Commercial Metals Co (CMC) 2010 Q3 法說會逐字稿

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

At this time all participants are in listen only mode.

After managements 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, June 22, and your participation implies consent to our 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.

Hi, good morning and welcome to CMC's third quarter fiscal 2010 conference call.

With me is Bill Larson, our Chief Financial Officer, and as usual, I'll begin the call with an overview of the third quarter and then I'll ask Bill to provide further details.

Finally I'll comment on the outlook for our fourth quarter fiscal 2010 which ends on August 31.

In terms of an overview of the quarter, obviously was a much improved quarter.

The Spring construction season stimulated demand for scrap and steel products.

Ferrous scrap prices peaked in March, were stable in April before declining in May.

Steel prices such as rebar and merchants peaked in April and then started to decline in international markets during May, and they were stable here in the US during May.

Restocking occurred across the supply chain, but was largely over by the end of May, particularly in international markets.

The fallout from the Greek financial crisis impacted markets in Europe, in particular Southern Europe towards the end of the quarter.

As well, China's deliberate action on slowing its economy, in particular focusing on the speculative real estate markets caused a pause in other Asian markets.

By segment, our recycling operation returned its best profit result in seven quarters based on higher shipments, better prices and better margins.

US steel mills had a very good quarter with a rolling capacity utilization rate of 75%, which was higher than the 68% that we forecasted previously.

US Fabrication operations had a loss mainly due to a low priced backlog when faced with rising steel prices.

On a positive note, the backlog did expand during the quarter and had better prices as steel prices rose, with significant highway work including some stimulus project work being awarded.

Our International Mills had a loss overall, however Poland was profitable and our Mill in Croatia suffered from a low price backlog and rising scrap prices, as well as start up costs for the new melt shop.

Our marketing and distribution group had a very good quarter lead by our raw materials division CMC Cometals.

In addition we did well in Australia, Asia and in the European markets.

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

Thank you, Murray.

Good morning.

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

In addition, we've given guidance regarding our outlook for the fourth quarter of fiscal 2010 in our press release.

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

In accordance with Regulation G in the Securities and Exchange Commission, you are aware of non-GAAP financial measures.

Some of these derived fairly straightforward from our financial statements or in common business use can be the subject of our discussions today and our investor business, but there are other items outside of our ability for discussion, you may need to be patient with us if we defer comment and I would direct you to our website where there's additional information at cmc.com.

Well the tide turned for us in our third quarter.

It seems as if previous to March 1 all the news was bad or trending bad.

During this quarter the news was generally good or trending good.

Murray has noted some of these, I will mention some others, but I think we need to take all of this in context.

No one is going to start doing their Snoopy happy feet dance based on what transpired this quarter.

In some segments signs of recovery are fairly clear.

In others it's hard to repass the next month.

It's not terribly different than the French soccer team.

You don't know what's going to happen if and when they take the field.

We have been positioning CMC over the last six quarters to take advantage of the uneven economic recovery which is under way.

This includes making the operational base consistent with the demand in the market, and let's review some of those undertakings.

We exited the joist and deck business.

We have absorbed $54 million of charges, not counting normal operating results associated with this decision.

We have an active divestiture program under way and expect to have substantial wrap up by August 31.

Our SG&A is down $62 million from the nine months of last year.

We've made the difficult decisions to close locations and downsize our workforce.

We've cut discretionary spending including our incentive compensation with our SAP system rolled out to most of our substantial manufacturing locations.

We are reaping both the benefits of the system and the absence of implementation fees.

In addition to our ERP system, we have brought three significant CapEx programs into production.

Our Arizona micromill, our melt shop in Croatia, and our wire rod block in new flexible rolling mill in Poland.

A quick note on each of these.

Arizona is performing magnificently and is expected to reach full production by August.

Our melt shop in Croatia is casting quality round blooms and increasing its number of heats weekly.

The wire rod block in Poland has allowed us to roll higher quality niche products.

