Commercial Metals Co (CMC) 2010 Q1 法說會逐字稿

Hello and welcome to today's Commercial Metals Company first-quarter 2010 earnings conference call.

At this time all participants are in a listen-only mode.

After management's remarks we will conduct a question-and-answer session and instructions will follow at that time.

Please be advised this call is being recorded today, December 22, 2009, and your participation implies consent to our recording of this call.

If you do not agree with these terms, simply disconnect.

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 fiscal 2010 conference call.

With me is Bill Larson, our Chief Financial Officer.

As usual I will begin the call with an overview of the first quarter and then ask Bill to provide details on the first quarter.

Finally, I will comment on the outlook for our second quarter fiscal 2010.

During the first quarter markets were mixed with the US and European non-residential construction markets relatively weak while markets in China, rest of Asia, and Australia were continuing to improve.

Ferrous scrap prices in the US trended down during the quarter with a pickup from mid November.

Rebar and merchant bar prices followed ferrous scrap prices down.

Inventory levels remained low with scrap yards, mills, and fabrication facilities within the US.

Also in the US the non-residential construction public sector business demand was okay without any significant boost from stimulus dollars.

However, the private sector remained very weak.

Our fabrication and downstream businesses remain in a very competitive environment with lower prices and shrinking margins.

In China steel prices stabilized during the quarter.

There was some product price increases by quarter end.

Demand for all steel products remained strong in China, although inventories are high for many flat products and rebar.

Spot iron prices and ferrous scrap prices through China increased significantly by quarter end.

All our global trading businesses apart from the US steel trading business were profitable during the quarter.

This reflects improving global market conditions.

As reported our Polish mills volumes were good but the middle margins were poor.

Our mill in Croatia showed signs of improvement.

November was actually profitable.

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

Good morning.

Let me call your to attention the detailed Safe Harbor statement included in our press release and in our August 31, 2009, 10-K that in summary says that in spite of management's good-faith current opinions under various forward-looking matters circumstances can change and not everything that we think will happen always happens.

This is similar to your kids' Christmas wish list.

In addition, we have given guidance regarding our outlook for the second quarter fiscal 2010 in our press release subsequent to this call.

We will not been 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 measure.

Some of these have derived fairly straightforward from our financial statements or are in common business use can be the subject of our discussions today and in our investor visits.

But there are other items that may be outside of our ability for discussion and you may need to the patient with us if we defer comment.

Our website has additional information at CMC.com.

There is a story told about Winston Churchill that he was confronted at a party by an irate woman who accused him of being drunk.

He is said to have replied, Madame, I may be drunk but in the morning when I wake up I will not be.

However, you are ugly and when you wake up in the morning you will still being ugly.

When I wake up tomorrow morning these first-quarter results will still be ugly.

However, I have dealt very well with ugly as any of my high school blind dates will attest.

If we tear apart the quarter I think you will see why we believe we have one more tough quarter ahead of us and then the beginning of relief.

Let's start with our Arizona micromill.

It is right on schedule for its ramp up.

We believe in December we will roll 12,000 tons and ship about 7,000 tons.

This puts us at about 50% of capacity in only four months of commissioning.

The Arizona mill had a loss of $11 million this quarter, which is still a loss but more in the nature of startup expenses than a true operational loss.

Actually, without that the mill segment would have been profitable.

As Murray indicated, all of our marketing and distribution units were profitable with the exception of our Dallas steel business.

This is indicative of the continuing strength of the Chinese economy, the rapid recovery of the Australian economy, and our continued success at marketing niche products.

Even in our steel import business we have stopped the significant losses incurred last year.

In addition, recycling had a slight profit with prospects of a better second quarter as ferrous scrap prices are on the rise and nonferrous prices stay high.

Our copper tube mill was profitable as well and our mill in Croatia, as Murray indicated, is beginning to see better days.

So there are reasons to the optimistic.

It is true enough, though, that as prices rise our mills will be in a short-term margin squeeze and our fabrication operations will be in for a longer margin compression.

Both of these, of course, are accelerated by the lack of non-res commercial volumes.

But in the end higher prices are always a positive.

When you look at our sales by segment they are a fair reflection of market conditions.

Recycling was our only segment with higher sales in the first quarter this year versus the first quarter of last year, as especially nonferrous pricing, as I mentioned, remained high.

Mill prices are down; sales are down; fab reflects the lower volumes of work that are available.

But at the operating profit level there is a few encouraging trends.

As I mentioned, recycling was profitable albeit at what maybe termed a black zero.

Copper tube was profitable but I think the most telling trend was with marketing distribution with a solid -- it was almost a record first quarter.

Other economies are pulling out of the recession with much more targeted and effective stimulus than the United States.

So there are parts of the world that get it.

A few statistics; the LIFO reserve at November 30 was $224 million, which after tax is about $1.29 a share.

During the quarter it increased net earnings $11 million or $0.10 a share versus last year it increased earnings up some $74 million or $0.65 per share.

Depreciation and amortization for the quarter was up $43.695 million and I would anticipate that total D&A for fiscal 2010 would be around $177 million.

