Commercial Metals Co (CMC) 2009 Q3 法說會逐字稿

Hello and welcome to today's Commercial Metals Company third 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 third quarter conference call.

With me is Bill Larson, our Chief Financial Officer.

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

Finally, I'll comment on the outlook for the fourth quarter.

As forecast in our last call, very difficult market conditions prevailed during the third quarter.

Destocking continued across all steel product lines, although by quarter end, some gaps were appearing in certain product lines.

Our US mills capacity utilization rate improved from 55% in the second quarter to 58% in the third quarter.

This was more to do with seasonal factors than improving end use demand.

There are virtually no signs to date of any impact due to the US stimulus package.

However, there's clear evidence that China's stimulus programs are working.

Stimulating demand both through domestic consumption and infrastructure spending.

China's rebar production and domestic consumption is now close to 10 million tons per month, which is 20% higher than 12 months ago.

Prices for most steel products appear to have bottomed during the quarter, and were trending up by quarter end.

The subsequent settling of 2009 contract iron ore prices in Korea and Japan is seen as a positive.

That is, lower price reductions than had been anticipated.

And this will influence favorably prices for pig iron and ferrous scrap going forward.

I will now ask Bill to provide the details on the third quarter.

Thank you, Murray.

Good morning, everyone.

Let me call your attention the detailed safe harbor statement included in our press release and in our August 31, 2008 10K, 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 fourth 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 are aware of non-GAAP financial measures, some of these if 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 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.

It is paradoxical, but we work harder for less in bad times, and we work less for more in good times.

Our employees, being the most valuable asset we have, they have risen to the task in these difficult times.

There are untold and likely never to be known sacrifices that our workforce make each day to deliver superior service, make that extra sales call, forgo that expense dollar.

We are appreciative of all of their efforts.

I think an apt description of our results of this third quarter is that we were the tallest pygmy.

I do not believe that to be any great honor, as we lost money, but I do believe, compared to our peer group we are weathering this economic crisis better than most, as our vertical integration, long product focus, and geographic dispersion is mitigating the damage and taking advantage of what opportunities are available to us.

As our press release detailed, we took $49 million in hits, not for extraordinary items, not for one-off expenses, but items that occur in bad times.

This amount is less than half of that occurred in the second quarter, consistent with our view that we are off the bottom of the cycle.

Many of these items will disappear once prices stabilize or begin an upward trend.

We believe that will occur in the fourth quarter.

We have indicated that we believe the fourth will look about like the third, but if pricing improves earlier rather than later in the quarter, we may have some up side to that.

Actually, that forecast was one of several that senior management voted on, the results were a 63% in favor of it.

I thought this was odd in that only two of us voted.

When I inquired how this could happen, I was told, quote, the saboteurs must stop their actions or face decisive and revolutionary action.

No major fraud or breach in the election has been found.

Our financial condition remains excellent in this difficult time.

Inventories and accounts receivable have been converted into cash.

Our cash and short-term investment balance of $441 million represents an increase of $327 million, just since the end of the second quarter.

Our $400 million revolver remains substantially untapped, save for some small letters of credit outstanding.

We renewed our accounts receivable securitization program.

We lowered it to $100 million.

That represents our high water mark of historical usage of the facility and will save us bank facility fees, which have become unconscionable.

Sales are down across all segments.

It's more volume related than price.

The metal margins, though lower than in the first or second quarters, are still at historically solid levels.

What we lack is the volume in tons.

Our two segments that did have operating profits this quarter, the American Mills and American Fab, it's all about geography and cycle time.

For the Mills, rebar continues strong in the greater Texas region.

For Fab, their profits come late cycle, as higher priced backlog is met by lower priced steel.

The LIFO reserve at May 31 was $279 million.

It increased net earnings by $29 million, or $0.26 per share, versus last year an expense of $83 million or $0.71 per share.

Year to date LIFO has increased net earnings $184 million, or $1.62 per share, versus an expense of $118 million or $1.00 per share last year.

Just as a comparison, we have had year to date gross LIFO income of $283 million.

Recall that last year for the entire year we had LIFO expense of $322 million.

So, although if you the look back over the history of LIFO, and we've been on it since the late 1970s, these are extraordinary numbers.

I do think you have to take into account that the pricing and the volume drops this year are simply in comparison to the tremendous run-up that we had last year.

