mills.

Shipments were down roughly 20% to 35%, depending on the product line.

We saw major market claims, price renegotiations, cancellations of orders during this period of rapid decline in the market.

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

Good morning.

Let me call to your attention the detailed Safe Harbor statement included in our press release and our August 31, 2008 10-K that in summary says that in spite of management's good faith current opinions on various forward-looking matters circumstances can change and not everything that we think will happen always happens.

In addition, we've given guidance regarding our outlook for the second quarter of fiscal 2009 in our press release.

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

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 straightforward from our financial statements or (inaudible) business use can be the subject of our discussions today and in our investor visits, our website has additional information at CMC.com, but there are other items that may be outside of our ability for discussion and you may need to be patient with us if we defer comment.

Commercial Metals remains financially strong in these trying times.

As discussed in our press release our working capital is converting into cash as expected but the abrupt downturn in material flow starting in October as well as the usual payment of year-end obligations has delayed a larger amount of cash.

I believe you will see more significant amounts converted in the second quarter.

Our $400 million contractual revolver remains substantially unused.

There are some small amounts of standby letters of credit outstanding and our accounts receivable securitization program at $120 million of unused capacity at November 30, 2008.

This particular program issues asset backed commercial paper which carries the treasury's guarantee.

Recently borrowing rates have been under 1%.

We had two debt covenants and EBITDA to interest coverage.

And a debt-to-cap ratio.

The interest coverage ratio is 2.5 times, calculated over rolling four quarter average.

This quarter the first quarter we just ended is the lowest of the last four, and if it was used stand-alone as a stress test it's still greater than six times coverage.

Our debt-to-cap test is 60% and we're at 42%.

I think it's pretty evident we have no concerns here.

Our use of excess cash will in the main follow the following priorities.

We will build cash reserves for safety.

And then the ability to take advantage of opportunities that will inevitably arise as recovery occurs.

The Board in its normal schedule will review the dividend rate at its January meeting.

I would not anticipate particularly aggressive stock buybacks but we will be opportunistic.

We are projecting near break-even for the second quarter.

My colleague in Europe, (Ludo Guidesch) has referred to this as a black zero meaning we have upside from there as opposed to a red zero which has negative implications.

Our break-even anticipates not particular lot of LIFO income but LIFO income would be the upside factor to the numbers that we have given.

I pretty much exhausted the thesaurus in attempts to describe what happened October 1 in the steel industry.

I think the title of the sci-fi classic "The Day the Earth Stood Still," may be appropriate.

Markets simply ground to a halt.

As Murray indicated, we had a very good September followed by a severe dropoff in October and November.

Poland's adjusted operating loss in the main was attributable to inventory write-downs.

You'll already, it is a FIFO reporter and suffered the steep price declines.

Actually, speaking of the day the earth stood still and in the spirit of the holiday season, I will give a CMC shirt to anyone in the Q&A who can tell me in the 1951 version, the line that Michael Rennie told Patricia Neil to tell the robot when things got tough.

Its three words, I'll give you that -- three words.

Alright, lets talk a little bit about some details here.

LIFO, Murray touched on this.

My streak of missing LIFO estimates remains unbroken.

Though, to my credit, I will note that I predicted that income would be a minimum of $50 million, which 114 qualifies.

The LIFO reserve is $449 million and if you apply the marginal tax rate, that represents $2.60 a share.

In the first quarter, LIFO increased net earnings $73.8 million.

Or $0.65 per share, versus the first quarter of last year of income of only $2.8 million or $0.02 per share.

Depreciation and amortization for the first quarter was $41.308 million.

I would assume that depreciation expense for all of fiscal 2009 will be $165 million.

If you look at SG&A, it didn't change a whole lot.

It was up about $3.5 million.

But really, that's the swing between some -- not huge items, but there are a few that are netting in there.

On the plus side, causing SG&A to go up, salary expense in the main, that's headcount increases substantially, are acquisitions that we made late in the year in rebar fabrication.

We have played safe in our allowance for doubtful accounts.

We increased the allowance some $8 million.

The exposures, you know, they're -- we feel that based upon what we have seen so far, although we don't have an exhaustive list yet of these, it's always better to play safe and that is what we're doing.

So, salary expense, bad debt provisions, and also translation losses, you're aware that the US dollar strengthened throughout the quarter and particularly against the Australian dollar and that has caused some -- about $10 million plus of translation losses that are in the financial statements and SG&A.

So, those are on the plus side.

On the minus side, going the other way, are our incentive compensation accruals are down substantially, as you would expect.

I mean, it is -- we have always been a pay for performance company and the accruals are down rather a lot.

Interest expense, I would expect for the next quarter to be about $23 million.

As indicated in the press release, we do have at the end of February a $100 million debt issue that I feel will be able to pay off out of regular cash flow.

Finally, some other statistics, the book value per share was $13.79.

That doesn't include the LIFO.

That is just the straight book value.

The average shares diluted for the EPS calculation in this quarter was 114, 473, 163.

So, that's 114, 473, 163.

The actual shares that are outstanding are 112, 185, 288.

So, $112,185,288 million.

We spent about $87 million in capital expenditures.

The majority of which went towards the four large projects that we discussed at year-end.

