Commercial Metals Co (CMC) 2010 Q2 法說會逐字稿

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

At this time all participants are in 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, March 24, and your participation implies consent to all recording this call.

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

Your host for today's call is Mr.

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

Mr.

McClean, please begin your call.

Good morning and welcome to CMC's second quarter fiscal 2010 conference call.

With me this morning is Bill Larson, our Chief Financial Officer.

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

Finally, I'll comment on the outlook for our third quarter of fiscal 2010.

With respect to an overview of the second quarter, and I'd just like to also talk about background going into the second quarter of 2010, that firstly, as highlighted in our previous call, our second quarter, which includes the winter months of December, January, and February, is always our weakest quarter.

Obviously, they aren't the winter months of Australia, but for most of the large markets we're in US and Europe, they are the winter months.

Our results from continuing operations were worse than we had anticipated based on the combination of weak non-residential construction markets, prolonged and harsh winter, both in the US and Europe, plus a major jump in ferrous scrap prices which out-paced finished good prices, that is steel products, finally rebar and merchants that we manufacture.

Now, Bill will talk in further detail about our discontinued operations, that's namely joist and deck.

During calendar 2009, most prices that's rebar and merchant products trended down, almost monthly in the US and Europe, as extensive de-stocking occurred.

Ferrous scrap prices on the other hand, while volatile, trended higher creating a margin squeeze at the mills.

The markets appeared to have turned with a large ferrous scrap price increase in December of 2009, resulting in generally the first 2010 price increases for rebar and merchants.

Our further scrap price increases in January and in March of this year have resulted in significant price increases of rebar and merchants in February and next month, April, respectively.

Now, why do I mention this?

We believe the market psychology has changed as raw material price increases, in this case scrap, have been passed on in finished good prices.

We did not see this in 2009.

It is clearly a good trend for 2010 and particularly going to the spring and summer months which are the peak periods for construction.

As well, inventory levels at all levels in the supply chain remain relatively large.

Any seasonal pick up in demand, including restocking will be a positive.

Now, just reflecting back on the second quarter by segment, our recycling segment, the business here was somewhat disappointing, despite the higher ferrous scrap prices, we did not see the flows that we had anticipated.

Now, this was mainly due to the harsh weather conditions that I mentioned earlier in the US and Europe which made collection of scrap very difficult.

In our mill segment, they had a margin squeeze due to the big ferrous scrap price increase in December and January.

Also, it impacted negatively billet shipments, we had substantial billet shipments during the quarter.

US fabrication segment was caught with a low price backlog and rapidly increasing steel prices.

This was a similar story for our international mills, in particular Poland We finished good prices lag well behind ferrous scrap price increases resulting in significant losses.

The final segment is our market and distribution segment, that's our global trading businesses.

These overall were profitable, reflecting improving market conditions, in particular in Asia and Australia.

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

Thanks, Murray, good morning.

Let me call to your attention the detailed safe harbor statement included in our press release in our August 31, 2009 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 qualitative guidance regarding our outlook for the third quarter of fiscal 2010 in our press release.

Subsequent to this call we will not be updating our outlook until later in the quarter.

In accordance with Regulation G of the Securities and Exchange Commission, you're 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, but there are other items that may be outside of our ability for discussion; you may need to be patient with us if we defer comment.

Our website has additional information at CMC.com.

As Murray said in December's earnings call, we mentioned we still had one tough quarter ahead of us and this certainly has come to pass.

No one is going to look back on this quarter with any degree of nostalgia.

True enough the second quarter is historically our weakest, but it seems as if all my favorite answers, China, the weather, product mix and LIFO all came into play with a vengeance on top of the already weak economy.

We had to make some tough calls in operations, the highest profile one being joist and deck, in order to size the business to the expected level of demand in the midterm, but we've come through the worst recession in decades in good shape.

There are many positives to point to.

Our balance sheet, capital resources, and banking relationships remain strong.

Our cash and short-term investments totaled $297 million at February 28.

Our inventories are conservatively valued on LIFO, the reserve is $232 million, and a substantial amount of our accounts receivable, our credit insured, are backed by letters of credit, this in addition to the $41 million allowance for doubtful accounts.

Working capital ratio is 2.2.

At February 28, goodwill and intangibles total $129 million, representing only 3.6% of total assets.

On the operational front, as Murray has stated, pricing is on an upward trend.

The winter is finally giving way to the spring construction season and shipments will improve.

We have initiatives under way at many locations to continue to capture the working capital savings we have experienced over the last year.

Our new micromill in Arizona is ramping up on schedule and we will be near full production capability by the end of this fiscal year.