Depreciation for the third quarter was $37.470 million

In the second quarter of this year, we fully depreciated Zawiercie, that's our mill in Poland's equipment.

So, depreciation dropped a little bit.

I would suspect now for the year, total depreciation will probably come in at about $156 million.

I think you can see from the financial statements we are containing SG&A.

Both the quarter and year to date are lower than the prior year, in spite of the many hits that I just discussed and are detailed in the press release.

The single item that would stand out, although there are many that are being contained, is our incentive compensation, as we've discussed in previous years, Commercial Metals is a large incentive compensation payer, and it's intended to be that way, because in cyclical industries, you need to have variable costs and certainly in this particular year, you are seeing that the reduction in bonus accruals, in fact, the absence of bonus accruals, is consistent with the results that we're having.

Interest expense, we should anticipate about $20 million for next year.

I'm sorry, next quarter.

If you look at the quality of our balance sheet, if you take our goodwill plus our amortizable intangibles, it makes up less than 4% of our total assets, and I would ask you to go out and do that same calculation on all of our competitors and see whether you come up with a number that's lower than 4%.

The book value at May 31 is $13.28.

The number of average shares for the diluted calculation is the same as the basic calculation, because when you have a loss, there isn't a dilution, but nonetheless, setting accounting trivia aside, the number is 112,191,349.

Year to date the average shares diluted is 113,855,406.

The actual number of shares outstanding is 112,513,917.

Not including acquisitions, during the third quarter we spent $80 million on capital expenditures, that puts us at year to date at $290 million.

We still anticipate coming in fractionally lower than $400 million for the year.

As a reminder, the big projects being our micro mill in Arizona, a flexible mill in Poland, and our melt shop in Croatia.

We did not repurchase any shares during the quarter, and the remaining authorization is right at 8,260,000.

Murray?

Thanks, Bill.

Just the outlook for the fourth quarter.

In the US and in many global markets, we see that destocking is almost over.

There will be some exceptions to that, some products may need another quarter or two.

But we definitely are seeing some gaps appearing, and we're seeing some modest restocking has started to take place.

So that will continue in the next two or three months.

We anticipate ferrous scrap prices and shipments to increase in July, led by restocking by the US steel mills, and also the strong international markets.

We anticipate our US steel mills combined capacity utilization to increase to around 65%.

So that's up from 58% in the third quarter.

In Poland, it should actually be even higher at over 80%.

We're seeing increased market activities in Asia, led by China.

Rebar and billet prices are firming, and flat product prices are increasing by $50 to $100 a ton in China and Taiwan from July.

Our fabrication business in the US will remain depressed, with both lower shipments and a declining backlog.

Hopefully during the second half of calendar 2009, the stimulus package will show signs of kicking in with more jobs being awarded during this period.

Our marketing and trailing operations should improve, in particular in Asia and Australia.

We will continue to have contractual claim and inventory issues related to our US steel and core business for another one to two quarters.

US steel imports are likely to remain modest for the next three to six months.

Rebar imports in the US are less than 50,000 tons.

That's metric tons per month year to date, and are likely to stay at these levels until the end of calendar 2009.

Our global markets overall remain fragile, in particular in the US and Europe.

Many of our customers still have issues with liquidity, limited credit, and weak end use demand.

Against this background, any recovery is likely to be modest, and more due to restocking and seasonal factors, rather than a pick up in end use demand.

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

Thank you.

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

(Operator Instructions).

Our first question is from Rob [Moffatt] with Longbow Research.

I'm a little bit curious regarding your outlook for construction.

How does that tie into an outlook for metal margins moving forward?

Well, we review, particularly, as you know, we're a steel producer, and if scrap goes up, as we forecast in July, we anticipate rebar prices for arguments sake, to be basically stable, so we'd expect on the mill basis, margins to be squeezed from there.

Obviously on the recycling side, their margins should improve.

If scrap prices go up, and certainly if shipments go up, which we anticipate as well.

Then if the demand that we're seeing right now is seasonal after some of that wears off.

If there isn't maybe a solid nonresidential construction market.

Do we potentially see pricing come down after that?

That's possible.

As we mentioned, we don't see any great impact with the stimulus package this calendar year.

Hopefully next year, that will kick in, but certainly, in our view, there will be a gap between when that kicks in.