That would be Arizona, Poland, Croatia and SAP.

In the first quarter, in what was a very limited window of opportunity, we bought back a $1,752,900 shares, that's 1,752,900 shares and paid an average price of $10.56.

Finally, on a happier note from the perspective of my Christian tradition, I want to wish all of you a Merry Christmas and from whatever religious tradition you hail from I wish that the new year brings great blessings of faith that things will get better, hope that it will touch each one of us and charity towards those whose pain may last a little bit longer.

Okay, thanks Bill.

In terms of the outlook, in the global steel markets we anticipate destocking to continue into early calendar 2009.

Some markets still have high levels of inventory.

A good example is in China with spot iron ore is still around 53 million tons at the ports.

This is down from about 60 to 70 million tons.

So, it is dropping.

In the Middle East in Dubai and United Arab Emirates, still very high inventories of rebar and billets.

In particular, billets is an issue on the part of the world, rebar inventories are dropping.

Other markets, in Poland and central and Eastern Europe, comparatively low levels of inventory, in particularly rebar so that is a positive going forward.

However, the continuing credit squeeze remains a real concern, we mentioned in our comments in the press release and the outlook, particularly for the private sector and when this will ease obviously time will tell.

But it is a concern for the next two to three months, at least.

Credit and confidence certainly must be restored before any significant recovery occurs and we believe the global stimulus packages announced around the world are likely to take three to 12 months before they have any impact.

The Chinese package of $580 billion, roughly, may -- stimulus package may have an impact or may be some positive signs after Chinese New Year, which -- so after, say, February, March period we may see some positive signs.

I mean, clearly there's been some firming of prices in China in the last two or three weeks.

It is too early to say if that's a positive sign going forward so we would anticipate as I say, after Chinese New Year, to see any signs there.

Here in the US, obviously there's been a lot of discussion about what the (inaudible) structure package may be.

But most likely, even once it's announced in detail, it could well take six to nine months before any significant impact is felt.

We will clearly continue to reduce the size of our businesses to match market conditions and as we mentioned in our outlook statement, December to February period is our winter quarter and as always, the weakest quarter for us.

And certainly this year is no exception and we anticipate this quarter to be particularly weak.

Finally, we are hopeful of some recovery and signs of that in the first quarter, calendar quarter of next year as I mentioned February, March period, will be a critical period to watch.

So, with those comments I'd just like to open up the conference now for 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 Kuni Chen from Banc of America Securities.

Hi, everybody.

Good morning Kuni.

I'll defer on the Michael Rennie question, so --.

Alright.

A little bit of trivia that I'm not too familiar with.

So, maybe somebody else will get that quote.

So, I guess just first off, on the infrastructure stimulus side of the equation, you know, it was helpful that you gave us some time frames there on when you may see some benefits from stimulus.

I mean, what is your view on kind of whether the public spending side of the equation can at least maybe offset some of the declines we're going to see on the private and commercial construction?

I just want to get your view on kind of how those two might net out over the next couple quarters.

Well, here in the US, Kuni, I mean we -- non residential on the public side is around about 30% of our business and that could expand to 40% plus.

So, it could be quite significant.

But obviously, clearly, non-res overall, unless the credit situation eases, on the private side is going to be down substantially in 2009.

So, public will take up some of that slack but not all of it.

Right.

And then how about into 2010, you think that 30% to 40% kind of could go towards 50% or higher?

Well, it's -- obviously we don't know what the package is so it's difficult for us to comment there, Kuni, but unlikely higher.

We hope obviously that the credit markets have eased and the private sector is starting to work, not back to what it was but to work more efficiently and so there will be more activity there.

Right.

Okay.

And then just moving on, on scrap, can you give us your views on where you see the market going over the near term?

I mean, do you think the domestic mills may be starting to rebuild some inventory or do you think the kind of recent uptick is just more export-driven?

Well, the mills have still got down time in this month of December will probably the lowest level in terms of production activity at the mills.

But we see, talking about our mills now, some uptick come January, February time.

Though will definitely have to buy some scraps.

Scrap flows are starting to improve a little bit.

They almost dried up completely with the tremendous drop in prices.

So, there could be in the new calendar year, January, February period a bit of an uptick in scrap but we don't think it will be significant.

Depends, obviously, you mentioned international markets, if there is increased activity in some of the key international markets.

That would certainly help the situation.

Right.

Okay.

And then just lastly, on Poland, can you share some color on what your production plan is for the quarter going forward, maybe talk about expected operating rates?

Yes.

I'll -- actually, Poland is a bit more optimistic than our mills here in the United States.

They're anticipating that their melt shop will run at about 65% capacity, but that the mill including the new Morgan wire rod block on a five-day -- well, we'll be running at about 95% of capacity, although we're calculating statistics a little bit different there.

There is probably a translation loss there.

I mean, 90% is about as high as you could get.

And so, they are anticipating with the backlog that they have that they will run with their wire rod mill as well, probably in the high 80%, Kuni.

Now, the metal margins are, you know, so-so and as long as pricing doesn't get horrendous as it did as it dropped during the first quarter, you know, Poland should probably fare okay.

Certainly not extraordinarily, but they ought to do alright.

Alright.

Good.

I'll turn it over, thanks.

