Commercial Metals Co (CMC) 2012 Q3 法說會逐字稿

Hello, everyone, and welcome to today's Commercial Metals Company third-quarter fiscal 2012 earnings conference call.

As always, today's call is being recorded.

After the Company's remarks, we will have a question-and-answer session and we'll have a few instructions at that time.

I would like to remind all participants that during the course of this conference call, the Company will make statements that provide information other than historical information and will include expectations regarding the Company's future prospects, revenues, expenses, or profits.

These statements are considered forward-looking statements and may involve speculation and are subject to risks and uncertainties that could cause actual results to differ materially from those expectations.

These statements reflect the Company's beliefs based on current conditions but are subject to certain risks and uncertainties that are listed in the Company's press release and described in the Company's latest 10-K and 10-Qs.

Although CMC believes these statements are made based on management's expectations and assumptions, CMC offers no assurance that events or facts will happen as expected.

All statements are made only as of this date.

CMC does not assume any obligation to update them in connection with future events, new information, or otherwise.

Some numbers presented will be non-GAAP financial measures, and reconciliations can be found in the Company's press release and on the Company's website.

And now for opening remarks and introductions, I will turn the call over to the President and CEO of Commercial Metals Company, Mr. Joe Alvarado.

Good morning, everyone.

Thank you for joining us to discuss CMC's third-quarter fiscal 2012 results.

I will begin with highlights for the third quarter and an update on our strategic initiatives.

Barbara will then provide further financial details relative to the quarter and the first nine months of our fiscal year.

And I will close out with comments on our outlook for the fourth quarter of fiscal 2012, after which we will open the call to questions.

As described in our earnings release this morning, we reported net sales of $2 billion for our fiscal 2012 third quarter ended May 31, 2012, 3% higher than fiscal second-quarter 2012.

We also reported net earnings of $40.7 million, or $0.35 per diluted share, in this year's third quarter, marking three consecutive quarters of solid profitability improvement.

Our adjusted EBITDA for the quarter was $104.3 million, and Barbara will walk you through all of the details in a moment, including the impact of discontinued operations.

I'm also pleased to report that our Board approved our quarterly dividend of $0.12 per share, demonstrating our commitment to delivering shareholder value.

This quarter's financial results represent the first time since early fiscal 2008 that all of our operating segments are profitable.

Our Americas fabrication segment broke even, ending a string of 10 consecutive quarters of losses.

Domestically, shipments increased over the prior-year quarter for our recycling mills and fabrication segments.

Selling prices increased in most of our domestic units, most notably in our downstream fabrication unit.

Our domestic order books remained solid.

Our international mills segment was negatively impacted by the continued crisis in the Euro zone, as both shipments and selling prices were lower than the prior-year quarter.

Conversely, our international marketing and distribution segment reported a strong quarter, primarily on the strength of our raw material sourcing and distribution operations.

Focusing on the Americas, our Americas recycling segment was profitable for the ninth consecutive quarter, with an adjusted operating profit of $3.9 million.

Volumes shipped were higher than last year's third quarter, but declining scrap prices during the back half of the quarter were reflected in lower adjusted operating profits when compared to a year ago.

For our domestic steel mills, we recorded increases in volume of products shipped and average sales prices compared to the same quarter a year ago.

In May, we took an outage at our Alabama mill to replace and upgrade equipment for the finished goods stacker.

Our state-of-the-art Arizona mill achieved yet another quarter of profitability.

Our steel mills operated at 79% of capacity for the first nine months of the fiscal year as compared to 73% for the same period last year.

Overall adjusted operating profit for the segment was impacted by margin compression at our copper tube mill, as the average copper sales price was 12% lower than a year ago.

Looking at our Americas fabrication segment, operating results improved $14.9 million over last year's third quarter, resulting in a modest adjusted operating profit of $200,000.

Solid shipment volume, higher selling prices, coupled with stable raw material pricing and a significant reduction in fixed costs were the primary drivers of the improved performance.

This segment's backlog continues to reflect steadily improving prices.

We continue to be encouraged by improving market conditions, and we continue to experience growth in the private sector projects.

Shifting to the international business, our international mill segment recorded a quarterly adjusted operating profit of $1.3 million, compared to $22.6 million in last year's third quarter.

Our Polish mill operations were impacted by competition from imports in our key product lines at significantly lower selling prices.

We experienced significant margin compression due to the oversupply of product as we work through higher priced inventory.

We've continued to evaluate options to adjust our operating rates and cost structure in response to the recent developments in the Euro zone.

Our international marketing and distribution segment had an adjusted operating profit of $23.3 million as compared to $17 million in last year's third quarter.