Our flexible rolling mill in Poland is nearing completion as is our melt shop overhaul in Croatia.

These projects will afford us expanded product lines at lower cost and bode well as the recovery continues.

Yesterday, through the good work of our Treasurer, Lou Federle, we entered into an interest rate swap that covers $500 million of our long term debt.

In this period of historically low rates and with the anticipation of continuing low rates, we believe this is a prudent move.

In addition, it balances our fixed and floating debt to a ratio of 50/50, so we are not taking a view on future interest rates.

The interest savings for an entire quarter should approximate $3.5 million, if current interest rates hold.

Overall the trends are positive and we position the Company to take advantage of them.

It's been a tough slog and I want to express my continual thanks to the employees of CMC who continue to perform exemplary work during this period.

I am proud to be part of their team.

In reviewing sales trends, recycling is the beneficiary of higher prices and our mills of higher volumes, but with the continued decline of commercial construction, our fabricators will definitely have unfavorable comparisons on sales.

The decline in sales in international market and distribution is mainly due to the reclassification of our CMC Dallas Trading operations here.

As you'll recall imports in the United States are off substantially.

When you look at adjusted operating profit, the significant factors in the swing between last year's second quarter and this year's second quarter among our American mills, it's both the trend in LIFO as well as the margin compression Murray mentioned; in the fabricators, it's unquestionably the margin compression, and we have the exact opposite of the situation we had last year.

The fabricators do much better in periods of declining prices and get hammered in periods of rising prices, and again, in international fabrication, the reclassification of our import steel business in the United States into international market and distribution has caused an unfavorable comparison there.

LIFO for the quarter decreased net earnings $4.8 million or $0.04 per share in comparison to -- a stark comparison to last year's income of $80.7 million or $0.72 per share year-to-date, though it's increased net earnings $6.4 million or $0.06 versus last year as $154.6 million or $1.36 per share.

We had depreciation and amortization for the quarter of $44.681 million.

We also include, for purposes of covenant tests, the impairment charges as part of EBITDA.

Those totaled for the quarter $32.4 million, so you'll see in supplemental information the figure $120.747 million for depreciation and amortization and absent impairment charges; I would continue to believe that D&A for the year will be about $177 million.

If you look at SG&A, there's a little bit of a disguise here.

SG&A is down a little bit but because of a classification effect, the real change is being masked and I'm going to explain a little bit of P&L geography here.

We have assets and liabilities in a non-qualified retirement plan and the expense is in SG&A, but the income from the assets is up in revenues, so we mark both of these to market each quarter and really these two generally offset each other, and so if these were, if this was stripped out of SG&A for the six months, SG&A would have declined another $32 million plus and the main components of that are lower payroll, lower professional fees as we no longer have as an aggressive rollout of SAP and lower bad debt expense.

Book value at 2/28 is $11.49 a share.

Average shares diluted are 113,275,457 and the actual shares outstanding are 114,128,067.

We had CapEx of about $40 million during the second quarter that puts us at $87 million year-to-date.

I've mentioned before that, although we have a budget of roughly $150 to $155 million, it's broken out into about $100 million of committed spending, $20 million of safety environmental, and the rest will be spent if and when we see that it's appropriate.

I suspect we are not going to reach the $150 million level in CapEx for the year.

Regarding joist and deck, the major items that enter into the discontinued operation for the second quarter, the largest would be the impairment charges on fixed assets and goodwill and intangibles.

That would be followed up by some inventory, some orphaned inventory, obviously severance costs for the employees, and the operating loss that they incurred during the quarter.

Finally, you all know I'm an advocate of giving as much information to our investor base as possible, and part of that is to give you an estimated earnings range each quarter, but just must reiterate what was noted in the release.

The factors that are most indicative of earnings are in huge flux right now, particularly pricing on both ferrous scrap and finished goods and the timing of inventory flows, the recovery of Poland from a terrible winter, how all of this affects LIFO.

There are just too many variables right now to give a good faith estimate, but as soon as the quantification of these trends is clear, we will be back with you.

Okay, thanks, Bill.

Just the outlook for the third quarter, we anticipate our recycling segment to be profitable based on increasing flows of all types of scrap plus higher prices, as well we have further reduced our cost structure in this segment.

Our US mill segment, overall, should improve based on higher capacity utilization rates.

You'll see that we mentioned 67% as our forecast for this quarter.

which is substantially up and also it will be higher prices, higher shipments, and improving margins by quarter end.

There's a bit of a margin squeeze earlier in the quarter with those scrap prices moving faster than the rebar merchant prices, but in April, they will catch up the finished good prices.

Unfortunately, our US fabrication segment will have a very difficult time due to our low price backlog and faced with rapidly rising steel prices.

