Commercial Metals Co (CMC) 2010 Q4 法說會逐字稿

Hello, and welcome to today's Commercial Metals Company fourth 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 that this call is being recorded today, October 29, and your participation implies consent to our recording of 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, you may begin your call.

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

With me is Bill Larson, our Chief Financial Officer and Joe Alvarado, our Chief Operating Officer.

I will begin with the call with an overview of the fourth quarter and then ask Bill to provide further details.

Finally, I will comment on the outlook for our first quarter fiscal 2011.

Afterwards, Bill, Joe and I will be happy to answer any questions that you might have.

With reference to our fourth quarter fiscal 2010, overall, a modest profit, but it is certainly good to be in the black.

Ferrous scrap prices have trended down since April, reaching a bottom in July before recovering in August.

Rebar and merchant prices have also trended down during this period.

We mentioned in our June quarter that restocking in the US was largely over by late May.

This held true during our fourth quarter which impacted our US mills capacity utilization rates.

In the US, nonresidential construction continued to be very weak.

Public nonresidential construction in the US was good, but lacked impact from the stimulus package, unlike what has happened in China.

In Europe, markets were mixed with good results coming from many European markets north of the Alps.

In our case, Poland improved nicely over the quarter.

In Asia, China continued its strategies to slow down the economy from a 10%-plus growth rate.

The Chinese government clamped down on many energy intensive industries including many steel mills by cutting off power or severely restricting supply.

This had the immediate impact of lowering iron ore prices and increasing steel prices.

The rest of Asia continued on a steady growth trend.

Australia ,despite their elections, continue to grow steadily in most sectors.

Four out of our five segments were profitable during the quarter, namely recycling, Americas Mills, International Mills and market distribution.

Our Americas Fabrication segment continues -- or continued to make a significant loss.

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

Bill?

Thanks 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 in 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 will think will happen always happens.

In addition, we have given guidance regarding our outlook for the first quarter of fiscal 2011 in our press release.

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

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

Some of these are derived fairly straightforward from the financial statements, or our in common business use can be the subject of our discussion 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 as additional information at cmc.com.

There has been a significant turn in our prospects in Texas since early October.

Much as the recession has been a once in a career occurrence, this recovery has been equally dramatic.

I am referring, of course, to the Texas Rangers playing in the World Series.

I love our investors in the Bay Area, and I still do, even after the first two losses.

I always loved Willie Mays, Juan Marichal, sourdough bread.

Stan Raben was a huge Brooklyn Dodger fan.

But this is the home team with the Cowboys on the highway to hell, which -- by the way, that is a great song by AC/ DC.

I've got to get my antlers and claws up.

Hopefully, we can in the future speak of a metals business dramatic upturn, but for now the word is caution.

Financially, this means that is we will continue to hold a strong cash position.

At August 31 we had right at $400 million of cash and short-term investments.

As a reminder, our accounts receivable are largely credited, insured or backed by letters of credit.

Our inventories are on LIFO, our goodwill and intangibles are a small percentage of our assets.

We remain financially strong.

After three years of large capital expenditures in 2007, '08 and '09, we set a budget of $150 million in 2010 and spent about $125 million.

For fiscal 2011, we are again setting a targeted budget of $150 million, but we will be constantly monitoring the business case for each project.

Safety and environmental projects, though, will not be delayed.

There's a defensive scheme in basketball known as the box in one.

Four players hold down the paint, and one is a chaser.

Our fourth quarter results, as Murray mentioned, were like that.

Four of our segments, recycling, the America Mills and International Mills plus international market distributions stayed in the black paint and won the American fab was still chasing it.

Each of the four who made money had both higher sales and higher operating profit in the fourth quarter compared to the fourth quarter of last year, and the fabricators were the exact opposite.

Both their sales and operating profits were lower.

Our LIFO reserve at 8/31 was $230 million.

The effects of LIFO in fourth quarter increased net earnings $23 million or $0.20 per share, and last year's fourth quarter, it was about the same.

It really is a push in income of $24 million $0.21 per share.

But there's a dramatic difference in the year.