The raw materials operating group within the segment continued to execute well and was the largest contributor to the increased profitability.

All operating divisions within this segment were profitable during the quarter despite difficult market conditions facing our operations in Europe, Asia, and Australia.

Last October, we laid out a plan to improve the financial performance of the business, which included the decision to exit our Croatian steel pipe operation.

On June 1, we announced the sale of all of the shares of our Croatian subsidiary, other than certain assets that were excluded from the sale.

On June 13, we completed the sale of a portion of the excluded assets, and we continue to market the remaining assets.

As previously described, these transactions mark a key step in our efforts to position our business for both improved financial performance and shareholder value.

With that overview, I'd like to summarize.

Our year-to-date earnings of $177.3 million are evidence that our strategic initiatives are returning results to our bottom line, and thus improving shareholder returns.

With that, we will continue our strategy to service our customers to the highest degree, competitively structure our Company to adapt to changing market conditions, and improve returns for our shareholders.

I will now turn the discussion over to Barbara Smith, Senior Vice President and Chief Financial Officer.

Barbara?

Thank you, Joe, and good morning, everyone.

As Joe mentioned, for the third quarter of 2012, we reported net earnings of $40.7 million, or $0.35 per diluted share.

During the same period for 2011, we reported net earnings of $36.2 million, or $0.31 per diluted share.

We're pleased with the increase in earnings of $4.5 million on a year over year comparison.

Continuing operations had net quarterly earnings of $39.1 million, or $0.34 per diluted share, while discontinued operations, which consist primarily of the Croatian pipe mill, had quarterly net earnings of $1.6 million, or $0.01 per diluted share, as a result of liquidating the inventory at our pipe mill.

Included in earnings from continuing operations is an $11.5 million, or $0.10 per diluted share, tax benefit related to expenditures for research and development, primarily for the start up of our Arizona steel mill.

For the nine months ended May 31, 2012, net earnings were $177.3 million, or $1.52 per diluted share, as compared to a net loss of $9.3 million, or $0.08 per share, in a year-ago quarter.

Sales of $6 billion were 6% higher than the same nine-month period last year.

Continuing operations for the first nine months had net earnings of $191.9 million, or $1.64 per diluted share, while discontinued operations had a net loss of $14.7 million, or $0.12 per share.

Included in the results of continuing operations is a tax benefit of $113.5 million, or $0.97 per share, related to ordinary worthless stock and bad debt deductions from the investment in the Croatian subsidiary, as well as the tax benefit for research-and-development expenditures.

As mentioned in our last quarterly earnings call, discontinued operations for the first nine months included approximately $18 million of severance costs associated with the closing of our facility in Croatia.

Collectively, our US-based steel mills generated an adjusted operating profit of $62.6 million for the quarter compared to $67.6 million during the same period last year.

Net sales of $516 million were up 5% from last year's third-quarter sales of $492 million.

Pretax LIFO income was $3.1 million lower than the third quarter of 2011.

Shipments were 58,000 tons higher than in the prior-year quarter.

Within the Americas mill segment, our copper tube mill recorded an adjusted operating loss of $3.3 million, with pretax LIFO expense of $3.7 million in the third quarter.

This compares with a $3.5 million in adjusted operating profit, with a pretax LIFO expense of $2.2 million that was reported in the third fiscal quarter of 2011.

Drop in copper prices during fiscal 2012 had a negative impact on results for the quarter.

The average copper selling price in the current quarter was $4.39 per pound, as compared to $4.98 per pound in the third quarter of last year.

For Americas recycling segment experienced another profitable quarter and delivered $3.9 million adjusted operating profit, including the pretax LIFO expense of $3 million, primarily due to lower non-ferrous demand in prices.

This compares to the third quarter of 2011 adjusted operating profit of $13.2 million.

Average ferrous scrap sold for $3.54 per short ton during the third quarter, which is comparable to the third quarter of 2011.

Average sales pricing on non-ferrous scrap was $2,867 per short ton, which was down 16% quarter over quarter.

We shipped a total of 588,000 tons of ferrous scrap, which was up 6% over last year's third quarter, consistent with improved demand in the US market.

We shipped 60,000 tons of non-ferrous scrap, which was down 10% for the same period last year due to reduced demand from Asia.

Our Americas fabricating segment recorded an adjusted operating profit of $200,000 for the quarter compared to an adjusted operating loss of $14.7 million in the third quarter of 2011.

We continue to see recovery in this market segment as the backlog is near all-time highs in terms of tons, tonnage.

