Commercial Metals Co (CMC) 2011 Q1 法說會逐字稿

Hello, and welcome to today's Commercial Metals Company first quarter 2011 earning 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 today's conference call is being recorded today, December 21, and your participation implies consent to our recording of this call.

If you do not agree to these terms, please 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.

Good morning, and welcome to CMC's first quarter fiscal 2011 conference call.

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

I'll begin the call with a brief overview of the first quarter, and then ask Joe to comment on significant operational events, to be followed by Bill who will provide financial details.

Finally, I'll comment on the outlook for our second quarter of this fiscal year, after which Bill, Joe and I will be happy to answer any questions that you may have.

Overview of the first quarter, after a sluggish start to the quarter, momentum built as ferrous scrap prices rose in November.

In addition, we noticed a strong booking month in November for rebar merchants.

Some of this is pull forward demand in anticipation of higher steel prices in December and January.

Our backlogs, both at the mills and rebar fabrication have expanded since August.

In general, we saw a slight improvement in non-residential construction markets both here in US and in Poland.

Joe?

Our domestic mill's FIFO operating profits improved $19 million, or 65% in the first quarter compared to the fourth quarter, while our domestic fabrication operating profit declined $4 million, or 21%.

Our domestic recycling business operating profits also improved quarter on quarter $5.4 million, or 108%.

The net gain of $20 million in domestic operating results unfortunately was offset by International mills and fabrication results, which declined $18.3 million.

The decline was almost entirely attributable to our Croatian operations, as the Zawiercie mill in Poland was ahead of plan, and profitable in the first quarter.

In comparison to the prior year first quarter, domestic mills' FIFO operating results improved more significantly, $43.6 million, and recycling improved $11.7 million.

Domestic fabrication results, however, declined by $7.7 million in the same period.

International mills and fabrication performance improved by $12.8 million quarter on quarter, mostly due to improved performance of our Polish operations as previously noted.

Our marketing and distribution business continued posting strong results.

FIFO operating profits were $16 million higher in the first quarter compared to the fourth quarter, and $6.3 million or 40% higher compared to the prior year first quarter.

Prospectively, we anticipate second quarter operating rates to be near first quarter levels, and we are using the winter quarter to complete regularly scheduled annual maintenance work.

Thanks, Joe.

Bill?

Good morning, everyone.

Let me call to your attention the detailed Safe Harbor Statement included in the press release, and in our August 31, 2010, 10-K that in summary says that in spite of management's good faith current opinions on various forward looking matters, circumstances can change, and not everything that we think will happen always happens.

In addition, we've given guidance regarding our outlook for the second quarter of fiscal 2011 in our press release.

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

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

Some of these have derived fairly straightforward from our financial statements or our 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.

We had discussed a black zero at the end of the last quarter.

This was achieved net, but there is something to be gained by a bit more analysis.

Operationally, our focus, as Joe mentioned, is clearly on Croatia.

It is difficult to escape Croatia in the numbers.

As we are not assured of using their losses as offsets in the future, they are not tax benefited.

This has caused a rather extraordinary tax rate.

When you are near break-even, everything has an oversized effect.

Results, both LIFO and FIFO profit before tax were, as Joe mentioned, above our expectations, and particularly notable was the continuing outstanding performance in our marketing and distribution segment.

The LIFO reserve at the end of November stood at $236 million.

The LIFO effect for the quarter was to decrease net earnings $3.7 million, or $0.03 a share.

Last year it was income of $11.2 million, and $0.10 a share.

The depreciation for the first quarter was $40.643 million.

Before I had mentioned -- or I should say last quarter, I had mentioned that I thought depreciation for 2011 might be in the range of $175 million plus or minus.

It's probably now more in the range of $165 million, and it's down because we have sold our joist and deck operations, as well as our heavy forms business.

I would remind you that $500 million of our long-term debt is swapped to floating rates, and during the quarter, that swap saved us $3.3 million in interest expense.

SG&A costs dropped $9.6 million from quarter to quarter, first quarter to first quarter.

This is a result of our continued cost containment efforts.

The specific categories were lower professional fees, and lower headcount and the associated benefits with that.

The balance sheet remains strong, only 3.2% of our total assets are represented by goodwill or intangibles.

The current ratio is 2.1.

Our long-term debt remains investment grade.

The book value per share is $11.02.

In the first quarter, the average shares diluted were 115,223,693 shares.

That's 115,223,693 shares, and the actual shares outstanding were 114,375,664.

We spent $11.9 million in capital expenditures.

The budget for the year is $152 million, not terribly unlike fiscal 2010, and probably not terribly unlike fiscal 2010 where we spent only about $125 million.

We are being very cautious in our spending in the first six months of the year.

That's rather obvious from the $11.9 million of $152 million budget, and we will continue to monitor that very, very carefully.

And we did not purchase any stock during the quarter.

Finally, I would like to end with my sincerest hope for all of you for a happy and blessed new year.

Those of us from a Christian faith tradition, okay, this is a big week.

But regardless of where you currently stand, let us all keep faith that times will get better, and that we and our families remain healthy and strong in the coming days.

Murray?

Okay, thanks, Bill.

The outlook for the second quarter fiscal 2011, that's for us living in the northern hemisphere our winter quarter, December, January and February.

My Australian colleagues always complain, and remind you, that this time of the year, they're either drinking beer, watching cricket or on the beach.

Some do all three.

Anyway, the winter quarter is our weakest quarter historically, and we don't think there will be any difference this year.

Despite rising ferrous scrap and steel prices, it's basically volume related.

Volume is clearly lower, whether it's in the scrap operations or the steel mills, as construction slows down over winter.

And with the rising scrap prices, there's always the lag effect with finished good prices, which will create a temporary margin squeeze for the next couple of months.

But based on anticipated demand for the spring construction season, ferrous scrap prices are likely to increase again in January and February, followed by further steel price increases.