4/20/10 it increased, LIFO increased net earnings $7 million, or $0.07 per share versus last year, it was $208 million for $1.83 per share.

Depreciation and amortization for the fourth quarter was $40.5 million.

That then for the year ended up right at $169 million.

And in addition to that, there was also $35 million in non-cash impairment charges taken.

The expected appreciation for fiscal 2011 is about $179 million.

Half of our long-term debt floats on an interest rate swap, and the swap saved us during the fourth quarter $3.6 million.

SG&A for the fourth quarter went up about $32 million.

It is primarily associated with lower head count and the associated benefits of that go with labor.

Book value per share at 8/31 is $10.94.

For the fourth quarter, or average diluted shares were 114, 946, 453.

Year-to-date, the average diluted shares were 113, 524, 836, and the actual shares outstanding are 114, 325, 349.

Our capital expenditures in the fourth quarter were right at $18 million, and as I said, it ended the year at about 125, 127 to be exact.

As we look at fiscal 2011, the budget is plus or minus $150 million.

Our largest projects are going to be the carry-over in the final spending.

The micro mill in Arizona, the wire rod block in the new mill in Zawiercie, Poland and the rest of the Croatian melt shop.

New projects that we'll undertake will include new recycling equipment, some upgrades to our domestic mills and the remainder are kind of small upgrades in maintenance, capital expenditures.

We did not repurchase any stock in the fourth quarter or in the entire year.

Okay.

Thanks, Bill.

The outlook for our first quarter fiscal 2011, we are almost two months into the quarter, so the outlook is a little more predictable than usual.

We anticipate a black zero or breakeven outside LIFO considerations.

Clearly, as Bill mentioned, there's a lot of uncertainty, in particular here on the US leading up to the midterm elections next week.

As well, a seasonal slow down leading into the winter months will -- or should impact our results.

By segment, we anticipate CMC Recycling, Americas Recycling, that is the fair scrap prices there are trending up for November.

However, flows are slowing.

Non-ferrous scrap, in particular, copper remains strong.

And for this recycling segment, we anticipate it to be profitable, based on its lower cost structure.

The Americas Mills, we anticipate our US steel mills' capacity utilization rates overall to be slightly higher than they are fourth quarter fiscal 2010 as some seasonal restocking occurs.

Rebar prices are likely to remain relatively flat.

There could be a modest margin compression based higher scrap prices.

However, overall the US steel mill segment should be profitable.

Our Americas Fabrication segment, unfortunately, this segment will remain unprofitable.

While backlogs are relatively good, in particular, highway work, weak private sector demand, intense competition at margin squeeze will impact results.

The same seen on International Mills, our Polish operations are likely to continue their improved performance.

Our Croatian operations are likely to record losses, but reducing each month.

Overall, this segment is likely to be marginally profitable.

International marketing distribution, there is some seasonal slowdown in international markets leading to the winter.

However, overall, this segment should remain profitable.

We will now open up the conference for questions.

At this time we will now begin the question-and-answer session.

(Operator Instructions) We will pause momentarily to assemble our roster.

Our first question comes from Luke Folta from Longbow Research.

Please go ahead with your question.

The question I had here, firstly on your fabrication business.

You had guided to further weakness in results in the first quarter.

Can you just maybe talk a little bit more about what your backlogs are currently versus what they historically normally are?

And then just on the competitive environment, are metal spreads actually coming down in the first quarter?

Are we seeing sort of stability at low rates?

I will answer the first maybe and maybe Joe would like to answer the second part.

The backlogs are actually pretty constant.

They haven't dropped that much.

It depends -- that on overall depends on what region.

The east is probably -- has dropped some.

Central has remained the same, maybe a little bit stronger ,and the west about the same.

So overall, fairly constant.

Joe, do you want to talk about the margin pressures and --

We are expecting a bit of a squeeze on margins in the sense that scrap prices are starting to move.

But there isn't the strong demand for end use products.

So, as Murray commented, we do expect a little bit of a decline in metal margins, but not anything overwhelming.

Okay.

And secondly, your -- on the International marketing and distribution business, we had seen revenues increase there pretty meaningfully sequentially in the fiscal fourth quarter, While margins came down, LIFO doesn't seem to have been that big of an impact.