The new flexible mill is commissioning the back end and should be ready by the end of the fourth quarter.

All of this was accomplished without compromising the financial strength of CMC.

We continue to have one of the highest quality balance sheets in the industry, only 3.5% of our assets are represented by goodwill and intangibles.

We remain on LIFO accounting for inventory.

We have substantial bad debt reserves on top of credit insurance and letters of credit underlying our accounts receivable.

We met our covenant test at 5-31-2010 and believe that our fourth quarter will result in even stronger metrics.

This after getting waylaid by a large LIFO charge this quarter.

The trend in higher ferrous scrap prices earlier this calendar year has now flowed through to the other segments.

Only our domestic fab failed to show significant sales growth versus the third quarter of last year.

As Murray mentioned, they are working off a low value backlog.

We have discussed on other occasions the strategic value of our International Marketing Distribution segment, as well as its low cost, high return on capital business model.

As it has in past recoveries, it leads CMC identifying the markets of first opportunity, both for the quarter and year-to-date they are the clearest savings leader.

I will reiterate my life philosophy.

Live by LIFO, die by LIFO.

The larger expense numbers are why we ended up at the lower end of the earnings range that we had mentioned a few weeks back.

The LIFO reserve at May 31 is $266 million.

For the quarter, LIFO decreased net earnings $22 million or $0.20 per share versus last years, we had income of $29 million or $0.26 per share, and year-to-date for the nine months it's decreased net earnings $16 million or $0.14 per share, whereas last year we had income of $184 million or rather whopping $1.62.

Depreciation expense for the third quarter was right at $40 million.

That leaves it at $128 million for the year not counting $32 million almost $33 million of impairment charges we've taken on joist and deck.

I would anticipate that depreciation for the year will be about $170 million, not counting the impairment charges which if you tack them on in the end impairment charges are nothing more but accelerated depreciation, and that will give the non-cash charges for depreciation right at about $200 million.

We talked earlier on the second quarter call that we had instituted an interest rate swap.

This was effective on May 23 and lowered our interest expense for the quarter $2.1 million, because it wasn't effective for the entire quarter, I suspect the benefit in the third quarter will be higher, possibly $2.5 million or so for the fourth quarter.

I've already touched on the lower SG&A expense for the quarter.

The effects were pretty well evenly split between lower labor costs, professional services, bad debt and incentive compensation.

Finally some statistics.

Book value per share at May 31 is $10.71.

The earnings per share were calculated for the quarter on a diluted share count of 114.067 million, for year-to-date the count is 113.279 million, and the actual number of shares outstanding at May 31 was 114.291 million.

We spent about $22 million in capital expenditures for the third quarter.

Year-to-date that puts us at about 110.

Most likely, we will come in under $130 million for the fiscal year for capital expenditures.

Murray?

Thanks, Bill.

The outlook for the fourth quarter, we anticipate being marginally profitable in our fourth quarter.

We predicted on our previous quarter a price correction by mid 2010.

This happens starting late April, early May in international markets and it expanded to the US over May, June period.

It clearly starts with scrap and then flows through to steel products.

International scrap prices and many store products prices have retreated back to January, February 2010 price levels.

We anticipate prices to marginally trend lower until August when a modest rebound is likely to occur.

Some of the price volatility is seasonal with a slowdown in demand, however the uncertainties in the Euro zone, as I mentioned Greece plus others, China deliberately slowing its economy and the relatively strong US dollar adds to pricing pressure.

In the US, many sectors of the economy remain in a recession including private non-residential construction.

Other parts of the economy performing reasonably well, obviously there's been a tick up in automotive, aerospace, and the oil and gas industry, despite the BP spill.

We don't know what the outcome of that will be, but clearly onshore operations are still performing okay.

We have concerns with funding for the public sector, for non-residential construction.

Certainly once the stimulus dollars run out and before a new transportation that's a highway bill is approved hopefully in 2011.

Our restocking, as I mentioned, of most product segments is now over or largely over.

Infantries, however along the supply chain, remain relatively low.