On a positive note, however, backlog have expanded significantly in the last few weeks and these new orders are based on higher steel prices.

Our international mill segment should improve significantly this quarter, and steel price increases, that is mainly rebar and wire rod in Poland, out pace scrap price increases.

In addition, shipments are picking up quite strongly at our Polish mill.

Our mill in Croatia will show some marginal improvement, but realistically, Bill mentioned it before, unto all the CapEx projects are completed in Croatia that we'll see a significant turnaround.

We don't anticipate this to occur until towards the end of our fourth quarter.

Our international marketing and distribution business should steadily improve as we experience seasonal pick up and demand in many markets.

The chart on the rest of Asia already showing stronger growth in 2010 than in 2009, and since Chinese New Year several weeks ago, there have been significant price increases in a number of raw materials including those who follow the spot iron ore prices, scrap, as well as steel prices.

However, there's likely to be some price correction in our view over summer lead by scrap and flowing through to some steel prices, but we believe this will be relatively modest as inventory levels in all parts of the supply chain remain relatively low.

We're starting to see some stimulus funded projects being awarded in the US.

In addition, there are some other major projects in the process being awarded.

At the same time, as we mentioned in the release, the private sector of a non-residential construction market remains very weak and we think this is likely to continue certainly through the Year 2010 into 2011.

We continue to lower the cost structure in all our businesses and while we are somewhat more optimistic about market conditions for the next three to six months, we do realize, however, apart from China and Asia, most markets remain fragile.

At this time, we're not giving a range, as Bill mentioned, for our third quarter because there are just too many variables which can significantly impact results.

We will, however give guidance, as Bill mentioned, closer to quarter end when there is more certainty.

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

(Operator Instructions).

The first question comes from Kuni Chen of Banc of America Merrill Lynch.

Hi, good day, everybody.

Good morning, Kuni.

Just to start off, obviously the charges in deck and joist joist are pretty straightforward, but as you go through some of these other charges that you've broken out here at about $93 million pre-tax, can you give us an after-tax number on that?

Should we be using a 30% tax rate on that?

You know what I always do, Kuni?

I always just use the marginal tax rate of 35%, that way all of the numbers are consistent from release to release.

I mean, we are in fact targeting a 30% annual rate, but on the margin, each new item is 35%, so I just do that for ease of comparability from release to release.

Okay, and can you just give us some more detail on the charges for the backlog in Poland?

Yes, theoretically, it's not dissimilar to what we have in the United States.

The mill has given their fabricators a set price on finished goods in order to allow the fabricators to bid and prices have gone up in Poland; and they will have to send to their fabricators and the fabricators eventually to outside customers steel that will cost them more to produce.

It's the same type of margin squeeze Murray was talking about on the fabricators here in the United States.

I see, okay; and then just one last question.

Oval, we're in a rising raw material environment both in the US and Europe, globally.

When you look at pricing trends in the US versus Europe, which in your view is the structurally more challenged market or do you see them as about the same?

I would say probably here in the US because of the private sector, but clearly, the funds are coming through and to be honest we don't care where the funds come from as long as they come through, but from the stimulus package or if it's from the normal highway, and other programs, so we are seeing some positive signs there.

In Poland, structurally, it's a little bit better, we believe because the infrastructure on the public side is certainly strong and will get stronger there, but there's some signs of residential and even small funds of commercial coming back -- I'm just talking Poland, now -- so that is a bonus because Poland in those markets uses a lot of rebar, and we're actually pricing twice a week now in Poland on finished good prices since March so that's a real turnaround.

Okay, I guess my question was more from a mill standpoint, so in line with your overall macro comments there, you think Poland has better pricing power at the mill level?

We believe so.

There's obviously not as many producers in Poland as there are in the US.

Got it.

I'll turn it over, thanks.

The next question comes from Timna Tanners of UBS.

Yes, hi, good morning.

Good morning.

Wanted to just drill down a little bit on some things that you talked about with regard to the tax benefit reversal, does this change the view that you might have on the timing of eventual profits on Croatia?

From the language, I'm just not clear, it says the timing of the limited tax carry forward position or operating loss carry-forwards, could you elaborate on that?

Yes, you're going to be sorry you asked this question, Timna, but you'll be able to get continuing education credit afterwards.

There is a bright line test in the accounting literature on accruing for deferred tax assets so what do we have here?

If you have a loss carry forward and you think you're going to make money in the future, you're allowed to anticipate that, take the benefit, and of course the other side of the entry is an asset.

Right.