We commented in the press release that infantries across the supply chain are relatively low, and we anticipate a period of restocking in the first half of calendar 2011, similar to what happened this year.

Internationally, it's quite clear with contract iron ore prices up around 8% for Q1 calendar 2011, that ferrous scrap prices will continue to trend higher.

China appears to be successfully managing towards a slower GDP growth rate for 2011, and our view will be around 9%, down from 11%.

But there will be an increase in iron ore and scrap and steel prices, certainly in the first half of calendar 2011, and the Asian markets will follow the lead of China during this period.

In summary, at CMC, we'll be focusing short-term, as Bill and Joe mentioned, on CMC Sisak, that's our Croatian operations, to significantly improve their performance.

In addition, over coming months, we'll continue to improve our Arizona micro mill operations.

As well, we'll take advantage of favorable market conditions come the springtime in Poland through the combination of our additional roll in capacity in our new mill there, as well as offering the market a broader product mix.

Longer term, it's still our intention to generate 50% of our revenues from our international operations.

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

(Operator Instructions) Our first question comes from Timna Tanners from UBS.

Good morning, happy holidays as well to you all.

Thank you, good morning.

I just was hoping you could provide a little bit more color on what you're seeing in the scrap market for starters to understand the abrupt increases in prices that you're seeing there.

And if you could talk about how the process is going for passing that along with your -- to your customers, that would be helpful.

Well, I'll start and maybe Joe could add some more color.

We saw a similar situation last year, Timna.

It started last year in November -- well actually, late October, November period internationally, and then the US followed.

We were seeing good demand in international markets, but clearly here in the US.

And as I mentioned, inventory levels have been relatively low.

So, demand was reasonable, I would put it that way, over the last couple of months, so that had an impact.

And clearly, the flow was being tighter than we would have anticipated, and some of that is obviously psychology.

People will hold back on scrap because they think next month's price is going to be higher.

So, we saw the tick up in November and then obviously a big increase in December, and we would predict another increase in January.

Joe, do you want to add any?

That's good, thanks.

And you talked about how some of your demand in November seemed to be pull forward of expected higher prices.

Would we not have seen that in the inventory data?

Would that maybe lag a little bit?

I'm curious about that phenomenon.

Yes, that probably lags a little bit.

It's interesting, a lot of -- we don't -- of course, a lot of companies report the end of the calendar year, so they normally watch their inventories.

But -- I'm not saying they are not watching their inventories, but with prices moving fairly rapidly, it becomes more important to get ahead of the market.

So, we're seeing some pull forward in demand, but we really believe the first half of next calendar year is going to be stronger than the first half of this calendar year.

So, not just here in the US, but internationally.

And I didn't get clearly the sense that you have of construction markets, if you could talk about any early indicators you might have for the level of recovery you might see or hopefully see this year -- this coming year.

We think the mid-term elections, there's a lot of uncertainty leading up to that.

Seems to be more certainty, maybe it's psychological, I don't know.

But certainly with the tax situation being clarified, we are seeing customers now making decisions, things starting to happen.

Also, the stimulus package here in the US, we think there will be an acceleration in 2011 to get that spent.

So, a combination of things happening in the markets.

And we're seeing the Texas market here is generally quite good and has been good, as you know.

But even some markets in the east are recovering a little bit.

The west is the worst.

So, there's a little bit of improvement, and as I say, I think there's a bit of improvement in demand.

We made those comments, and I think the seasonal improvement starting probably around February next year will be more significant.

And then the last one for me, I guess you made this point a couple of times, Bill, that you remain investment grade rating.

But I was just curious, the covenant metric looks like, as you point out, it won't be as much as an issue going forward.

But if you look at debt to EBITDA or some of the other metrics that rating agencies tend to look at, it's obviously very high and ideally improving.

Can you give us any color on how those conversations are going or how you think the balance sheet looks from a rating agency perspective?

You're talking to the wrong guy.

You'll have to ask them, Timna.

Those conversations pretty much are in confidence.

And they publish reports, and I suspect that to their subscribers they would speak a little bit more, but I don't have anything to add.

Okay, great.

Thanks a lot, and happy holidays again.

Our next question is from Brian Yu from the Citi.

Good morning, and happy holidays.

A couple of questions.

First with the micro mills start up costs, and you stated that you absorbed about $11 million.

What -- do you have any outlook on what those start up costs are going to look like next quarter or how that improves going forward?

We're past the stage, I think of labeling the startup costs.

Last year, remember that we didn't roll our first bar until September, and when you're breaking in the mill and you're at very, very low tonnages going through the machinery, it's the most expensive rebar we'll ever make in that mill.

So, the characterization, I think is valid in startup costs.

At this stage though, that mill is fully functional.

And yes, we still have some fine tuning to do but realistically, it's rolling -- it's melting and rolling the way it's supposed to.

Yes, we could get a little bit better at it and God bless us, we could certainly use a better market.

But the results pretty much are what they are.

So I guess, Brian, what I'm saying is that whatever Arizona achieves, it's achieving because of the market that it's allowed to achieve and not because they're having disproportionate costs as on some learning curve.

I would tell you what the expectation though for the year for Arizona would be --

Essentially, we had originally planned on a learning curve that was going to be 18 to 24 months.

I would say we're ahead of that plan operationally, and we're hitting rated capability of the mill on a regular basis and sequencing through the mill.

But it's all about getting our daily operating costs down as opposed to any startup costs.

I can't think of anything significant that's still hanging there.

And then at Croatia, you talked about some of the problems you're having there.

For the last several quarters where you've disclosed melt versus roll versus shipment numbers, it seems like that ratio's deteriorated.

And could you just provide a little bit more color on what is happening there and what some of the actions are that you're doing to try to fix it.

Sure, Brian.

Let me take that.

First off, we did have an outage in one of our pipe mills.

A planned outage in September that effects the overall shipments of products from that facility and also added to our cost burden and that major maintenance project.