You probably saw that our SG&A dropped this quarter $13 million, $14 million.

In the main those are cost reduction efforts.

It's spread across several accounts but salaries, our bad debt allowance --, we have set it pretty high last year -- have not needed quite as much so the comparison to last year is favorable.

We are lower on professional fees as we cut back on consultants.

We have an austerity program in travel and entertainment, and of course the results certainly do not indicate any need for incentive compensation accruals at this time.

The balance sheet remains very strong.

I will point out that only 3.8% of our total assets represent goodwill or intangible assets, and I would ask that you run that comparison against any of our competitors.

I am certain that we will come out the lowest.

Our current ratio is 2.5.

We have stockholders' equity of about $1.5 billion which translates into a book value per share of $13.50.

For the first quarter earnings [for these] average diluted shares were 112,495,297.

The actual shares outstanding were 112,756,203.

We spent $46.5 million in capital expenditures in the first quarter.

In the main those are commitments that we had that came over from last year -- our Arizona mill and our Polish mill and the melt shop upgrade in Croatia in particular.

I still believe, and we have discussed this before, that the budget is about $100 million of committed spending and $20 million of safety and environmental.

Anything after that we will see and approve on a one-off basis.

We repurchased no shares during the first quarter and our remaining authorization is still at about $8.3 million just a little shy of $8.3 million.

Finally, in my Christian tradition this is an important week.

It's the season known as Advent and that comes from a Latin term meaning to come.

We all need some better days to come.

We all need to keep hope that what troubles us today will be gone tomorrow.

So for each of you it is my Advent wish that whatever would make your life better it is to come.

Okay, thanks, Bill.

Just talking about the outlook for our second quarter fiscal 2010.

Bill covered some of these points but they are certainly worth repeating.

The winter quarter, December to February, is always our weakest quarter.

We anticipate our US recycling segment nevertheless to have a good quarter based on the ferrous scrap price increase for December, and we believe there will been a further price increase in January lead by overseas demand.

Volumes, however, will be critical as scrap flows slow down at this time of the year due to difficulties in collection.

With copper over $3 per pound our nonferrous scrap prices and volumes should be good for the quarter.

Our US mills shipments are likely to be up 20% in December due to the announced price increase for rebar merchants effective January 1, 2010.

However, metal margins will continue to be squeezed due to the rising scrap prices.

Our US fabrication and downstream businesses will suffer from a significant margin squeeze due to rising import costs that steel and lower price backlogs.

Our international males will be impacted by seasonal factors in Poland with our mill in Croatia likely to continue to improve due to higher global pipe pricing.

[American] distribution businesses should all be okay apart from the [OS] steel trading business.

Looking further ahead we remain optimistic.

As Bill mentioned, there is still demand and prices in China and the rest of Asia will do stronger during spring and summer of 2010 and 2009.

In addition, markets in Australia, India, North Africa, and the Middle East will continue to improve.

We believe Poland will be stronger due to the major infrastructure projects planned in readiness for the European Cup in 2012.

Other markets in Europe are likely to be mixed.

Finally, the US stimulus package is likely to have some impact on steel demand by mid-2010 which will be a positive.

However, once real demand starts to improve capacity utilization will increase and margins will start to improve again.

So with those comments we will now open up the conference for questions.

(Operator Instructions) Kuni Chen, Bank of America-Merrill Lynch.

Good day, everybody.

Just to start off, on some of the charges that you guys broke out this quarter is there any way to assign them to the different segments?

Can you help us out with that?

Yes, there is.

Hang on one second.

For the most part, Kuni, it would be -- it's in the nature of, as it indicates, inventory adjustments.

Probably $11 million of the total charges were in the international mills in Poland and in Croatia.

In fact, of the total almost $20 million that was listed in the various elements about probably $15 million of it is sitting in the international mills.

Okay.

All right, that is helpful.

I guess just your comments on scrap suggest maybe some more upside here in January you had -- how sustainable do you think the uptrend is?

Is this a two-month trend or do you see something that can continue for a longer period of time?

Well, we think, Kuni, the train will be up.

Obviously scrap is volatile and it could come back down January or February period, but we think the trend leading into spring and summer next month will be up.

As I mentioned earlier, we just think the demand in many markets of the world are going to be stronger next year.

The other point I made is inventory levels -- in all areas of the supply chain alone the only inventories that are high that we see at this point in time are in China.

That is mainly on flat products and to a lesser degree rebar.

But we all know the consumption level of rebar is at historical highs in China because of their infrastructure and stimulus packages there.

So, in summary, we believe the trend for scrap will be up the next two or three months.

Okay, great.

I will turn it over, thanks.

Timna Tanners, UBS.

Good morning.

I was wondering if you could comment a little bit about how you see your market condition year over year.

Because I think talking about the second half gets a little complicated with seasonality.

So can you just discuss how you are expecting the year to evolve compared to where you were at this point last year?

Where we were this point last year clearly there was tremendous destocking going on.

Everyone was -- demand almost stopped.

So destocking in all sectors occurred, whether it was scrap, whether it was the mills, whether the fabricators so that has changed.

