Commercial Metals Co (CMC) 2012 Q4 法說會逐字稿

Hello and welcome, everyone, to today's Commercial Metals fourth quarter and full-year 2012 earnings call.

As always, today's call is being recorded.

After the Company's remarks, we will have a question and answer session.

We will 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 these expectations.

These statements reflect the Company's beliefs based on current conditions that 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.

Although CMC believes these statements are based on the 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 fourth quarter and full year 2012 results.

I will begin with highlights for the fourth quarter and full year, and an update on our strategic initiatives.

Barbara will then provide further financial details relative to the quarter and fiscal year, and I will close out with comments on our outlook for the first quarter of fiscal 2013, after which we will open the call to questions.

In our results for the quarter and year end, as detailed in our earnings release this morning, we reported net sales of $1.9 billion for our fiscal 2012 fourth quarter, a decrease of 16% from sales of $2.2 billion for the fourth quarter of 2011.

We also reported net earnings of $30.2 million or $0.26 per diluted share in the fiscal quarter ended August 31, 2012.

This marks four consecutive quarters of positive earnings and yesterday our Board of Directors declared a quarterly dividend of $0.12 per share for shareholders of record on November 7. The dividend will be paid on November 21.

Positive results from operations were driven in part by slightly improved demand combined with our continued focus on improving product mix, cost efficiency, and service to our customers.

For the full fiscal year, we reported net earnings of $207.5 million, or $1.78 per diluted share on slightly lower sales of $7.8 billion.

Full-year 2012 results mark the fifth best performance in the nearly 100-year history of Commercial Metals Company.

In comparison to fiscal 2011, the 2012 results are a huge turnaround from a net loss of $129.6 million, or $1.12 per diluted share -- loss per diluted share on sales of $7.9 billion, a $337.1 million turnaround in net earnings.

During the year, we generated $364.2 million of adjusted EBITDA as compared to $237.3 million for the full-year 2011.

The $127 million increase in adjusted EBITDA reflects a dramatic turnaround in operating performance, including changes in our organizational structure to improve operational focus, difficult but necessary restructuring actions in 2011 and improvement in overall product mix.

Yet another important highlight in the second half performance is the performance of the Americas fabrication segment.

We have been describing to you for some time the efforts underway to stem the ongoing losses generated by this segment.

Those actions have now yielded two straight quarters of modest profitability.

Another important milestone achieved during fourth quarter was the share sale of our Croatian subsidiary.

This complex three-part transaction was concluded on September 21 when the final group of assets was sold.

We expect to receive a total of approximately $41 million in cash as a result of these transactions, and we will have no ongoing business obligations in Croatia.

The fourth quarter also marked the second consecutive quarter in which all our operating segments achieved profitability.

Our Americas recycling segment remained profitable in the fourth quarter and for the fiscal year despite volatile market conditions and reduced demand in our non-service business.

The Americas mill segment reported substantial improvement for the fourth quarter and full fiscal year during 2012 over the same periods in prior year.

Operating rates remained above 75% utilization for the full year.

And, as already noted, we are quite encouraged with the improvement in our Americas fabrication segment which reported improved adjusted operating results of $113.4 million as compared to the prior year.

Stable material pricing with improving transaction and backlog prices coupled with our disciplined marketing approach are driving improved results.

From an end market perspective, many of the same concerns we've expressed recently remain mostly unchanged and continue to slow any meaningful market momentum.

Availability of credit, lower state and federal funding, and unemployment levels have contributed to flat construction and manufacturing activity.

End markets showing the best demand continue to be public works, energy, healthcare, heat treating, and institutional buildings.

Our fabrication backlogs have remained steady at elevated levels when compared to fiscal 2011, and the average price in margin in our backlogs continue to improve.

The international mill segments results continue to be negatively impacted by significant margin compression driven by the economic recession in Europe along with import pressures in Poland.

Our international marketing and distribution segment was hit hard in the fourth quarter due to a global slowing of key end markets in regions where we have a presence.

We've recorded a decline in adjusted operating profit in our International Mill segment which is attributable to the continued economic uncertainty in the US, Europe and China.

With that as background, I summarize our progress on the broad set of strategic initiatives as follows.

At this time last year we committed to a plan to improve the financial performance of CMC and to position our Company to capitalize on the eventual construction cycle recovery.

Furthermore, we committed to exiting unprofitable businesses that were not part of our core strategic operations.

Lastly, we committed to improving our cost structure and our ability to generate cash.

As we reflect on our accomplishments during the fiscal year, we believe we've accomplished what we have committed to do.

Compared to our peers, CMC has unique advantages with our global reach and vertical integration.

We operate in highly cyclical business with many factors influencing our results.

Slowing demand in certain markets we serve, volatile pricing, and global liquidity constraints underscore the current business environment.

Continued low levels of construction spending in the US and competitive pressures in Europe are ongoing obstacles for CMC.

Though challenges remain, we believe we have taken substantial measures to strengthen our competitive position, to serve our customers in a more effective manner, and to improve shareholder return.

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

Barbara.

Thank you, Joe.

Good morning, everyone.

As Joe mentioned, for the fourth quarter 2012 we reported net earnings of $30.2 million, or $0.26 per diluted share.

Compared to last year's fourth quarter, net earnings improved over the net loss of $120.3 million, or $1.04 per share.

Included in the results for the fourth quarter last year were pretax restructuring charges, including impairments of approximately $144 million related to our decision to exit the Sisak mill in Croatia and to close 14 other unprofitable locations.