In addition, we had startup costs associated with the new ladle met station.

Recall that we had started the [furnace] back in the May time period, about when I joined, and ran without a ladle met station until we started commissioning and developing our sequence practicing -- sequence casting practices in October.

Again, delayed from what was supposed to be an August start.

So, we began the year behind the eight ball on the pipe mill and put ourselves behind the eight ball with a slow startup of the melt shop.

And as a result, as is noted in the commentary in the press release, we made some changes in Croatia to bolster management there and to improve and reduce costs and improve overall performance, including better standard operating practices.

So, we've got a team of individuals that have been assigned there to get us through the continued startup, and that work will continue throughout this quarter.

Okay.

And just for a clarification on my part, for the quarter, the press release said you melted 38,000 tons, rolled 19,000 tons and shipped 13,000.

The difference there, is that because of product rework, or is there material that's going into inventory?

There's some material that's going into inventory.

We also have a qualification process that we're going through on blooms.

So, we are melting products for trial testing.

That material has to be tested and released before we would ship additional product.

And then also with the pipe mill having been out of commission for the better part of the month in September, we ended up building a little bit of inventory there.

And again, we're trying to improve upon the operating practices of the facility and testing equipment.

So, some of that material will later be converted into pipe product or sold as bloom product.

Okay.

Thanks.

Our next question comes from Luke Folta from Longbow Research.

First question I have this morning is just on your -- how you guys look at LIFO expenses.

I forget, is it a full year expectation that's trued up quarterly, or is it taken on a quarter to quarter basis?

We square it up at the end of each quarter, Luke.

So, we do, to the extent possible, I don't want to leave you with the impression it's a full blown calculation, because that's just not practical in the closing period that we have.

But we go through as extensive a calculation as we can, and we book the entire answer.

Okay, so whatever you book this quarter is not indicative of what you expect in the future.

No, it's -- and your point is well taken.

Many, many years ago, and the methods are perfectly acceptable, the alternative, which is to estimate the year and divide it by four, then three and then two.

But what we found is that -- and you've heard me certainly confess that my ability to estimate LIFO is not one of my better traits, and you end up in the fourth quarter with some oddball answer that you didn't -- people keep asking me why did -- please explain this LIFO number.

So, we opted about four or five years ago just to book in the entire answer every quarter.

Secondly, you had noted that you're seeing some improvements in backlogs in your fab business.

Can you give us maybe some more color there on maybe the magnitude that you're seeing or just maybe your base case on what you think shipments to the construction sector could do this year?

Just trying to get a sense of what your base case expectations are for rebar in fab.

As Murray noted, there's been a slight degree of optimism in the order book, reflected in the order book.

It's really across the board.

So, some of it is the inventory build that Murray referred to or the replenishment of stocks.

But in the construction sector, overall market booking rates continue to be more oriented towards highway work for us.

Commercial work is more on a short lead time basis.

And so while we have our fair share of commercial work, the expectations of that getting much stronger in the short-term are not very great.

So, if anything, we seem to be benefiting from a little bit greater optimism and an order book that's a little bit stronger than we might have anticipated it to be.

And hence, the comment that our operating rates will be around the same level, slightly lower in the second quarter than the first quarter -- as compared to the first quarter, which is different than is traditional.

So, we've got a little bit of an improvement in the order book overall which has helped our backlog at this time, which is unusual at this time of the year.

Okay.

Just lastly, just in case Chuck forgets to ask.

Any thoughts on what electrode prices could be for 2011?

Thanks.

I should tell you I'll wait till Chuck to ask, but I'll look.

Actually, the -- we negotiate those contracts on a yearly basis, and they were already negotiated about two months ago.

And although for proprietary reasons I won't get into the exact numbers, I think it's essentially flattish.

Great, thanks.

Our next question comes from Mark Liinamaa from Morgan Stanley.

Yes, also on the rebar fab business, I believe since previous good times in that sector, there's been a fair amount of consolidation.

Can you comment at all how the business in general is set up when demand does come back to a suitable level?

Could you elaborate on that?

I'm not quite sure what your question is, how the business is set up.

Historically, it's been a fairly low margin business because of a lot of players.

It seems like there's been a little bit of consolidation.

Is that something you would agree with?

And is the business in general set up to maybe have a little bit better pricing power?

I won't get into pricing, but certainly there's been some consolidation of the industry throughout.

It would be hard for us to say that it's had much of an impact.

But there's certainly a large contingent of independent fabricators that are important customers of ours that don't have necessarily the same sort of mill support that mill owned fabricators might.

But it would be difficult to speculate on what it might look like in the future.

I would guess though, when you look at it strategically, Mark, that -- and if the supply chain were a perfect world, it's not, but if the supply chain were a perfect world where recycling only sold to our mills and our mills only sold to our rebar fabricators, it tends to be the only place that we touch the customer and therefore, it ends up being strategically very, very important.

I would add to that fundamentally, one of the issues in the business relates to the nature of our raw material cost and the structural pricing for long-term contractual business that doesn't tie out.

And that's something that's a business model we're addressing as best we can, which has more of an impact than the number of competitors, say.

Okay, thanks for that.

And maybe just on Croatia.

You talk a little bit -- the way I read it anyway is that the people there were set up to succeed and didn't.

Can you talk about why or how the new gang that you're bringing in there is going to be better positioned to put some good numbers on the board?

Thanks.

Yes, the issue that we face in Croatia was one of a lack of progress.

I believe we do everything we can to make people and prepare them to be successful.

We just weren't seeing the sort of progress that we had anticipated.

Recall that I mentioned the melt shop started up in May that was supposed to have started up in February of last year.

The ladle met station was supposed to have started up in August and didn't really didn't start up until the middle of October, and we were way behind in our casting.

We're also not completely -- we weren't completely satisfied with some of the process that we expected to make in selling tubular products in the various markets that we compete in, nor were we pleased with the cost structure and/or quality and some other fundamental management issues.