Clearly, we have gone through all that destocking for virtually all products and there was some restocking, as you know, late summer.

What we think, as I mentioned earlier, that inventory levels that are very low and any pickup in demand you will see customers -- we are already seeing it with the increase in rebar and merchant bar prices for January customers are trying to beat their price increase.

So we believe for most products we have hit the bottom and we think there is going to be some recovery in 2010.

Okay.

So you are seeing some customers start to restock.

But can you talk a little bit about the demand environment as well?

Well, demand environment -- as mentioned the public sector is okay and we think they will get clearly stronger here in the US once the stimulus dollars take affect, but the private sector remains pretty weak.

So the only way that recovers is with the easing of credit situation, more consumer confidence, etc., in the marketplace.

So that is going to take some time.

Okay, great.

And then talking about LIFO, and I know it's really difficult to forecast, but if scrap prices are rising could we see the income reverse in this upcoming quarter?

Is that a reasonable way to look at it?

If prices continue to rise throughout the quarter the recyclers will have had enough period of time to turn the inventory (technical difficulty) and what will be left in the inventories at 2/28 will be higher than what -- price than what is in them at 11/30.

And that would -- for that segment would bring on expense.

Okay.

And not necessarily in the other segments?

Like could that not translate through for the other downstream mills?

Yes, point well taken but it's a timing issue.

It will take a little bit longer for that to work its way through the mills.

We are with our -- the information that SAP can generate for us we are doing our best to keep the inventories at the lowest cost possible and that is at the recycler.

So we are trying to maintain more raw materials at the recycling level rather than factor it all the way up and down the supply chain and keep higher inventories at mills.

So it's always a question of volume versus price.

But I would say, let me just simplify the answer, you would probably see the increase hit more in the third quarter for the mills as they had a chance to cycle through the inventory.

Okay, that is really helpful.

And then finally, the one-offs that you identify in the front page of the release it seems reasonable that those are one-offs but we have seen them now for the past couple of quarters.

So can you characterize why you think we are closer to maybe the end of some of these items?

Yes, and you will never see the word one-off in there.

Sure.

No, fair enough.

But why?

Well, when I look at what makes up the most of them and going back to Kuni's 13 of the 20 are lower cost-of-market adjustments.

Substantially the rest are job loss hits we have to take in fabrication because prices -- the same conversation we are having with rising prices but set sales prices we are going to take a squeeze on that one.

What we have seen up when you look at where we took the largest hit, which was almost $9 million in Croatia, those are tubular products.

And we have seen first of all -- and you have read the same way with tubular manufacturers who are obviously a lot larger than we are beginning to get orders on inventory niches that have run down low.

The general trending on tubular products is stable to up.

We have written these products down to whatever the current values, whatever the current market values would say at November 30 yet the trend over these last three or four weeks has been stable to up.

So that is the main reason it's the upward trend generally in pricing.

Okay, great.

So these items should start to taper off as we get to more steady pricing environment?

Yes.

I mean if prices stayed level that you wouldn't see most of this stuff at all.

Got it.

Now as prices increase you won't see massive amounts of income.

What you will see -- in these items it will roll through the profit and loss statement.

You are not able to write things up I guess is what I am telling you.

Okay, just wanted to understand that better.

Thank you very much.

Happy Holidays.

Thank you.

You, too.

Luke Folta, Longbow Research.

I had a quick question first off on your guidance for the quarter.

You had guided for similar results quarter over quarter.

Are you talking GAAP EPS?

Yes.

So I guess the way to look at it -- we probably don't see as many charges in the way of the LCMs, so would that kind of imply the net result comes down excluding these charges?

That is certainly the expectation, Luke.

Okay.

And then what are you looking for as far as expenses related to the Arizona micromill in the second quarter?

Not going to give a shot at that because the -- were at that stage where everything -- and I know I am tapped dancing but it's out of pure ignorance than anything else.

Everything that happens there is significant.

If they go as they say from 12 -- they probably roll, I don't know, 8,000 tons or so (technical difficulty).

When you go up 50% in one month it changes the dynamics rather strongly.

I think it's going to be lower, Luke.

But given the rapid ramp up in this thing I just don't know.

I don't think -- let me put it this way.

They are not going to be profitable in the second quarter.

Okay.

And just regarding the billet sales in the quarter, were those mostly export?

Yes, both from the US and from Poland.

Okay, and then just lastly.

If you could provide any kind of update on what you see as far as the inventory levels for OCTG products that would be helpful.

Well, we mainly with our mill from in Sisak mainly a line pipe mill, a little bit of lower quality OCTG.

But so the question is OCTG in general, I think obviously the oil and gas industry is improving.

Particularly with natural gas over $5 now that is a good sign; rig counts are improving slightly.

So 2010 looks to be a better year clearly, but out there there is still significant inventories which we will take, depending on the type of product, several more months to work through.

So we are seeing from our mill in Sisak on line pipe anyway improvements.

Improving prices, improving market conditions, not just here in the US but in other parts of the world as well.

All right, great.

Thanks a lot, guys.

Sal Tharani, Goldman Sachs.

Good morning.

Couple of questions.