Can you give us a feel for what was happening there?

Yes.In the International marketing and distribution, we don't have LIFO except for the -- which we include in the segment now for our US steel import business.

So, the vast majority of that segment is on FIFO.

There's some seasonal slowdown there.

Our raw materials business continues very nicely, and we think that will continue, even through the winter months.

Clearly, the steel business and steel-related products are slowing down.

I just came back from Australia.

The economy there is tremendous.

There is a seasonal slowdown, ironically, going into summer.

The Aussies take three weeks off and go to the beach and drink beer all of those good things.

So, there a slowdown coming into December, January, and then they'll pick up again in February.

But it's interesting, in Australia, I have got 18% of their GDP is in projected infrastructure projects.

That's a huge amount of money that will be spent over the next three to five years and starting next year.

So, Australia is in good shape.

Europe marketing distribution, as I mentioned, north of the Alps, not too bad.

And our Asia business quite good.

A bit of a slowdown at this time of the year, but we think that will pick up early next calendar year.

If I could just ask one more, on your International Mills segments, startup costs in Croatia, looks like there's two components, some maintenance and also some start up costs in the LMF.

Can you just give us a sense of what those numbers, some sense of magnitude on what those numbers could look like over the next couple of quarters?

Thanks a lot.

Don't know about the next couple of quarters, but the maintenance costs are probably in the $2 million range, plus or minus.

We had a major outage, basically a refurbishment of one of the pipe mill lines, and then the capital costs are associated with the startup of the LMF, which is being commissioned as we speak.

Our next question comes from Timna Tanners from UBS.

Good morning.

Good morning, Timna.

Wanted to ask, just -- I did hear the detail by segment on the outlook, but for the overall view being breakeven without any LIFO impact, that would imply a nice sequential improvement from this last quarter, the fourth quarter, which was profitable, but with a significant LIFO contribution.

So what is the area of, if you could just take a step back, that's going to see the sequentially improvement?

Is it the mill business with better utilization?

Where is that coming from?

We would say probably the mills business here in the US, but also the international mills.

We think Poland could do quite well this quarter, despite Croatia making a loss.

There's where we would think the upside is, Timna.

Okay.

That's helpful.

And then just to take a step over to the balance sheet, I guess it is helpful to think about your strategy and keeping cash on the balance sheet and managing that.

But can you give us an idea about your conversations with the rating agencies?

Is there any risk to the investment grade rating?

Or how important is that to you at this point?

And given that your dividend is pretty high and the debt metrics aren't among the best in the group.

Thanks.

Don't be with them until next week.

Don't have anything to say.

So, how important is it for you to keep the investment grade ending?

Is that important to the international business, or how do you look at that?

It is better to be investment grade than not to be investment grade.

Okay, thank you.

Our next question comes from Sanil Daptardar from Sentinel Investments.

Thanks.

How do you view the stimulus spending?

Do you think that is coming to an end or what stages we might be in?

Well, we have got -- if you look at the McGraw-Hill Dodge data, only 36% has been spent -- I am talking construction now which is still related.

I think of the $700-odd billion stimulus package, about $135 billion was targeted and -- for construction.

And as I say, only about 36% has been spent as of October and 5%-odd has been put in and another 60% still to be spent.

So, we are halfway, if you like.

And we would think that next calendar year, hopefully it is accelerated.

I think these midterm elections should give the President and his team a good kick in the backside and start spending this money.

That's my personal view.

So, if there is some kind of acceleration probably, because still more than 50% is left, do you think that the not private sector, the non-spending probably, might be somewhat offset by interest spending on the public sector side and it can help your results?

We don't think the private sector can get any worse.

I think it is at the bottom.

So, anything on the public or any side benefits to the private will certainly help.

So, we just hope the US administration and whoever gets their act together.

A bit like China.

They did it in a quarter or two, and start to accelerate this process.

So, I think once these midterm elections are out of way, all of this, there should be a lot more clarity going forward.

Okay.

Going beyond the first quarter, when you look at the profitability, you are breakeven in the first quarter.