What the literature says is if you have had three consecutive years of losses, there is almost no evidence, there is almost no evidence under the sun that can convince anybody -- it doesn't matter whether we, if all of the stars were aligned and we could make $100 million on September 1, what the literature says is if you have three years of losses, it is incredibly debatable whether you can maintain that asset or not, and we looked at it and knowing the forecasts were Croatia and that they would lose money in a 8/31/10, that would be the third consecutive year, we went ahead and took the -- well, we reversed it.

So it's an accounting law, but your forecast for continuing losses would be what, for the next quarter?

Well, yes.

The point is very well taken.

There are two different dynamics going here.

What is what does the accounting literature have to say and the other is what do we think will happen down on the ground.

Yes, we think the operations will turn around and that a significant portion of the NOLs will be used successfully and of course what will happen then, you can see what will come up.

Every time you use one of those NOLs, our effective tax rate is going to drop significantly because we're going to get a benefit because we've never accrued it before, so yes, it's a distinction between just what the literature says and what we think will actually occur.

Okay, on Arizona, you mentioned the capability would be up by the end of your fiscal year, but I didn't know if that was a change from what you said about the production being up, so are you expecting to be able to run full out by the end of your fiscal year or talking about your assets being in shape?

No, we would anticipate being near full out by the end of the fiscal year.

Finally, I hate to ask this, but we're getting so many queries about potential M & A.

If you would give us your latest thinking or reiterate your thinking on your potential candidacy?

I know you're getting questions as well.

You know, no one is questioning whether my health is any good.

And I was kind of disappointed when I had to back out of those conferences -- nobody asked if I was going to die.

Look, standard response is, we don't comment on questions and rumors and speculation about M&A activity.

Okay, thank you.

The next question comes from Michael Gambardella of JPMorgan.

Yes, good morning.

Good morning, Michael.

Two questions.

One, are you seeing demand from the stimulus package yet?

Well it's very mixed.

We're seeing some signs, just seeing a number of larger projects coming up and some of these are a lot of highway work, etc.

It's a bit of a gray area.

Some say it's the stimulus funds involved, some say it's like markets like here in Texas that bring in projects because the stimulus funding is coming in behind, but certainly the second half of this calendar year, we believe more projects will be awarded based on stimulus funds; and as I mentioned earlier, we don't care where the funding comes from as long as it comes and as you know, it's been very slow over the last few months.

What is the current spread between your fabricated rebar and rebar pricing, say in Texas, versus where it normally is?

I don't know that we're going to give you Texas specifically.

That would probably be -- did one of our competitors ask you to ask that question, Mike?

No.

I had heard that for a while, I don't know if this is still the case, but I had heard for a while that fabricated rebar was being sold in the Texas area for rebar pricing or less.

Well, we're not going to get into specifics.

I will tell you that margins are tight.

Well certainly, Mike, last year as I mentioned with prices dropping there was a big difference between list prices and transaction prices and rebar fabricated prices dropped steadily as well, so it was a huge margin squeeze, but that situation is happily reverse in the last several weeks so we'll see a margin expansion.

And last question, we're projecting, continue to project very high scrap prices, and I would think scrap prices would continue to go high for the next several months.

Even in the long products business, just the rebar business, under that scenario, shouldn't you see an increase in your metal spread with much higher scrap pricing?

It will eventually come through.

We think scrap will probably move up again in April but we think the finished good prices will hold but as I said earlier, our view is, and time will tell, that there will probably be a correction on scrap round middle of the year, May, June, maybe July period, the last two years it didn't happen, I would say two abnormal years, but historically it does happen.

We think it will be more not so much in the US, but more of what happens overseas, we think in China there could be some pullback, and some of that is seasonally related the middle of this year and scrap prices will drop.

We don't see scrap prices continually climbing forever.

We think, as I said, there will be some correction in the middle of the year.

Couldn't you get an offset to that with a very large settlement on iron ore prices, though?

Yeah, I mean clearly the iron ore prices while they haven't been settled and you follow it as well as we do, it looks like it may go to quarterly pricing, but the huge delta between the spot iron ore prices and the current last year's benchmark prices, clearly the benchmark prices have to move from $60 to over $100 a ton because with spot on ore prices close to $150 a ton, something has to give.

Clearly, we would believe that some of the Chinese steel mills will start cutting back production, because they won't be able to pass on the full price increases to their customers, so as I mentioned, there will be some correction and scrappers related to iron ore, there's a close correlation as you know; so we think there will be some settling down in our view, as I mentioned, the middle of the year.

Okay, thank you very much, Murray.

Our next question comes from Chris Olin of Cleveland Research.

Good morning.

Hi, Chris.

Bill, ironically my first question was actually how is your health?

You know, Chris, it's great, thank you.