First in the outlook section that you mentioned something about interest compliance covenant.

That is a new statement.

Is that something you always put out that it may not be guaranteed that you will comply in future?

I think you put it in when you have a -- if it's one scenario out of many that might happen -- I mean, just look in the abundance of caution and transparency my main concern is that the factors such as LIFO could give me an answer.

You have seen it in the past where I end up with $50 million and $75 million of expense in a quarter.

It may be non-cash but it runs through GAAP.

So it's just a question of abundance of caution and letting you know where we look and that there are lots of factors, including factors that would go the other way.

There are economies that could come back.

If Poland doesn't have a particularly strong winter that would be very favorable.

Okay.

What is the ratio right now?

It was past -- it was about 1.8.

Okay.

On the breakdown of all these one-off charges there is a, I believe, credit for bad debt expense.

It means that you had over written the bad debt expense and you are taking it back.

Is that correct to assume?

Yes, it happened this way though.

We had specifically identified an account that we didn't believe that we would collect and we collected it.

So it was more in the nature of an actual event that occurred than our assessment that right now the world has gotten better.

Okay.

Can we see something like that in inventory write-downs in future?

Maybe some of the inventory you have written down over the last couple of quarters, prices may rise and you are able to get better pricing?

You would, but you would see that running through the P&L.

You are not allowed to write inventory up.

I see.

At least not here in the United States.

Okay.

You had -- I have seen some news releases that some of the mills, and perhaps you yourself, have also raised prices for all the material of metals -- all the steel based on higher scrap prices, about $65 on rebar.

Are you seeing those prices sticking in the market or do you think they will stick?

We believe so.

Bear in mind there is some discounting going on or has been, but just the rush of orders this month in December, as I mentioned, we could be 20% up on November, indicates customers are trying to beat that price increase.

We think the trend, as I mentioned earlier, Sal, scrap is certainly trending up.

And we can only talk for ourselves, but we will be pushing through those higher import costs into steel prices in 2010.

Okay.

Bill, what was the SAP cost this quarter?

I'm sorry, what was the --?

SAP costs you have been --.

Oh, I don't track it anymore.

It is just all part of our IT costs.

Okay.

But it's not any more significant than it used to be; is that correct?

It is a lot less significant, that is absolutely right.

Okay.

Croatia was profitable because pricing volume.

What was the reason for it to be profitable in, you said, December or November?

November.

Yes, a couple of reasons.

The yield, we had a yield improvement there.

We've been doing a lot of work, as you know, in Croatia.

But also we've got some better pricing on some recent orders, so a combination of things there help.

Now that is only a sign, so we believe the losses will be reduced once the major CapEx project is completed.

That will be in the third quarter.

It should start to be -- we believe improve quite a significantly from then.

I mean, this is a positive.

I think this is the first (multiple speakers).

It is a positive.

It was really -- it was unexpected.

We didn't expect them to be profitable in November.

Yes.

Is this the first time you have been positive on a monthly basis since you bought this company?

Yes.

Okay.

That is certainly -- you're getting close to what we were hoping some time ago to be.

Right.

And last question on scrap inventory.

Are you running -- you mentioned that there has been difficulty in securing scrap, which you've been hearing also from other sources.

How is your scrap inventory at the mills?

Are you running more than usual, less than usual, or you would like to get more?

Well, we are running pretty low.

As Bill mentioned, we try and keep the scrap at the recyclers where we can.

So it would be on the low side.

But obviously, we can -- we are long on scrap, as you know, Sal, so we can collect -- process enough scrap to satisfy our mills and also sell to other customers.

So yes, it's on the low side at the mills.

And is that because of (multiple speakers)

And you are right about collections is an issue with ferrous scrap.

We would like to collect more if we could.

Nonferrous doesn't seem to be such a problem.

It's only maybe down 15% on a year-ago in terms of volumes, but ferrous scrap is down probably as much as 30%.

Okay, great.

Thank you very much, guys.

Tim Hayes, Davenport & Co.

Good morning.

Just a few numbers questions.

On Arizona is the guidance for the year of 147,000 tons is that still good?

Yes.

And then in the rebar shipments for American Mills you had a number of 27.

Does that include or exclude the Arizona shipment?

It includes.

It's all of the mills.

Right.

And then what tax rate should we use for fiscal '10?

I think 36% to 37% right now, Tim, would be a good rate.

Okay.

Thank you.

That is all my questions.

Barry Vogel, Barry Vogel & Associates.

Good morning, gentlemen.

Most of my questions have been asked but I do have a just a couple.

Bill, in looking at Arizona would you think based on where you are at right now that it will not have a deleterious affect on your P&L when the year is said and done?

We will make money by the end of the year, but it will be a net loss for this year.

Do you have any idea of some kind of a range do you think?

Not yet.

Okay.

And as far as the SAP program, I am not going to ask you about that because you just answered that question with a non-answer.

Are you getting the return on the S&P investments that you expected?

First of all, Barry, you are just mad because Texas beat North Carolina in basketball.

So there is no need to vent on here.

Okay.

Texas deserves a break.

That women's volleyball championship was just out of sight.

