Commercial Metals Co (CMC) 2009 Q2 法說會逐字稿

Hello and welcome to today's Commercial Metals Company's second 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 second quarter fiscal 2009 conference call.

With me is Bill Larson, our Chief Financial Officer.

As usual, I'll begin the call with an overview of the second quarter and then call on Bill to provide further details.

Finally, I'll comment on the outlook.

Our second quarter, that's the December to February period and those of us in the northern hemisphere, it is the winter quarter, those down under, it is obviously summertime, but they go to the beach anyway so it is normally a quiet period there.

It is always our weakest quarter.

But as predicted in our last call, this quarter turned out to be very weak.

We took the opportunity to book substantial expenses, which are listed on the first page of the press release and these are reflective of the very difficult business conditions we face.

The quarter was characterized by very weak demand in virtually all markets resulting in low levels of shipments, continuation of extensive destocking and price decreases for most products.

Ferrous scrap prices rose early in the quarter but declined by quarter end.

Chinese domestic prices for raw materials and steel increased during the December, January period but fell after Chinese New Year.

China now has the highest domestic steel prices in the world for many steel products.

While more details on global stimulus details including the US were made known during the quarter, we have not seen any impact and realistically, it will not be until the second half of 2009 until any impact is felt.

We made considerable cost reductions and improvements in our working capital position during the quarter.

I'll now call on Bill to provide further details on the second quarter.

Bill?

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 that in summary says that in spite of management's good faith, current opinions on various forward-looking matters, circumstances can change and not everything that we think will happen always happens.

In addition, we've given guidance regarding our outlook for the third quarter of fiscal 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 straightforward from our financial statements or in common business use can be the subject of our discussions today and in our investor visits.

Our web site has additional information at CMC.com but there are other items that may be outside of our ability for discussion and you will need to be patient with us if we defer comment.

Our financial statements look like the board from the Star Trek television series.

A disparate group of life forms all joined together in one common entity.

This quarter included lower cost of market adjustments, contract compliance reserves, bad debt increases, severance impairment charges, LIFO income, bizarre income tax rates; it makes our quarterly charge for SAP roll-out look almost normal.

Sadly though, our steel markets seem more like something out of science fiction, they're reality and our results reflect this.

Rapidly declining prices require valuation adjustments on inventory; these times test the ethics of your customers and some do not pass requiring contract compliance reserves.

The lack of liquidity has forced companies onto life support or bankruptcy, necessitating bad debt allowances.

The lower demand requires us to downscale our operations, unfortunately leading to reductions in work force.

We've shut down our coal processing mill in Croatia and idled capacity in our Joist plants causing impairment charges.

Where we had exposures, we took our hits to the fullest extent allowed by sound accounting.

The question inevitably arises as to whether there's more to come.

I would say it is likely there's more to come but nowhere near the magnitude seen in the second quarter.

Pricing may deteriorate some, but we're close to what we believe is the bottom.

Valuation adjustments do not have that far to go.

As you read in our press release, we believe our third quarter will incur a slight loss, but not at the level of the second.

And there may be some upside in LIFO but that is always problematic, at least for me, in predicting.

Our financial strength is excellent.

During the quarter, we retired $100 million of long-term debt.

We did not use our AR securitization program so effectively we paid back $80 million during the quarter on it.

We used less of our International AR sales programs.

We have no significant debt maturities until 2013.

We're building short term cash investments.

We have our $400 million revolver and our $200 million AR securitization program available to us and we have head room in our debt covenants.

In summary, our cash flow has allowed us to retire $180 million in debt this quarter, fund our capital expenditure program and build cash balances, all with sufficient backstop liquidity if needed.

Our corporate goal is to generate and hoard cash.

We're not interested in buying back our debt and although our stock is at a compelling value in these uncertain times, we need to play safe first.

The most frequently asked question is this the dividend safe?

I don't know what safe means.

The Board approved the payment at the same rate for our next dividend during what was our weakest quarter in 30 years, so you can conclude what you want from that.

The quarter was not without its highlights.

Our mill in Birmingham, Alabama was recognized as the safest steel mill in the United States for 2008.

Upholding the tradition in culture of safety at CMC, our mills have held that top spot for seven consecutive years.

Looking at the details of the financial statement, the only highlight from a revenue standpoint was our Americas fab segment which did gain versus the second quarter of last year.

But that was more due to our acquisitions late in fiscal 2008 than the same store growth.

Clearly, LIFO was a huge positive offset this quarter.

Our mills that have greater rebar capacity fared decently well in the quarter.

The rebar fabricators have at least one more good quarter of backlog before the slowdown might take effect.

The LIFO reserve at 2/28 was $324 million; during the quarter it increased net earnings $80.7 million or $0.72 per share.