So, it could be one to two quarters.

And if you guys do see some kind of a stimulus impact, where in the construction market do you think it would be?

Well, definitely for us in the highway work, on the public sector in general, it would be very positive.

Outside of that, with the fab side of your business, are there still backlogs there?

There are still backlogs, but they're declining, and there's a lot of small jobs been awarded, but not too many large jobs.

Hopefully with some price stability, and either directly or indirectly because of the stimulus package impact, that should pick up in the next few months.

Can you give us an idea of what kind of a rate they're replacing at right now?

Probably half.

50%, okay.

And one more quick question.

Could you just give us a little update on your three big projects, Arizona, Poland, and Croatia?

Where we're at in terms of completion.

Arizona will commission in probably September, if we get lucky maybe earlier in August.

So it is right on schedule.

Our mill in Poland, the new rolling line, is coming along fine, probably set for completion in early 2010 and commissioning then, and then we'll wait and see how the market plays out as to whether we run it flat out or vary it between the other rolling lines that are there.

The Croatian melt shop is progressing very nicely.

The improvements to the caster have been made, and we have trialed and successfully run various billet sizes, round billet sizes, and we're very happy with the caster improvements.

We are undertaking now the building of a new melt shop.

It's actually an extension on the building that houses the current melt shop.

That is progressing well.

Should be in place probably November, perhaps December of calendar 2009.

Thanks a lot, guys.

Good.

Your next question comes from Kuni Chen with Bank of America - Merrill Lynch.

This is actually Chris Brown filling in for Kuni Chen.

Can you give us some additional color on the guidance?

If steel prices and volumes are going to be higher next quarter, then why are earnings going to be flat?

What businesses are going to be sequentially worse, I guess?

This is the LIFO conversation, Chris.

We're either going to make this an hour, or we're going to make it a minute.

If prices stabilize, a couple of things happen that should cancel each other out.

One, we will not have anywhere near the LIFO income that we have.

In fact, we may not have LIFO at all because without the deterioration in pricing, and with quantities no longer going down, that would stop the LIFO income.

So, that's on one side, the other thing that it will stop is the lower of cost or market adjustments that we're taking, and I read all the same press releases that you do, that our competitors are taking as well.

Those two would tend to offset one another.

Where the up side is, is the margins will expand.

It's just the history of steel that as prices go up, margins go up, and so I would say that if LIFO cancels out against any further accounting adjustments we have to take, then some margin expansion could, I'm not predicting profitability, but some margin expansion might knock us into black numbers.

And then can you discuss recent backlog trends for both the US and Polish steel businesses?

In the United States, in terms of the fabricators, where it's much more relevant, they are, as we mentioned earlier, when talking with Chris, they're coming down at a rate of for every two tons we send out, we're only replacing it with one.

And, of course, the pricing on that is going to be lower as well, because it's at current pricing rather than rolling off the old jobs which were at higher pricing.

So that trend, absent stimulus work coming into play very quickly, which we do not see, we're going to have a lower shipping come perhaps the tail end of calendar 2009.

It's a much more positive story in Poland, and we made reference to this in our press release, where the infrastructure funds are finally, and its EU funds, being distributed, and we have seen from the backlogs in both our fab shops and the mill, to be progressing very nicely, and you see that, as Murray said, if our mills here in the United States might run at 65% of capacity, Poland could exceed 80%.

Now, some of that is going to be billet sales, but you know the theory on that.

As long as you keep the melt shop running flat out, you can carry your variable costs, and every ton of steel you roll is going to be cheaper because you are melting more.

So, it looks a little bit more positive for Poland in the fourth quarter.

In fact, it looks a whole lot more positive for Poland in the fourth quarter.

A couple of points to add to that.

Poland, those billet sales, some of those are going into Asia, markets like Taiwan, they're getting priced at $430 CNF now.

So scrap prices actually moved down in Poland in June, so that will help.

So Poland is looking quite good for this fourth quarter.

And then lastly, just current views on the US scrap market.

Do you see prices moving higher as utilization rates improve, or do you see the market as adequately supplied, whether steel mills are running at 50% or 70% utilization?

We see, just on the mills, based on our own mills, but we assume others, the utilization rates are probably increasing too, so certainly shipments will improve, and we anticipate higher prices.