A pretax LIFO expense of $1.4 million was also included in the third-quarter result, as compared to a pretax LIFO expense of $3.4 million for the comparable quarter a year ago.

The average selling price of $906 per ton increased $67 per ton over last year's third fiscal quarter average selling price.

Our international mill segment reported an adjusted operating profit of $1.3 million for the quarter, compared to an adjusted operating profit of $22.6 million for the same period last year.

Shipments and other operational statistics were lower compared to a year-ago quarter, primarily due to the import pressure previously mentioned by Joe.

Furthermore, new infrastructure projects in Poland slowed during the period compared to a year ago.

CMC's international marketing and distribution segment reported an adjusted operating profit of $23.3 million for the third quarter of fiscal 2012.

Our raw materials marketing division was the largest contributor to this improved profitability.

This result compared to an adjusted operating profit of $17 million during the third quarter of 2011.

During previous earnings calls, we indicated that we would incur unusual expenses related to the proxy contest and the tender offer defense.

We incurred approximately $4 million in expense related to these matters during the third quarter of 2012, and we expect to incur an additional $4 million in the fourth quarter of 2012.

Capital expenditures were $29 million for the third fiscal quarter and $83 million year-to-date.

Overall, the balance sheet remains strong.

Cash and short-term investments totaled $234 million as of May 31, 2012.

The business generated $95.8 million cash from operations during the quarter.

In addition to our credit facility and receivables purchase agreements, which together provide access to a total borrowing capacity of $500 million, we continued to maintain significant unused, uncommitted credit lines that give us a great deal of liquidity to support our working capital needs and adapt to changing market conditions.

During the quarter, we liquidated our interest rate swaps relative to our long-term public debt for cash proceeds of approximately $53 million.

This gain is being amortized over the remaining duration of our long-term debt.

Thank you very much.

Now I'll turn it back over to Joe for the outlook.

Thank you, Barbara.

In summary, we posted our third consecutive quarter of earnings, and we are profitable for the first nine months of fiscal 2012.

The key highlights include the following.

We reported $40.7 million in net income for the quarter and $177.3 million year-to-date.

We generated $104.3 million of EBITDA in the quarter and $255.1 million of EBITDA year-to-date.

We generated $134.8 million cash from operations year-to-date.

And we declared our regular dividend for the 191st straight quarter.

Our actions to adjust our cost structure have helped to improve the financial performance of the Company.

Our fabrication segment produced positive results for the first time in 10 sequential quarters.

And in June, we completed the sale of the stock of our Croatian subsidiary and the majority of the assets of our Croatian pipe mills, generating approximately $37 million in cash that will be reflected in our fourth-quarter results.

With respect to our fourth-quarter 2012 outlook, we expect to record another profitable quarter.

In our fourth quarter of 2012, we expect scrap prices to weaken amid weaker domestic flat-rolled demand and concerns about the Euro zone and lower demand from China.

We remain encouraged by the strong backlogs in our domestic operations and anticipate a relatively good shipping quarter.

Our recycling business has demonstrated that it can operate profitably in most market conditions, but this quarter may prove to be challenging.

Results from our Poland mill should improve in the fourth quarter of 2012, but we expect international markets to remain volatile.

We are pleased with our performance and improvements in the first three quarters of fiscal 2012.

In addition, we're also pleased to report that we've added Joe Winkler to the Board of Directors of Commercial Metals Company.

Joe has a long career in the energy services industry, and he's a great addition to our Board.

We've issued an 8-K to that effect this morning.

We look forward to continued success and progress for the remainder of 2012 and beyond.

Thank you for your attention.

At this time, we will now open the call up to questions.

(Operator Instructions) Our first question comes from Evan Kurtz from Morgan Stanley.

Please begin with your question.

Just a question on scrap to start off.

We've seen a big, roughly $60 decline last month, and we're hearing that it could fall again in July.

I was just curious, what are your thoughts on what scrap price it takes to deter scrap peddlers from going out and actually collecting, and just trying to figure out some economic bottom to scrap pricing.

We've been asked this question before.

Before the run-up in scrap that started back in the 2004 time period, when scrap sold on average for about $200 a ton or less, there was plenty of generation, but it's a difficult question to answer because I think it's a reflection more of economy and the initiative of people that would go out and collect.

Industrial probably is more important component in the summertime.

That's a more volatile supply base, so I'd be hard pressed to put a number on what that might be.

I don't think there's an issue even with declining scrap prices that scrap will flow.

Right now, though, with the adjustment that has taken place in the market, and expected continued adjustment, there's no doubt that stocks will have a higher impact on pricing than flows will.

Got you.