Yes, down two sets and then Penn State came roaring back.

Unbelievably exciting event, no question.

Yes.

Well, I mean good for Penn State.

They got quite a dynasty going there.

I forgot your question.

What was it?

Yes, the returns on the S&P investments, are you satisfied?

Yes, I would say that I am satisfied.

I am not ecstatic.

It's unfortunate that with the recession we are not able to get all of the results because we don't have as much to work with in terms of volumes that it can analyze.

But it is doing what it was supposed to do.

And so with that I think you have to be satisfied.

We are spending a lot of time right now, Barry -- and this is a longer answer than you wanted.

But we are spending a lot of time right now instead of rolling out new units going back and optimizing the units that are on it, turning on functionality, more sophisticated functionality and better reporting out of the systems.

So we are really going back and mining it now for a lot more than just the initial rollout.

Now what was the total amount of money that you invested in this project?

A lot.

I don't know.

It was north of -- including the infrastructure that goes with it it was north of $200 million.

So the returns on this investment so far are negatives and it's going to take time I presume to get them to a positive basis.

Well, it depends upon how you calculate it.

I mean we are getting a return on the investment.

If it's a question of when will we recoup the investment, it will be long after my career is over.

Okay.

Now your book value as you stated right now is $13.50 a share.

Before the conference call started your stock was around $15.50 a share.

As you have stated you have hardly any goodwill.

You have a $350 million or so in cash.

You don't have a leveraged balance sheet.

What conditions would be needed for you to buy back stock on your remaining authorization?

The banks show a little bit more willingness to lend, both to our customer base and to have better fee structures.

The liquidity out there is still problematic, Barry.

More so for our customers than for us.

But I think we need to see a greater improvement in the general capital markets before we would feel safe to be retiring any more of our own shares.

Well, that is great.

Thank you very much.

I appreciate it.

And have a great new year in every single regard, and you too, Murray.

Thank you, Barry.

Thank you.

Gregory Macosko, Lord Abbett.

Yes, thank you.

Could you talk a little bit about, a little more about Arizona?

What is the expected capacity there?

And could you give me a sense of how much of that capacity you figure is going to your internal fabrication uses versus what you might sell on the marketplace?

As Bill mentioned, Greg, we are looking at about 147,000 tons this fiscal year.

No, but I mean capacity at full --

(multiple speakers) that is right.

The second year we will build that up to capacity which is 280,000 tons.

It may well do a little bit more than that depending on the castor speed.

But approximately 60% of that will go to our own fabricators.

Okay.

And the other 40% or whatever is left over, how far does that -- do you expect that to go?

Is that going to go to Los Angeles?

Does that go to Nevada -- I mean Las Vegas?

Where do you expect those --?

Mainly Arizona, Nevada, but also into certain parts of California.

And what do you expect that competitive market to be?

Well, it certainly will be competitive but generally speaking in the West historically margins have been better there.

[Particularly] at this point in time the market is down on the West and the Southwest.

But we expect it to come back in a couple of year's time which is about the right timing from when we have that mill at full capacity.

So we are relatively optimistic that we certainly will sell out that mill.

And then just one more on the billets.

The demand was as you said I guess strong export, both Poland and the US.

What is your outlet?

Is that a short-term thing because of the weak dollar or what is the outlook there?

Yes, we would clearly prefer to sell finished goods.

In time in Poland we will be mainly selling rebar and wire rod, just not mesh quality.

With the new mill going in higher quality wire rod products, merchant products, a bigger range with the (inaudible) flexible mill.

So that is what we would like to sell and not so much in billets.

Because billets, as you know, you are selling at a lower margin and then you are relying clearly more on export markets.

And prices of scrap can fluctuate tremendously from month to month so you can get caught selling billet.

So, yes, longer term we prefer not to sell billets; we prefer to sell finished goods.

But what are you seeing in December?

Are you seeing continued demand for that billet?

Yes, billet demand is good, particularly in Asia and also some parts of Central and South America.

Okay, thank you.

Brian Yu, Citigroup.

Great, thank you.

My question is in regards to the fabrication segment.

First, Murray, I think earlier you had mentioned that the stimulus program could kick in by spring.

Are much in the way of projects coming up for bid?

Yes, we are seeing some coming up in various states including here in Texas and Florida and some other markets.

So we are optimistic that these will be awarded around the first half of calendar 2010.

So definitely 2010 will be better than 2009.

Okay.

Can you comment on what type of projects these are?

Are they road building, infrastructure, hospitals, schools?

Yes, a combination.

There is a lot of road building, highway work certainly here in Texas.

There is highway work in Florida.

There is Miami Tunnel in Florida.

There is hospital work and education facilities.

It's a mixture of things but certainly highway work is right up there.

Okay.

And then for your backlog, can you give a sense of where that stands and then maybe for the month -- quarter ending November what your book-to-bill ratio might be in the fabrication side?

Bill is just digging that out now.

The backlog, depending on what area did decline slightly, but the main concern is prices dropped.

So higher-priced backlogs have been replaced by lower-priced backlog, so that is where you see some of those margin squeeze.

But overall it's holding up reasonably well, particularly in the public sector.