So the flow should improve as well.

So it will be a combination of both.

Okay, great, good luck, guys.

Thank you.

Our next question is from Timna Tanners with UBS.

Your line is open.

Hi, good morning.

Good morning, Timna.

I wanted to start out by asking a little bit more about the stimulus.

I was surprised by the comments that you're not expecting to see much by calendar year end.

Does seem like a lot of the projects are being obligated, and there's a time frame by which they have to award and obligate some of these projects.

Can you tell us why you think there might be the delays and why you think it's more of a 2010 story with a little more color?

Well, if you look at the mechanics that have to happen with these jobs, this invented phrase of shovel-ready is fine for sound bites for politicians, but in the end, that is not what happens.

These jobs have been bid and rebid and rebid.

During this period of time where prices have declined, six to nine months, nobody is going to go out with a job, if they think that next month they'd be criticized because steel dropped.

So what they are doing, and we've seen this pattern over and over and over, is the same job gets rebid one month, and it gets rebid the next month.

On top of that, as competitors small and large, certainly in fabrication, begin to hurt more, more competitors come in to bid these jobs.

When they see more interest in that, they hold off awarding it.

Hey, let's have it another round of bids.

Even then, once it's awarded, you have to go through all the specifications.

The drawings have to be made.

These things have a very long gestation period.

So it's not the case, I'm not certainly going to debate that there aren't projects that have been identified and have been approved for funding, but whether they actually get started or not, and on a new project you've got to grade the land.

It just doesn't happen overnight.

That's really helpful.

Okay.

So more of a 2010 story than calendar 2010?

We think so, Timna.

Here in Texas, it's probably a little bit better than most of the US.

There's definitely the highway programs have been accelerated because they're anticipating the stimulus package to come in behind.

So that's more of a carry-forward than anything.

But as Bill said, we're being conservative.

We just really don't see anything yet.

The small jobs, but no substantial jobs at this point in time.

Okay.

And then on Poland, if you're over 80% utilization, is it fair to say that that would put you in the black, or is there a different way we should be looking at it?

I think it's a fair assessment, if they get up to 80% they will make money.

Then on the international fabrication distribution, you said last quarter it would be another quarter or two that you would see, I forget the euphemism, but the cancellations and the challenges there.

Now you're saying another quarter or two.

Can you give us more detail on what might be transpiring there?

Yes, the big areas there are mainly pipe, plate, and SBQ, which most of that are those end use markets, the oil and gas industry, which, as you know, has been devastated with the rig counts down dramatically.

A little bit of good news, rig counts seem to have stabilized at the bottom and may be coming off the bottom now.

The other bit of good news is there's anti-dumping now on Chinese, or proposed antidumping on Chinese OCTG, so that sets the floor price for pipe product, but it is an ongoing issue.

When we think, yes it will take another one or two quarters, there's still a lot of unsolved pipe, if you go down to the port of Houston, or Houston in general, at the distributors, so this will take time to sort through.

Great.

My last question is on corporate and eliminations, because the adjusted operating, maybe you addressed this and I missed it, but the adjusted operating loss fell substantially, and I know that you're still talking about SAP costs continuing for another quarter or two.

Can you give us an update on those items?

Yes, actually for the quarter, the changes between third quarter to third quarter were more, and hopefully I don't lose you on this, but we allocated out more interest expense and now that SAP is up and running, we allocated out its costs as well, and in addition, we reversed an accrual on our long-term bonus plan.

That bonus plan is dependent upon EBITDA.

It's a three-year period, a three-year rolling period, and we determined that for all three periods that are open right now, that none of them are probable of meeting the goal, and so when you add those up, more interest expense sent out of corporate, so that's, think backwards now.

That's income to corporate.

More SAP expense allocated out to the units.

That's income.

And then a lower bonus accrual.

So that makes up the quarter.

Those same factors come into play for the nine months as well, with a couple of other items thrown in.

The one thing that goes opposite to that is salary expense, because of the buildup in IT, due to the SAP project, is higher.

So you've got that offset going against more interest sent out, more SAP expense sent out, more reversal in the long-term plan.

I think I mostly followed you.

Just on the SAP question, did I get that straight, is that something continuing to be tapering off in another quarter then?

You're right, we made brief reference to it because it's a longer story, but the project has fulfilled its purpose.