Your next question comes from Timna Tanners with UBS.

Good morning.

Good morning, Timna.

Hello, so wanted to try to try to focus in a little bit, as you characterize the different trends that you're seeing in your different products, and different segments, I should say.

If you could help us identify what specific trends are more kind of behind us or will be in the February time frame behind us and what could be kind of persistent.

So, for example, as we think about the backlog, that's a concern going forward but if we think about the international distribution arm, I mean, how much do we think these continuing cancellations of orders will be a problem going forward?

Timna, we think most of that will be out of this quarter, will shake most of that out.

I mean, some of these problems go on for some time, unfortunately, but I think the worst should be behind us in this quarter, certainly by March we should be through the worst of it.

And can you give us a little bit more color on how that's transpired and what you've been doing in response?

Well, what's happened there with the tremendous drop in prices, and customers as I mentioned about the destocking period, there's been a lot of cancellations of orders but a lot of price renegotiations.

So, that's how you normally settle -- you hope to settle commercially.

In some cases, customers have cancelled outright and in some cases customers, quite frankly, their credit lines have been pulled or significantly reduced and you're better off keeping the material in inventory rather than selling it to a customer who may not pay you.

So, there are a number of issues there and -- but at the end of the day you take it out of your margin.

And as I say, it takes two to three, sometimes four months, to sort through this period.

How can you be sure that won't be a problem going forward?

Because you're going to be more stringent in the contracts you sign or how does that work?

Well, the market tends to solve the problem because when prices drop to the level they are, you know, there's not the same need for customers to try and cancel or price re-negotiate so the market tends to take care of it.

You can obviously tighten up contracts and that but clearly if a customer is going to go bankrupt, it doesn't matter how tight your contract is, it becomes a decision whether you sell to them or keep the material in inventory.

Okay, that makes sense.

And then to the other question I was asking in terms of in general what things might be behind you, do you think that working down high cost scrap is mostly behind you in the prior quarter or also into the second quarter will be an issue?

If you could talk about that.

Well, we think on the scrap side, most of that should be out of the way this month in December, so going forward, that should be better.

Shipments should pick up.

Certainly as the steel mills start to pick up some demand because as I mentioned earlier, to Kuni's question, we anticipate our mills to start buying scrap again in January.

So, I think the recycling -- we're seeing signs -- will see signs next month to improve.

Okay, great, anything else that you identify as issues that are behind you and issues that, maybe, going forward continuing to be a problem?

Well.

as I mentioned, the credit squeeze is a continuing problem because obviously many of our customers are having their credit lines reduced and so that's a continual concern and hopefully we'll see some easing in the next three to six months.

But that is a major concern and I think none of us know which customers may or may not go bankrupt.

And we credit insurance on many of our customers, not all.

But even with credit insurance, the credit insurance companies are taking a harder line and reducing credit limits.

So, this situation could go on for a few months.

Okay.

Great.

Thanks very much.

Your next question comes from Michelle Applebaum with MAR.

It's (klaatu barata nick sho).

You're right.

Okay, and its actually four words.

Michelle, you're good.

What?

And I was so excited about the T-shirt.

I think I might have forgotten my question.

Next question.

That's so easy, Bill, why did you do that?

I wanted to ask you, you gave guidance on October 30 and you said that you would do, at the low end, $0.07 a share before LIFO, right?

Right.

And you ended up doing a loss of, what was it, $0.11 a share?

You're right.

Before LIFO.

Yes.

And you only had one month to go, right?

Yes.

And the prices deteriorated in that month just faster than we would have anticipated, Michelle.

It was the inventory write-downs.

Okay.

And you made a comment that was uncharacteristic about your peers not giving guidance on the October conference calls but they were guiding for a full December quarter.

Do you want to take it back now?

No.

Okay.

I wanted to --

Well, Michelle, it's obviously difficult for anyone to give guidance when you see a dramatic drop in markets and --

Oh, yes.

It just -- as you know, it's not a monthly thing.

It was a weekly -- almost a daily thing.

It was very, very difficult.

Right.

So, we don't -- you know, we don't criticize our peers for not doing it.

We just felt we should.

And clearly we weren't quite as accurate as we thought we might have been but it is extremely difficult.

Right.

And, Michelle, as you and I have talked, I think what the market needs and I think what our investors appreciate is whatever color we can give them and the factors that go into our estimate and if we happen to get some of the factors right and other ones wrong, you know, we're always doing it in good faith as I'm sure our competitors are as well.

And it is as you know at least as well as I do, kind of an unprecedented set of circumstances right now.

That it makes it tough to be as accurate as you'd like but you still have to try.

Right.

No, I'm not criticizing the mix.

I'm just suggesting -- you may not even remember but you made a comment, your conference call was after most of the others and most of your peers did not give guidance and you were actually critical of that and you gave guidance and I was just pointing out that you only had one month to go, they had two months to go and -- or even more, because their calls were earlier than yours.

And you were -- you know, had a little bit of a miss even with a month so I was just kind of closing the loop on that comment.

But getting to the fundamentals, I wanted to ask you, I'm sure you saw that new core went out on pricing for January, it's the first month in a while that there wasn't a decline for most long products and seemed to, if you listened to what they've said or what -- and what others are saying, seemed to be indicating a bottom.