I always liked you.

Okay, good good.

I'm looking at the potential demand drivers for rebar in the second quarter, first would be stimulus, second would be the weather pushing out projects that weren't delayed just postponed, and the third would be residential.

If you would look at each of those, what would you have more confidence in taking place the next few months?

Well certainly, the public works and the highway work, we've seen a big pick up in backlogs just in the last few weeks.

Here in Texas it's very strong.

We see some pick up in markets like Florida and the Gulf states as well.

Anything energy related is good.

Healthcare is good, so these are leading the way, but on the private sector is weak.

We just don't see any recoveries, we mentioned earlier until next year some time.

Would you say it's still weak taking out the weather impacts for the last few months?

Yes.

It's still weak.

It's just a matter of funding and in some cases, it's just too much capacity, things were overbuilt and that was one of the reasons we got out of the joist business, with the downturn on housing, shopping centers, big warehouses, etc., there was just too much built during the boom period.

Understood.

One of the concerns I would have then, looking at some of these public projects coming up, would be the surge in scrap and the inevitable movement in rebar.

Would that shelve a number of projects just because of cost, once again?

Is that an initiative we need to think about?

I don't think so when you look at where rebar prices are now.

When you look beyond a couple of years ago I think we've got a long way to go.

It's possible, but I think, as I mentioned earlier in the call, the psychology has changed.

Last year, customers were just sitting on their hands and rebidding and rebidding and rebidding and our people have to take action because they see prices are moving up and they've got a viable project or job, they need to award it earlier rather than late, because they know the price is going to be higher.

Now, some people might be a little bit cute and think price is going to come off, but I think that's a dangerous strategy, prices may stabilize, but we don't see them dropping dramatically.

Interesting.

And then just lastly, because it's something I'm thinking about, been focusing on this micromill, which is interesting to me.

If you wanted to build one on the West Coast, like California or anywhere around there, could you get the air permit for that facility?

Well, I think California would be out of the question.

I mean it's just too tough a state, but we may look at other areas in the US where it makes sense, but California would be hard.

Okay, good.

That's all I had.

Thanks a lot.

The next question comes from Brian Yu of Citigroup.

Good morning, Murray and Bill.

Good morning, Brian.

So my first question, it's regarding the Americas Mills.

We've seen a fairly close correlation between your profitability there versus metal margins, and I just notice in the second quarter metal margins were up sequentially or profitability, the loss widened further.

Were there any lumpy expenses that showed up?

No, I think it's just the metal margins just didn't allow it.

I mean there's always -- it's some severance here and some closure expenses there, and various operations, but nothing particularly significant.

We did get a little bit, Brian, with being acquired a period of the year, you tend to produce more billets and that's a thing in scrap prices are relatively stable, but clearly not a good thing if scrap prices jump sharply like they did in December and January.

Okay.

They jumped $105 a ton in two months.

I mean, we hadn't anticipated that.

Yes, well, I was looking at just the metal margins which I thought would already account for any moves in scrap and metal margins were up, but it sounds like it's just maybe some small items in there.

Nothing significant.

Yes.

Let me add one thing, Brian, that Kuni and I were talking about.

The Mills also have a backlog that goes out to our own fabricators and they have to grandfather those prices so some of those job loss reserves are at the mill level.

Got it.

Okay, and well I guess that just takes us to my second question, with regard to your various fabrication projects, I try to make a distinction between where margins are coming in because you bid them low versus where they actually come in because of rebar prices may move against you.

Now, we've been kind of just hearing about contractors and fabricators trying to bake into their futures bids, some sort of indexing mechanism on the rebar side, so you don't get caught.

Is that type of bidding gaining any traction in the marketplace or are you attempting build that into your bids?

No, not to our knowledge.

Okay.

Great.

Thank you.

The next question is from Rob Moffit of Longbow Research.

Good morning guys.

Good morning.

On the fab side, I was wondering, how deep is the backlog there?

Well, it's very significant, as I mentioned it's jumped quite sharply in recent weeks.

Our backlogs now are stronger than they were over 12 months ago.

Obviously, they declined for a number of months, but they've come back and they are growing at a good pace now.

Obviously, as I mentioned earlier, we've got issues, for a quarter anyway, of low price backlog and clearly when the higher price comes through that will be our benefit.

Is there any way to quantify the average lag time between when the contract is signed and it's actually delivered?

I wish I could give you an exact figure.

I always hate answers that start off "it depends" or facts and circumstances, but you have some jobs -- and a lot of these jobs are relatively small jobs.

It used to be you'd hope, you may not even look at jobs below 1,000 tons, but a lot of these jobs are 400 and 500 and 600 tons and will get delivered next month.