I think, Brian, just some data points on backlog.

As far as our mills are concerned, at least in the greater Texas area, there is probably nine months maybe almost a year's worth of backlog.

When you look at the rebar fabricators though I would say that they may have three months, four months worth of backlog as compared to in normal times probably six to eight months worth of backlog.

Copper tube probably has half a month; that is a very spot business.

It generally compared to last year is down significantly, but it's not so much the tons -- and that is actually what I was referring to.

But it's the dollars in the backlog which are down significantly, which is why the fabricators will have a little bit of a difficult time during this period of rising prices as they did in past times of rising prices because the contracts are going out at pretty competitive prices and the mills are trying to raise their prices.

So there is going to be some margin compression.

Okay, thank you.

Jeff Cramer, UBS.

Good morning, guys.

Just on the international fabrication and distribution, obviously you had a good quarter.

Given your outlook on the international markets I guess generally do you see that continuing or possibly some upside from here?

Yes, we think -- certainly in the spring and summer of next year we think it will be stronger.

Our indoor Asia business is doing very well.

Our raw materials business is doing well but should improve.

And Europe should get better; Middle East, North Africa should get better.

Australia is bouncing back a quite strongly, and even our US steel import business, which has dragged us down, should start to improve by spring and summer of next year.

So, overall, it will definitely be stronger.

Maybe not this quarter but as I say in the spring and summer quarters.

Okay.

And the market conditions are obviously out of your control but can you comment on your commitment to investment grade ratings or what you may have discussed with the agencies last month?

Well, I don't think we will get into any particulars about what we discussed.

We certainly gave them the same outlook that we have discussed with the investor group and that is there is going to be a tough three months coming ahead and then light at the end of the tunnel come March.

We are committed to staying investment grade.

We believe it has very positive effects on the capital structure of the Company.

Definitely, okay.

Just for EBITDA and the compliance calculations, there is no adjustment to that?

It's just a straight net income plus interest, taxes, depreciation?

Correct.

Calculation?

Yes.

Okay.

And if I heard you correctly earlier on the CapEx front, you said $100 million in CapEx plus $20 million or so environmental is the expectation for fiscal '10?

Well, those are the ones that are on the approval list.

I mean realistically the total amount that has been at least ostensibly approved -- and I think I have talked about this last quarter -- is probably in the nature of $155 million to $160 million.

But we are not going to go forward with $40 million or $50 million of those projects unless the sky is clear and things look a whole lot better.

So I wanted to be a little bit more distinctive in what I think we are going to spend as opposed to what has technically been approved.

I hope that makes sense.

Yes, okay.

Thanks, guys.

Sanil Daptardar, Sentinel Investments.

Yes, thanks.

Murray, you talked about in the press release that China would be stronger in 2010 versus 2009.

Currently China was a net exporter of steel operating around 600 million tons annually.

So what gives that confidence that China is going to be much stronger than 2009?

Yes, we think the Chinese with the stimulus package there is at least two more years of strong infrastructure growth there.

Virtually all their industries are performing well.

Obviously not the export industry, export manufacturing and it ship building are probably the weakest.

But clearly automotive, white goods, real estate; you go through a whole list of things, they are all strong.

The Chinese government may start to work on monetary policy to slow some things down.

But overall I mean their stated goal they want I think a 9% to 10% GDP growth rate next year, which is up from what it is this year.

So we think there is still -- consumption will be stronger next year.

The Chinese government, admittedly they have made these statements in the past but maybe they are getting more serious, they want to crack down on some outdated mills, old mills -- these are mainly long product mills which are polluting mills as well -- shut down that capacity.

They certainly want to consolidate the largest state-owned mills, make those groups bigger.

So maybe they will accelerate those programs.

The other thing they have introduced is no new steel projects to be approved in the next three years so they are trying to obviously curb new steel production capacity coming on stream.

So when you put all those measures together we think China is going to be strong next year.

We think -- like iron ore prices are likely to be 20% up on 2009 so scrap prices will be stronger and they will lead the rest of Asia.

So we are quite optimistic that China will definitely be stronger and obviously they had a very good 2009.

So can it be reasonable to assume that probably China would be a net importer of steel for the next two years given that there are going to be curbs on new steel capacity?

I don't know if they will be a net steel importer.

I think they will probably still remain a net exporter but it will be limited because clearly a lot of their products because of anti-dumping and protectionism they cannot send now to the US and to Europe.

So they will be limited to mainly selling their exports into Asia and some other markets.

There will definitely be import requirements.

Particularly if prices in some parts of the world including the US are lower than in China there will be opportunities to sell steel to China next year.

On the US market of course the private sector is still weak.

Have you seen any kinds of any changes in the demand trend in the private sector in terms of the non-residential construction market?

Or do you think that is second half of 2010 (inaudible) doesn't seem that it's going to change or improve anytime soon?

Well, we think maybe we are at the bottom but we don't see any great change in the next few months.

I mean, clearly, if the banks and obviously President Obama and the administration are starting to put pressure on banks to lend more to small and mid-sized businesses that will be a positive.