It got substantially all of the Americas and upwards of 60% of the earning power of the Company on to SAP, and certainly the units that we had estimated would have the greatest benefits because of an integrated supply chain.

We'll be up on it at August 31.

So what will happen after this, Timna is we're just going to fold that project into our regular IT.

We will not have anywhere near as extensive an effort, we won't need as extensive an effort on SAP rollout from here on out.

So yes, the costs will decline significantly.

thank you.

Your next question is from Evan Kurtz with Morgan Stanley.

Your line is open.

Good morning.

Question on the recycling business.

Judging from the commentary in the press release, it really sounds like flows are the issue there on margins.

I was hoping you could give us a sense of what the industry operating rate needs to be for the recycling business to get back to break even.

Probably upwards of 60%, I would think, Evan.

We don't have an internal calculation, but based upon the pricing that we've seen in the utilizations over the last three to six quarters, I think you got to be above 60%, and it would be more helpful if the EAS were above 60% than the integratives, because obviously that's not a particularly large customer for us.

Sure.

Could you also remind us what your internal consumption is, how much scrap you're shipping from your own yards to your mills?

Yes, we typically had been at about 50%.

I believe now we're exceeding two-thirds or more, and the only exceptions to that are if a mill is particularly out of reach, which none of ours are, or we get a particularly good buy, but it's upwards of two-thirds.

I've got a schedule here.

I'll get more exact numbers for you.

Got it.

Okay, that's good.

Finally, you might have answered this in one of the other answers, but getting back to the backlogs in the F and D business, did you happen to say what the typical project length is?

It had been historically between seven to eight months.

That's shrinking right now.

The smaller jobs, it's much more, I hate to use the word spot work in fabrication, but it's much smaller and much more immediate.

Great, thank you very much.

Our next question is from Sanil Daptardar with Sentinel Investments.

You talked about the stimulus.

Looks like stimulus is one of the catalysts here.

If I had to put in in context here in terms of the volumes, how much it would be helped.

Can you just give color, how much volume would come from the stimulus program, an increase in the volumes basically?

Sanil, it's one of those questions, depending upon who is asked and what projects they had in mind and what part of the United States they were in, you'd probably get a different answer.

The best that I have seen, and let's talk about rebar, because that's the most relevant to Commercial Metals, is that the entire stimulus bill might be worth two million tons of rebar.

I think that's a high estimate, but let's just say two million tons.

United States, in a normal year, or even its best year, would have been upwards of 10 million tons of rebar.

So if we were at high tide, it would be 20%.

We're obviously not at high tide.

We're lower than that.

So the impact would probably be closer to 25% or so increase in rebar shipments.

As far as the other steel is concerned, which we don't produce, I'd just to have guess, Sanil, I don't have a good feel for that at all.

If I had to look outside the stimulus program, and the commercial market, private sector market, are you seeing any kind of signs that things are beginning to stabilize or pick up, or just still the same basically, no changes out there?

It's basically still the same.

It's still very weak.

Okay.

Going into the international markets, on Poland, the capacity utilization, talked about going up to 80% in the fourth quarter.

Is it driven by the market or is it driven by the surrounding areas, might be picking up steam, or it's just stimulus, or the build-up offering in the public sector?

It's in the main infrastructure within Poland, but there are decent shipments to Czech, and the Slovak Republic, so the near in markets are pretty good, and then as Murray said, the billet markets in Asia, the last two destinations I believe were Vietnam and Taiwan.

It's not just rebar, Sanil.

Wire rod is quite good in Poland and merchant products as well.

Okay.

And merchant products, too?

Yes.

Okay.

Just a question, last question on China.

Of course, the stimulus program is helping a lot, I think.

There is also belief in the Chinese market that the residential property market might be undersupplied in the first half of 2010.

Is that the same that you are getting from your Chinese contacts?

If that's the case, then there might be pick up in the prices, but what is a color that you are getting?

What's the sense you are getting there?

Well, the Chinese, we have to take our hats off.

They're have really gone about in this a serious manner.

They've tackled infrastructure, they've tackled the ship building industry, which is depressed.

They've tackled public housing, which you mentioned about residential, in a major way.

They've accelerated their program in the Schezuan province, where they've had the earthquakes.

They've introduced a lot of initiatives to encourage domestic consumption.

