Commercial Metals Co (CMC) 2011 Q2 法說會逐字稿

Hello and welcome to today's Commercial Metals Company second-quarter 2011 earnings conference call.

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

After management's remarks, we will conduct a question-and-answer session.

Instructions will follow at that time.

Please be advised this call is being recorded today, March 22, 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, please begin your call.

Good morning, and welcome to CMC's second-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 couple of comments on the second quarter and then I'll ask Joe to comment on our operations, followed by Bill, who will provide financial details.

Finally I'll comment on the outlook for our third quarter fiscal 2011, after which Bill, Joe and I will be happy to answer questions.

With respect our second quarter, that is the winter quarter, it is always our weakest quarter.

Nevertheless, we were pleased the way the quarter panned out absent the large LIFO expense which Bill will explain later.

We saw a gradual improvement in many of our operations which should carry through to the third quarter.

Joe will now talk about our operations.

The Americas Mills and Recycling segments exceeded our projections in the second quarter due to a favorable price environment.

Those favorable prices [for] the Mills and Recycling, however, resulted in higher steel input costs for our Fabrication segment, contributing to higher-than-expected losses for the quarter.

Our International Marketing and Distribution segment remained profitable in all major geographic areas but at seasonally lower levels.

Stronger-than-expected demand in Poland led to an unexpected profit for our Zawiercie mill in what is typically our softest period.

However, losses in Croatia, though reduced, offset the unexpected operating profit in Poland.

Our Domestic Mills FIFO operating profits improved $4.4 million or 9% in the second quarter compared to the first quarter, while our Domestic Fabrication operating profit declined $14 million or 54%.

Our Domestic Recycling business operating profit also improved quarter-on-quarter $7.5 million or 72%.

The net decline in domestic operating results was $1.8 million.

International Mills and Fabrication results were flat quarter-over-quarter.

Despite the benefit of improved operating performance in Croatia led by the assistance of technical teams dispatched there in the second quarter, the level of losses remains unacceptably high.

In comparison to the prior-year second quarter, Domestic MILLS FIFO operating results improve more significantly, $54.7 million, and Recycling improved $18.2 million.

Domestic Fabrication results improved $10 million in the same period.

International Mills and Fabrication performance improved by $48 million quarter-on-quarter, mostly due to improved performance of our Polish operations.

Our marketing and distribution business FIFO operating profits declined $8.3 million, or 37%, to Q1 but improved significantly by $23.7 million compared to the prior-year second quarter.

Prospectively, we anticipate the third-quarter operating rates to continue to improve while operating rates in the second quarter were 73% compared to 72% in the first quarter.

That compares favorably to the 58% operating rate in the prior-year second quarter.

Thanks Joe.

Bill?

Good morning everyone.

Let me call to your attention the detailed Safe Harbor statement included in our 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 we think will happen always happens.

In addition, we've given guidance regarding our outlook for the third 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're aware of non-GAAP financial measures.

Some of (inaudible) fairly straightforward from our financial statements or in common business use can be the subject of our discussions today and in our investor visits, but there are other items that may be outside of our ability for discussion.

You may need to be patient with us if we defer comment.

Our website has additional information at CMC.com.

Well, as Murray and Joe said, LIFO gives and LIFO takes away.

In this quarter with its rapid rise in metals pricing, LIFO certainly took earnings away.

As a full [stop] per quarter of LIFO, each quarter is approached as if it were year-end.

We took the full brunt of the increased prices.

If pricing trends stay historically consistent, a good portion of this will disappear in the second half of our fiscal year, but how much I do not know.

All comparisons of sales and operating profit, both second quarter to second quarter last year as well as year-to-date, are very favorable.

However, this is a low hurdle to step over for operating profit as last year's second quarter was the worst quarter in CMC's history.

It included, among other items, our exit from the joist and deck business.

However, the increase in sales is very encouraging as we see some pickup in real demand.

As I noted, this quarter was all LIFO all the time.

The LIFO reserve at the end of the quarter stood at $291.689 million, or roughly $292 million.

During the second quarter, it decreased net earnings $36.2 million or $0.32 per share versus an expense of $4.8 million or $0.04 per share.

Year-to-date earnings have decreased $39.9 million or $0.35 per share, versus income of $6.4 million or $0.06 per share in last year's year-to-date.

Depreciation and amortization for the second quarter was $40.988 million.

That puts year-to-date D&A at $81.631 million.

The expectation is we would be about $162 million to $163 million in D&A for the year.

We have an interest rate swap outstanding on $500 million of our debt.

We had a $3.5 million favorable pickup on credit on that interest rate swap.