And I was just reading actually that in March, construction kicked off on the Virgil Summer nuke project in South Carolina, and I'm pretty sure that's fairly close to your KC South Carolina mill.

Do you have a piece of that?

Have you been bidding on any work there?

We've been interacting with them, Evan.

I can't tell you exactly if we have some of that business.

We could follow-up on that.

I don't really have an answer for you right now.

Our next question comes from Luke Folta from Jefferies.

Please go ahead with your question.

I had a question on your fabrication business.

I remember just coming out of your results last quarter, I think there was some discussion around there being some contracts, some infrastructure contracts that are there that are multi-year, at least 18-plus months, that had unfavorable pricing that were going to take some time to work off.

So, I was pretty surprised to see you generating a positive result for the quarter.

Just to get into more detail on what drove that, was that just a function of a pick up on the private side with maybe better priced tonnage?

Or I noticed the volumes kicked up pretty meaningfully, too.

Was it just better fixed-cost absorption?

Can you maybe give us some sense of magnitude on how these things might have impacted the result?

Luke, I'll take a shot at that.

And I think we've been talking in sequential quarter reports about the fact that we continue to improve the quality of our backlog, both as a function of new work that we're booking at higher prices, reflective of higher scrap costs during the period of time.

And also as a result of reducing the backlog of those fixed-price contracts that were a burden to the order book.

So, it's a mix of that, and as well as more private work on the books that's shipping on shorter lead time, which is more reflective of our cost than long-term contracts might be.

And bear in mind, too, that we do mark-to-market on our fab accounting projects, so that too has an impact.

Okay, so, if we assume that there's not going to be any major swings in pricing from here, that we see some sense of stability, do you think that a breakeven-plus number in fab is sustainable going forward?

Yes, we certainly think it's sustainable that we'll continue to improve the profitability of fab.

But we just saw a swing of $60 a ton in raw material pricing, so, ultimately if that works itself into finished goods pricing, as well as quoting activity in the fab business, which I expect it would at some point, it's a matter of managing our margins.

But yes, we believe the quality of our backlog will allow us to improve -- continue to improve the performance of the fab business.

Okay.

Second question I had was just regarding the highway bill that's being proposed.

It looks like, assuming something happens by this Saturday, and we don't get another short-term extension, have you taken a look at it?

And do you have a sense of -- how does it match up relative to your expectations, and what impact do you think it will have on your business there?

Luke, the highway bill is just an extension of the existing bill, and so, we're better off to have it because it funds projects.

But it really doesn't even begin to address the infrastructure needs of the country.

And three-month extensions don't allow businesses to plan properly, or to plan on increased demand from the Federal Government side, so that's part of the malaise that we face today.

Our next question comes from Sal Tharani from Goldman Sachs.

Please go ahead with your question.

Joe, the scrap prices have moved down significantly you mentioned, we all know it, and perhaps go down again in July.

But when we see the official numbers, or at least the announcements of the metal prices or steel prices, the announcements show that there could be some metal margin expansion going into July, perhaps even in June.

How do you feel about that at your business?

Do you think that you will see that?

Well, yes.

Based on the relative difference between the scrap price reduction and price announcements, which are down roughly $30 a ton on average, there should be some margin enhancement.

But at this point, Sal, we're chasing things a little bit.

The anticipation of lower scrap prices always cause us some uncertainty, and could have an impact on prices in the future.

So, for the time being, there's an improvement in margin, but there's also still some instability in scrap pricing.

Got you.

And this also flows into your fab business, as you mentioned earlier, that the steel prices coming down, fab business should benefit also with that?

Sure, absolutely.

Any of those fixed-price contracts that we have reflective of higher scrap costs, reflective of higher scrap costs with lower scrap as part of our raw material input, would benefit.

Great.

On the Croatian pipe mill, were you selling product from there through your international distribution business?

Will that impact -- have some negative impact in terms of not being able -- because Danieli is planning to close their pipe mill down, as far as I have heard from them.

Yes, Sal.

If you look at our results for this year, we haven't been moving much product through international marketing and distribution.

They used to move some of that product through historically, but overall it wasn't significant to the overall top line.

Of course, it was a big negative detractor (inaudible).

And in the aggregate, Sal, we have other sources for tubular products, and the greater demand for tubular products is in OCTG, as opposed to line pipe.

And predominantly what we were shipping from Croatia would have been in the lined pipe category.

The last question on copper spreads.

The impact will be when the prices are coming down.

Once the prices are down and stable, you should start to get some better margins over there; is that correct to assume?

Yes, our guys in Howell would like to know what stable means.

There's so much volatility in copper prices this year.