Should we assume that the profitability can improve sequentially in each of the quarters in fiscal 2011?

Well certainly, obviously, the winter quarters, historically our worst quarter.

It depends on how severe the winter is in Poland, but obviously, things slow down here.

Recycling with collections, et cetera.

But yes, I think February, March of next year, I just came back from the World Steel Association meeting in Japan earlier this month, and apart from the US and Japan, most markets -- and southern Europe is also in that category, are a bit more optimistic next year than this calendar year.

And certainly, the markets that we are in in Poland, Australia, Asia, et cetera I think you will see a steady improvement, hopefully here in the US we will see some form of recovery.

So yes, I think our third and fourth quarter fiscal year likely to be stronger than our third and fourth quarter this year that has just passed.

So, in that case, there's no risk to the dividends payments pay outs?

I'm sorry, Sanil?

There's no risk to --

There's no risk to the dividend pay outs?

You're going to leave the dividend where it is currently for the rest of the --

The dividends are declared each quarter, based upon how things look at that quarter.

So, I don't think any company is going to ever tell you that the dividends are absolutely guaranteed to any great extent.

I think much more than that.

I don't think any company is going to go out on a limb.

Okay.

Just last question on the scrap supply.

There was talk about scrap, the ferrous prices are moving up but flow is slowing down.

Can you talk qualitatively, is there enough scrap in the marketplace?

Or we should continue to see scrap prices moving higher because I think Valley, in their conference call, mentioned that iron ore market to be tight again in 2011, so probably there might be -- scrap prices might be moving on back of the iron ore prices?

Yes, the track iron ore prices.

You know pig iron comes from iron ore.

My humble view, and I'm often wrong, is obviously, we see ferrous scrap prices moving up in November.

It could come off in December, but I would bet my dollar, not your dollar, that scrap prices will move up early calendar year, seasonal factors kick into play.

So, China is on target for 3.5% new production capacity increase next year, and while that doesn't sound a great deal, compared with what they've been out, it's still 20 million to 25 million tons coming on board their economy.

They have got their new five year plan, which will be announced shortly.

It is refocusing more on the domestic economy.

But certainly, they have issues with congestion in their major cities.

They will be obviously encouraging more infrastructure in the hinterland and the outer provinces, subways, railway systems, et cetera.

So, China is going to continue to grow.

It will be down from 10% or 11%, this year, but 9% to 10% next year is still pretty strong.

And so the view on iron ore, obviously, as I say, it's related to scrap pricing.

I think I would be more bullish than pessimistic.

I think it will be -- we won't see the big increases we saw in the last year or two, but it should be a steady increase.

And I would think starting early next calendar year.

For scrap, that is.

Okay, thanks.

I'll -- thanks.

Our next question comes from Sal Tharani from Goldman Sachs.

Please go ahead with your question.

Good morning, Sal.

I wanted to ask you on the fabrication side, there were comments, you remember last year, we were making that the actual fabrication selling price in some cases were below the metal price itself.

It was so competitive.

And I see the -- your listed price of $778 for the average fab selling price, and the metal price is $636.

Is that enough spread to be positive?

Because I think the conversion cost is that.

Does that come with the conversion cost, or are you still losing money on everything you sell.

Yes, so that covers conversion costs.

It varies, obviously, by facility and size and scale and by the time of work that we are doing.

But there's room, and we would like to have a lot more margin than that.

But there is room in that to cover costs.

Got you.

So it is not a situation like last year where it was so desperate that sometimes it was selling below the metal costs or close to the metal cost?

That's not the case anymore .

Well, I wouldn't say entirely, Sal.

It's very intense in some markets.

It depends which -- like the east is very intense and particularly the west is very intense.

So, I think that pressure will be there for the next few months.

Okay.

And you mentioned the margin, modest margin decline in the US mills.

How does it look in Poland?

Was that just the same or you think it would be more flattish?

I think it will be more constant there, Sal.

I think the -- other than the winter seasonality that will be coming in, I think their prospects are a little bit better than ours here.

Okay.

And are you seeing -- I am sorry.