Interest expense should continue at a quarterly rate of about $18 million a quarter.

SG&A for the second quarter dropped $26 million.

For the six months, it's dropped $36 million.

The explanations are generally the same.

We have a lower headcount and lower associated employee benefits, professional services are down as well as our workman's comp and medical expenses.

Finally, our intangible assets make up just 3.2% of our total assets, a very solid balance sheet.

Our current ratio is 2.1, book value per share at 2.28 is $10.89.

Our average shares diluted for the second quarter were 114,736,984.

Year-to-date, the average shares alluded are 114,528,001.

The actual shares outstanding at February 28 are 115,408,109.

Capital expenditures for the second quarter were $11.1 million year-to-date.

That puts us at $23 million.

Our original budget, as we've discussed previously, was $152 million.

Our target for spending this year is probably no more than $125 million.

We made no stock repurchases in the second quarter.

Thanks Bill.

The outlook for the third quarter -- ferrous scrap prices are likely to stabilize at relatively high levels before a seasonal correction possibly by May but more likely by June/July time frame.

(inaudible) of our prices also likely remains relatively stable, which should expand metal margins.

In the US, we anticipate seasonal demand to be above last year's levels, which should result in high shipments.

And then lastly, we anticipate favorable market conditions in China, Southeast Asia, Northern Europe, in particular Poland, and improving conditions in Australia.

In summary, we anticipate that four out of our five segments to be profitable in the third quarter, mainly our Recycling segment, Americas Mills, International Mills, and Marketing and Distribution.

We'll now open up the conference for questions.

(Operator Instructions).

Luke Folta, Longbow Research.

Good morning guys.

My first question had to do with the fabrication margins.

I think I know what's going on here.

You had booked forward some pricing, some product at a fixed price and then rebar input costs have increased on you.

I just wanted to get a sense of the fabricated product that you're selling now, are you able to get enough pricing to pass along current rebar prices?

In other words, is this more of a timing issue or are we not getting the pricing there?

That varies by geographic region according to demand.

Essentially, we're always lagging in our fabricated pricing increases.

Rebar prices go up faster than scrap prices.

Rebar prices go up faster than our fabricated rebar is able to in the same way that scrap prices go up faster than our rebar or merchant products are able to cover it.

So the point that Murray made about stabilization in our pricing has to do with full recovery, although geographically it's more difficult in the fab business to recover the full margins of rebar, particularly on the West Coast and to a lesser degree on the East Coast.

The central region is much stronger.

Should we see some price stabilization on the rebar side?

Do you think it's possible that we could see a profitable quarter in 4Q in fact?

Probably not.

I think the backlog that we have to run out is significant enough that it would take a very significant drop in rebar prices that we would not anticipate.

One more if I could.

On the Fabrication backlog, as you mentioned, can you give us some sense of how the backlogs look currently versus how they looked at the end of last quarter in Fabrication?

The Fabrication business our backlogs are fairly significantly.

In North America in particular, on the fab side of the business, it's up roughly about 40% from -- I'm sorry, that's from the end of the fourth quarter.

From last quarter, it is up only slightly, just a few thousand tons.

So the most significant pickup was from the end of the fourth quarter our fiscal year, which was the end of August through the end of our second quarter in February.

We also saw quite a pickup in bidding activity, which is a good sign for the future, so that's a positive.

In Europe, to answer the question from the European perspective on the fab business, our backlogs are actually down from last quarter, reflecting what's more of a spot market as opposed to the contract market that we have in North America.

Okay, thank you.

Brent Thielman, D.A.

Davidson.

Good morning.

Thanks for taking my questions.

Just on Croatia, you mentioned the scheduled maintenance and inventory write-down.

Do you have the net effect of those items on segment operating income?

No, we don't break it out.

Okay.

Then I guess back on Fabrication, in terms of the average timing of projects in your backlog I guess in terms of execution on those, is it becoming longer or shorter, or have you seen much of a change there?

It's skewed right now to the long end because we were successful in getting two and a couple of other fairly long jobs, some very significant highway work in Texas, and that has changed the average rather significantly.

Typically, it would be five, six, months perhaps I suspect on average.

But the average again is being skewed rather significantly by a couple of jobs.

It is probably more like eight or nine.

But it's, as I say, it's the addition of some regular jobs and a couple of behemoths.

We are seeing some small work which comes and goes within the quarter, which we really don't include in the backlog.

That's a positive sign.

In a healthy market, you see a lot of that activity typically in the commercial side, so we are seeing a little bit of that coming back, particularly in the central states.

So, that's a good sign.