But yes, stability in any raw material pricing, whether it's copper or ferrous materials, helps to stabilize the order book and operations.

And otherwise there's a lot of reaction, not only to the price, but inventory valuations and trying to maintain margins.

So yes, we would love to see stable copper prices, but I don't think we've seen that in a long, long time.

Our next question comes from Arun Viswanathan from Longbow Research.

Please go ahead with your question.

So, I guess my question is on the rebar side.

Maybe you could just talk about a little bit on what you're seeing as far as pricing and demand outlook, as well as trade in North American rebar.

Well, we shared with you our -- the comparative pricing statistics.

I really can't comment on pricing activity right now, but demand remains fairly strong.

It's summertime.

Our backlogs have remained stable.

Our shipping levels are a little bit higher this quarter as compared to the prior quarter, and that includes rebar as well as merchant products.

So, the industry is still dealing with short lead times, and sometimes it's hard to have order visibility, so that's why the backlog is a strength for us.

But volumes remain fairly strong.

The pessimism that we read about every day in the steel business, in many regards, is more of a reflection on flat-rolled business than it is on long products.

And certainly while we're impacted in the Euro zone in our Polish operations, and it's broader based there, but more on the pricing side than on total demand or shipping volume, we aren't seeing as much volatility, or I'll say bad behavior as the flat-rolled side of the business in North America.

So, I think we suffer a little bit because of the -- being grouped with all steel, whereas long products has been a little bit more stable.

And what about the trade side?

Barb, imports have also been there, so, has that been a problem, and do you see that continuing to impact the business?

Yes, certainly, imports from Turkey in particular are up significantly.

I believe, off the top of my head, [134%] from prior year.

The Turks have been more aggressive.

But more recently they've been out of the scrap market, and then just this past week came back into the scrap market.

And I think it's -- for them, it's all a function of what their home or near-location markets demand is like.

Because with scrap going one way across the Atlantic and rebar coming the other way, it must be a very difficult proposition for them to consistently make money.

We haven't been as severely impacted as one might expect, but, of course, it has an influence when imports are a larger figure.

Yes, so, I guess as a follow-up last question, how would you characterize the supply/demand situation in rebar?

I know that you guys had some consolidation activities yourself over the last couple quarters, but is the supply/demand situation in North American rebar such that when the market does recover, in construction especially, you should see some pricing power in that market segment?

The consolidation that you referred to, Arun, was in our fab business, not in the mill business.

So, our mills are capable of running at higher than the 79% year-to-date level that we reported.

So, yes, there's some upward potential on volume, but we don't see the markets changing anytime soon.

We see stability in the markets, not significant growth.

Our next question comes from Brent Thielman from DA Davidson.

A question -- Joe, you mentioned the strong backlog headed into the fourth quarter, and I'm wondering, have those backlogs since dwindled from the start of the quarter as prices have taken more of a hit here in June, and maybe your customers are waiting for a bottom?

Or are you still seeing some stability in orders despite the pressure on prices?

What we're seeing -- and just the backlog in general is flat quarter-on-quarter, but last quarter was a record quarter for us.

So our backlog being flat from prior quarter is still a good level for us --in the aggregate, over 1 million tons of backlog in our rebar and our fab business.

But in terms of the impact that the price environment has on us, it's more a pressure on shipping than it is on order entry, and it's a timing matter.

A lot of customers will hold to wait and see what's going to happen in the ensuing month, so that can be disruptive to shipments more than bookings.

I see.

And then, when you refer to the backlog in the international operations going into Q4, are you referring to the marketing distribution business, or the mill in Poland, because that statement seems to conflict with the comment about difficult market conditions in Poland for Q4?

The mill in Poland -- when we talk about backlog in Poland, we're talking principally about the backlog in the mill in Zawiercie.

And the backlog there has improved quarter-on-quarter.

But at the end of the second quarter was when we saw -- well, in the middle of the second quarter is when we saw the deterioration in pricing in Poland.

So, there was a lot of uncertainty in Poland about pricing because of imports, principally from Latvia.

That's worked its way through the system, and so now we're seeing a little bit more stable order-entry pattern there, with stronger pricing as well.

Our next question comes from Brian Yu from Citigroup.

Please go ahead with your question.

This is actually John Sullivan filling in for Brian.

I just had two quick questions.

One on the Americas mill segment -- it seemed that scrap costs were flat quarter-on-quarter, when I would have thought that perhaps we would see a decline there based on spot pricing.

And secondly, on the international mills segment, I was just wondering if there was anything behind the apparent increase in unit costs, ex-scrap?