Do you think that's just a scrap-driven bottom or do you think we've taken inventories out enough that we're going to be kind of more eating what we kill kind of thing, rather than purging inventories?

Well, Michelle, we can't really comment too much on new core but as we see it, as I mentioned, recycling, we think it has come off the bottom.

But other products, you know, like rebar is stable now, prices for January and depends on shipments, you know, January, February period, it may increase again possibly March.

So, it's possible that some products have -- are at bottom or coming off the bottom.

And other products may still have room to go down.

I mean, there's -- like the merchant bar products, there's a large premium between the merchant bar price and the rebar price but there's not a great deal of demand for merchant bar.

It mainly goes to service center.

So, possibly those prices may come down in the future.

It's hard to say.

So, I think definitely on the scrap side, I think it's bounced off the bottom.

It all depends, mentioned earlier, you know, how much demand.

Even a small pickup in demand early calendar year will definitely help a lot of products in the supply chain get off the bottom.

And what are your trading side -- what is your trading side saying about imports?

Are we still seeing kind of --

They're declining significantly and we don't see any pickup virtually in any product the next three months.

Customers, just as I mentioned earlier, just looking for liquidity is number one.

Destocking wherever they can.

Buying even from each other, service end is buying from each other.

Even from our own Company we buy internally where we can.

So, I think this trend will continue for some time and with imports, apart from nearby countries like Mexico, I think the trend will be even lower.

You can see rebar imports are only 20,000 tons in November.

December probably even less than that.

We know have 40,000 tons from Turkey arriving in January.

That's mixed with wire rod.

But we don't know of any other shipments.

In the port at Houston it's down to about 50,000 metric tons now and the shipping out in trucks at the rate of about 1,000 tons a day.

So, inventory levels are getting fairly low on the import side but the offers from Turkey, the major traditional exporter to this market, those prices are not attractive and no one is prepared to take the risk of buying imported material, waiting three to four months for it to arrive in this climate.

So, we think imports in general will be at the levels they are, if not lower, in the next three to four months.

Okay.

And then for the products that you trade but you don't sell, like beans or sheet and that type of thing, what do you see?

Same thing.

And even the ones that were strong like OCTG, we see a big decline there, or significant decline imports, China being the major exporter of those products but that's really come off in the last few weeks.

And you don't see any change with China's shift in terms of their export tax situation?

Not really.

Typically, the products that we're in, China's already reducing its exports, so we don't see any immediate change.

Okay.

Cool.

Thank you.

Thank you.

Your next question comes from Fritz (Vancarte) with Sage.

Yes, I just was wondering, in reference to the stimulus plans that people have been discussing, do highways use a lot of rebar?

Is there a lot of rebar in the highway and remind me how much of your mix is rebar?

There's a lot of rebar.

And it depends on the type of highways.

Obviously all bridge work, regardless of the type of highway, there's a lot of rebar.

Asphalt highways, not so much rebar clearly but all the concrete highways.

The new highways actually use more rebar than the older concrete highways so the -- you know, the states of Florida, Texas, California, these are mainly concrete highway states so they use a lot of rebar.

A rough rule of thumb, Fritz, but it's very rough, is that a mile -- a single lane of highway would use about 100 plus or minus tons of rebar every mile.

100 tons you said?

Yes, each lane.

So, if you're building four lanes it's 400 tons, obviously.

But you have to anticipate this infrastructure package when it comes through.

You know, a lot of highways have to be built in or around the cities of the US and a lot of these are built up and that uses a lot more rebar than the normal highway which are not built up.

So, for us, you know, it's -- any stimulus package will be very positive.

Okay.

And how much of your mix is historically been rebar and how much -- in general, how much of that has gone into the highway sector?

Typically about 45% or so over a period of time is rebar and 55% would be the various merchant shapes including billets and of that, right now, Fritz, although typically 30% should have been the number, probably now it's more like 40% of our rebar will end up in infrastructure projects.

Thank you very much, guys.

Okay.

Thank you.

Your next question comes from Sal Tharani with Goldman Sachs.

Hi, guys, how are you?

Good morning, Sal.

Good morning, Sal.

Just one very quick housekeeping question.

When is your revolver expiring?

May of 2010.

Okay.

Great.

Thanks.

I wanted to just get some more color on your comment earlier that LIFO will be a small part of your 2Q guidance.

Is that correct, that I heard that?

Yes.

Well, there are two pieces of it.

There's very little LIFO in the guidance and to the extent that we have upside, it will clearly be coming from the LIFO.

Okay.

Bill, can you remind us the way you do LIFO.

I think you have a little different method than other companies where you take quarterly LIFO rather than a yearly view.

Right.

Just as a quick lesson, there are two ways to do it.

The way we do it is we try to attempt as comprehensive a calculation each quarter as we can.

Now, there are some estimates involved in that so it's nowhere near as strident as it is at year-end and whatever the answer is we book to 100% of the answer.

The other alternative, which we used to do three years ago, is we estimate what the charge for the year or the income for the year would be, divide that by four in the first quarter, re-estimate in the second, divide that answer by three, and just kind of keep going along.

What we found is that as no surprise to my followers here, I wasn't very good.