China made the exception with infantries.

They do have higher infantry levels with iron ore.

It's about 77 million tons at the ports now and some steel products within China.

However, China, as you know, have announced over the weekend the gradual appreciation of the currency.

They did this in the 2005-2008 period and the appreciation then was roughly 5% per year.

We anticipate it will be similar going forward and clearly this will help the slowdown of steel exports from China.

Even more significantly, China announced overnight the removal of significant VAT tax rebates.

These were effectively export subsidies on key steel products such as hot roll coil plate and coal rolled coil to be effective July 15, and this will definitely slowdown steel exports from China in the short-term.

Just looking at by segment for the fourth quarter, our recycling segment, we forecast to be profitable but significantly below third quarter results based on we anticipate clearly lower prices and lower shipments of ferrous scrap, which will impact margins.

Non-ferrous scrap volume should be okay, but prices remain volatile.

International demand for ferrous scrap is unlikely to pick up in our view until August.

US domestic mill demand for ferrous scrap may be lower than the third quarter.

For our US Americas Mill segment, we anticipate a Summer performance to our third quarter with improving performance, as Bill mentioned, at Arizona micromill plus better metal margins.

This will be offset somewhat with overall lower shipments.

With our Fabrication segment here in the US, we anticipate another loss.

We're still working through low priced backlog which will be shipped out, most of that during the fourth quarter.

The International Mill segment, this segment could surprise the upside based on good shipments out of Poland plus improving metal margins.

Also, the operating losses at Sisak and Croatia are likely to decline with better shipments and better margins.

So we're hopeful that Croatia could be breakeven by August.

Our Marketing and Our Marketing and Distribution segment, we anticipate a good fourth quarter.

Clearly it will be not as good as the third quarter, but still will be a good quarter.

Prices for most steel products and certain raw materials have declined over the last one or two months.

Demand has certainly been impacted as customers take a wait and see approach to buy, and certainly as prices decline and many steel products customers will sit back and like to see if prices will move down further.

So maybe they will talk about the French soccer team, but maybe everyone is taking a pause at the moment to watch the soccer World Cup.

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

(Operator Instructions) Your first question comes from Kuni Chen at Banc of America Merrill Lynch.

Hi, it's actually Chris Brown filling in for Kuni.

Good morning.

Hi, Chris.

Good morning, Chris.

With other micromills getting funding from China, how does this impact your approach?

Is there a rush to get there first and then how far along are you in identifying other potential locations for micromills?

Well, we don't think because the location, Chris, it will impact us at all.

They are in Mississippi where that joint venture, which as I understand hasn't been finally approved as yet.

So what we realistically -- a micromill is a regional mill so in the US, it will have no impact, and we're still looking at areas, not just in the US but internationally for our second micromill that when we're ready to make an announcement about that we will.

And then China is currently producing at a 675 million pace.

Do you expect a slower pace going forward and do you think the slower pace will impact raw material prices and trade flows?

Yes, we do.

We think China's move is definitely to slowdown their economy overall.

As I mentioned the target, the real estate market but also the steel industry, they want to slow that down.

They want to consolidate the steel industry further and our view is they want to reduce the GDP from 10% to 11% pace, back to 8% or 9%.

So that will slow definitely the steel production, and then made announcements about new projects that they will not approve any new steel projects through the end of 2011.

So all those measures, I think will definitely slowdown the production capacity or new production capacity growth rate in China.

So China will slow from that point of view, but bear in mind, with a GDP of even 8% to 9%, that's really strong.

So the demand is still strong for many of their products and their infrastructure work remains strong within China.

Clearly it will have an overall effect on raw materials.

We'll see prices have moved down.

As I said we anticipated a correction around mid year this has happened.

We believe that there will be maybe a modest rebound in three or four months time, prices will start to move back up modestly.

Okay, great.

Good luck.

Thank you.

The next question comes from Chris Olin at Cleveland Research.

How are we doing?

Chris, good morning.