So maybe the banks will start lending more freely sometime next year; that would be a big positive.

Okay.

One last question on the numbers.

In fact when you talked about the second half (inaudible) to see the improvement in the middle margins it would be more driven by the price and the volumes, right?

Yes, we think as prices move up we think demand will come and as I mentioned the capacity utilization rates will improve.

They will be -- the other key is very low inventory levels.

We saw it over the summer at the end of the destocking period some restocking.

We think there will be more restocking next year and the capacity utilization rates will improve.

So if mills are starting to, say, in spring and summer of next year operating over 70% -- 70% to 80% in that range -- capacity utilization, definitely margins will come back.

Okay, great.

Thank you.

Happy Holidays, guys.

Thanks.

Yes, Happy Holidays to you.

Charles Bradford, Affiliated Research Group.

Good morning.

I would like to ask my usual questions about cost specifically about what you are seeing these days in refractories and electrodes.

It's about that time to do next year's contracts.

Well, we are seeing at the moment a bit of a mixture.

But overall the end use customers are cautiously optimistic about next year, Chuck, so that means I think they anticipate demand to pick up and obviously prices will start to pick up.

But if we look at prices in the last couple of months some are up and some are down and some are unchanged so it's a bit all over the place.

But I would say by spring and summer of time next year overall people are a little bit more optimistic than they have been.

I think, Chuck, in terms of electrode pricing I think you pretty much have to compare it to 2008 because 2009 was a bit of a wash or a washout for them because the buying was so sporadic.

I don't think there is a pattern but I would say that you may see anywhere from 20% to 30% increases.

It depends upon, of course, size on pricing.

When I look at refractory grade worksite it's down $15 a ton November versus October.

[Dead-burned] magnesite is up $5 a ton.

Silicon carbide is down $10.

Brown fused alumina is up $25.

Needle coke, I know you follow that, that is basically unchanged one month to the other.

Okay.

I know you don't use coking coal and iron ore in your various steelmaking but you trade it a lot.

What are you thinking about next year's pricing on the coking coal and iron ore?

Well, coking coal we are really out of the market because we were exporting from China until they slapped the 40% export tax on it.

The only markets that are probably available at the moment are India.

We think it may move up a little bit.

Iron ore, you obviously follow that closer even than we do.

As I mentioned earlier, we think that price will definitely be up next year, maybe 20%.

A number I like to hear.

When it comes to capacity obviously you got the new minimill on.

Nucor has done the upgrade at Kingman.

Are they actually producing any product there?

I know they are not making any steel there, but are they shipping any finished product out of there that would been in competition with you guys?

I think you are going to have to ask them, Chuck.

Okay.

Do you hear anything about the [Carunni] project in Mississippi?

No.

No.

Well, I guess no news is good news.

Thank you very much.

And I know this is a shameless plug, but shame doesn't seem to be one of my attributes.

Thanks for sending the report on China.

For those who don't have it, Chuck has compiled some of the best historical statistics on Chinese manufacturing and output and other interesting ones.

It's a great read so I appreciate you sending that to me, Chuck.

Well, thank you very much.

Help the plug.

John Tumazos, John Tumazos Very Independent Research.

Good morning.

And before John can even ask his question, John was number one in a poll on returns.

So I got to give a shameless plug to him too.

Thanks.

The World Steel Association yesterday reported a decline in Chinese output, not quite 10% on a per day basis.

I was wondering your interpretation of that first.

And then second, from the standpoint of the various fabricating product lines -- and I am just thinking, for example, of the joist market where the peak to trough decline in tonnage might be two-thirds or three-quarters -- how you are operating and staffing those facilities when the market goes quiet?

Just give us a flavor in the different fabricated product lines of how you are doing as well as you are doing to contain results.

Well, I will take the fabricating and then I will punt the Chinese to Murray.

The fact of the matter is you must scale your business to the demand in the market.

And joist is off at least 50%, maybe more if you look at forward order books as well.

The rebar fabricator is not quite so bad.

What have we done?

Well, we closed down lines.

We moved production to other facilities so that you still have a critical mass.

The same is true with rebar fabrication.

There are facilities that we have closed down.

We mothball certain lines.

They are in condition to come back when the market returns but I think, John, you would be incredulous if I told you the joist market is going to come back to its all-time highs anytime soon.

I mean it is off -- there is probably an expectation in 2009 that there would be between 550,000 tons, 600,000 tons of joist.

That is certainly less than half than the all-time high.

Given our comments on commercial construction and the outlook for that I think you need to be scaling back because there is just -- the demand is not going to be there.

John, just on China.

China typically does slowdown this time of the year right through to about Chinese New Year in the middle of February.

Clearly, particularly construction steels they are impacted by weather and a lot of parts of China are over the winter time.

So there is a natural slowdown, seasonal slowdown so that is not surprising.

But I think what is interesting is (inaudible) Steel, who obviously are mainly a flat product producer and pipe etc., they announced price increases in January.

So clearly they see the market in China being strong next year.

There could be some inventory adjustment as well as I mentioned flat products, hot rolled coil, high inventory levels in China and some rebar areas there is some high inventory level as well.