So, that's why the changes were made.

And the net result is that we've assigned individuals with a variety of operating experience in rolling mills and melt shops.

Quality systems logistics to help provide some guidance and some day-to-day oversight while we get the right people in place that we think can execute the plan more effectively on a daily basis.

How quickly would you expect to see them be able to kind of turn around the situation?

Our team landed there earlier this month, the first full week of this month, and they'll remain on assignment.

I would say that we'll have a better indication of what progress has been made and what can be made by the end of the second quarter.

Not that we would be prepared to talk in much detail about it, but that's something that we'll have a better sense for.

Great, thanks.

Good luck with turning it around.

Thank you.

Our next question comes from Chris Olin from Cleveland Research.

Hello.

Chris, good morning.

Good morning, Chris.

I got onto the call late, so I apologize if this was asked.

But you were talking about scrap prices moving higher from January and February -- into January and February.

Did you give any thoughts on the magnitude?

It seems like there's been talks that prices theoretically be up to $70 to $100 a ton.

Does that seem realistic?

No, we didn't give any magnitude.

But we think they could be significant, but maybe not to that -- those levels.

When you see prices now in Asia at $450, $460, and prices December here in the US $105 higher than this time last year, you can see what the increases are and are likely to be.

But clearly, the 8% increase in iron ore prices, contractor prices for Q1 of 2011 is underpinning scrap prices, and the spot iron ore prices are higher than the Q1 prices.

So, everything indicates that scrap prices will move higher.

But to the levels you talk about, I think that some are saying it's unlikely, but they will move, but I don't think to that degree.

So, maybe closer to a $50 type of number?

You pick it.

I wouldn't like to guess it at this stage.

Okay.

When you look at domestic drivers, if you had to look at it from a point of flows or export demand or incremental domestic demand, what is putting the greatest amount of, I guess, incremental stress in the marketplace right now?

Well, the big flows for -- I'm talking the scrap that we're mainly involved with are obsolete grades.

That's the biggest flow, and clearly in the winter time, that slows down.

The collections slow down.

The second biggest area is the industrial or scrap from manufacturing and then the third is demolition.

Well, that also slows down obviously at this time.

So, it does -- the winter has started early in the -- typically in the northern part of the US and in Europe, so it's definitely having quite an impact on scrap flows at this point in time.

Just lastly too on the fabrication business.

I know you said you didn't want to get into pricing, but the concern here when you look at this business versus your other business is you have scrap and rebar pricing, which has become far more volatile than last cycles, and you've got a fabrication business that may be slower moving in terms of the contract structure.

And I guess, is there anything we can do to help combat volatility, or is this a business that you think makes sense to be in over the long term?

Well, it makes sense for us to be in the fab business for the reasons that Bill mentioned earlier.

It's the only link that we have with the end user markets.

It helps to guide our mill operating and mill loads.

And what I was alluding to a little bit earlier, Chris, is the fact that there's a mismatch between, as I said, raw material prices and the long-term nature of contract pricing in a lot of the rebar fab business.

We're looking for solutions and have developed some alternatives that involves getting customers to make longer term commitments and understand that escalators are part of the business.

It's not the nature of the business to be priced that way, so there's some fundamental structural changes that are going on that will be a result, I think, of everyone seeing the same thing that we're seeing in this business that fundamentally, it doesn't make sense to match long-term selling prices with short-term raw material costs.

Okay.

I wish I could tell you that we have a silver bullet.

We don't just have it yet.

We're clearly looking at all forms of hedging, whether physical or financial, and there are some mechanisms out there and maybe a combination of these make sense going forward.

But as Joe said, fundamentally, the business model has to change some at some stage.

Thanks, guys, appreciate it.

Our next question comes from Sal Tharani from Goldman Sachs.

Good morning, guys.

Good morning, Sal.

What is the rebar price in the US right now approximately, and where was it at the bottom?

What would you be -- what the mills are quoting at the moment?

Well, what's being quoted and what's in the marketplace are a little bit different, but -- though we can give you an indication.

Joe, do you have something there?

Yes, compared to the same quarter a year ago, the first quarter a year ago, prices are up about $90, $95.

Kind of back to what we were talking about on scrap.

That's just a very general price on rebar.

And the scrap is up about same or a little bit more?

About the same.

Scrap itself would be in the range of about $75 to $80.

So, the -- once you realize this price, there might be some market expansion, once you realize the quoted price?

I think you know Sal, and this has been discussed on other calls, that we are able to buy unprocessed scrap at prices that are more favorable than the quoted benchmarks on these sort of things and therefore, we can take the processing profits in.

So, once we catch up, but you always have that lag, right?

But your point is well taken that in a consistent, and God bless us that we should ever get back to that, ferrous scrap market, the margins would increase.

If fab goes up $50, $60, $70, whatever, do you think the market will take another $50 increase in rebar prices or [merchant bar] prices?

Well, we believe so, because what alternatives are there?

Obviously, international prices are moving up quite strongly as well.

And with low inventory levels, we certainly want to make money, and we will push through prices.

And there just hasn't been, absent Mexico, a lot of imports.

We do understand that there is a Turkish shipment that may arrive in February but even that, it's, I think was it at 30,000 or 40,000 metric tons and pretty modest compared to the overall market.

So, your Dallas trading division is not seeing much opportunity, advertised opportunity of bringing rebar into the US?

No.

Not really.

That 40,000 tons is not us.

It's other traders, but they're taking a position.

Got you.

I'm going to just divert back to fabrication.

Obviously, that was one of the biggest impact -- or negative impact on the earnings we've been seeing consistently, and it's just that if you add back the LIFO benefit you had in there, the $1.9 million of sale, this was almost a $30 million loss.

And Joe, you alluded to that this business helps mills, and you're not the only one to do that, and all competitors do the same [if] they have with fabrication business.

Is this business important for everybody, because it helps to offset the mill load, and it's better to show better operating rate at the mill and have this business -- it continues to show.