Also Sal, the new product mix is starting to kick in from the new flexible mill with higher margin products, particularly merchants and wire rod up the wire rod block.

So, that will have an impact, even going to the winter months, on a positive way.

Got you.

And are you seeing any -- I know that you mentioned comments about how well the economy is doing over there.

But any significant change in the construction activity from the expected -- that European football championship or something they're doing over there?

Yes, we think Poland is nicely placed.

We saw signs that over this last summer that, obviously, you've got the winter to face, but definitely, infrastructure is increasing there, and interestingly enough, even residential is starting to come back.

Modestly, admittedly, but we think that will pick up.

That's mainly apartments, but those apartments use steel.

So, we think 2011 calendar year will be a good year for Poland.

And lastly, on Croatia, once you are done with your changes over there and the new equipment you're putting, what would be the capacity of that plant in different product mix will be over there?

The product mix is going to be heavily dependent on selling of blooms as part of our overall strategy for Croatia.

And roughly or presently, we can -- we produce about 7,000 tons of tubular products.

We are ramping up on blooms and expect to fulfill the rest of the capacity.

We are targeting an overall capacity of about 300,000 tons.

The ultimate capacity is 500,000 running full out, but we are not expecting to be anywhere near that.

That's a capacity of more than steel, crude steel, is that correct?

That's correct.

Great, thank you very much.

Our next question comes from Evan Kurtz with Morgan Stanley.

Good morning.

Actually had a follow up on the -- on Croatia.

I know when we talked earlier in the year, you were targeting something like 150 euros to 200 euros per ton and savings once the melt shop was on.

You thought that Croatia might even be profitable by end of the summer.

Sounds like some of that is getting pushed out to the right at this point.

Just wanted to get an update where you are as far as cost targets and timing on that.

Those cost savings that you refer to are what we are anticipating.

Of course, until we get the melt shop up and running, and that includes ladle met station, it is hard to realize those benefits.

Some of the cost savings also comes from selling blooms and running at higher rates.

And of course, without the ladle met station, it is difficult to produce trials that would lead to regular commercial orders.

So, the ladle met station was to have been commissioned by the end of the summer.

We had some delays in equipment delivery.

Subsequent to installation, we started to ladle met production earlier this month, and it is progressing nicely.

So, I would expect it is going to take us another month or two to get up to a full measure of production and to start realizing some of those benefits.

Okay, great.

And just one more on scrap.

Not to beat a dead horse, but just your view on November scrap, do you have any granularity on primers as obsolete?

Not really.

We think -- we follow obsolete obviously more closely than prime.

In our view, obsolete is probably moving in the $20 a ton range, there's going to be a big jump.

Got it, okay.

Alright, thank you.

Our next question comes from Charles Bradford from Affiliated Research Group.

Hi, good morning.

Morning, Chuck.

Can you talk a bit about -- a bit more about rebar pricing?

Seeing market quotes in the neighborhood of 565.

That seems to be on the low side, what are you getting these days?

Which market, here in the US or international?

No, US.

US.

Well, we need be careful of that question for obvious reasons, but I'll answer it this way.

We see US prices, if you convert them to metric tons, being pretty similar to northern Europe prices, even parts of the Middle East.

The highest prices for rebar are still in China and the Asian countries, and obviously, Brazil is a special case.

Some markets have got incredible prices because they -- the way they are structured.

But the prices internationally, fairly similar to the US without adding freight.

So, except for some of those Asian countries.

What would be the spread be like with merchants these days?

The spread is about 100 and -- was it 64?

It has come down, Chuck, because obviously, merchant products have -- pricing has moved down more than -- more than rebound pricing.

You mentioned the forecast that the WSA had out for 2011 at 3.5% but also, 9% economic growth.

How do those two equate?

That would seem like a really low steel number if economic growth is 9%.

Yes, I think there's a few mixed things happening there, Chuck, depending on the products.

I think that the -- there's no doubt the Chinese had high inventories of flat products that took two or three months or more to get through.

Long products we see inventories relatively okay, but I think rebar production, et cetera, has definitely slowed down and probably flattish, if not declining slightly in China.