One more if I could.

Just on Americas Recycling, ferrous shipments look like they were up Q2 versus Q1, which I think is somewhat of a deviation from typical patterns.

Is that a reflection of better collections, or demand-driven?

Any sense there?

I think on the ferrous side, obviously the scrap price is ferrous scrap hitting $4.70 in January, and $4.55 February and March roughly.

It does attract slightly stronger flows.

You're correct.

Normally this time of the year, the winter quarter flows do slow, but higher prices certainly attracted I would say a better flow than normal.

Thank you.

Kevin Money, Cleveland Research.

Good morning.

We've been hearing more on Turkey being slightly more aggressive on the rebar side.

Could you talk a little bit about what you're seeing in terms of imports?

We reported this in the last call, I believe, that we had received market reports of significant imports from Turkey.

Those have been realized really in the February/March time frame and orders are still open through April.

So they have taken a more aggressive posture towards the United States and have been slightly disruptive to the Mexican imports more than anything else.

But yes, we've seen a significant impact.

Roughly 100,000 tons is what market reports are of what's been imported or contracted for.

A lot of that was booked in the second half of December, was just a spot opportunity where the prices were going up here fairly rapidly in the US starting December/January.

So and it coincided with the spring construction season.

Those shipment started to arrive in February, some were in March and some may go into April, that 100,000 tons.

Have the protocol issues in the Middle East led to more of that, or is it just the continuation of what you saw last quarter?

Certainly, the political issues in the Middle East and typically North Africa are having some impact.

(inaudible) intelligence, the Turkish supplies or (inaudible) cutting back they're looking at other markets into Europe, South America, or into Asia.

Not so much here in the US, so we don't see, apart from that 100,000 tons, significant -- any other significant shipments coming.

They may come eventually, I don't know that, but not at the stage.

Great.

Just wondering if you could provide some color on what you're expecting out of infrastructure spending going forward.

Particularly do you see any kind of resolution to a long-term highway bill?

Unfortunately, it would appear that we won't see any resolution to that any time soon in terms of a long-term highway bill.

Of all the other priorities in Washington, this seems to be one that gets pushed to the back burner.

There was extended funding for an existing program but nothing in the way of new funding, certainly not the order of magnitude that is being called for, for infrastructure improvement.

Great, thanks guys.

Tim Hayes, Davenport & Co.

Good morning.

Just one question -- on the Americas Mills, the merchant shipments, they had a surprisingly strong quarter.

Was that -- do you attribute a lot of that to service centers prebuying to get ahead of rising steel prices?

If so, what would you expect for the May quarter?

Will we see more muted seasonal improvement or even perhaps a decline from the February level?

There is no doubt there was some preshipment or prebilling going on in the sense that prices were escalating pretty consistently from the end of the calendar year into the first quarter.

So, we did see some pull-up shipments in December and January.

We don't expect that to have a long-term effect.

Service center stocks are still fairly low.

This is a busier season for them, so we would expect them to continue to buy.

Don't see any dramatic change.

If anything, we've seen the brunt of that already.

Okay, thank you.

Charles Bradford, Bradford Research.

Good morning.

Do you see any increased usage by your customers or yourself of the various commodity exchanges that are now trading rebar and billets?

No, not that we're aware of.

Not here in the -- you mean in the US or internationally or both?

Both.

We are seeing it more internationally, but not so much here in the US.

We've looked at it, but I think it's early days here yet.

Any indications what may be happening between Turkey and places like Egypt?

Because a lot of Turkish steel used to head there.

With Egypt being the big gorilla in the Mideast and it's having its political problems, has construction activity continued, slowed down, buying from Turkey been disrupted, or do you have any idea?

Yes, it was disrupted for a period, but in the last couple of weeks, they have people reporting back that things are starting gradually getting back to normal.

So assuming there is no other civil unrest in Egypt, it should stabilize.

Clearly getting into summer, their construction season, as you know, slows down; it's a very hot time of the year.

So you know, by September period, after the holidays, it should resume back to normal, assuming there's no more, as I say, unrest there.

Thank you very much.

(Operator Instructions).

Sanil Daptardar, Sentinel Investments.

Thanks.

Bill, just wondering on the American fabs, if the process improved the lag that you mentioned about with the current cost structure, do you think you will be breakeven?

You're talking about this fiscal year?

Yes, for the fabs, suppose if the prices improve that lag which you're talking about, but [and] what current cost structure you have in the fabs.

Do you think that you can break even or make profitable?

I think we still have a couple of quarters of diminishing losses ahead of us.