And you're not the only one confessing a negative impact.

Everybody else is having it.

I just wondered what is the use of this business because when I talk to the fabricators, the conversion cost plus the metal cost, if you add that up is lower than -- is higher than what the selling price of the fabricated product is right now.

And this is going to get worse.

Is this something which is something you may want to divest more going forward?

Sal, the way I'd answer that question, to go back to the comment Bill made earlier about interacting with end users in markets and the fact that, as I stated, that this is a business model that doesn't work.

If we didn't have access to the end user markets, we've couldn't have conversations about why this market doesn't work and how, in order to be a long-term viable supplier, both in the mill as well as in the fab business, there's a business model that needs to be changed.

If we were to not have contact or sell only through distribution channels that would preclude us from talking to end users, we wouldn't have a chance with that dialog.

So, it's important on two accounts.

One is it does certainly help us with loading the mills, but it also helps us to address issues like this one that come up by talking directly with the consumers of those products who are also stuck with contracts, whether they're at the state or the federal level, that push them towards wanting to lock in for long-term pricing.

And so what we're doing is trying to address some of those fundamental needs of customers as well as their need for product and match that with our own business model.

So, it's important for that reason as well, so.

And last question.

Murray, you mentioned the backlog at fabrication in November was better than expected.

Do you expect that to continue?

Is that something which is a turning point in the non-res construction market, do you think?

It's a little bit early, Sal.

December looks quite good as well for future bookings.

But as was mentioned, I think the psychology changed a little bit after mid-term election, and we'll know early next year.

But there are certainly better pockets of activity, put it that way, than there was over the last few months.

So, I would say that next earnings call we'll be able to say is this trend continuing or was it just a bit of a blip and we just remain pretty flat with our backlog.

And, Sal, except for the first quarter of fiscal 2010, since the first quarter of 2000 -- well, the second quarter of 2009, there's been a steady improvement in the backlog.

So, it's something that's been building little by little over time.

Not spectacularly so, but a steady improvement.

Thank you.

Our next question comes from David Woodyatt from Keeley Asset Management.

Yes, with regard to the Croatian situation, what is your current understanding of the chances of Croatia joining the European Union and what the timing might be and how critical you think that is to getting that operation turned around?

Well, it's the -- in terms of the timing, it's flagged for January 2012.

But the three chapters that haven't been closed yet to our knowledge, and one involves corruption, and I think the EU is a lot more sensitive after issues in a couple of the other countries that joined the EU a few years ago.

So, that could be delayed a few months or 12 months.

We're not sure.

In terms of being critical for us, it's not on the bloom side, but it's on the pipe side where there's an anti-dumping duty of 29%.

So, that would go away once Croatia joins the EU.

In fact, we've got to wait six months before they join the EU.

And so that means would have access to the European markets for pipe, which would be relatively significant.

Joe, would you comment?

Murray's captured it quite well.

On the bloom side, there are no issues for us to sell product throughout Europe on the pipe side.

It's important to help us improve our margin and focus on what's a more natural market for the Croatian facility.

We're entirely too independent on export from that facility at this point.

Okay, thank you.

Our next question comes from Brent Thielman from DA Davidson.

Hi, good morning.

Good morning, Brent.

Yes, just on the international marketing and distribution segment.

Obviously, it continues to be a solid contributor to the bottom line.

Can you just give any color on any near-term seasonality which is expected there, just given all of the different geographies that are associated with that?

There will be a bit of a slowdown this quarter.

I mentioned Australia, zero operations while they have their summer holidays down there.

A quieter Asia in general, is a little bit quieter.

Leading up to Chinese new year, which is early this year.

It's the first week of February.

We would expect their third quarter -- or our third quarter results to be better than the second quarter for marketing and distribution.

In Europe, it's a bit mixed.

Once again, a lot of that is seasonal, and activities pick up definitely around February, March period.

And here in the US where the raw materials business, it's pretty constant, and it depends on the product there.

A lot of their products are doing quite well.

So, in summary, we would expect probably the second quarter results to be down and then pick up again in the third quarter.

Okay, that's great.

And just a point of clarification, I guess, on the fabrication segment.

But you did indicate you started to see some better pricing there maybe in that segment.

Are you still expecting to see the losses widen in Q2 versus Q1?

No.

Okay, great.

We would expect them to shrink.

Okay, great.

Thank you, happy holidays.

Happy holidays, thank you.

Our next question is from Sanil Daptardar from Sentinel Investments.

Thanks.

Murray, you talked about slight improvement in the non-residential construction market.

Do you think that is sustainable?

It's hard to say.

I think, as Joe mentioned, when we're looking at our backlogs, rebar fabrication, just a slow, steady trend of improvement.

Nothing spectacular.

As I said earlier, we just anticipate more money to be spent based on what has to be spent on the stimulus package, and we just anticipate a little bit better in commercial work coming slightly better, nothing great.

So, we think spring and summer here in the US is definitely going to be better than this year.

How much better?

It's a bit early to say.

And this improvement, is there -- this improvement is because of the improved credit ability, or it's like some finances being provided by the government?

Well, I think it's a combination of both.

Definitely finances from the government obviously, but I think a slight easing with the banks too.

We certainly see that internationally with credit insurance.

It's a bit easier to get credit insurance now on customers than it was even six months ago.

A little bit, but nothing spectacular.

Joe, you've got any comments?

On the service center side, given the end prices rising so fast, do you think that the service centers are getting compelled to restock more than what they did last year in the first half of calendar 2010 versus what they would be doing here?

Or you think that --

We obviously supply the service centers with some of our products -- is that a little bit more optimistic?

Their customers they sell to.

So I think so.

I think they will probably build their inventories.

Not spectacularly, but they will build, certainly starting now, but certainly into early calendar 2011 and just see how the market develops.

So, yes, I think there should be an improvement.