Other ones, large highway jobs will go out two or three years, the engineering hasn't been done on them and they probably don't start for the better part of three or four months, so I think there's a direct correlation between size and starting date, I think anything under a thousand tons probably starts within a month or two, much beyond that you're talking three or four months minimum.

Okay, in your recycling segment, have scrap loads improved much over the last month or couple weeks as the weather has gotten a little bit better?

We see a pick up this month in March.

It was terrible in January and February, so it is improving.

But then we had snow in Dallas on Sunday, so just when you think things are getting better, the weather strikes again.

If flows continue to improve with the weather, is that a risk to pricing near term?

I mean it is at some stage.

Clearly, when we see each year that the flows really pick up strongly, it did impact prices.

We don't see it, our view is maybe April prices are more lead by international demand this time; we'll move up again, May, we obviously don't know.

It may come off in the May or June period as I mentioned earlier.

And just one other question.

Regarding your sales, do you have an ASP number for that?

No.

At least not today I haven't run them yet.

I have to do a little homework.

Thanks a lot guys.

Thank you.

The next question is from Gregory Macosko of Lord Abbett.

Yes, thank you.

Hi, Greg.

Good morning.

Just wondered with regard to the joist business and the write-offs, etc., there, are you looking at any of the other fabrication operations?

Are there any other small pieces?

I know you've made acquisitions over the years in that area.

Is there any other pieces that you're looking at and could we see something in the next year or two?

Which way, Greg?

Plus or minus?

Minus.

Oh, minus.

Look, we've been -- and I think we discussed this in other calls.

In selected operations and selected geographies, we have closed down capacity in recycling.

We've done it in various fabrication operations, so yes, I'd say there's a continuing look to see whether we're positioned appropriately versus what the market demand is.

But there isn't anything on the burner besides the joist and deck.

Selectively, there may be one or two sites, Greg, but realistically, anything that we've mothballed, we would hope to bring back up again particularly in rebar fabrication as market conditions improve.

But with regard to joist, that is not mothballed?

No.

No.

That's the end of the line.

And then with regard to the balance between scrap and mill capacity, etc., does that change the balance in terms of how you internally supply from the mill to the fabrication and is that an opportunity near term or is that going to create some imbalance for a short period?

It's a great question, and the answer is yes, things are changing in terms of the way the supply chain is set up.

You'd like, theoretically, to maintain the inventory at its cheapest point in the cycle and that would be at the recycling level and we are unquestionably looking at a system that will not start the inventory flows until a fabricator has an order and that will work its way back through the mill and then result in the demand from the recyclers, so that is part of the initiatives I mentioned in terms of maintaining the low working capital in working ever closer, and of course SAP is a huge resource in being able to get that information.

And so we could, perhaps, see some modest impact on margins, maybe sequentially going forward from that?

Yes, it's always difficult to ascribe what came about by way of process versus what the market gives you.

I've tried it in the past and it's very difficult at times to be able to say yes, this definitely was because we got the supply chain in line versus well, that was just what the market gave, but yes, we would certainly hope that would be the case.

I'm just not dead certain I'll be able to quantify it for you.

And then with regard to the backlog in fabrication you mentioned you still have lower margin backlog in there.

When do you expect that to clear through and I'm sensing that kind of given the move in scrap prices and just generally speaking, that the mills may have to take another modest hit from that dislocation.

We would anticipate that to roll through during this third quarter and, of course, we set up reserves at 228 to offset any of those losses.

If pricing continues to go up, you're right then.

There will be, until such time as they're delivered, there could be another charge.

Okay, and I'm assuming that's the same situation that happened in Poland in the second quarter; correct?

Yes, that's exactly the situation Greg.

Is it more difficult in Poland to manage that than it is in the United States?

Yes, in the sense of the recycling industry isn't as well developed, it's not as sophisticated.

It still has a certain element of the wild west.

There's a large portion and it's not just the Polish market, scrap is pulled from Slovak, from Czech, from Germany, as well.

There's still, I will be kind to them and say entrepreneurs, others might recognize then as speculators in that market, and so it's a little bit more difficult and we don't control as much in terms of percentage flow as we do here in the United States.

We certainly are heading in that direction, but we don't have as much dominant position as we do here.

They are also heavily influenced by export markets, even exporting as far as Asia, in Poland, so there's more variables I would say in that market.

And then finally, perhaps with regard to the previous question regarding California, would you say that you're looking towards another micromill perhaps somewhere else in the United States and examining that seriously and does this tie in to the making available of more cash and investment capability to do that from the write-off, from the sale of the joist operation, I'm sorry.