I'll take the first one, and I didn't hear the second.

I've got the second.

I'll take the first one.

John, the erosion in scrap pricing really didn't hit us full tilt until this month, so, we're out of the third quarter at this point.

There had been some slight erosion during the period that's our third fiscal quarter.

So, quarter-on-quarter, we're okay.

You'll see a difference -- I think a more significant difference at the end of the fourth quarter.

So, everything that we're talking about is more a fourth-quarter fiscal year for us impact than third quarter.

Okay.

And on your second question, I think is around conversion costs out of the international, out of the Polish mill.

And as Joe mentioned, we saw significant deterioration in that market about mid-quarter because of the impact of the imports that were being placed in the market there.

And so, obviously we tried to dial back our operations to adjust to that.

And whenever you do that, you know you're going to see a higher unit cost [basis].

Our next question comes from [Mark] Parr from KeyBanc.

Please go ahead with your question.

I had a couple of questions.

We've seen scrap come down a lot here in June and heading into July, but iron ore, on the other hand, has actually been recovering somewhat, say from the low $130s to the high $130s.

Is it -- do you view this move in iron ore over in China as any kind of a leading indicator for potentially the US ferrous marketplace?

I wish that we could say that there was a real strong correlation dollar-for-dollar, day-for-day.

But as you might recall, back in the Fall when there was a rapid decline in ore prices, that scrap prices lagged by at least a month, maybe a little bit longer, and then recovered much more sharply back to the level they'd been at, than ore did.

So, there's some correlation, and there might be sympathy.

I think that in this instance, while we could still see some weakness in July on scrap prices, seasonally adjusted we would expect still in August for that to recover -- more related to demand and production activity than necessarily iron ore prices.

So, I don't always see a strong correlation, and it's certainly not a dollar-for-dollar, Mark.

But in the metallic world, there's always the impact and influence of alternative sources.

I think over the long term, there should be a correlation, but you can have dislocations.

Okay, just one other follow-up, if I could.

In the fabrication business, are you seeing any movement as far as base pricing is concerned in your backlog relative to the shipment activity you had in the most recent quarter?

Certainly, future business, Mark, we'll have customers that are going to put pressure on us for what are lower raw material costs.

There's no doubt about that, but no change or erosion in the base presently.

The backlog is pretty strong backlog.

It's a good backlog in the fab business and reflects higher selling prices than what may come to pass, depending on what happens with raw material pricing.

But certainly that pressure.

I appreciate that color, and good luck in the upcoming quarter.

Our next question comes from Nick Farwell from Arbor Group.

Joe, can you please remind me to what degree you hedge any of your commodities, say, copper as an example, other than the natural hedge that comes from the scrap lows?

We deal with copper not only in the copper tube mill, but also in our recycling business.

Right.

In the recycling business, we have a higher percentage of hedging to cover our exposures, principally because of the lead times associated with procurement and sale of that commodity.

A lot of it is exported, so we'd have a fairly large period of exposure.

We have, in the copper tube mill, hedged from time to time, but as a rule, do not.

But then our turnaround is normally faster in the copper tube mill than it would be in the recycling export business.

When you aggregate up your hedging positions, has it had much impact on the P&L, say, over the last three or four quarters?

I think the copper hedges don't qualify for hedge accounting, so we do end up mark-to-marketing that.

And this quarter, I think it was about a $3 million loss for the quarter, but I don't have the prior quarters off the top of my head.

So, is that a realized loss, or is that just marketing to market as of the end of the quarter?

It's just mark-to-market as of the end of the quarter.

Okay, and then I'm curious, and I'm sure you look at this in a variety of ways, but what are the quoting trends in what I'll call your early-cycle businesses, your earlier-cycle businesses, suggesting about your outlook?

Is there some informational content there, or are we in such an uncertain period of time that that really doesn't provide you much insight?

I'm not sure I understand what you mean by earlier-cycle businesses.

Well, I think of an early-cycle business as those that might be associated with, say, residential construction as opposed to that which is associated with the highway bill or later-cycle businesses that have their own funding sources or sources that aren't necessarily tied directly to the economy.

Like commercial construction --- my expectations are -- tends to lag residential construction; so, one would tend to look at residential construction as an early-cycle set of businesses.

So, let me take a shot at this, and then Barbara can expand on it if she has something more to add.

Our longer lead-time business -- maybe the best way to talk about it is in terms of the architectural building index.

The ABI for about five months consecutively had been up, and then took a -- up above 50%, and then two months consecutively was below 50%.