Last year was during a period of rising prices, it was an expense of $38.3 million or $0.32 a share.

So, year-to-date, we've increased net earnings $154.6 million or $1.36 a share versus the expense of $35.5 million or $0.30 per share last year.

And although these numbers, they seem pretty large, recall that last year we incurred $322 million of pretax LIFO expense and we have rolled back but $238 million in income this year.

So -- and I'm not predicting that we'll reverse all of last year this year but if that were, in fact, to happen, there is still at least another $80 million left to go.

Depreciation and amortization was $37.267 million for the quarter.

That looks a little odd.

Foreign exchange movements in zloty and Kuna are kind of mucking things up.

You'll recall a stronger dollar makes foreign -- any type of foreign number shrink and that's really what happened.

It is not that we weren't depreciating anything.

I would now expect, given these forex changes, that depreciation expense for 2008 will be about $160 million, that's a little bit lower than what we talked about last time.

SG&A during the quarter rose about $24 million, before our discontinued operations are taken into effect.

On the plus side, items which you've already seen in the press release, bad debt expense increase, severance costs were up, environmental costs were up, impairment charges were up.

Contract loss reserves were up.

And the big offset to that was bonus expense was significantly down.

Interest expense will fall this coming quarter to about $20 million.

We do not have the $100 million in long-term debt and we are not borrowing short term at present in the United States.

Again, looking at the balance sheet, we have total intangible assets of $147 million which represents only 4% of our assets.

I think that is one of the lowest among any of our peer groups.

Current ratio is strong at 2.3.

The book value per share at 2/28 was $12.83.

The average shares that we used for the diluted calculation in the second quarter were 111,998,128.

Year-to-date, the diluted average shares were 113,917,263.

The actual number of shares outstanding are 112,505,772.

Our capital expenditure budget is expected to be slightly under $400 million for fiscal '09.

You'll recall that the three largest projects are the micromill in Arizona, a new flexible rolling mill in Poland and mill shop improvements in Croatia.

Finally, we did not repurchase any stock during the quarter.

Thanks, Bill.

In terms of the outlook in the US and in many global steel markets, we anticipate destocking to continue until at least mid 2009.

Everyone remains focused on cash generation and driving down inventories.

We anticipate steel prices in the US to weaken further.

However, ferrous scrap prices may be close to bottom as seasonal demand picks up.

Particularly in global markets.

China appears to be the only country at this stage which has freed up their credit markets with lending at all levels active during -- and since January.

In our view, China remains the key market to underpin iron ore, scrap and steel prices in 2009.

In particular, China can achieve 6% to 7% GDP; in 2009, their target is actually 8% which appears high but at 6% to 7%, they can achieve that target then steel prices are likely to stabilize in the second half of 2009.

[Steel-on] products in particular rebar are likely to firm over time as global infrastructure projects take hold.

In summary, as Bill outlined as well, we face very difficult market conditions which are likely to remain until at least mid 2009.

We'll now open up the conference for questions.

(Operator Instructions) We'll pause for a moment to compile the Q&A roster.

Your first question comes from Michelle Applebaum with Research.

That's good enough for me.

Hi.

Good morning.

Hi, Michelle.

Good morning.

I wanted to make a Star Trek joke but I can't think of one.

I want to go through the accounting first.

You have unusual items at about $103 million.

That's all pretax, right?

Yes.

And your average tax rate was 25%.

Do I use that to add this back or do I use your marginal tax rate?

I would use the marginal rate, Michelle at 35%.

The tax rate that's shown here is kind of the fallacy of small numbers.

When you get plus or minus near zero, your permanent differences and things like state income tax --

Oh, yes.

Those are not -- those are fixed, they're not variable so it is going to affect your average rate massively.

Okay.

So, that should be added back at 35%.

And then your LIFO credit of $80.7 million, how much of that was layers?

Very little.

$12 million pretax.

$12 million pretax?

Yes, about $8 million after.

Okay.

So, so, if you reported a loss -- so if I take the $103 million and add it back at the 35% tax rate and then take out the $8 million, I would get about $0.20 a share profits clean?

Is that a good number, do you think?

The SEC has a real problem with me telling you that earnings should be anything other than what they were, so I'm going to have to defer comment but you can conclude any way you want.

Well, let me ask you a question.

You're disclosing these unusual items but you're not mentioning the tax rate associated with them.

And then you're disclosing the $80 million in LIFO credits but you're not mentioning the layer liquidation which even at $0.08 is meaningful when you're earning $0.10 or $0.20.

Why can't you put that in your release?

Is that not allowed?

Oh, no.

It is very allowed.

If we thought it was material, it would have to be in the 10-Q but we don't think it is large enough.

Oh, the layers, you mean?

Correct.

Okay.