And some of that is the Chinese government's energy policy.

As you know they weren't meeting the five year energy plan, so they just cut off the power or severely restricted it to many industries including the steel industry, and a lot of small Chinese steel mills were effectively shut down and not many rebar producers.

So, that had an impact there.

But going forward, you follow it as closely as we do.

The automotive industry is extremely strong in China.

Cars and trucks and buses combined, they are the pace of 70 million units this is year and by 2015, they're planning between 23 million to 30 million.

So, there's still consumption.

Flat products is obviously going to continue to be strong.

And wide goods is strong, the [shipbuilding] is coming off of it.

And just isolated areas where they've dealt with that speculation real estate, I think fairly effectively.

But I think the Chinese are predicting next year 3.5%, as I mentioned earlier, production increase is probably realistic, even though the GDP will be around 9%.

And as you know, China has got excess capacity.

So, some of that unutilized capacity I would suggest will be starting to be used next year.

In the Arizona mill, how would you compare the cash operating cost, basically the conversion cost, to some of your other rebar plants.

Well Chuck, the Arizona mill really is still technically in start up.

We are still working through some issues there.

We are expecting savings clearly on energy costs because of the direct convert overall on gas, for example, but electricity rates are pretty high and particularly in the summertime.

So, we saw higher costs than we had anticipated from a melt shop perspective, but those will smooth as we get into the winter months.

So, our conversion costs are still above where we expect them to be.

Partly because of startup and partly because most recent data with the highest volume production is in the most expensive months.

But long term, it expect there to be some savings relative to conversion costs in conventional mills.

In certain aspects, not all aspects of the facility.

Thank you very much.

Our next question comes from James Adler with Paradigm Capital.

Hi, it is Tim Adler speaking.

Hi, Tim.

Hello.

First on Croatia.

Is the timetable, as I recall talking to you about this previously, still end of year, end of fiscal year for breakeven?

Yes, we would anticipate by the end of the year breakeven, correct.

And it was Croatia that I thought was going have EU membership by the end of the year, but would be able to ship tariff-free by the middle of the year?

That's correct, the middle of next fiscal year, yes, Croatia it is on line or on target to join the EU in January 2012.

So, six months earlier, we'll be able to ship in there.

But it really won't effect this fiscal year, it will be really into our fiscal year 2012 that we'll see that impact.

Okay.

Next question, just on the America margins, this is sort of a general education I suppose, but under what market conditions would you expect to see the selling prices exceed scrap costs so that your metal, you have got some expansion in metal margins?

Well, that's -- we would expect that normally.

Normally, scrap is first in the cycle.

As I mentioned earlier, there will be a little bit of pick up November, probably go down or stabilize December.

We would think early next calendar year, through scrap prices led international demand plus demand US mills will pick up earlier in the calendar year, and then rebar merchant prices follow a month or so later.

So, it takes a couple of months to pick up, so maybe the finished goods prices will go past and middle margins expand again by March, April period.

That's my best guess.

Okay.

Tim, there is a lot of other dynamics involved.

One, as Murray mentioned, the level of international demand.

If one would expect the Chinese to stay in the market, but if the Turks drop or the Koreans drop out and there's more scrap available here in the United States, and you have got a weak US dollar, which will not encourage imports into the United States, you may very well have the case where scrap prices will fall, but finished good prices may not.

So, that could lead to margin expansion.

Right, okay.

I think I got it.

Thank you very much.

That's it for me.

Thanks, Tim.

(Operator Instructions).

Our next question comes from Brent Thielman from DA Davidson.

Just wanted to get your perspective on Gerdau's purchase of Tamco and how you think that may or may not impact the competitive dynamics in the southwestern markets for you?

Well obviously, strategically, they don't have a mill in that part of the US, whereas their competitors, namely Nucor and ourselves, do.

So, that makes sense from their point of view, I would think..

The markets will clearly change.

As far as we're concerned, we'll continue to supply not only to our rebar fabrication shops, but independents as well.

So, there may be some opportunities for us that people, for whatever reason, prefer not to buy from Tamco.

Now, I don't know that.

Time will tell.

Okay, great.

Thank you.