The backlog is just too large to run off at the current prices, again subject to an unanticipated significant drop in rebar which we don't see.

I think we are -- the die is kind of cast on this one.

You think that the cost structure has to improve in that further or do you have any costs to take out from that, from the fabs?

If you look at it, the price of a job, probably 60%, 70% or more of it is the cost of the rebar.

It's just very difficult to squeeze -- I mean the only thing you have left of significance is labor, and very difficult absent running a significant volume of tons through there.

At the same time, we have addressed the manpower as well as location issues.

There's been some consolidation of facilities, some costs absorbed as a result of that for severance and the like, which is in the numbers but it's also helped us reduce our operating cost structure.

We've done that both in the East and in the West in particular, but we've also made adjustments in the central region where it makes good sense for us.

Okay.

My question is on -- the other question is on the utilization.

When you talk about the third quarter that there is a seasonal update because of the seasonal build period, do you think that the utilization may go above 72% that you had in the current quarter?

Because there was some pull through in the second quarter because of the demand in the third quarter in the seasonal uptick period.

So does that utilization might remains constant or you think that utilization will have to increase in that case for the demand?

We would anticipate that utilization will increase.

This is normally a busier time for us.

It's extraordinary that we were operating at such a high rate in the second quarter partly owing to what we've talked about already with merchants and a strong backlog, if you will, in rebar.

So with normal seasonal uptick, we would expect that those rates would continue at or above the current rate.

But the demand you see coming is through from the publics and infrastructure works, because there is a mention in the press release that commercial is picking up, but weak in the rest (inaudible).

That's correct.

So the commercial in the other parts of the country have improved compared to the last quarter, and do you see the trend continuing or it might be just a seasonal pickup?

More a seasonal pickup than anything else.

Okay, thanks.

Luke Folta, Longbow Research.

I was hoping you could talk a little bit about what's happening in Croatia regarding your restructuring efforts there and give us some sense of how you think the progress will play out over the next few quarters.

As we reported, there actually was an improvement in operations and there was an awful lot of cleanup activity, most of it associated with -- and I'm talking about inventory -- mostly associated with the new technical teams landing there and essentially providing the leadership and guidance that we have been expecting they would provide.

We would expect that, in the third and fourth quarters, our operating losses would decrease substantially as we address the operating issues, the inventory issues and the selling price issues.

It was a combination of all of that.

So we've had a good, thorough look at what's going on in Croatia.

We have a better perspective of what we needed to correct.

We made those corrections.

Moving forward, however, there's still fundamentally only a limited number of tons that we can produce in Croatia for tubular applications, and most of it is for export.

It would be nice if we had access to the EU.

It would help our realizing prices and our margins.

While that work continues, there is no official session date for Croatia into the EU.

So, the prospect is for reduced losses, but not to be profitable any time before the calendar year-end.

Okay.

So, it seems like the team is now fully in place there.

It is just a function of trying to work through some of these issues.

You said the inventory issue seems to mostly corrected.

Is it mostly now kind of a marketing effort that's the biggest thing to improve?

The inventory issues that we had there were more production-related in terms of lots and late deliveries and shorts, things of that nature.

So those were more operational problems, Luke, than they were commercial problems.

The commercial issues for us were on-time delivery and being consistent.

As we get the mill in shape and the inventory out of the way, which was clogging up our operations, we expect to improve our performance commercially.

Thanks a lot guys.

Good luck.

Barry Vogel, Barry Vogel and Associates.

Good morning gentlemen.

I just don't want to beat a dead horse, because I know you're very serious about Croatia, and you've used very strong language in your public press releases about that.

But going forward to fiscal '12, given everything that you know, is it likely that you will have an operating profit, fiscal '12, in Croatia?

Not on a cumulative basis for the year.

I would suspect, by the end of the year, we'll have months that could reach that.

We might, for the year, be cash flow neutral, if not positive.

That's about the best I can offer.

It obviously depends too, Barry, on the prices for the products.

If oil continues over $100 a barrel and assuming the Middle East and North Africa settle out, margins could expand.

That would be in our favor.

So we've taken very conservative assumptions.

As Bill said, we can see the thing gradually turning around, but it will be later in the year, not earlier in the year.

Okay, but are you committed -- I know it's a public call you're on right now, but after everything you've done and all of the analyzing, are we likely to see this operation continuing business going forward in the future?

Well, we can't really comment on that, but clearly we want to improve it so that our options are broader, put it that way.

So we just want to get it to the profitability stage and as quickly as we can and as efficiently as we can, and put in a strong management team there to run the operation.

So, that's our short-term goals, and that's what we are [setting down].