But what about the tax rate?

A lot of people are going to add back those numbers.

The 10-Q will have a reconciliation of the tax rate in it and the very late into the press release.

Your point is well taken.

I probably should have moved it up a little bit as an explanation of the tax rate.

Okay, yes.

Because not all of us have accounting degrees.

I want to publicly thank my mother.

That I do.

My next question for you is this.

You made an interesting comment about what's happening in the global market and you said something about import markets being shut down which I thought was an interesting observation.

There's been just in the last three days, some -- a flurry of pickup in activity and pricing in the global trade arena.

Have you seen that?

And do you have any thoughts about that?

Three days worth

The comment about the import markets being shut down, that was really reflective of the situation with Poland.

Because they have markets for billets were the Middle East and obviously the problems in the Middle East with too much infantry of billets is ongoing.

But you are correct.

There's been -- in Asia, there's been a pickup, particularly with billet demand in China or in Taiwan and countries like Vietnam.

In fact, we just booked a shipment from Poland to Taiwan which is a first for us.

So, there is a pickup in Asia.

Just a small pickup.

So it's too early to say if it is a trend at this stage.

Okay.

And where do you think it is coming from?

It is coming from a couple of things.

A number of the Chinese mills which started up the smaller mills late last year have shut down again.

And, there's a bit of a shortage of billets in China at their rerollers and also in countries like Taiwan.

So, we anticipate in those markets, maybe a little bit of a pickup or certainly a pickup in prices.

We've seen a pickup in prices also out of Turkey for billets and also the CIS seems to be reducing their number of exports of billets.

Now, clearly, a lot of those billets were distress cargoes and high infantry levels late last year which seems to be being reduced.

Okay.

When we ever do get a pickup, what do you think it will look like?

Do a science fiction thing for me here since Bill and I are into that.

Well, as you know, Michelle, we're mainly a long products producer.

We look at those markets more closely.

What we really believe because of all of the global infrastructure projects and the stimulus packages, some will be more effective than others.

It will certainly favor long products, products like rebar, structural steel products, et cetera, wire rod.

And as I mentioned, we're optimistic that China will see a pickup probably after mid year, July, August, September period, we would think there will be some pickup.

So, we're closely watching China.

China's exports, as you know, have dropped off dramatically.

Most of the steel that is being produced there is being consumed there.

So, we're more optimistic about China with their stimulus measures than a few other countries.

Great.

Okay, thank you very much.

And thanks for the accounting help.

Very well.

Thank you.

Your next question comes from Kuni Chen with BOA Securities.

Hi, good morning, everybody.

Good morning, Kuni.

Good morning, Kuni.

I guess just to start off, on the bad debt expense, can you give us a little bit more color on that, kind of which areas of the business you're seeing that in?

I would suspect more on the Americas F&D but perhaps you can give us a read into some of the end market types of customers where that's been becoming more of an issue.

It is more concentrated in the Americas, not that International is without theirs, but they tend to have a little bit tighter regime when it comes to letters of credit and credit limits that are covered.

So, we don't generally see quite the same -- and maybe their customers are more honorable than what we have in the United States.

I don't know.

But anyway, you're right.

It is more of a United States -- well, one of the largest ones, this won't come as any great shock that we have allowed for was [Alaris].

So, you're seeing that -- anyone who dealt with aluminum or some of the nonferrous metals, we've had a problem with that.

We have also seen those who took imported material.

So our CMC Dallas trading also has a lot of exposures in it as well.

So, as a rule, it is generally those two.

Mill customers pretty much, Kuni, have been pretty good.

It is the fabricators and recycling where we've had trouble.

And the distributors.

Yes, the distributors, right.

Okay.

And I guess just going back to Michelle's earlier question on China, obviously we've seen some seasonal inventory rebuilding, but prices for rebar and flats are starting to decline.

Do you see a scenario playing out where potentially you could have a bounce here in billet as you talked about earlier?

Would have other finished prices declining for the next couple of months?

Well I think, Kuni, as I mentioned, I think it is -- in broad terms, you can split the products up into two categories.

Long products, I think they would tend to firm.

Particularly rebar in the second half of the calendar year.

Our flat products, we're not so optimistic.

Clearly, a lot of those go into manufactured goods which were being exported so there is considerable weakness there in China and maybe that will remain for some time.

But certainly long products, our view is most likely they will firm after midyear.

Okay.

I mean it just seems like those inventory levels appear very high.

So I don't know if you had a point of view on that.

They are at this point of time.

Yes.

But, as I mentioned, the Chinese government with their stimulus package, 50% of that is steel related.

It will have a real impact.

Unlike here in the US where maybe 10% to 15% of the stimulus package is steel related.

China will be much more effective in that way.

Also, their provincial governments are lending a lot more at all levels for projects.