Our next question cops from Gregory Macosko from Lord Abbott.

Yes, thank you.

Could you just go through, if you would, the SG&A line?

I know it was down year-over-year.

I don't have the sequential, but what's your expectation there, what's putting it at this current level?

The decreases are clearly tied to headcount reductions, Greg, and the associated benefits that, whether it is lower medical or profit sharing or 401(K) matches.

So, that is the number one and whatever compensation in terms of bonuses are concerned, that is 75% of the answer.

The rest of it is caught up in -- the largest single item after that was the lowering of bad debt expense last year.

We increased the reserve and took a charge in the $30 million, $35 million range, and that did not repeat this year.

And is it -- all things -- with increase in sales, et cetera, do you expect that line to rise again other than for incentives or whatever?

No.

Really, I think because of the implementation of SAP over the last three years and changes in processes that both that has incurred as well as others, that we are at a level now that we can grow fairly substantially without increasing the infrastructure of SG&A.

Okay.

And then finally, with regard to the fabrication operations, you have divested some obviously, what is your expectation there in terms of the levels of -- cost levels, and do you -- are you planning more restructuring there?

Are they at levels and are just waiting for demand to come back?

Yes, it's been mixed, Greg.

I think some areas of the US, we are happy where we are at.

Obviously, if you cut too much, you not only get rid of some of your very good people, but to start up again is very difficult.

So, you got to be very careful.

But some areas like the west, there has been some further consolidation, putting two fab shops onto one side fragment, say.

So, some of that is ongoing.

But I would think the bulk of it is done there unless we hit a double dip recession, but I don't think that's likely.

So, yes, we are waiting for recovery and we'll be cautious when that happens in terms of ramping up.

Okay.

Thank you very much.

And our next question comes from Sal Tharani from Goldman Sachs.

Thank you.

I am not sure if you have already touched upon it, but we had seen some uptick in ABI recently.

Where do you think it is coming from, what segment of the non residential construction you think is bringing that number above 50.

Sal, well, as you know, it has been all over the place.

It is nice that it's finally got over 50, but who knows what next month is going to bring.

So, we don't see any clear signs.

Clearly, if it remains above 50, I think for three or four months running, you will start to see a trend, but Joe, have you seen anything?

No, I agree with you, Murray.

It hit above 50 for the first time this past month in 24 months.

So, that's not a trend yet.

Okay, and lastly, the joist business you have divestitured, had that been with the company, you think your fab losses would have been worse?

If it remained with the Company?

Yes.

Yes, clearly we were losing money every month.

It would reduce the losses, but yes, definitely the losses, if you take that to one side, would have continued.

And as we said, we think that's the weakest sector in the non-residential market, and we think it will be one of the last to recover.

So, that was the main reason why we made that decision.

Okay, great, thank you very much.

And our final question comes from Timna Tanners from UBS.

Hi, just a quick one.

I saw that there's a sale to SIMs of your Australian recycling business, and I didn't hear you touch on it..

It was probably small, but just wondering if you can give some thoughts on that and any further potential divestitures?

Thank you.

Timna, that was extremely small, and we were between a rock and a hard place.

We had to invest a lot of money in that facility or walk away from it, so we basically decided to sell it.

So no, it was only one little recycling facility we had in Australia, and that was it.

The rest of our operations in Australia are doing very, very well, particularly our service centers and our steel trading business.

So, that was a small one-off.

Okay, and no other divestitures that you would contemplate or non-core items that you are looking at this time?

As the Company overall?

No, it is fair to say we are always looking, and you are always looking at underperforming units and how you make them better and how long they are likely to be in the current market environment.

Then yes, we constantly look, but we have nothing on the short-term horizon.

Okay.

Thanks again.

This concludes today's question-and-answer session.

At this time, I would like to turn the conference call back to Mr.

McClean for any final remarks.

I would just like to thank everyone for your attendance today, and I just want today comment that Joe, Bill and I will be on a visit-to-visit next week, and we will be happy to answer further questions during our visit.

So, thank you very much.

This concludes today's conference call.

We thank you for attending.

You may now disconnect your telephone lines.