Joe, have you seen any --

Sanil, I would add to that the rate of the price increases as compared to their inventory levels, as well as prospective year-end tax issues that they may be facing on inventory have compelled them to think that it's worth putting material on the ground.

So, that's helped the order book a little bit.

But also, I would say a fair share of improved optimism that would allow them to do that as opposed to lead times jumping up democratically, because that has not been the case.

So, those are business decisions that they're making that are supportive of the order book.

One other thing I'd add is we've got very low inventory levels at our mills and service center's been drawing inventory from not just our mills, other mills too, I guess.

So, they have to make sure they got the sizes they need, the products they need for their customers.

So, that encourages service centers to buy a little bit more.

So, I think they'll be watching it very closely the next two or three months to see where prices are going to go.

And as we mentioned, our view is prices are going to move right through to probably February period before there's a force.

Just help me understand, since you're looking for improved conditions here, why expect a small loss for the second quarter?

Is there something which is there that is contributing to that loss?

It's the lag effect when you think of it.

If you look at our five segments, recycling will be profitable, but will be down because the volumes will be down.

As we mentioned, you don't collect and process as much scrap over winter.

You look at our US mills, they'll be profitable too.

They'll have a bit of a margin squeeze with the scrap price increases going through.

You look at our fabrication segment.

Obviously, they're going to make a loss.

As Bill said, we anticipate a lower loss than first quarter.

You look at international mills, clearly, we're still going to make losses there at Sisak and Poland because it's already a tough winter in December there.

So, that segment will make a loss.

And then M&D, their results are likely to be lower than Q1.

So if you add all of those things up, that's why we may be conservative, but we're just banking on a tough winter.

Joe, do you want to comment?

There is one other thing I would add to that Sanil, we -- and I mentioned this in my comments, in the winter quarter we'll spend at a higher rate than we might otherwise spend on major maintenance activities.

We've been doing that throughout the Company in Europe as well as in the States.

And so with the holiday shut downs, opportunities for doing major maintenance allow us to get that done so that we're prepared for any pickup of activity in the spring.

So, that's a pretty common phenomena that our spend pattern will be generally higher in the second fiscal quarter.

Okay, and in Croatia, in what timeframe do you think that you might breakeven with the change of the people there now?

Well, as Joe said, we should have a reasonable indication by the end of the second quarter but by the end of the third quarter, we would know pretty well where we're at.

It's too early to say when we're going to hit breakeven.

We've just be disappointed.

I think that's fair to say.

So, we're now putting, like we did in Arizona, putting our best people in the melt shop, MLS, caster, et cetera, and really look at that operation from top to bottom to turn it around.

Okay, well, thanks.

Happy holidays to you all.

Thanks.

Happy holidays to you.

Thank you.

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

Good morning.

A couple of questions.

Hi, Chuck.

Hi, and I'm not going to ask about electrodes.

(Laughter) Bill was waiting for you.

Yes, I know.

How about a little bit of enlightenment on the current pipe and tube business?

I know you don't do any of that in the US, but there is a market for Croatia.

And since you have some experience in some trading, what we've been seeing is prices coming down.

Is that pretty much in line with what you're seeing as well?

Chuck, you know the pipe and tube market is always an up and down market and the state is highly driven by drilling activity.

And we participate in this market both with line pipe as well as a little bit of OTCG.

So, in responding to your question about pricing, it bounces all the time, and there has been a slight turn downward recently, and that's consistent with what is happening on the energy front from a drilling perspective.

But overall, we ship product to not only North America, but to the Middle East.

Those markets have been stable overall.

I wouldn't say that there's been a huge or significant deterioration.

It's been fairly flat.

But as you know, from month to month and quarter to quarter, it can bounce pretty substantially.

On the flat rolled side, your marketing people are pretty knowledgeable about that market worldwide, even though you may not make any of it.

What are they seeing at this point?

Obviously, been hearing about pretty massive price increase announcements.

Is the product actually being sold at anywheres near these price levels, or is a lot of this geared more to impact the CRU index on the contract business?

[Where are you getting a foothold?]

(Laughter) Chuck, it's fair to say we do trade on those products, but many of our customers, rightly or wrongly, are fairly cautious at this point in time.

I don't -- Joe, have you anything further?

Chuck, whenever prices spike like this dramatically, you see interesting reactions.

I read in the paper and only read in the paper this morning about one international player committing to whole prices through March.

Maybe because prices are jumping too quickly.

And while we trade in flat products, kind of around the globe, it's more concentrated in southeast Asia and hence the optimism -- or the conservativism that Murray alluded to.

It's a bit of a wait and see, and we haven't seen as broad a reaction as there has been in the States, which I think -- now, this is just me speaking, is more capacity driven.

Partly demand, but also availability on account of blast furnaces and their ready status to start or not start.

I think, Chuck, the key will be around Chinese new year, late January, early February is the Chinese new year period.

So, probably mid February to late February, you'll see a market trend, and customers believe these prices are going to stick or not.

So, we just see quite a bit of caution, particularly in the Asia markets at this time.

We had heard that one of the domestic mini mills got themselves in a short squeeze on scrap, and that's been pushing the whole thing up.

We don't know about that.

Okay, thank you very much.

Thanks, Chuck.

Our next question comes from Barry Vogel from Barry Vogel & Associates.

Good morning, gentlemen.

Good morning, Barry.

Murray, first question for you.

And I know that many questions have been asked about Sisak.

Obviously, investors are concerned about these losses which have been consistent for the last few years.

What if it doesn't improve?

Do you have a game plan if it doesn't improve?

Well clearly, Barry, yes.

We have contingency plans if it doesn't improve.

We don't think we can get the returns that we would like to get long-term.

Yes, there's different things we can do.

So, definitely.

And we'll be focused on that for the next few months.

And I have a question for Joe.

Could you tell us the capacity utilization for your domestic steel mills in the first quarter?

Yes, 72% I believe is the overall capacity utilization that we had.

I have that figure here, hang on a second.