Well in this environment we'll remain conservative, but that doesn't mean to say that we're not doing our homework and we're very pleased with that Arizona mill and the start up and also the acceptance in the marketplace, so yes, but it's too early to comment on that.

Thank you.

The next question comes from Wayne Atwell of Casimir Capital.

Good morning.

Good morning, Wayne.

Some of what I'm going to ask you has already been sort of touched on, but instead of asking about possible M&A activity involving you on the receiving side, how about consolidation?

Some of the stocks in the market haven't really been that strong and this might be a time to look outside for something that would fit in well with your business.

Any thoughts about your ambition in terms of making an outside acquisition?

Well, I think, following on the previous question, Wayne, I think it's just too early.

We want to be conservative.

We just got through our worst ever quarter.

The liquidity is very important to us and we will just see how the market develops over the next few months, but we think it would be more when Markets start to show consistent recovery patterns that you may or we maybe tempted to look seriously.

So for the foreseeable future next few months you're probably not going to be out there doing your due diligence and making an offer somewhere?

Right.

I mean maybe one or two isolated things, I'm not saying just here in the US, but for strategic reasons or other reasons, we may look at something but it's not top priority, that's for certain.

Okay, and then if we could just maybe go to the 40,000-foot level for a second and talk about scrap -- with the met coal pricing where it's at and with the iron ore prices where they're at and the fact the general market's grown and new scrap and old scrap really is not going to provide the same share as it has in the past, there is every reason to believe that scrap pricing over the next few years, three to five years, is quite strong compared to where it was in the past.

Would you agree with that?

I would agree with that.

I just recently came back, as you know I travel frequently to Asia, and there's still a lot of capacity even in this environment.

Admittedly, their recovery is happening faster and earlier than here in the US and Europe, and it's still a lot of the EIEF production going into Asia, various countries including countries like Vietnam.

Yes, scrap demand is going to remain strong, supply could be an issue with some markets around the world and we would agree with you, we would think that prices would tend to stay high.

Now, in terms of managing your business, I think that there's a high probability that's going to be the case.

I guess the volatility is going to be fairly high, so I guess if one weren't careful in running their business, you could have very strong pricing and that could end up being a problem instead of an advantage because you could get whip sought on your inventory and your pricing in the fab area and such, so am I right in assuming it's going to take a lot of skill in managing your business to avoid getting hurt with strong pricing and volatility -- volatile environment?

Yes, I think that's a good assumption.

You need to be more careful than in the past, but as Bill said earlier, we've got SAP now and we've got much better visibility than we've ever had from the fabrication through the mills back into recycling.

Just because we did things in the past, doesn't mean to say we'll do them in the future.

So we look at inventory in all areas in the supply chain and what makes more sense where we can reduce the volatility, we will do it and, fortunately, being vertically integrated, we have the means of doing it better than some that are not.

Okay, thank you.

(Operator Instructions).

The next question comes from Tim Hayes of Davenport.

Good morning.

Good morning, Tim.

Just some house cleaning items.

In the quarter, what were the start up costs at the Arizona mill?

Well actually, we don't consider it started up anymore.

They just had losses.

Very well, and the merchant bar premium?

Hang on a second.

I guess, 173, Tim.

Okay, and then lastly, on the job loss reserves, that $57 million, what segments are those going into?

Is there a couple that are bigger and what amount might that be?

Yes, there's undoubtedly there are ones.

Hang on.

The biggest adjustments, no surprise on the job losses, were in the fabrication operations in the United States, and, as I said, in the mills in the international, same thing price protection on grandfathered jobs.

Do you have the amount for fab, just to get an idea?

Yes, it was predominantly about 24, roughly.

Okay.

That's helpful.

Thank you.

Okay.

The next question is from Sanil Daptardar of Sentinal Investments.

Thanks, I think scrap prices are increasing on back (inaudible) which was not in the cycle.

Is the scrap supply not simply available in the marketplace or there is significant amount which is there, but scrap prices will continue to go higher on (inaudible) prices?

Sanil, good morning.

Definitely, the supply is down on what it was for two or three years ago and for obvious reasons, clearly, manufacturing is down so there's less scrap being generated from manufacturing in the US.

Demolition activities are down from two or three years ago, so there's less scrap from that source and the biggest source of scrap is obsolete and there's less obsolete from two or three years ago.

People hanging on to cars longer, not throwing out refrigerators and washing machines and getting new ones, etc., so in life scrap definitely is down in terms of supply and I think that situation will remain until such time as the US economy strongly recovers, so you're just not going to see the close you saw two or three years ago.