As far as Poland is concerned, you were surprised I think that you had a profit in the quarter.

Does that auger very well for a very strong second half?

Yes.

You earned more money in Poland than you thought at the beginning of the year?

Yes we did.

Remember what Murray said in our opening comments.

The second quarter is normally our weakest quarter, really for weather reasons.

Poland can be among the harshest environments in which we operate and sell and most difficult for construction markets.

It's a combination of a little bit stronger demand overall, some of it weather related, and improving mix in Poland towards value-added products, both merchant and wire rod but more the merchant side of it.

So that's why we made the investments in Poland and are starting to see some of the benefit of that.

I think we made a comment there somewhere.

Poland is the big swing factor, and we think it will be very positive in our third and fourth quarters.

As far as a description of -- your description of the non-residential construction and user demand going forward, Murray, how would you describe it?

Here in the US?

Yes.

As I mentioned a little bit earlier, we're seeing a pickup in bidding activity which we haven't seen for quite some time.

And that's a good thing.

You're not going to get every bit, obviously, but we are seeing some small commercial work being awarded.

Obviously, the public work was [fighting] about that.

Education, anything to do with oil and gas industry is quite good, and health.

Anything in that field is quite good.

So it is building, as Joe said, the seasonal demand pickup, we see some real demand slight picking up.

We are not being wildly optimistic, but we are definitely seeing an improvement.

That's why we are saying this third quarter that demand will be certainly better than the third quarter of last year.

So, we are quietly optimistic that things are improving.

Not every state in the US, not every region in the US, but overall for us it is getting better.

Thank you very much.

Good luck.

(Operator Instructions).

Sanil Daptardar.

Yes, just I heard that comment on the cash flow neutral thing.

Do you -- I assume that's after dividends, right?

That comment dealt with Croatia only.

I see there was -- of course there was a cash drain here on the six-month statement on cash flow with the cash now on hand going down to $265 million.

But if that continues, do you think there might be a possibility of (inaudible) payments?

A change in the dividend, Sanil?

Yes, (inaudible) dividends probably.

[And suppose] because when you compare the guidance, what you've given, and if the things (inaudible) it's only a seasonal factor, pickup in demand (multiple speakers)

I follow you.

I would tell you this, that the Board looked through one of its committees at the situation.

Before they declare the dividend each quarter, they assess the same factors that you're talking about, plus a lot of others to make the decision.

Given where we stand right now, I don't think there is any conversation plus or minus about the dividend.

Okay.

Do you think that, at any point of time, you might have to access your credit lines?

Because right now, I think there is a $10 million [rate], I believe.

Yes, we just issued the commercial paper just to keep our name in the market.

We didn't really need it.

So that was more just kind of a greasing the skids and maintaining the relationships.

Okay.

Got it.

Thank you.

Leo Larkin, Standard & Poor's.

Good morning.

Could you give us guidance for, if it's available, preliminary guidance at least for CapEx and depreciation in fiscal 2012?

Haven't done that yet but by next quarter we will have done the preliminary planning for 2012.

I'll have a better answer for you -- or I'll have an answer for you, Leo.

Okay, thanks.

Barry Vogel, Barry Vogel and Associates.

I have a question, a couple of questions on the Arizona mill.

First of all, is it profitable?

Yes.

I'm pleased to report that the mill itself was profitable on a net income basis in February, one month, on an operating profit basis for prior month, which was January.

So we've seen good progress in the facility.

We're weighed down more in the Western region by our fab business than -- and margins or lack of margin in the fab business.

So we've made good progress, and I'm pleased to report profitability in the mill itself.

So will you be profitable for fiscal '11 at the Arizona mill?

Haven't done that yet.

That's -- oh, fiscal '11?

Too early to say right now.

All right.

Now, given the fact that you never did this before, long-term, would you be considering -- consider duplicating this particular successful mill going into the future?

I'm sure if the circumstances are right.

We've discussed that before, Barry, that first of all, to your point, we wanted to break this mill in and find out all of the idiosyncrasies and how to run it.

Now that we have it, would we duplicate it in some other geography?

Yes, I think we would, but that may not necessarily be the United States as we've discussed in the past.

Yes, we're pleased with the technology, Barry.

Having worked with it for over a year now, we are obviously complementary (inaudible) we work very closely with them, hand-in-hand with them.

But whatever reservations that we might have had operationally, we think we've gotten over those hurdles.

Great, thank you very much.

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

Mr.

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

Joe, Bill, and I will be on investor visits the remainder of this week.

We'll be happy to answer further questions during our visits.

In the meantime, thank you all for your attendance.