We understand mills in China now are being prepaid which we would love to have that situation in the US for projects.

So, all of that starting to happen.

So, there is a time lag effect.

So, give it another quarter but I think we'll see some positive signs as I mentioned after midyear.

Right.

Okay.

And just one last question.

I'll turn it over.

On capital spending, obviously there are still a number of projects that are winding down this year and overall Cap Ex is at fairly high levels.

I guess at what point can you kind of slam on the brakes for capital spending for next year and how low can Cap Ex for fiscal '10 go down to?

It is not so much slamming on the brakes as it is -- although I think the point that you're trying to make is when does this thing end.

I think the three big projects will predominantly, as far as spending is concerned, will end in our fiscal year; so 8-31-09.

We have not put together the capital expenditure budget for next year, but one would suspect we will start with the conversation being just maintenance Cap Ex at a level at least 50% to 75% lower than what we're spending this year.

Okay.

All right.

I'll turn it over.

Thanks.

Your next question comes from Timna Tanners with UBS.

Hi, good morning.

Good morning.

Good morning, Timna.

I was wondering if you could give us a little bit more of a breakdown on your outlook.

I'm trying to understand how much of the challenges that you experienced of course in the February quarter that were one offs might be left behind?

Specifically if you look at the trading arm, what you call International fabrication and distribution.

There was some high profile shipping incidents and cancellations that, kind of thing.

Can you give us your best sense of how much that kind of thing is behind you and when you go through with your outlook if you can tell us where you might see the challenges to see another loss from sequential -- sequentially from the second quarter?

Timna, as Bill mentioned, we think the worst is behind us but we're certainly exposed, as you mentioned, in some areas.

In Europe, and in Asia in general, we believe the worst is behind us.

Australia came into this recession pretty late.

So they've got some issues for the next quarter.

As I mentioned, our steel import business still has issues here to be resolved.

That will take one to two quarters.

So, we believe the worst is behind us.

But we're realistic.

We believe this next quarter is going to be also very tough.

We hope it is going to be better than the second quarter.

So, there is obviously with this destocking situation and once credit markets start to free up, we've seen some obviously positive signs in the last few days.

Customers will start to restock and shipments will start to flow.

And all of these issues will disappear but it takes time and I would think at least one more quarter.

So, if it goes sequentially, then it sounds like specifically, you're talking about with Australia and the shipping arm, it sounds like the International fab and distribution should see another loss to get us to a quarterly loss?

But are you expecting to continue to have losses in your International mills?

Recycling, you're talking about being at bottom.

If you could give us a little bit more detail on the segment kind of sequential move.

I would love to do that but I'm not allowed.

I would say that in terms of who will be stronger versus who will be weaker, I think -- I think recycling has probably now hit the bottom.

There is a little bit of downward movement in ferrous prices this month, but copper prices are rebounding.

So, doubt that they are going to take it quite as bad as they have the first six months of this year.

The mills, as you saw, from the outlook will continue to produce at about the same level as they did during the second quarter.

The fabricators still have a little bit of backlog left.

It is not quite the same in the International mills, backlog isn't quite as large in Poland as it is here in the United States.

So, I can't -- I really can't give you a whole lot more than that other than I would have to waive our projection by segment in front of you and I don't think they're going to allow me to do that.

Got you.

On Poland's last conference call, you said that that market was holding up better than other markets and that was a -- you were expecting better utilization.

Has that changed then materially?

Well, not materially.

They aren't utilizing their rolling capacity at a higher percentage.

Fractionally.

But at a higher percentage than what we are in the United States, overall.

The mills in the United States are rolling not quite as high as Poland is expected to.

But that is clearly -- I don't want to leave you with a wrong impression here.

That's clearly the difference between two different worlds.

If the mill has rebar capacity, they are rolling it much higher than if for instance, our mill in Alabama that only makes merchant shapes, who are rolling at a much lower.

Okay, final question for me.

If you could comment a little bit more.

You talked about how your backlogs look okay and some of the federal spending or state spending.

Could you talk a little bit more about anything you're seeing on state budget health and any change there?

We've seen highway rewards to started to look worse for February.

Wondering if you've seen a change there?

We sit in the lovely state here of Texas and it is a nice spot to be at this point in time.

I mean the stimulus package is really impacting Texas to the tune of about $3 billion for highway spending in the next several months.

So, we see some very positive prospects here in Texas and the highway backlog is good.

So, we expect that to even get better.

Okay.

Great.

Thanks so much.

Your next question comes from Bob Richard with Longbow Research.

Good morning and thanks for taking our call.

Good morning, Bob.

How are you?

Hi, Bob.

Okay.

Hi, your lower cost of market inventory adjustments, I imagine that's overseas.