If you don't think I'm very good estimating LIFO with just a quarter, you can imagine when I'm looking a year out and what happened is that the fourth quarter ended up having the most bizarre LIFO result imaginable because it was what -- it was what it took to balance to get to the right answer.

So, we square up every quarter so, you know, if for some reason Commercial Metals packed up its tent at the end of that quarter, that would be the answer, nothing left outstanding.

Okay.

On the same note, I mean, if I look at your LIFO progression last year, every quarter it came back going up and significantly up in the third and fourth quarter.

I'm just surprised at why was the first quarter LIFO so low credit.

I mean, you have -- you took $325 million of LIFO charges.

Alright, alright, Sal, I'll tell you why.

Our marketing distribution units had rather significant inventories on the water.

And they actually -- one of the units actually had a small LIFO expense.

So, that's also the answer to the next question you're going to ask is why cash flow didn't come in quite as strong as I would have thought.

In transit inventories in marketing and distribution, this is from a period of time.

Remember, what the lead time is on this, sometimes it's three and four months so these were inventories that were contracted when times were still good, before the earth stood still and they are just now coming into port.

So, it had the two effects of masking otherwise drops in inventories, and causing a kind of a negative offset in to LIFO income.

I think you had about a $27 million of LIFO charge in that distribution business, correct?

Yes.

Right, the -- it was mainly the steel import business.

Yes, so that means that your fab business actually did wonderful if you add that back to the fab side.

That is correct.

And you know, you expect that.

I'm sure the investors were tired of listening to us talk about margin compression but you know now you have the best of both worlds.

You've got LIFO coming back and you've got these jobs that -- and rebar fabrication, we should make a little bit of a distinction here, you know, unlike in some marketing distribution that Murray was discussing earlier where Mr.

(Rabin) used to say that times like this, they test the ethics of our customers and suppliers and not everybody passes, you usually don't get that in rebar fabrication.

There are no market claims.

There are no renegotiations.

The end customer is typically a city or a state or perhaps it's the Federal Government and so those contracts that were let six, seven months ago at relatively high prices are now being fulfilled by very lower cost steel than what we estimated and so besides LIFO, they've got the expansion in margin compression and will continue for the next quarter as the higher priced backlog rolls off.

You mentioned Stanley.

Stanley always used to say watch the copper as a leading indicator.

Do you have any view why copper and base metal prices are back to 2003 probably levels and steel still is probably hovering around 2005, 6, 7 levels, and hasn't come down?

What is helping us?

I mean, there has been consolidation in many industries also but why particularly steel has been holding up so well?

Well, we think if you look globally, Sal, the tremendous cutbacks in production.

You know, so I think every steel producer will -- ourselves, and particularly, we're trying to match the inventory levels, with shipping levels, et cetera, with production cutbacks.

So, I think that's a major significance.

With copper, you know, we dabble in that as you know.

We see significant production cutbacks from some major producers.

But, you know, its a terminal market, there are high inventories on the LME.

China obviously is the big driver in terms of demand and they are up, as everyone knows.

But you know, there may be some positive signs, particularly with the stimulus package in China.

Because with public housing, will be stimulated as well as infrastructure projects and also the Chinese helping the white goods manufacturers with extensive VAT tax rebates.

So, you know, there could be a slight pick-up of copper demand in China and that will help the global markets.

So, I think the two markets, steel and copper in particular, are quite different.

But you're right, copper is a bell weather of economic times and clearly demand is down.

But even at $1.40 a pound it's not the end of the earth and probably the trend over the next few months for copper may actually rise from that level.

Okay.

And last question is on your numbers between production of the actual steel melted and steel rolled.

Apparently your production is down or the melting is down more than your shipments.

So, is that the in process inventory you're using and how large that inventory is now and how fast it's coming down?

Yes, it is and all the inventories are coming down.

We're tracking this weekly at all of the mills and the fabrication shops and sometimes -- well, we've seen in overall tonnage, improvements each week, but sometimes that comes in scrap, sometimes that comes in billets, sometimes that comes in finished goods.

So, I wouldn't necessarily read a whole lot into that other than the trend is down.

Okay, thank you very much.

Your next question comes from Michael Willemse with CIBC World Markets.

Thank you, good morning.

Good morning, Michael.

Just wanted to follow up on Sal's question.

And maybe you did answer it.

But on the LIFO assumption for the next quarter, just -- it just seems odd to forecast a small LIFO credit, given how much prices have come down and if it is a small LIFO credit next quarter, would we -- should we expect a large LIFO credit the following quarter?

Well, as you know, LIFO is contingent upon two things, pricing and quantities.

And I have anticipated that we'll drive the quantities down a little bit more, which would lead me to my slight LIFO credit.

Pricing, you know, we've talked about the trend in ferrous scrap pricing being stable to a slight upward indication and one would suspect that the finished goods may follow that.

So, I just don't see that dramatic decline still coming, Michael.

Obviously, I can be wrong.

The one area where I can be wrong and could be wrong by a fairly substantial amount is if these trading inventories that are in transit actually land and are sold and are out of the inventory by 2028, that's the upside I was talking about that's out there.

Okay.

And then just following up on the comment on public infrastructure, did you say that public infrastructure is about 40% of your business?