72, Bill?

Yes.

Okay, and as far as the Arizona mill, can you give us some idea of what the operating profits or loss was in the first quarter and your best guess about the results for the year versus last year?

We'll definitely do better than last year, Barry, and I'm offended that you didn't ask me the first question, but that's okay.

I've got to give Joe some questions.

(Laughter) Yes, and I would say we would hope to be cash flow positive.

But you know on brand new large capital-intensive operations, the depreciation expense is going to be very hard to overcome, given the market that we have out in the West.

All right, so what you're saying is you're going to lose money this year?

I didn't say that.

Are you going to lose money in the Arizona mill this year?

Barry, we don't disclose that individual -- I've given the best answer I could.

Go ahead and ask Joe the same question, you like him better (laughter).

I have a couple of questions for you, Bill.

I didn't see tax refunds receivable in the balance sheet, and I think that I wrote down in my notes that there's some big tax refunds coming this year.

Yes.

Can you give me some color on that?

I can give you a lot of color on that, Barry.

It's in other current assets, and it's north of $100 million.

Other current assets.

And you expect to receive it this year?

I would say within the next three months, give or take.

Okay.

And as far as your -- the line item write-down of inventories, I hadn't noticed that before as a line item, and it says here you had a $3.8 million write-down in inventories in the first quarter versus 13 last year.

Is that over with in your opinion?

Which segment are you pulling that from, Barry?

That was on the balance sheet for the cash flow statement.

Under the words write --

Oh, yes, yes, yes.

That's just the lower cost of market adjustments that you're going to see, and that's mainly predominant in Croatia where our costs are higher than the finished goods selling prices.

Okay, so would you expect that situation to continue for the rest of the year?

Well, I think that's the part that we've been addressing.

I would certainly say that in the near-term, it's going to be.

Barry, I would add to that that one of the principal charges of the people that we send over there is to address our costs.

And sequence casting, for example, on the caster has tremendous implications for overall manufacturing costs of any product, obviously.

And we're just getting into that and seeing the benefits of it, but it has the potential to reduce our total operating costs significantly, and that's why those people are there.

So, it depends then, the other side of the equation is what happens with pricing, which is the question Chuck was asking about tubular products.

And we're generally positive about tubular products and don't expect any wild swings.

Just the typical up and down throughout the course of the year.

We're still very bullish about the energy markets.

Thank you very much.

Thanks, Barry.

(Operator Instructions) And our next question comes from Michelle Applebaum from SMI.

Hello?

Hello, Michelle.

Can you hear me?

Yes.

Hi, sorry, I'm in a hotel room with a weird phone.

Hi.

Nice performance at the domestic mills this quarter.

I wanted to ask you, there's so much conversation about whether or not you can pass through higher scrap costs, but I thought I would ask the question a different way.

Can you tell me in the history of the long product business, how many months have you ever gone where you have, in a row, where you have not passed that?

So, in other words, how bad has the lag been historically for longs?

Well, I can remember back in 1943, we really had a -- no, Michelle.

You can't see me smiling, but I am smiling, because I expected that from you, Bill, and I should have asked it a different way.

You just couldn't resist.

I know, I know.

Realistically, in normal market situations, if you consider what the mills have in terms of a backlog, and that may run 45 days, and then the fact that our price increases generally don't take effect until the beginning of the next month.

So, you're usually 60 days minimum, Michelle, before the first product that you can roll and will be shipped under a new pricing contract.

So, I generally would give the guidance that it takes about 60 days or so to see the first, and it takes an entire quarter to realize the new prices.

And then of course, every time, and you know at least as well as I do if not better, the volatility these prices have had over this past year, the 60 to 90 days, it starts over again at the beginning of each month.

And so I've had a hell a time trying to explain average selling prices, because it's one-third from September's increase, and then you had October's decrease and then 40% of November's increase.

But generally, I would say in our experience it takes 60 days to see the first prices roll through and 90 to get the entire price into the product mix.

Okay.

That's an answer to the question of how long does it take for a price increase to hit your P&L.

My question was, and I'm sorry if it wasn't clear, my question was how, historically speaking, for how long have you ever seen the spot steel price for longs not follow the scrap price?

It's never historically been more than may be a month or maybe two in terms of the posted price.

Not how long it hits the P&L.

I understand you have to sell the steel and it goes through the income statement.

But has it ever been more than a month or two where the long product price hasn't followed the scrap price?

In a simple answer, no.

Okay, I'm looking for the simple answer because I see a lot of people spinning their wheels saying whether or not the steel price on the long product side will follow the scrap price.

And historically speaking, it never has not followed it for more than a month, or has it been as much as two ever?

I would agree with Murray, but I would caveat that that's a domestic answer.

We certainly have seen in Poland where scrap prices have gone up, finished goods prices have gone down, vice-versa.

We've gotten every pair mutation.

And I know you were asking domestic, but I just want to clarify that the markets are a little different overseas.

In Poland, how long has it been where scrap prices have gone up and steel prices have gone down?

Sometimes it's -- we spent a good part of last year in that mode.

Sometimes it's three and four months at a time, Michelle.

Okay.

And in terms of global price trends in general, how many months has it ever been?

That I haven't calculated.

Okay.

Because if you go back and look at posted prices, globally and domestically, they typically respond within a month, and I've never seen anything in terms of posted spot prices more than two months.

So that --

You get mucked up here on a global basis by the fact that the integrated are out there in such a huge proportion, especially in China, that now you have to have the conversation about iron ore and not just scrap, and there the whole thing just kind of collapses on all the information you would have to have.

And Michelle, I think that's one of the reasons why Nucor bought their scrap surcharge and adjusted their prices monthly either up or down or flat.

So, I think that's been going on now for what, four or five years?

I think people react much faster than they used to, and you have to in this environment.

In the old days, a $10 a ton scrap price increases being a big thing are over.

They can move $20 to $30 to $40 to $50 a ton, as you know, in a month.