Does any kind of any news from, sorry, does that news from (inaudible) yesterday that they're looking for a 100% increase in demand of prices and China is disputing that --just haggling with that because of the big three are trying to corner the iron market, does it have an impact on the scrap prices and scrap prices will continue to go up.

Are your customers comfortable if you increase the prices on the surcharges to recur the scrap charges or are they not comfortable with the kind of surcharges you delivered in the past?

Well, if you look at the markets, the export markets were quite strong up until October-November period last year, but the more recent price increases are being caused by demand here in the US.

Now, the Asians are coming back again this month quite strongly on the last few weeks, so definitely, there's a strong correlation with iron ore prices, but our view is still that these prices are not going to go up forever.

There will be a correction and our view is around mid-year.

Good to hear that the demand is coming back in the US.

Do you have plans to increase the utilization rate to $0.94 in the forthcoming quarter?

Well we mentioned 67%.

That's rolling capacity.

Last year, fourth quarter was our best quarter for calendar 2009 and that was 68%, so fourth quarter we don't know but we hope will be in the seventies, so, yes, it is coming back slowly, but it's coming back.

Okay, thanks.

The next question is from Sal Tharani of Goldman Sachs.

Good morning, guys.

Hi, Sal.

I got on a little late so if anything was touched upon I apologize, but in Poland, how is the competitive landscape in terms of imports from Germany or so forth?

Is there a problem besides, obviously, the margin squeeze which is happening across the world?

Well, there was a real problem, the finished good prices were way too low and we're getting negative margins in the last quarter or two but that seems to be reversed and very strongly in the last few weeks, particularly, this month.

We know one of our competitors has got major export business and there's actually a temporary shortage of rebar, would you believe, in Poland at this point in time, but we think that will be resolved in the next few weeks.

But your prices have moved up sharply.

We've seen this before, Sal.

Poland is a funny market, almost like a spot market, it can move from one month to the other.

Some of their competitors have been pricing daily, rebar prices, for argument's sake, and we're doing it now twice a week.

We used to do it monthly, so there's quite a change there, but, as I mentioned earlier, the infrastructure work there is quite strong and it will get stronger this year over spring and summer and a little bit of a comeback in residential which is a good thing so we're quite positive.

In terms of competition from outside, we're not seeing a lot so far, and these big iron ore price increases in coal, the integrated guys and some can produce rebar like in the Czech Republic, they are going -- until scrap moves up more strongly -- are going to be at a competitive disadvantage, so we don't see that in the short-term.

Clearly, if rebar prices get too high in Poland, we've seen it before, imports will go back into that market and prices will stabilize, but hopefully in the next few weeks we'll continue to be positive.

Okay, and Murray, you just came from Asia.

How are you seeing things over there, with the physical presence in China also and in terms of on the ground any concerns about tightening, property markets, bubbles, people are talking about over there or how you saw this time when you went there?

Well, I think it's clearly speculation in major cities in China.

The Chinese, the banks at all levels land about 9 trillion RMV last year, but they're forecasted to reduce it to 7.5 trillion, which is still the second highest on record and clearly, the central government through monetary policies so far is trying to slow things up but they still want GDP growth rate of 9% to 10%, which is very healthy but eventually all sectors remain quite strong in China.

The white goods, automotive, obviously, infrastructure, construction is good, and will remain good;maybe things will come off the middle of this year, second half of this year, but it seems pretty firm and other parts of Asia are also strong, Singapore is growing in strength, even Vietnam has some short-term financial or currency issues, but they seem to be getting through that so our strong view is Asia lead by China, most countries, maybe not all, will be stronger this year than last year and the peak period is really now through until September.

We saw prices in China jump $30 to $50 a ton last week and steel prices, so it's a sharp increase, so things are still quite bullish in that part of the world.

Okay, and in the US, if you look at the lag issue, at the moment the price of rebar or merchant bar of what you're asking in the market, has it fully taken into account the current scrap price, whatever we have seen so far increase?

Yes, well the April prices which are effective the first of April, they will go past the scrap price increase so it's been a lag and a catch up so far.

Clearly, we don't know what April scrap prices are going to be but we think they will be firmer, but maybe $20 or $30 a ton, not $50 or $60 a ton.

Time will tell, because the US scrap prices out paced international prices and our international scrap prices are starting to catch up with the US prices, so April will be an interesting month.

Great.

Thank you very much.

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

Mr.

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

Okay, thanks very much.

In summary, clearly, we're very disappointed with our second quarter results.

Looking ahead, we see slowly improving market conditions and with a lower cost structure, we anticipate improving results.

Next week, Bill and I will be on our investor visits, and we'll be happy to take further questions during these visits.

Thank you for your attendance.

This concludes today's conference.

You may now disconnect your lines.