But if you look at the underlying data, it was the industrial side that continued to track above 50%, while the non-industrial -- or I can't remember the category, is where the hit had been taken, which is consistent with what we've seen in construction patterns.

That residential itself is still long lead time, while there is still a long time before we are expecting strength in the residential and/or non-residential.

But some of the industrial has improved, and some of the economic activity on the construction side has been void by private spending, and I think that's what we're seeing more than anything else.

Love to see the public sector increase budgets, like in the highway bill, that would give us some indication of where we could anticipate some strength in demand from that sector.

But in the meantime, the private sector has been a stronger sector for us, though not nearly -- though not anywhere near traditional levels.

We've been as high as 70%, what I'll call private, and we're tracking still below 40% on private construction in our order book.

Our next question comes from Phil Gibbs from KeyBanc Capital Markets.

Please go ahead with your question.

Seen a nice SG&A cost reduction trend here over the last several quarters.

Can you discuss where you believe you are in terms of your opportunities, and how the completion of the IT system may be assisting?

Yes, we appreciate you taking note of that.

And clearly, there's been a lot of blocking and tackling, and cost reduction efforts have been ongoing.

And I describe that as a never-ending process.

But clearly, if you go back to our announcement, back in October, we did announce that we were taking significant reduction in our overhead structure.

And it takes a little bit of time to implement, or fully implement all of that.

All those actions are largely complete.

And where we are today is -- I'll call it the ongoing process improvement that needs to occur within any business to continue to look at ways to be more efficient, not only in our operations, but also in all of our administrative and back-office processes.

I would further point out that, included in the SG&A, of course, is the proxy contest and tender defense, which was $4 million for the quarter.

It's $11 million year-to-date.

We'll have another $4 million in the fourth quarter, and about $5 million spill over into next year.

When you get past that, you need to take that into consideration, because we would hope that that would not be an ongoing reoccurring expense item, which further enhances that reduction in SG&A that you're seeing.

Our next question comes from Chuck Bradford from Bradford Research.

Please go ahead with your question.

I noticed that the Carl Icahn sold about 1.8 million shares in the first quarter, leaving him with about 8.7 million as of the middle of March.

Do you know if he's been continuing to sell shares, and how much he might still own?

Yes, based on our monitoring, it seems like he's held steady at that level with about 7% overall of our shares, so, down from almost 10% to 7%.

Can you talk a bit about conversion costs?

Natural gas obviously is a lot cheaper than it used to be, and could you go through -- whether that had a meaningful impact -- what refractories and electrodes might have done, or are doing?

Yes, natural gas, we've talked about this a little bit, Chuck, that natural gas is an important part of our manufacturing process.

But in some places like Arizona, it's not an issue at all because of the continuous operation there.

More electricity costs are a factor.

And while natural gas prices have gone down, the bulk of the nation still sits at about 55% coal-fired generation, and we're no different.

There's sectors within where we operate where the percentages are lower, but the real benefit of natural gas is for those who are consuming much larger quantities than we might.

And I use as an example, a DRI operation, which is a huge consumer of natural gas.

And certainly hot strip mills, rolling flat products, or plate products would have a significantly higher cost of natural gas than their manufacturer.

I guess what I believe is our benefit in natural gas is that as more and more companies, industries switch to more natural gas or relocate to North America because of low raw material prices and natural gas, we'll have a residual effect in jobs and construction and housing that would be the real benefit for us, more so than someone, for example, who's in DRI business.

I think the second half of your question, Chuck, was like the roll-through effect in other raw materials that we purchase.

And of course, lower natural gas price is a positive for us.

I don't know that we've seen that effect roll through other raw materials; there are other competing inflationary pressures, and some of those are annual contracts which will get revisited again whenever that cycle turns.

So, I think overall, it has a good effect, but it's not significant or material to those other materials that we purchase.

Our next question comes from Luke McFarlane from Macquarie Capital.

Please go ahead with your question.

So, what I was wondering -- is the research and development tax benefit you got, can you just expand a little bit on that?

Just more in terms of -- is that an ongoing thing, or is that just for this quarter that you receive that benefit?

Yes.

We have a new tax director who's been in place for the past couple of years.

Highly skilled.

Mary Lindsey comes with deep experience, and she has undertaken a number of important initiatives to optimize all our tax situations.

And as evidenced by the worthless stock deduction that we were able to take in the first quarter related to our exit of the Croatian operation.

This is another project that Mary has undertaken in the past number of months because she noticed that Commercial Metals did not have -- was not taking any R&D tax credits.

So, in this instance, it was a project to look at the open years and what may exist out there.

So, a lot of this benefit is related to all of the R&D that was done with the start up of the new state-of-the-art Arizona micro mill.