But overall we are still pretty bullish about China for 2010 as I mentioned earlier.

So we would expect from second half of February onwards for China to pick up steam again.

Think you.

Bob Richard, Iron Edge Research.

Good morning.

Thanks for taking my call.

Not to belabor the lower cost of market adjustments, but, Bill, if I heard you right you said the majority of that was on finished tubular products in Croatia?

Is that accurate?

Well, yes, probably half of all of the charges were on the inventory that Sisak has, that is correct.

And I guess that begs the question, how many tons were written down by how much, Bill?

Can you give me round numbers there?

No, I don't have that down.

If you follow the tubular good prices, whatever it fell from 8/31 to 11/30.

If you can use that and divide it into about 8 million and you will figure out the --.

I am not trying to hide it from you, I just don't have the number in front of me.

Yes, okay.

Okay.

The other question is the premium of merchant over rebar, pretty important statistic.

Is it safe to assume that that is still going to be under pressure going forward?

Well, of course there is two parts to the calculation.

There is the price of rebar and there is the price of merchants.

The merchants have actually been fairly resilient in this.

We would anticipate the premiums to stay out there.

Okay.

You had mentioned in your release that it was down year-over-year, but [$163] is what we should expect?

Somewhere in that ballpark?

Yes, I mean we don't project individual pricing out quite that well but at least the current trend would be about that.

Yes, I would think so.

It is higher than historical.

Historical has been $100, $125 a ton, sometimes a little bit lower even.

Okay, great.

Thanks.

[Fritz von Carp], Sage Asset Management.

Morning, guys.

And if you have said this I apologize, but could you talk about some of the trends in terms of inventory stocking or destocking and price or demand or however you want to characterize it for some of the other long products?

Like you talked a little bit about merchant bars; more on that.

Other sort of light structurals and things like that.

Sort of the non-beam long products, non-beam, non-rebar long products, where are they?

Well, most of those products have fairly low inventory levels whether at the mills or at -- are you talking here in the US where it serve (multiple speakers)?

Yes.

Here in the US, yes.

So, yes, there was some restocking late summer period, but that seems to have slowed down some.

But we would expect that to pick up again around probably February, March period of next year.

It doesn't sound like there is any sort of -- I mean are the inventories low enough that it's starting a frenzy or is it the case that it's maybe a little bit higher than that and things will stay a little soggy?

Or is it somewhere right in the middle of those two?

Certainly no frenzy.

We would need strong demand for that, but customers are sensitive.

We mentioned rebar and merchant bar products going up $65 a ton January the first so what we are seeing, as I mentioned earlier, quite a pickup in shipments this month.

People beating their price rise.

So I think many customers see that prices have reached a bottom and the trend will we up, and that will be our view for next year.

There could be some fluctuations but overall based on scrap prices moving up, iron ore prices moving up we would think steel prices on long products are going to move up in 2010.

So customers where they can they may start to increase their inventory levels certainly to beat a price increase, but overall they are remaining very cautious.

Okay, great.

Thank you.

That is very helpful.

Kuni Chen, Bank of America-Merrill Lynch.

I am fine.

All my questions are answered.

Happy Holidays, guys.

Thank you, Kuni.

(Operator Instructions) Sal Tharani, Goldman Sachs.

Hi, guys.

The comment that 60% of your rebar from Arizona is going to your own fabricators that implies about 170,000 tons when you are running at full capacity.

While you are ramping up to that level is everything going to your fab guys right now?

Yes.

Yes?

Yes, it's a higher percentage than that.

Substantially all of it has gone to in-house but there have been some outside sales.

But, yes, the outside sales will be developed more as the year progresses.

Sal, the interesting thing is not just our own people but those people from outside have seen the new bundles.

They are the best in the industry, typically the small diameters.

So we expect the demand for this rebar from this mill to be very good, to be a preferred product, if you like, all things being equal in that market.

And you obviously have a cost advantage there because you are not using a reheat furnace.

Are you observing that numbers you were using earlier, whatever, that you are getting that kind of cost benefit?

The indications are we will, but of course we are not putting as much tonnage through there but on the curve it is developing that way.

But I don't want to leave you in the impression that the cost structure right now is anywhere near what it's going to be.

It's still on the development stage.

If today's metal margin do you -- what utilization rate do you think you can be profitable or breakeven at this mill?

In Arizona or all the mills?

No, Arizona only.

Don't know.

We haven't done that calculation because we haven't tested the mill fully to find out all of the input costs and throughput so I don't have an answer for you yet.

Okay.

The last question on the Arizona mill is that you gave some -- you made some comments and I want to make sure I heard correct -- that the mill actually will be profitable at the end of fiscal 2010.

However, for the year it will not be profitable.

Is that correct?

Right.

We think it will break into profitability in the fourth quarter.

Okay, great.

Thank you very much and Happy Holidays.

Thank you.

Happy Holidays.

At this time there appear to be no more questions.

Mr.

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

Thank you.

Bill and I will be traveling during the first week of January on investor visits and we will be happy to answer further questions at that time.

In the meantime we wish you all Happy Holidays and thank you for your attendance today.