I just have a couple of small questions here, but to start with, I'm hearing the July scrap price, I'm not sure if you referred to this, could be down in the neighborhood of $40 a ton.

Does that sound realistic?

Yes, we anticipate at this stage maybe $20 to $40 a ton and it definitely seems to be trending lower.

And then on your comments about the Chinese iron ore inventory, I'm curious, how do you frame up that 77 million tons versus a normal level or how long will it take to work it down?

Do you have any thoughts on that?

Well, they can work that down fairly quickly.

A normal level is round about 70 million tons.

It has been lower, but just based on their demand within China.

So they could work that down pretty quickly.

The other measures within China to slow their economy down and it will take maybe two or three months to kick in.

China, as we've seen, unlike most countries around the world can take action, take it very quickly and can make, as you can see, a big difference certainly within a quarter.

We get a lot of good data points on the Dallas region or even Texas in terms of infrastructure spending in a number of projects going up.

I'm curious with your asset position, are you gaining share in that region?

Are you seeing a lot more demand in Texas?

Can you give me a little hope there?

Well, we can only speak for ourselves but yes, certainly Texas, I think, of all of the US states, and I speak with a Texas accent here so I'm pretty biased, is doing very well on the highway work and we've been awarded some good highway work in the last quarter and so that looks very promising.

So we have a good position in Texas and hopefully that will continue.

And then is there any change to the utilization rate as it is right now?

Did you refer to that yet?

We haven't.

We actually were surprised on the upside with that utilization rate on a rolling basis, but at 75% for the third quarter.

We think it will be down a little bit to maybe 69% or 70%, around that area for the fourth quarter.

A couple of reasons.

The restocking as I mentioned is basically over, a lot of customers in the third quarter were certainly restocking and in that March period where we're trying to beat the price increases so they're ordering more.

So that seems to have quieted down, and so, but even at 69%, 70% we will be quite happy with that and that doesn't include our Arizona mill at that rate.

All right, thanks a lot.

Keep working on that Texas accent.

Thank you.

The next question comes from Brian Yu at Citi.

Good morning.

Thank you.

Good morning, Brian.

Hi, Murray, hi, Bill.

A question regarding your fabrication business.

I think you mentioned that profit or losses there will narrow in the fourth quarter.

Can you give us a sense of when that operation might breakeven given what you're seeing in terms of backlog build and the type of contracts that you're winning these days?

Brian, it's Bill.

If the pricing trend continues as it has been, which is relatively stable for rebar fab in that there is a downward pressure in scrap prices, I would suspect that with the price into the backlog, they won't make it this quarter, although August, they might.

Let's set LIFO aside which should help them in a period of slightly declining prices, but setting LIFO aside, I would say that they probably set themselves up for September, October period of time to turn it around, barring any significant increase in pricing.

Okay, and then I just wanted to run through the guidance you gave out earlier to make sure I have it down right.

So in terms of sequential comparisons, at 4Q you're expecting Americas Recycling profits to be down sequentially, International Marketing and Distribution down, International Mills up, Fabrication up and then kind of Americas Mills essentially flat quarter on quarter?

That's a reasonable assumption.

And that's kind of FIFO versus FIFO, the way you'll add it all up and figure out the change between the third and the fourth is there won't be, at least we don't anticipate, $34 million worth of LIFO expense sitting in there.

So that will be the great equalizer.

Again, if pricing continues to trend flat to a little bit down, one would suspect LIFO is going to give you a rather benign answer.

Okay, and then you mentioned earlier that you expect July scrap price to be down $20 to $40.

From the demand you're seeing, can you differentiate between what type of pull you're seeing from the domestic builds versus International?

Is it mostly because International demand has died down and that's probably what's driving the prices?

That's correct.

The last couple of months, International demand has really fallen off.

So it has more to do with International demand than domestic demand.

So until Turkey and some of the Asian countries get back in the market in a significant way, prices will tend to go low.