It is now.

And that's because the -- it's not that the absolute tonnage went up, but the denominator of the fraction which is the total tons, it went down because as Murray indicated the non-res is weakened so much that as a percentage of a smaller pie, the infrastructure is larger.

Okay.

And all public infrastructure, that's by America, correct?

So, any increase will still by by America over the next year or two?

Thats a good question.

The federal work is by America.

Some states have that as well.

I note that in conversations about this stimulus package, which as Murray indicated, we don't know what it's finally going to look like, but they are talking about extending the by America provisions to even a greater range of projects than what it's currently applicable to and that would be good.

And do you have any thoughts yet on like how much this could increase your normal -- your shipment levels in this business, up 10%?

20%?

30%?

Or is it just way too early to tell?

Yes, Michael, it's way too early to tell.

But you'd have to figure a minimum of 10% but as Bill mentioned, some of that's going to be offset by the decline in the private sector and, you know, we're anxious as I mentioned earlier for the credit markets to ease and for the private sector to be stimulated with credit.

Okay.

Just a couple more questions.

On shipping costs, how much does it cost to import steel from, say, Turkey or China today relative to June last year?

And then also, how much would it cost to export scrap to those markets today versus June of last year on a per ton basis?

Well, from Turkey now to the US, steel shipments you can get $22, $25 a ton freight, so it's very low.

So, that's less than half of what it was a year ago.

A year ago it was probably $55, $60 a ton.

So, the freight rates are really low.

Not just the cape size but the (pana maxes), the handy size, the handy max, everything has come down significantly, so the freight markets are now back to 2003 type levels.

And same with scrap?

About $20, $25 a ton.

Scrap -- we're not a big export -- we don't export in bulk, scrap, but I assume will be similar.

I mean, we do export -- not export.

We import raw materials from China (inaudible) and the pana maxes are $30 a ton or less now.

Okay.

And then just last question, on kind of long-term scrap pricing, I mean, when you look at where scrap prices are now and when you look at iron ore and coal prices are now, I know you trade iron ore and coal so I'm just wondering your thoughts on how much iron ore and coal pricing have to come down to kind of I guess, you know, take out the average (inaudible) out of the market on the materials.

Well, both -- you know, coal in particular is coming down, as you know and iron ore, ironically iron ore prices seemed to have bottomed.

The spot prices in China seemed to have bottomed around about $65 a ton, have moved up to $70, $72, and now just in the last two or three days, $75 to $78 a ton.

The benchmark from Brazil is around 84 and Australia is I think is 98.

So, spot is getting closer to the benchmark prices but still the spot market is a much smaller market than the benchmark.

So, in looking forward, I mean, our view is the benchmark prices could drop in 2009, 30%, maybe 40%.

But still, it's still lower than the 2007 prices because of the huge increases in 2008.

So, I think iron ore and coal prices would have to drop significantly more to offset scrap, where scrap is.

But mind you, scrap is coming back up again.

So, at this point in time, I think if your question is leading on to the competitiveness of the electric arc furnace producers versus integrated, I think the electric arc furnace producers are clearly more competitive at this point in time.

Alright, okay.

Thank you very much.

Your next question comes from Barry Vogel with Barry Vogle and Associates.

Good morning, gentlemen.

Good morning, Barry.

Bill, I have a couple of quick questions for you.

You talked about possibly breaking even in Croatia in the new year.

And yet you had a pretty decent loss in the first quarter.

Is that off the table, in your opinion?

Not off the table but the probabilities are less than they were before.

We are -- this has probably less to do with our plans in Croatia and a whole lot more to do with the decline in pricing.

They took some significant write-downs, not on their seamless, per se, but they also have a welded and a drawn tube mill there and the raw materials that go into that, one of which is hot rolled coil, they took a beating on, as everybody did who is on FIFO.

So, I would say that operationally from the plans that we have in place, they are going to continue to pan out the way we'd expected but we had not anticipated this inventory write-down, Barry.

Okay.

And I notice you had phenomenal metal margins in the quarter, I guess it was all-time record metal margins.

Yes, sir.

And I know that it's happened because of discipline of the producers and obviously a lack of competition from imports coming into the United States.

What do you think's happening today in terms of the metal margins and what's -- do you think that they can hold at very high levels for the balance of the year?

Barry, rebar, metal margins are certainly dropping.

You no, when you look at what scrap is doing now, it's bounced off the bottom, scrap, and rebar prices have dropped and will be stable through January period but that metal margin you can anticipate for rebar will drop.

You know, into maybe the low 300s per ton.

It won't keep at that level and most likely merchant bar as well.

But, if it can accomplish low 300s or anywhere near that, based on history, that's phenomenal metal margins.

Correct.

Absolutely.

Okay, also, Bill, I noticed that the corporate and eliminations number was extraordinarily high on your press release at $42 million.

Can you tell us what happened there and does that reverse?

I can tell you exactly what happened.

The difference is predominantly in three things.

One is in SAP expenses.

Recall, that we are now depreciating or amortizing, I guess more technically correct, the amounts that we capitalized in the past couple of years because more units are coming on board so part of that increase is the amortization of SAP.

A second piece is professional services dealing with SAP and some other projects that we're undertaking.