Can you break that down a little bit, Bill?

Maybe what products?

Well, I would like to say that there were some that actually went up in value during the quarter but it was -- I'm afraid, it was pretty much across the board in projects or in products.

I mean if I look -- if I look at the -- just kind of where we took our hits, you had -- you had it here in the United States predominantly and we tried to highlight this in the press release, predominantly in the area of unexpected or orphaned inventory.

Specifically that which our steel import business into the United States would otherwise have delivered say for noncompliance on the part of counterparties.

And we're now stuck with that inventory.

So, here in the United States, the overwhelming majority of it was in that trading unit.

The other ones recall are on LIFO.

Right.

So, we get quite a protection from that.

When you look overseas, the two main markets, Australia as Murray mentioned, went into the tank during this quarter so they had the largest and then followed by our mill in Poland and in Croatia.

Okay.

That helps quite a bit.

Thanks.

On your Cap Ex projects, the micromill here in Arizona, Poland, the long product mill expansion, Croatia tube mill, is it wrong to take a look at maybe -- to maybe ask which one of those takes priority?

Are they all pretty much -- I know Croatia is kind of need to turn that around to get that money spent with the furnace and new castor in.

Would you say that takes priority over the other two or do you look at it that way?

Well they're all going to be taken to completion but to try and give you a little bit of color, I think Croatia does take priority; without it there is not much hope of turn around.

With it, I think we have rather strong expectations of turning that thing around.

So, I think Croatia, although it is nowhere near the size in terms of Cap Ex dollars of either Arizona or Poland, is the most critical for that operation.

Next, I think would come Arizona.

Here is an opportunity to kind of lay a stake in the ground from a technology standpoint and perhaps develop a model that we can replicate in other parts of the world.

So, I think that would be number two.

And I think Poland would rank number three if, for no other reason than the market right now just doesn't need all of that additional capacity.

Now, it is not possible to be half pregnant with a steel mill.

We're either going to build it or we're not going to build it.

And we're far enough along the line that we will complete it, but it is not as critical, clearly, as either Croatia or Arizona.

Okay.

Thanks.

That helps.

My last question, I think you gave a reason, but I probably missed it.

Domestic mills with more rebar capacity served a lot -- or fared a lot better last quarter.

Why was that, Bill?

Is it because of the lack of imports of rebar?

Well, that certainly helped.

Rebar imports in the United States versus any historical numbers continue to be well down.

There is a little bit of opportunistic Turkish rebar coming in here.

But I tell you, the numbers still are not significant but the main driver, I digress, the main driver would be highway and infrastructure work, particularly in the five state Texas region.

And was, Bob, the merchant bar products been weak because a lot of their customers are in manufacturing service centers, et cetera.

So that's a very weak sector at this point in time.

Okay, thanks very much.

Good luck.

Thank you.

Your next question comes from Barry Vogel with Barry Vogel & Associates.

Good morning, gentlemen.

Good morning, Barry.

Good morning, Barry.

Bill, I have a couple of questions for you.

I know you had -- you were trying to answer that question about the $61.3 million of lower cost, lower cost of market inventory adjustments.

Right.

Could you be kind enough to actually break down that $61.3 million for us?

No.

But I love you, Barry but I can't do that.

You can't do that.

No.

Okay.

Let me put it this way.

I can do it but I won't.

I know that sounds harsh.

But there are certain, competitive reasons why I don't want to be too specific on this.

Okay.

Let's go on to -- keep on the same topic of the $103 million which included the $61.3 million.

You made a comment, a vague comment about -- you think the worst is over.

Knowing what you know about all of these items, the impairment charges, the severance costs, the bad debt expense, contractual, noncompliance, as well as the lower cost adjustments, could you give us just a general estimate of what you think the current quarter would have on these items, approximately, to give it some idea of the real bottoming on these charges for the third quarter?

I tell you what, Barry.

I'll do the best I can in terms of giving you some direction on this.

I won't be able to give you the numbers.

I don't think -- and this is all subject of course to being wrong as prices either skyrocket or, or plummet.

But I would not think that from an impairment standpoint, that we have any particular concerns.

I mentioned earlier that we just do not have that much in intangible assets on the books.

So, severance costs, always difficult to say but I would like to think that directionally, that that would be lower.

Bad debt expense, again, I think we took our hits predominantly in this quarter.

We will monitor that as much as we can.

But I would not think that that is going to be particularly onerous going forward.

The lower cost of market on inventory, don't really need to give you a whole lot on that.

I mean if you see prices -- now, they plummeted pretty significantly during this quarter.

So, I mean if directionally, you see that they're not going down, I mean it is a straight -- it is almost a straight line calculation.

So, if you're seeing that prices are stabilizing, that will tell you that we don't need quite as strong a charge.