So we think that will happen in July, but we think by August, certainly Turkey and some of these countries will have to start buying for the Fall period, so then we think it will start to reverse.

Okay, and then the last question and I'll get back in the queue.

With the domestic flat rolled mills, there's been some blast versus shutting down.

I'm wondering if you've seen any of the domestic related flat roll, whether it be recycling or maybe curtailing some of their scrap buys?

We really -- we supply some obviously prime grades of scrap, yet it's maybe it's seasonal but depending on which mill, but most of our scrap is -- we really supply to long products mills.

Okay, great.

Thanks.

Next question comes from Timna Tanners at UBS.

Hi, good morning.

Good morning.

Good morning.

Hi.

Just wanted to drill down a little bit and get some color from you if you could on non-residential construction and any color you have on what gives you conviction that we may be near a bottom and how to think about that going forward, what leading indicators you might look at?

It's pretty easy to sum up non-residential construction, it just doesn't exist.

What indicators we have and where the strength is clearly in the public sector, what commercial work there is has pretty much been confined to healthcare and to educational, but that would be higher educational building.

We're pretty much seeing the effects -- the better profitability is as much seasonal and the margin expansion with the lower ferrous scrap prices as it is any great upturn in the markets, but we don't see that the markets are going to get any lower than they are.

It's kind of hard to go below zero.

Timna, we think we're at the bottom, but we don't see any clear signs on the private side.

It's still very difficult for our customers, small companies and you would know better than us, getting funds from banks are very restricted.

We hear some cases where some builders have to get 100% of our new facility leased before they can get the funding.

This has almost come from one extreme to another.

So life is still very tough and I don't personally think it's going to change until maybe some time next year there will be starts of some recovery, but still very difficult on the private side.

Okay, it's helpful and consistent with what we're hearing.

I wanted to drill down a little on Europe and see -- I know the May quarter, I imagine, might have been a little early to see any impacts from the euro and its weakening, but I'm wondering if you could talk a little bit about anything you might have been seeing since then or any indication of any impact?

Europe seems to be now almost divided in two.

This is a generalization.

Southern Europe, obviously Greece, Italy, Spain, Portugal, those markets typically long products have been devastated, but Northern Europe seems to be performing better.

A lot of those countries, obviously Germany is a very big exporter of manufacturing heavy equipment, et cetera, cars, automotive, and certainly the weaker euro is helping them, but even in Northern Europe countries like Poland infrastructure is still quite strong and is strengthening over Summer.

So it's almost split in two.

Obviously the UK has got their problems in Ireland, but depends where you are in Europe, but clearly, the problems stemming from Greece will slow down growth in Europe overall, you would think for the next one or two years of the recovery.

We have gotten some inquiries as the dollar has strengthened against the [Isladi], and not only against the euro.

We have gotten some inquiries for export product out of Poland.

So with a stronger US dollar, it makes exports much more viable.

So don't know what that's going to translate into, but people are talking about it, Timna.

Got you, and last one for me was I don't know how much you can talk about the mention of a potential sale or divestiture of course, of your downstream assets, but do you know if the folks you might be talking to would run those assets or can you give us an idea of what might be shut there?

I don't know, you'll have to call them.

Yes.

So you can't comment on that?

Right.

Okay.

Thank you.

The next question comes from Wayne Atwell at Casimir Capital.

Thank you and good morning.

Good morning, Wayne.

Had a quick esoteric question for you.

We've seen quite a rise in the met coal and iron ore prices and what impact is that going to have on electric furnace shops?

Theoretically, obviously the competing iron input costs are going to be much higher than they would have been two, three, four years ago, but is that necessarily going to benefit your business model or is it going to be irrelevant?

One would assume prices would be higher, maybe you can tack on a higher margin.

Can you sort of talk to that issue?

In the US, we don't follow met coal prices that closely, but in the US, obviously we compete with other long product producers, electric [arcler] producers so that's scrap based.

So met coke and iron ore don't concern us in the US as much, but certainly in Europe, we've noticed the higher cost structure now for the integrated mills who produce long products like rebar and wire rod.