The third is -- this is going to get a little on the technical side, but there is a -- there's an accounting pronouncement known as FIN 48 that deals with income taxes and it says if you have an exposure, anything kind of above remote, you need to put an expected liability along with anticipated interest in penalties and we had an issue arise and the irony of it all is that if things pan out the way that we anticipate, this amount will reverse in the second quarter.

But nonetheless, you have to square up each quarter.

So, you've got three things.

SAP amortization, a little bit of rise in professional services, and some interest and penalties on a tax issue which we hope will reverse next quarter.

Well, bottom line is you had $113 million on that line item in fiscal '08.

I had been using a slightly lower number because I thought the SAP expenses might ebb a little bit in fiscal '09 versus fiscal '08 and obviously I didn't know about these other issues.

Can you give us a ballpark figure -- a ballpark figure of corporate and eliminations for the year?

I think the run rate will lessen, Barry.

That's my best guess.

Well, obviously with $42 million in the first quarter, $100 million is not -- it looks like it's way too low.

Yes, well, I show 31.

I don't quite --

It was on one of your sheets.

Maybe I'm reading it wrong.

It's on your quarterly and annual segment data,.

Right.

I believe it says corporate and eliminations, $42.351 million.

Mine would say it was $31 million.

Okay.

So, I've got to ask my boy, my guy in white plains, you know, the differential.

Okay.

As far as the inventories turning into cash, you were quoted as saying hundreds of millions of dollars will probably occur this year.

Yes.

Hundreds is a big number.

Hundreds is a very large number.

And the inventories dropped from the fourth quarter to the first quarter by $170 million and I know your accounts payable dropped by $297 million.

Can you give us a better handle now rather than using the word hundreds of millions, can you give us a better handle now that yo know what has happened during this last four months?

No.

But, it will still be hundreds of millions and it will come though by -- by way of both the inventories and receivables but the payables part of it I think is -- has run its course.

Alright, so that fact that the payables have run its course, you won't have that as an offset.

Right.

And it will add more cash to the balance sheet.

Right

Okay.

Do you have a number for interest expense net for the year?

Well, my best shot on that would be just, you know, you've got one quarter in and I'd say if I had to take a guess now, go 23 each quarter from here on out.

Okay, thats a good guess.

And as far as your stock buy back program, I was encouraged that you did buy some shares at those prices.

And I know you've said you know, liquidity is very important, et cetera.

But, would it be right in assuming that you would be opportunistic you know, buyer, as things sort out here and liquidity improves and business improves?

Yes, I think we'd be opportunistic.

I think though, and you put your finger on it, I think we're going to play safe to begin with and then take advantage of the opportunities that are staring at us, including buying the stock back.

Okay, one other question on inventory write-downs, because you talked about Croatia and you talked about Poland.

Can you give us an idea of what the inventory write-downs, which were, you know, probably, sort of non-recurring, for Poland and Croatia in the quarter?

I don't have the exact number, but as I recall, it was well in excess of $10 million for Poland, and remember there's some translation involved in that number too.

And I think it was six to seven in Croatia, but I may be a little off on that number.

Alright, thanks a million.

Keep up the good work, you're doing a great job.

Thank you, Barry.

Thanks Barry.

Thank you, Murray.

Your next question comes from Gregory (McCosco) with Lord Abbott.

Thank you, my questions have been answered.

Your next question comes from Charles Bradford with Bradford Research.

Good morning, oh, well maybe -- I guess its afternoon by now.

How's it going Chuck?

Can you talk a bit about the status of the mirco mill?

How far along is the construction?

And can you update us on expected start-up time?

Yes, the construction is going very well and we anticipate September of next year as the -- as commissioning.

What are you seeing these days as far as electro costs?

Graph Tech, on their last conference call said they hadn't been actually -- finalizing any contracts yet, I'm assuming that they are by now.

And even though you may not be buying from them I am sure you're hearing from others as well.

What are you hearing?

Yes, we don't buy from Graph Tech but they are well up, Bill's got the numbers here.

Yes, I think you're going to -- and of course Chuck, its always one of these, you know, dependent upon size type things.

But you know, I would anticipate it a range of 40% to 50%.

Okay.

In regard to SAP, what are you looking for in the second quarter as far as the expense, including the amortization?

Yes, a little bit lower, I would think maybe 10 million, plus or minus.

Well, thank you very much and have a good holiday.

Okay, thanks Chuck.

Thanks Chuck.

Your next question comes from Bob Richard, with Longbow Research.

Good morning, and thanks for taking our call.

Good morning, Bob.

How are you?

Things are alright, thank you.

Good, concerning your write-downs in Poland, they're a little more humble than what I had thought taking into consideration your loss over there.

Is it -- especially seemingly your metal margins seem to be pretty healthy over there, was it a utilization issue and sunk fixed cost absorption?

Is that the way we should look at it?

Yes, plus you had the -- a bit of a distraction, they finished the morgan wire rod block there, Bob, during -- and it started production just in the last week of November, so there were some other costs associated with it that are running through there.

That should be behind us?

Yes, in fact that ought to be what -- one of the reasons why their margins, whatever they are going to be will be sustained by it, because its going to put out, you know, a higher quality product in both wire rod and coiled rebar, so, you know, they're going to be able to upgrade the product line with the use of it.