Plus they've freed up their banking system.

Obviously they control the banking system from the central government through to the provincial banks through to the local banks.

So all those measures have had a huge impact, and we said earlier this year, we believe that China would achieve 6% to 7% GDP, even when things looked pretty poor, but now I think it's likely they'll achieve 8% GDP in this year, which is a phenomenal performance, and even maybe higher next year.

So, China has really taken the right measures for China.

And also, on balance, their exports down, they will be less than 20 million tons.

Imports at a similar level, so they are controlling their exports, particularly the lower grades of products, and clearly with China having higher prices for most steel products than other markets, most of that steel is being kept at home.

To answer your first question, we're very encouraged about China, because China has a huge impact, obviously globally, and certainly in Asia, it has a tremendous impact, but other countries are moving up also in Asia -- Taiwan, Malaysia, Singapore, even Indonesia, Vietnam, of course, are all improving.

So Asia looks positive going forward.

So all this means is that basically China may not be selling the steel export markets, international market, so that might be positive for us here in the US for the steel prices?

Correct.

It's positive.

Some of the higher end products, they'll continue to promote and sell, but we don't believe, like rebar, wire rod, low end products, most of those products will be consumed within China.

There might be some small exports to nearby Asian countries, but that's about it.

So there may not be any more capacity, they not have to raise taxes or raise rebates out there in China in that case.

We don't think so.

Obviously they reintroduced the rebate for hot rolled coil and one or two other products, but we think that's probably the limit to it.

There may be one or two exceptions.

But products like rebar, just phenomenal.

As I mentioned, they have gone from eight million tons per month of production and consumption, to 10 million tons production and consumption per month.

In the last few months.

So that means obviously their focus is on the infrastructure and construction in general within China.

Okay.

Great, thanks, Murray.

Thanks.

Your next question is from Tim Hayes with Davenport & Company.

Your line is open.

Good morning.

Good morning, Tim.

The question to add to one of the previous questions, on your views for the US market, I was curious to get more color within the nonres construction sector.

What do you see for the infrastructure versus the commercial construction out into calendar 2010?

It seems like you could have some divergent trends between those two markets.

I was curious what your take is.

Traditionally, nonres, we would have been probably 70% commercial, and the private sector if you like, and 30% public.

Now, its well over 50% of the public sector, and that could go close to, with the stimulus package to 70%, and only 30% in the private or commercial sector.

So it's a real swing around, but obviously the market is well down on what it was 12 months ago.

Right.

And then on the private nonres construction, was the credit crunch so severe in the last couple quarters that we could actually get a bounce in the private nonres construction just from that, or could that be a market that continues to move south?

Well, we think it could move south.

Or certainly sideways.

You really need the credit markets to ease up, and substantially, and more stimulus in that area.

So, we don't see that happening for the next one to two quarters.

Okay, thank you.

Our next question is from Jeff Cramer with UBS.

Your line is open.

Good morning, guys.

Good morning.

Just to wrap up on the guidance, I would have expected utilization rates creeping up in the US, and also in Poland, that probably be a better quarter.

Is this more of an accounting function?

Can you help me with that?

Oh, so you are going to throw into it my lap with the accounting.

It's only going to be accounting as far as the LIFO is concerned.

The real question would be if pricing goes up in July, its the timing of the pricing increases, which we anticipate will happen.

If the pricing goes up July 1, I think there's every reason to believe that we could break into profitability.

If it gets bled in and we don't see it hit until August, of course we're an August 31 year end, then we may not get the benefit of it.

LIFO sometimes is, you can cause things to go up and down, and the explanations are difficult.

Let's focus more on price increases, and if you see the market moving up as early as next week, and watch the scrap negotiations as they end up near the July 4th holiday, if you see a positive movement in that, then I think we're going to be better.

You've got substantial amount of cash now.

Are you going to be hoarding cash still?

Any plans about liquidity?

Yes, we have plans.

Not necessarily public information plans.

I would say this.

And we haven't talked about it yet in the press release or in the conference call, and that is, the liquidity still is not out there in the market.

We have not seen any relief from our customer base in terms of credit capability.

So I'm a little hesitant to declare that the good times are here.

Okay.

So really just going to be sitting tight?

Are there certain priorities with that?