They definitely are at a disadvantage at this point in time and we're seeing, for instance in the Czech Republic where we have 11% shareholding in Trinecke Zelezarny, they've actually stopped their production of rebar and focused on higher quality long products.

So it is having an impact in Europe.

US, I don't know.

We're not exposed to that.

Well, in the US, I was thinking that obviously, Turkey and Asia and all over, they will tend to import scrap when it's attractive.

So they would tend to drive the scrap price up because they would be the competing iron content would be of course generated with met coal and iron ore.

So even though you're absolutely right, you wouldn't compete with people who used met coal and iron ore to produce steel here that you make, you would compete globally with those who do consume scrap, even for flat rolled or whatever.

Any thoughts on that or is that answer the same?

I think it's the same, Wayne.

I think it's interesting in China for argument sake.

China was a big importer of scrap last year mainly because the prices internationally were lower than prices in China.

Now that's reversed, but in China, they look at the correlation between pig iron prices and domestic scrap prices.

So they watch that pretty closely and if that gets you out of balance, they would import more scrap, but at the moment international scrap prices certainly from the US are higher, have been higher than China.

And then lastly, I realize you have a lot of different facilities, but what is your general operating rate?

It's good.

You have to kind of break it out.

I would tell you that if you look at our American Mills, those Mills that have an ability to run rebar are running much higher than the Mills that only run merchant.

So as a general distinction, the recyclers and the fabricators, I will tell you are probably running between 70% to 80% of their capacity, but understand that over this last two years it's not the same capacity that we had coming out of 2008.

We have shuttered some facilities.

We've downsized others, so those that are still operating are operating at relatively high levels, but there's not as many of them, Wayne.

And also Wayne, some operations have a one shift operation, or in the past we might have had two shifts and those people on the one shift are working flat out and it's quite a bit of overtime, particularly over the Summertime, so it's pretty difficult.

You really can't compare apples with apples in this environment.

How about Poland, Czech Republic and Croatia?

Croatia is in their melt shop running flat out.

They are trying to increase the number of heats that they melt every week.

They are also refining the chemistries and the blooms in order to hopefully, and this is not baked into the numbers, it would be a plus to be able to sell some of the blooms by the end of the fourth quarter.

Their backlog is building and so I would say Croatia is running at a relatively high level.

Poland, it's a little -- I've got to give you a little bit of color on this one.

They aren't running flat out, but they're running well because they are now targeting more niche products.

This wire rod block that we have is able to convert a product into a much higher engineered steel than the commodity steels that would come off our other mills.

So there, Wayne, they're picking their niches and so the volumes won't be as impressive knowing that they can roll X number of tons, but they are aiming at the higher value products.

So actually they are going to do better with less.

Okay, thank you.

Our next question comes from Sanil Daptardar at Sentinel Investments.

Thanks, good morning.

Good morning, Sanil.

You mentioned about the public works basically the construction money, the stimulus money may run out probably and then you'll have to wait until 2011 for bridge construction activity.

Now if that's the case, and private sector not rebounding, do [all lives] resume going into the fourth quarter and first quarter of fiscal 2011 might be coming sequentially lower than the third quarter.

Is that a right assumption?

Well, yes, it depends on the funding, but we have to be sure there will be some funding available for highway and bridge work going forward, but certainly the stimulus funding has been disappointed, for us anyway, we've seen it, a lot has gone on to what we would say light construction, asphalt paving that sort of thing, which is good for the oil companies, not so good for us.

But in terms of heavy construction, when I talk about heavy construction, bridge work and we are using concrete and rebar and structural steel, that has been disappointing and we think that will peter out, most of those projects, some time next year.

So definitely you need something behind that, so we would hope that there's a meaningful highway bill introduced some time in 2011.

Okay, what is your exposure to the aerospace oil and gas?

I believe automotive might be very negligible I think, but aerospace and oil and gas industry?

It's not large.