Okay, I appreciate that.

And just one quick follow-up, to beat LIFO to death, in the America's mills, the income, $75 million, much greater than in the Americas recycling.

Should we -- I would imagine that you know, scrap prices is what came down the most in the quarter, it probably isn't steel whip on your Americas mills.

Could we infer from that, you're carrying more scrap on your mill side than in recycling?

No, I think what you're seeing there is that the recyclers went scorched earth, to be quite honest, during October/November, to drive the inventories down to the point where they were still excepting inflow from their industrial customers.

But on the margin, they were not taking any additional ferrous or non-ferrous from other sources.

And they were only selling, again, its difficult to talk in absolutes but what the word was is that they should sell to the mills and the mills would only buy from them in order to drive the inventories down.

So, you might have seen, and maybe this is responsive to your question, I mean you might have seen that the inventory shifted while -- from the recyclers to the mills while they were -- while we were doing this kind of fraternal transfer.

But, I think you are going to see it coming out the other side pretty soon.

Bob, rebar prices did drop significantly in that period to be at $380 a short time from September, so that was pretty significant.

Okay.

And that of course drives the Americas mills LIFO credit, okay.

Thanks guys, and thanks for that detail and good luck.

Thanks Bob.

Your next question comes from Leo Larken with Standard Poors.

Good morning everybody.

Are you a flower salesman now?

Not last I checked.

Could you give us -- just remind us what capital spending will be for '09 and if -- any indications for '10 -- 2010 excuse me?

Yes, none for '10, the anticipation would be fractionally over 400, you know, always on the look out, you know in case liquidity goes in a different direction than we would anticipate.

But -- and its those four projects I mentioned earlier, Arizona, Poland, Croatia and SAP.

Okay and even directionally could this -- could 2009 be maybe a plateau for CapEx?

Well, yes, I mean look if you don't pin me down to a specific number, yes, I would agree.

Because here you're going to have you know -- the Arizona mill will be done, the substantial -- a substantial part of the Polish mill will have been expended, Croatia will be done, by the end -- SAP substantaily will be done by the end of this fiscal year.

So, unlike 2009 where we had a lot -- you know, the train had left the station on a lot of these projects at 8/31/08 and so there was a lot of carry over into 2009 you would not anticipate that into 2010, Leo.

Okay, thanks.

Yes.

(Operator Instructions) Your next question comes from Gregory McCosco with Lord Abbott.

Yes, thank you.

I found one.

With regard to SAP you've talked a lot about it.

Just -- when do you expect the expense to be complete and what do you expect just in total spending on the SAP to be?

Well, we really haven't given out the total spending figure, but I would anticipate that -- well, I'll throw a couple of numbers out there.

We may spend about 75 on it in total this year, Greg, and next year it would be under 20.

So, this is the -- will be the last year of significant expenditures and probably the last year that I even give you any detail on because it should simply roll into normal operations where if we buy somebody we put them on SAP and just kind of become part of the -- part of the day-to-day blocking and tackling here.

Give me some sense of what the value or the -- what you see as it delivering in terms of profitability or inventory turns or whatever.

Yes, the payback is a minimum of 20% there are some estimates out there, I mean there are our own internal estimates, that would have that as high 25% to 30%, it manifests itself in several ways, one obvious one is, and I am going to sound like I'm SAP (inaudible) and consultant here, because I have listened to this stuff for so long, hopefully I haven't gone to the dark side.

But, what you end up having is supply chain management where you have total visibility from your recyclers into your mills and into the fabrictors and where you have right now -- here's an easy example.

Right now, the fabricators -- probably every one of our shops has a safety stock of 400 or 500 tons of rebar or merchant (inaudible) that they just hold just in case the mill doesn't get there on time or there is some unforseen circumstance.

Well, when you have total visibility up and down the food chain, you can drive those safety stocks out, have one, kind of central wearhouse or pick one fabrication shop in a geographic area, to hold the safety stock.

You can set the mills rolling schedule based upon what the fabrictors back-log looks like over an extended period of time.

It also, of course, has the ability to aggregate costs and then go to vendors for more significant discounts.

And so when do we expect those, kind of, just order of magnitude.

Have we already been feeling those safety stocks going down?

No, its a great question Greg, you would expect to see the beginnings of that in 2010.

You have to have a significant amount of the units on SAP and are -- the other two big mills in the United States are going in early 2009, we will be rolling on the recycling units -- a lot of them in 2009 as well.

So, you don't have to opportunity yet for the benefits until more of the units are on it.

Okay, thank you very much.

Good.

Your next question comes from Sal Tharani with Goldman Sachs.

Bill, can you tell us what your maintenance CapEx is generally for a year based on your current -- ?

Excluding Poland its probably $70 or $75 million Sal.

And with the macro mill, it will probably increase a little bit?

Yes, but very little.

That thing is a self contained unit that I would not anticipate to have much in the way of capital expenditures for a few years.

Great, thank you.

Uh-huh.

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

Mr.

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

Okay, thank you everyone for your attendance, I just wish everyone a happy and safe holiday.

Thank you this does conclude today's conference call, you may now disconnect.