The one thing I would warn you about which is the last one which is contractual compliance.

That may well still have some to go.

That is a individual negotiation, customer by customer.

It is a slog and I don't want to leave you with the impression that we, we took everything that we knew but there -- it is a battle.

Okay.

Can we shift to inventories?

At the end of August, you had $1.4 billion of inventory.

At the end of February, $904 million.

Which is a nice drop of $500 million.

Can you give us your estimate of the outlook for that number, the $904 million taken into account with payables and receivables to see what cash generation might occur in the second half of the year from that category of working capital?

Yes, not to be specific to either inventory, receivables, or payables but there is more to come out of working capital.

I suspect it's a number that is well north of $150 million to $200 million.

But I would use that as a minimum.

Are you talking about $200 million plus in the second half of the year?

Yes, total working capital reversal so let's not just focus on inventory receivables or payables.

Right, you might generate $200 million plus in extra cash.

Excluding your income or losses.

Right.

And the Cap Ex program, right.

Right, right, right, right.

Now, you had a goodwill write-down of $13 million.

What was that from and is there any chance of any additional good will write-downs in the second half?

Yes, we didn't -- the impairment charges were on the South Carolina Joist plant and our cold rolling mill in Croatia.

It wasn't goodwill.

It was impairment charges.

Right, but what about the goodwill charge of $13 million?

That -- I'll have to go back and find all of the detail on it.

Your next question comes from Chris Olin with Cleveland Research.

Hi, guys.

Good morning, Chris.

Have you tried to model what you think the ultimate volume impact that the stimulus in North America will have on, either steel demand or rebar demand, any kind of insight there?

No.

We pretty much have left that to some of the trade organizations.

I know that both of the two major steel trade organizations have estimated $3.5 million, $4 million.

The Association of General Contractors also puts out now, of course, theirs is going to be across a wider range of products and they've taken a stab at it but no.

Internally, we haven't.

Is that $3.5 million, $4 million just rebar?

No.

I suspect it is all products.

Interesting.

Any thoughts on the new highway bill that needs to be reset at the end of the year?

I mean are you thinking better, worse funding, any comments?

Well, it's difficult to say because -- I think they're probably going to at least maintain it.

Of course, you have the new stimulus bill throwing money into infrastructure projects.

And so the federal highway tax per se is still very important and one would guess that just back of the envelope that they will at least maintain it where it is.

But then you've got the other spending bills on top of that.

So, it looks pretty good, Chris.

Yes, overall, it should be up, Chris.

Ok.

Just finally, I know you kind of touched on it a little bit.

Are you seeing any kind of irrational tactics by the Russian mills or scrap dealers today?

Are they doing anything to take advantage of the currency?

Well, obviously they've got a very favorable currency to export.

But Russia, and we don't get a lot of press -- or very little press about Russia, is really in a very bad way.

I mean they're very distressed in terms of their financial situation.

Companies over leveraged, so, they have been aggressive exporters of a range of steel products, particularly semi products, slabs, billets, scrap to some degree, and flat rolled, hot rolled coil et cetera.

We expect that situation to continue for some time.

It appears to be slowing some and I guess they're reducing some of their infantry positions but Russia, yes, they have some real problems which will maybe take several months to sort out.

I guess the question would be is it a big enough situation or a big enough deal where they can prevent any kind of recovery in the markets?

I mean how big of an issue would this be?

I don't think so.

I think, I mean China's imported a lot of products from Russia in the CIS in the last three months.

Hot rolled coil, billets, slab, et cetera.

But also we see the CIS product billets into southeast Asia and we don't think it is going to be like the 1990s where the CIS, Russia dominated exports into Asia.

We think there will be a limit to it.

But it certainly is a significant factor.

But the interesting thing is their prices are starting to move up.

There was an earlier question on billets and their prices are starting to move.

$20 to $30 a ton the last couple of weeks.

So, that's the positive side.

Got you.

Good stuff, fellas.

Your next question comes from Sanil Daptardar with Sentinel Investments.

Thanks.

In terms of the credit situation around the world, have you seen any kind of improvement or do you think it is still the same, grade has not yet [improved] into the market place for your steel dealers, distributors, or the likes?

Sanil, on the private side, we see it still is pretty bad.

There's very little improvement anywhere.

Some markets, as we mentioned, have come into this later.

So, they're obviously in the early stages.

The only bright light we see is China.

And China is definitely at all levels, directed by the central government that right down to the local levels has freed up their credit markets compared with several months ago.

So credit is freely available in China and they have all sorts of mini stimulus packages in China to get people to spend more.

I mean the Chinese like to save so they've got all sorts of measures to help people buy products in China including coupon systems but we even see local bond issues in China.

We haven't really seen that before.