But clearly now with her leadership, we will have an ongoing process with our engineering organization and all of our operations to examine opportunities for R&D tax credits on a go-forward basis.

So, I wouldn't expect to see a one-time significant number, but we would expect to see some on an ongoing basis.

Our next question comes from Michelle Applebaum from Steel Market Intelligence.

Please go ahead with your question.

So, a couple questions.

First off, Nucor has got a big DRI facility that's going to be starting up in the next few months, and I was wondering -- what kind of impact do you think that might have on the scrap market?

Certainly, I said earlier when one of the questions we got about raw materials, I think it was from Mark, about iron ore pricing and scrap pricing, that there is metallic competition.

And their entry into producing DRI will -- it's going to have an impact, there's no doubt about that, on total scrap demand.

Pricing will be what the pricing is for scrap products, but that metallic alternative for DRI is a much more important source of raw material for Nucor than it would be for our order book.

So, less competition for some of the cleaner and more prime grades, I would suspect.

And for us --.

Is it big enough?

When you say it will have an impact, is it big enough to have a material impact?

Are they big enough?

As they ramp up, I guess we'll find out, Michelle.

But in the initial start-up phase, I doubt that it would have a significant impact.

Okay.

You said that with the scrap price down $60 -- you kind of said in a far more diplomatic way earlier that with the anticipation of further scrap price declines, it may be impacting customer activity.

Were you trying to say that customers are waiting to see if there's another drop in scrap to place their steel orders?

It's not so much placing steel orders, Michelle, as it is pressure on selling prices and shipments.

You know that the industry practice is for the most part applied against shipments in terms of reduced prices.

So, if a customer has something on the books, and they are anticipating that there would be further reduction, it has the tendency to slow shipments down.

There's usually a catch-up factor.

It's just unavoidable in the way that we do business in long products and on rebar and merchant shipments.

So, it always has a tendency to slow things down a little bit.

But not on the order entry side, Michelle.

More on the shipping side.

Our next question comes from Phil Gibbs from KeyBanc Capital Markets.

Just had a quick follow-up.

Barbara, the interest rate that stepped up in the quarter, should that be indicative of what we should be looking at going forward?

I know the debt load didn't really change all that much, but the interest rates and the expense went up.

Yes, we had a little bit of an impact because -- in my comments I mentioned that we had monetized our interest rate swap.

So, we did have some termination cost within this quarter.

But what it also means is that we fixed the value of that swap, and will amortize that over the remaining life of the swaps from a P&L perspective, but it also allowed us to bring in $53 million of cash.

So, for modeling purposes, we had been seeing about a $4 million benefit from that swap in the quarter.

Going forward, that benefit will be about $3 million.

Our next question comes from Sal Tharani from Goldman Sachs.

Joe, how is the Arizona mill doing in terms of utilization rate and profitability?

Are you consistently profitable at that mill?

Yes, we are consistently profitable at that mill.

We're really pleased with the progress that we made in the Arizona facility, not only getting up the learning curve, but essentially getting to its capacity.

So, it is a profitable business for us.

It's running at its name-plate capacity.

The biggest issue that we face in the western region is the geography that we're covering.

It's a micro mill.

It wasn't intended to cover as much geography as it does, but we are using it to service our fab shops, and we're really happy with it.

Our final question comes from Michelle Applebaum from Steel Market Intelligence.

Just a follow-up.

It's pretty clear that your old employer here in Chicago is in an asset divestiture phase.

And they have got an awful lot of small pieces of businesses that would complement yours all over the US, in particular in North America.

I'm wondering -- might there be some good fits for you with that organization, and would you look at acquiring right now?

Our focus right now, Michelle, is on building our cash reserves and strengthening the balance sheet.

That would be inconsistent with strengthening the balance sheet.

We wouldn't have the resources to do something that big today.

And so, while there are long products, it's a mix of long products that we are not particularly familiar with, either on the SBQ side or the rail side.

And it's pretty far outside our geography from a scrap collection perspective.

So, we -- if we were going to look at something, we would have to have the ability to implement the strategy that we employ at our other plants, which is sourcing scrap through our own network.

And we don't really have much in the way of scrap operations in the Northeast, and certainly not in Canada.

I hope that answers your question.

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

Mr. Alvarado, I'll turn the call back over to you.

Okay, well, thank you, everyone, for joining us on the call today.

We appreciate it very much, and we look forward to meeting with many of you in our investor meetings in the coming weeks.

Thanks again.

Goodbye.

This concludes today's Commercial Metals Company conference call.

You may now disconnect your telephone lines.