The one operation that would focus on that would be Sisak in Croatia with their line pipe and actually that's not setting aside the horrible publicity, and when you're here in Texas that hits right at home about the oil spill line pipe, which is predominantly their main product, is doing relatively well and lost in kind of the tragedy is the fact that natural gas continues to do well and the number of rigs that are drilling have increased.

So that's about it, Sanil, as far as energy is concerned.

Mainly our mill in Croatia.

Okay, great.

Thanks.

Our next question comes from William Florida, Advisory Research.

Hi, thank you.

I just wanted to -- you talked about capital expenditure this year was likely to end up at $130 million.

Could you break that down a bit and explain what that's going for?

Almost all of it, Bill, are the carryover projects that started last year.

It's the last of the spending on the melt shop in Croatia, on the long product mill in Poland and the wrap up on Arizona.

It's almost exclusively carryover projects.

And do you have kind of an ongoing maintenance level?

If you include Poland and Croatia, it's probably in the $75 million to $80 million range.

Okay, and this is just a term I had a question about.

You talk about the divestiture program.

That applies only to the joist and deck assets, am I correct on that?

Yes, that reference was just to theirs.

Okay, thanks a lot.

Yes.

(Operator Instructions) Our next question comes from Brent Thielman at DA Davidson.

Hi good morning, thanks for taking my questions.

Good morning.

Just on the recycling business, I guess with the pull back we're seeing in scrap prices, are you running into new difficulties in terms of securing material at lower prices and maybe can you just comment on the supply situation overall?

No, the flow is still pretty good.

Clearly as scrap prices drop, the flows will start to decline.

So there's no problem with flows, not like over the Winter period where we did have issues with flows, so the flow is fine, but it will, as I say, will reduce as prices decline.

Okay, and then I guess with the International Mills, I think you've talked before about obviously having fewer competitors.

Are you still continuing to see pricing accelerate there or are you starting to see some flattening out as well in those regions?

It's flattening out as well.

Scrap has moved down a lot more, so we expect say in Poland our metal margins this quarter to expand and be better.

Okay, and then I guess to that point just so I understand it and I appreciate the guidance on the domestic mills, but I guess with this pull back in scrap prices could we potentially see sequential improvement in domestic mill metal margins?

Yes, we anticipate that.

We think shipments may be a little bit lower this quarter than third quarter, but metal margins should be better.

So the shipments is the offset there?

Right.

Okay, thank you very much.

The next question comes from Leo Larkin at Standard & Poor's.

Good morning.

Could you give us guidance for CapEx and DD&A fiscal 2011?

Don't have CapEx yet.

We're right in the middle of that, so yes and no.

Not very good on CapEx.

DD&A's probably going to be in the 180 range as we have Poland and Croatia come on line all the way, plus a full year of Arizona.

So I would say you're going to be in the 180 to 185 range, Leo.

Okay just directionally, would CapEx at worst case be the same?

Oh, I think directionally you're going to see it in that somewhere between 150 to 200 range, something like that.

It was relatively modest this year because we've done a lot of stuff over these last three years and all we had to do was complete these other projects.

So I think it will be a little bit higher, but I don't think it's going to be a blowout year by any stretch.

Okay, any thoughts about the Australian mining tax, the chances of that passing or just what is your view of that and how is it going to unfold?

Well, I think it's a big political debate and a lot like the healthcare issues here in the US.

I think the labor gap from what I understand from my colleagues in Australia are under a lot of pressure.

So to reduce their tax or modify it, so that's going to be a big election item this year in Australia so it will be real interesting.

Personally I think it's crazy what they're doing.

Some form of tax here, but not on that magnitude of what they're doing.

So anyway that's a personal view and I was born in New Zealand so sometimes I can have a go at Australia.

All right, thanks.

The next question comes from Brian Yu at Citi.

In the press release on the International Market and Distribution there's a mention about still fighting contractual non-compliance issues, and I'm wondering if this is normal course of business or just carryover from the big price drops that we saw last year?