Yes, I mean, we want to play it safe, and some of those capex projects Bill mentioned, there will be a bit of a carry-over into next fiscal year.

So we want to complete those, particularly obviously the Arizona micro mill and in Poland and Croatia, the upgrade there.

But we want to play it safe for the next few months, anyway.

Okay.

Have you guys penciled in a number for where you think capex will be in fiscal year 2010?

I did.

I got tremendous push back from the operating guys.

I told Murray that we should start with $100 million, which would represent normal maintenance capex across the entire Company, plus one or two projects, one or two $5 million or $10 million projects.

Of course, then the wailing and gnashing of teeth began.

The CEO, in a moment of weakness, blurted out a number like $150 million, so I think we're going to do a wrestling match somewhere between $100 million and $150 million.

I think the point of the story is that if we were at $400 million last year, you are going to see it cut in half, if not more this year.

Okay.

And I would assume, I guess on the working capital front, depending on the timing of price increases, that with volumes starting to pick up, probably seeing most of the liquidation there, you obviously had a big inflow this past quarter, wouldn't expect too much more of that?

Yes, point well taken.

I would say that if pricing were to maintain at its current levels, there may be another $50 million, $75 million, maybe $100 million max to be gotten out of it.

If prices stabilize, that would be the answer.

If they go up, then it it will be an interesting run for the money.

We are implementing, as I made reference earlier, the supply chain management within the use of SAP, and trying to scale the inventories down to levels that we have never operated before.

Now, we may not make it early on, but we are certainly anticipating that our days outstanding are going to fall, all of which in the end is to say you'll probably see if prices increase, you'll probably see, maybe a modest amount of working capital being used in the fourth quarter.

I would anticipate it would be a whole lot.

Thank you.

Your next question is from David Stevens with Goldman Sachs.

Your line is open.

Good morning.

I just wanted to make sure I understood the guidance for fourth quarter correctly.

Is that, if you strip out everything, it looks like you had a loss of $0.05 to $0.07 this quarter.

That what you mean by flattish results in the fourth quarter, if you assume the prices are the same, but there are no other charges?

Yes.

Okay.

Then the other question I had is, do you think the industry has the pricing power to raise prices if scrap moves up significantly going forward?

Well, higher prices are always a good thing, and if customers will pay them, we'll charge them.

We can only speak for ourselves.

We can't speak for the industry.

Got it.

Thanks.

(Operator Instructions).

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

Could you give us DD&A for 2010, an estimate for that?

Don't have that yet, but I would think we're probably about the 155 to 160 level, Leo.

Okay.

The other thing, I know you want to be very cautious with your cash at this point, but I'm wondering, with this kind of environment, does anything look attractive in terms of potential acquisitions?

Or is it too early to think about that?

Well, look, we're not without our wish list, and I don't want to leave the impression that we haven't been doing our homework during this period of time.

The question becomes, though, at what point are either the valuations pretty much at their lowest, or at what point are sellers now motivated to talk to you.

You certainly see in the early days, of course, denial and things will always be better next week.

I think we've gotten to the stage now where, I think reality has hit home, and I would think, Leo there's a few more months to go yet of paying on some before I think buyers and sellers will end up having a common base from which to talk from.

But things will happen.

Okay, thanks very much.

The next question is from Rob Moffatt with Longbow Research.

Hi, guys, I just had a quick follow-up.

I'm trying to get a feel for your actual exposure to Asia.

That primarily through trading distribution?

Yes, it is, but we also export nonferrous scrap from the US into Asia, mainly China, and over to ferrous scrap as well.

That's about 50% of your nonferrous, somewhere in that neighborhood?

That was the total exports last quarter, that's correct.

Not all of that went to Asia, but the vast majority.

Okay.

And just kind of thinking through things, if we saw continued strength in Asia, we'd probably see it pull up scrap prices rather significantly in the US, which could potentially squeeze your margins down the road, particularly if nonres construction stays weak here.

Does that sound like a scenario that could play out?

Well, obviously recycling will benefit first, then the mills, but the fabricators, you're correct, they could well be squeezed for a quarter or two.

Okay.

Thanks.

That helps.

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

Mr.

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

I just wanted to make one comment.

Over the next three days, Hanns Zoellner, the President of CMC International and the Executive Vice President of CMC, will join Bill and me during investor visits.

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

Thank you for your attendance.