So, you have to react quickly with your finished good pricing.

Right, and since the surcharges, I think the correlation between scrap and sheet has gone to 80%, and I think it was 40% before that, and I think longs have gone from 80% to 90%.

So, even the long product side in the United States, which is already virtually -- it was 100% scrap set steel, the surcharge actually did improve that relationship, which I wouldn't have actually expected that given how tight the relationship was before '03 when the surcharge started.

The other question is, you were talking about -- on the one hand you were saying that the current environment has had buyers, distributors and what not prebuying ahead of price increases, and then you were saying that you expected to see first quarter inventory build ahead of the spring demand.

And I was wondering -- I was actually really wondering if you had a press release written a week ago and then you changed some things because things got so different in the last week, or if you could otherwise explain -- it almost seems inconsistent, like may be the prebuy you -- inventory building you would have expected in the first quarter is actually -- all happened in the last week.

Can you reconcile those two things?

Well there was some pull forward, yes.

Yes, Michelle.

When we talk about inventory build, we're referring more to what is going on in the merchant business through distributors, whereas the spring improvement is strictly a rebar of phenomena that we're talking about.

And there might be some additional inventory build in second quarter or what would be the second calendar quarter.

But those are two different things.

A little bit stronger rebar market for construction is seasonal, and we would anticipate that.

And that goes direct.

A little bit -- yes, that goes direct.

And the merchant is what goes through the distributors.

And you take for granted that we all remember that when we read your press release.

Okay, well, we'll be clearer.

No, no, it's funny because now I'm thinking, oh, that was obvious, but I didn't think -- I honestly didn't -- it didn't occur to me.

So it's a product --

Michelle, you are right.

We -- if you asked us three weeks ago about scrap pricing, our view would have been different.

The magnitude we said in our press release there was -- it did surprise us how strong it was because you have both international markets and the US mills coming in at once.

So, you normally -- well, last year the internationally mills -- when the national market led a few weeks before the US caught up.

Last year around this time, I wrote a report saying that -- and I'm talking about sheet, and I know that's not your domestic sweet spot, but you guys traded globally.

I wrote a report saying that sheet prices had gone up an unprecedented $800 a ton in eight weeks.

And this week -- or last week, and that was last year at this time.

Last week I wrote a report saying sheet prices have gone up an unprecedented $100 a ton in a week.

I'm just wondering, is this like global warming that's causing this?

Or, what are your thoughts on what's happening here?

Well, Michelle, I think to be fair, you should ask the flat product producers.

Okay, so you don't have a view on the volatility?

Michelle, I tried to allude to it earlier.

I don't what percent of -- when you look at the data on rolling capacity or production capacity of integrated and particulars in flat roll business, there's a lot of swing in that number.

And many mills are able to respond a little bit more quickly to increased demand.

I think some of the integrated producers have blast furnace issues to deal with.

And I have no idea what rates they're running at, but I know they're still idle lesser in capacity.

So, any pickup is going to put some strain on their order books.

And you haven't seen any -- have you seen any increase in import activity from the inquiry side of buyers since all this has been going on, either in the longs which has been also pretty high price -- pretty fast price increases, or on the flat side?

Not really.

On the long product side, yes, Mexico is the biggest supplier, or has been of imports of rebar, and that put their prices up fairly significantly, and Turkey has come back in, but that was just a spot opportunity, I believe, and that's tapered off.

So -- but as I say, prices have moved here, but they've also moved significantly internationally -- international markets.

Do you think that there's more of a, I guess a reluctance on the buyer's part to place an import order everything else equal, because it's more of a longer term commitment, and that seems to be the key piece of the market right now is that everybody's only willing to make a commitment for the next few days?

So that favors domestic?

I would agree with that.

In this environment of volatility and people watching inventory levels, obviously their cash position, et cetera to take a punt on material that is going to arrive three month's time, say from Asia or whatever is -- some people do it.

Some people take positions, but I would think many wouldn't in this environment.

Providing they can get it from the US mills, I think all things being equal, they will favor the domestic.

Historically, we used to always say, or as long as I've done this, that the equilibrium domestic to foreign price, everything else equal would be the global price plus the freight and logistics of getting it here.

So, the US market had always traded at a premium up until it started to change because of China the last seven or eight years.

Would you say that there's a potential because of the risk factor of an import order for the US market to trade at a higher premium than it had historically at some point?

I wouldn't think, unless demand picks up and the US dollar gets a little better, I don't why the US market would pick up, Michelle.

All of the economic factors are against right now, right?

Okay, I'm just thinking theoretically about how markets work.

So the offset, the historic premium, of course, is the weakness in the market here.

Can I switch to a different question --

Well somebody else may want to ask -- can we go back to the queue and then maybe come back, Michelle?

Sure, no problem.

Okay.

And gentlemen, at this time, I'm showing no additional questions.

Alright, well then, Michelle gets one more.

Okay.

Can you hear me?

Yes, we're back.

I just wanted to ask.

My experience with you guys is that you're some of the best thinkers that I've worked with, so another conceptual question.

There's been so talk, actually the Chinese a month or two ago were talking about expanding their participation in the scrap market, and I was wondering if you had any thoughts about that.

Well, we look at scrap more strategically than we do anything else, and our long-term vision is certainly to build up our capacities more so internationally.

Our mill in Poland has twice the capacity of anything we have in the United States and is, on a percentage feed basis, the lowest of what we have in captive recycling.

So, I would say definitely in terms of our international view of it, we would expand in there.

Okay, great.

Okay, thanks.

Great call.

Michelle, thank you.

At this time there appear to be no more questions.

Mr.

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

Thanks, Jamie.

Joe, Bill and I will be on Vista visits the first week of January, and we will be happy to answer further questions during our visits.

In the meantime, thank you for your attendance and wishing everyone happy holidays.

That concludes today's conference call.

We thank you for attending.

You may now disconnect your telephone lines.