So, the Chinese obviously they're a difference government, they are set up differently to here in the US and in the west.

They can act a lot faster and in a lot more coordinated way than we can.

But they definitely have freed up.

And we -- that's why we're more optimistic about what's happening in China than many other parts of the world at this point in time.

That's quite a good prospective.

Now, how much would it benefit from the China stimulus program?

Because I believe that your exports to China are not that significant, right?

No.

We're not a big exporter to China.

I mean it depends on the products and on the conditions.

We're more of a buyer from China.

But to us, the key is China will underpin scrap prices, iron ore prices and global steel prices.

So, in other words, there will be a bottom and I think that's a good thing.

And obviously China's exports will be substantially down this year.

They exported 59 million tons in 2008 and it will be well under 30 million tons, could be under 20 million tons, who knows.

It will be a huge reduction of steel exports out of China for this year, 2009.

So, focusing on domestic consumption.

Okay.

In the press release, you mentioned there might be a seasonal uptick in volume probably in third quarter or the fourth quarter.

Here, are you taking some bad debt expense here in the second quarter of $14.6 million.

Now, if the credit has not yet eased, probably, there might be more bad debt expenses if the volumes pick up in the sense because the distributors may not be able to pay you or you might be losing your credit terms.

Is that the case?

Is that the scenario that we should be looking at?

Well, yes, it is a scenario where we're obviously concerned about.

But at some stage, you have to assume the credit markets will start flowing to some degree.

And that will obviously help the private sector.

But we don't expect, certainly here in the US, any major pickup.

It will be a modest recovery and certainly it will be led by the stimulus package in the products that we're in, in light of this calendar year.

If I have to extrapolate there might be another bad debt expense number in the third quarter and the fourth quarter, probably?

Well, there might be but I don't think it is going to be anywhere near, Sanil, the size of what it was in the second.

Okay.

Okay.

Great, thank you.

Thanks.

Your next question comes from John Tumazos with Very Independent Research.

Good morning.

Good morning, John.

How are you?

It would seem like some of your customers are lousy customers or not good at their word.

And some of the businesses are far-flung and maybe the Company would have better returns if there were fewer moving parts.

And I'm just looking at the $103 million in charges and $116 million for an SAP computer system that isn't done yet.

Do you think -- how much bigger do you think your rate of return would be if you had one-third fewer assets employed?

And you just took your businesses with the customers that welsh the most and sell them to whomever?

Well, I wish we could predict who those customers were.

It could be the US government and your fabrication system next.

Their checks might start bouncing.

If we could downscale to our mill just in Texas, we would be the most profitable steel Company in the world.

But in fact, we believe that the assets do have value across the spectrum of both products and geographies.

Is that to say that there aren't businesses that we're constantly reevaluating whether we need to downscale them or not?

No, we're constantly looking at that.

It's very difficult to do.

How much smaller do you think the company should become?

I think we're comfortable with the size we are right now.

Hopefully we will be in a growth mode once the clouds clear.

John, I mean we complain about our customers.

We obviously have some very good customers.

And to be fair, of some our customers, it is really not their fault.

This thing fell off a cliff, as you know, in October, November last year.

And the banks have pulled the plug on many of these guys and putting tremendous pressure on them to reduce their inventories and they've just been squeezed of cash.

So, we do complain and have major issues.

Some, correctly do have money and are making market claims on all sorts of issues so you have to deal with that.

Basically, we like the balance to our business and certainly the vertical integration on this climate works extremely well for us.

And SAP once it is fully implemented certainly here on the Americas, we'll get tremendous efficiencies and transparencies out of that.

It has been a big project, a big expense.

But we will very soon realize reoccurring benefits; so that we look forward to.

Do you think that if the company grew and got bigger and had more moving parts, you would be able to manage a bigger, more complex Company?

We believe so in the areas that we know.

I mean we've got good experience obviously in recycling the mills, fabrication and downstream and the trading side.

We're pretty comfortable overall there.

I mean you can always improve the Company, of course.

And that we're look at all the time.

But we're pretty comfortable with the geographies we're in.

We think long-term, you need to be global as a steel player and not just be here in the US.

So, we're adapting to current conditions but we certainly have an eye on the future as well.

Thank you.

(Operator Instructions) Your next question comes from [Jeff Kramer] with UBS.

Hi, good morning.

Thanks for taking my call.

Good morning, Jeff.

I was wondering if you could comment on what you're seeing in terms of the global scrap trade flows?

Ferrous or nonferrous or both?

Both.

Both.

Starting with nonferrous, China is the driver at this stage.

I mean you see copper prices now at $1.80 a pound in this environment.

The main reason is China.

Also, the weakening of the US dollar in the last few weeks, obviously that favors commodity prices.