Yes, I think that was just a reference in comparing it to last year when they were fighting that.

I think that the magnitude of what we were experiencing last year is nowhere near what it is.

Now it's just the usual day in and day out disputes you have with customers and suppliers.

Okay, and in the iron ore markets, that looks like it's moving more towards a spot type.

I'm wondering if that impacts your International Distribution business at all and if so to what extent?

Well, we are in the iron ore business on a spot basis, but traditionally iron ore prices, even the old contract prices and the spot prices tended to merge and when there was a big gap or a big delta, obviously whether it was the spot price would change or generally speaking the last five years the contract prices moved up as you know.

So our view is probably iron ore prices are weakening and will continue to weaken for the next two or three months before turning around.

Okay, but now that markets moving a little bit more towards spot, is there a volume gain for you guys that you can probably participate greater in the market than what you've done in the past?

I think it will be much the same.

I think we're only a very small player in iron ore, so nothing much will change from that point of view.

Okay, thanks.

The next question comes from Sanil Daptardar at Sentinel Investments.

Thanks.

Sorry again.

You talked about the inventories restocking getting over and inventories probably I think have reason but still, there are still historically at low levels.

Would the distributors not continue restocking or what is going on in the space in that because the demand is not there.

They just don't want to restock, or prices are coming down, you are reading and opting read and watch approach in order to rebuild inventories?

Well, I think Sanil with a set of standards or end use customers are still very cautious and certainly not seeing international prices declining and some prices in the US coming off, so still that makes you even more cautious.

I mentioned customers in this environment sit back and wait and see and only buy what they really need to buy, so you're right.

The inventory levels across the supply chain still remain relatively low which is a positive clearly.

The customers are cautious and I don't see any big pick up in buying because prices are lower.

The reverse tends to happen and people will wait and wait until they think that they can get the very lowest price before buying or building any inventory.

So I think most people just remain cautious and obviously all of this negative news around the world with the BP spill here in the US and the Greece situation and anything negative spooks customers and you need probably one or two quarters of stability in the global economy before there's some level of confidence.

Sanil, I'd also add that given the utilization rates on mills that control merchants, there is no incentive for them to have to buy forward because they can still get delivery on a relatively short period of time and I don't know that the strength of the US dollar, which you would think if general economics works out, would attract imports in the United States.

I think following Murray's line of reasoning, these old boys are not going to go out there with a three to four month lead times and take plus higher quantities and possible price exposure in order to take advantage of possible imports.

So I think they're in a wait and see mode.

And how about the China's withdrawal of tax credits might help the steel prices of your business?

I think overall, yes.

I think towards the end of this calendar year, I think the actions that China has just taken or are about to take will be positive overall, because clearly, people worry about that huge production capacity that China has and they worry about any surge in exports out of China.

Well, clearly, we've said that for a long time as you know, Sanil, it's not in China's best interests to import higher cost iron ore and then export low value steel.

So we've always had the view that China, the Chinese government that is will take measures to curb their exports.

I'm not saying they will start exports all together, but they will slow them down significantly and probably focus mainly on the Asian market.

So I think that's going to be positive for the global steel industry, certainly towards the end of this calendar year.

So should one be thinking like your metal margin spreads might be expanding then in that case because if China is consolidating the steel sector and secondly they are going to reduce their exports or curbing exports, then the domestic prices might remain firm and then lower input costs like iron ore or scrap might help the metal margins?

Yes, I think that you could read that into it, but clearly, when there's a pick up in demand too and in end use markets to help.

So as we forecasted this fourth quarter, we think our metal margins will be slightly better overall.

Okay, good.

Thanks a lot.

Thanks.

At this time there appear to be no more questions.

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

Our Chief Operating Officer, Joe Alvarado, Bill, and I will be on investor visits for the rest of the week and we'll be happy to answer further questions during our visits.

In the meantime thank you for your attendance.

That does conclude today's conference.

Thank you for attending.

You may now disconnect.