So, I mean for us, quite frankly, the problem for nonferrous is on the collection side.

We're selling everything that we can collect.

When you think about the industries where we get the nonferrous from, it is mainly manufacturing, housing, automotive, et cetera; all of these are in a severe recession down into the US.

The volumes, the flow is just not available on the nonferrous side.

As I say, China is the big buyer.

On the ferrous side, the flows obviously is substantially down at the mill level here in the US with mills operating at 50% or less capacity, in many instances.

But flows are still reasonable in Asia.

They're obviously fairly slow in the Middle East.

Turkey is always a big buyer of scrap.

They'll be buying mainly local scrap.

But we've seen a slight uptick certainly in China but most people, I think are sitting on the fence at this stage, waiting to see the outcome of the iron ore negotiations which could drag on until maybe -- maybe June.

So, scrap and iron ore are closely related in terms of the pricing structure.

Okay.

Thanks.

You think iron ore could drag out until June even though we made progress on the coke and coal side?

Yes, well I mean iron ore basically it is a spot market because people are not working off the contract prices of 2008.

So, I guess our view is that -- and we're a spot player, we're not a contract player.

But, the benchmark prices may drop as much as 30% from Brazil and 40% from Australia but who knows.

But that one seems to be keen to either side.

The Chinese are obviously the main buyers and the Japanese and the Europeans or the sellers, the big three.

No one seems to be keen to conclude at this stage.

Okay.

And a couple housekeeping items.

The AR facility that you guys have, I believe that matures in April, I guess what are the plans for that?

Be renewed.

For how long?

It's -- from its inception, it has been one year.

It is kind of an evergreen, one year type facility?

Yes.

And as far as your covenants go, for some of the one-time charges, which of those would be considered add backs for the agreement?

Generally, I don't think any of them get added back.

And I would -- I would caution you that -- I didn't use the word one time, I mean that is certainly an interpretation that's being given and nor did I use the word noncash.

I'm always a little bit offended at that sort of -- I mean eventually it had to have been cash at one point in time, but I think the covenant generally is pretty straightforward.

Okay.

Thanks, guys.

Your next question is a follow-up from Kuni Chen with BOA Securities.

Hi, just a quick follow-up.

Bill, can you give us a view on LIFO income or charge for the quarter ahead please?

Yes.

Okay.

Put this one down in stone, Kuni.

You know this is going to be right.

Look, as we stand today, prices have fallen.

So, we would expect, if things ended today, a relatively modest LIFO income charge.

So, if things stabilize at these prices, perhaps a little bit of income.

That's about -- and the fact that we are also trying -- we were talking with Barry Vogel earlier in the call to try to lower the working capital.

That will lower the tons and the units and the calculations.

So, I think the expectation would be for a modest, now, modest compared to these large charges we've been having, large income.

But, some income but at a more modest level this quarter.

Okay.

So, some income and then on the inventory write-downs, that's if we have stabilization here, that should be sort of a neutral in the quarter?

I would agree with that.

Okay.

Great.

Thank you.

Your next question comes from Leo Larkin with Standard & Poor's.

Good morning.

Could you just remind us what Cap Ex will be for this year?

I think it will be in the $380 million to $390 million range, Leo.

Okay.

And I think I heard earlier that you could still get more out of working capital in the second half?

You got quite a bit in the first half.

Yes.

But there was quite a bit to get.

Okay, I just want to make sure, $150 million to $200 million.

That's my best guess for the last six months of the year.

Okay.

Thanks a lot.

Your next question comes from Charles Bradford with Bradford Research.

Good morning.

Good morning, Chuck.

I don't know if I missed it or not but did you discuss at all the reason for the tax charge despite the pretax loss?

And what we can look for?

Not in any detail.

It comes down to this, that the jurisdictions where we have very low tax rates which are International, we lost money.

And where we did make money, we managed to pick those states that have state income taxes.

And so you end up with the case of United States taxes, of course next to what is it, Japan, we have the highest corporate rate in the world.

Tack on state income taxes and you end up with strange answers like what we ended up with.

What should we look for in the next couple quarters when it comes to tax rates?

I would think we would hopefully stabilize back in the 37%, 38%.

But I'm going to have to hedge my bets because if -- when you're down here, as I mentioned earlier in the call, when you're down here, plus or minus zero, permanent differences can have a very strange effect on the overall rate.

I missed it.

Thank you.

At this time, there are no further questions.

Gentlemen, are there any closing remarks?

Yes, I would just like to thank everyone for their attendance this morning.

I just want to have a couple more comments.

Russ Rinn, the President of CMC Americas and Executive Vice President of Commercial Metals Company will be with Bill and I during the next three days of Investor Relations visits.

So, we look forward to answering further questions at that time.

This concludes today's conference.

You may now disconnect.