This year's fourth quarter results include an after-tax LIFO income of $18.3 million, or $0.16 per diluted share compared with an expense of $6.3 million or $0.05 per share during last year's fourth quarter.

Additional after-tax items included in continuing operations were a loss of $2.5 million related to the sale of a rebar fabrication shop in Rosslau, Germany, expenses of $2.5 million related to the full valuation of state tax losses and expenses of $2.4 million related to our proxy contest and hostile tender offer.

Net earnings for the year ended August 31, 2012, were $207.5 million, or $1.78 per diluted share on net sales of $7.8 billion as compared to the full year 2011 when we reported a net loss of $129.6 million, or $1.12 per diluted share on net sales of $7.9 billion.

For the year ended August 31, 2012, after-tax LIFO income was $29.6 million, or $0.25 per diluted share, compared with after-tax LIFO expense of $50 million or $0.44 per diluted share for the same period last year.

Additional after-tax items included in continuing operations were tax benefits of $113.6 million, or $0.97 per diluted share, related to ordinary worthless stock and bad debt deductions from the prior investment in our Croatian subsidiary and for research and development expenditures.

Furthermore, we incurred after-tax expenses of $9.7 million related to our proxy contest and hostile tender offer.

Turning to our results by segment, our Americas Recycling segment experienced a solid quarter at $8.3 million of adjusted operating profit in face of highly volatile ferrous and non-ferrous market pricing.

Average ferrous scrap sold for $309 per short ton during the fourth quarter, which represented a 14% decrease over the $361 per ton reported in the fourth quarter of 2011.

Average sales pricing on nonferrous scrap was $2,655 per short ton, which was down 22% quarter over quarter.

We shipped a total of 520,000 tons of ferrous scrap which was down 19% over the last year's fourth quarter.

We shipped 62,000 tons of nonferrous scrap which was a 15% decrease over last year's fourth quarter.

The Americas Recycling segment recorded an adjusted operating profit of $39.4 million for fiscal 2012 when compared to $43.1 million for the prior year.

The slightly lower results compared to the prior year were mostly due to reduced nonferrous volumes and pricing, down 9% and 14% respectively compared to fiscal 2011.

Nonferrous activity is closely tied to demand in Asia and uncertainty in those markets negatively influence our business levels.

Within our Americas Mill segment, our domestic steel mills generated an adjusted operating profit of $63 million for the quarter compared to $45.6 million during the same period last year, an improvement of 38% on 6% lower sales volume.

Net sales of $494.2 million for the fiscal fourth quarter compared to last year's fourth quarter net sales of $526 million.

We recorded a pretax LIFO income of $19.5 million compared to an expense of $5.1 million for the fourth quarter of 2011.

Metal margins expanded during the fourth quarter of 2012 to $332 per ton, up from $314 per ton during the prior-year quarter.

For the year, net sales of $2 billion were up 8% from $1.8 billion for the full year 2011.

Adjusted operating profit for the full year of $235.9 million was $86.7 million higher than a year ago, primarily due to stronger shipments and margins.

Within the Americas Mill segment, our copper tube mills endured a challenging fiscal 2012 with a backdrop of volatile copper pricing.

During the fourth quarter, the adjusted operating loss was $0.7 million with pretax LIFO income of $2.1 million, compared to a breakeven performance in the fourth quarter of last year with a pretax LIFO expense of $0.7 million.

For the year, the copper tube mills reported an adjusted operating loss of $2 million, including a pretax LIFO income of $3.8 million.

This compares to adjusted operating earnings of $12.5 million, including a pretax LIFO expense of $5.6 million for fiscal 2011.

Our Americas Fabrication segment recorded an adjusted operating profit of $1.5 million for the quarter.

This performance marks the second consecutive quarter of positive results for the segment after breaking a stretch of 10 consecutive quarters of loss.

The average selling price for the Americas Fabrication segment increased $54 per ton over last year's fourth quarter average selling price of $866 per ton.

Pretax LIFO income of $3.7 million was included in the fourth quarter results as compared to pretax LIFO expense of $1.7 million for the comparable quarter a year ago.

For the full year 2012, our Americas Fabrication segment improved $113.4 million on an adjusted operating profit basis.

The average selling price of the segment improved 11%, or $89 per ton, while shipments increased 55,000 tons compared to fiscal 2011.

The backlogs in this segment remain healthy in terms of both volume and total value.

CMC's [WRJR] polish [still] making operation reported an adjusted operating income of $5.4 million for the fourth quarter compared to an adjusted operating profit of $14.6 million for the same period last year.

While volumes were better than a year ago quarter, much of the increase hinged on spot bill of sales.

This segment continues to be negatively affected by the unsettled Euro zone crisis, import pressures from neighboring geographies, and the weakened Polish Zloty.

Operationally, other than shipments, the International Mills segment results were lower than in the prior year quarter.

CMCZ shipped 420,000 tons in the fourth quarter of 2012 of which 65,000 tons were [billed] as compared to 399,000 tons shipped in the fourth quarter 2011 of which 37,000 tons [billed].

The unit melted 404,000 tons as compared to 434,000 tons for the same period in 2011 and rolled 343,000 tons during this year's fourth quarter compared to 386,000 tons during the fourth quarter of 2011.

The average selling price was $570 per ton compared to $679 per ton for the same period last year, a decrease of 16%.

For the full fiscal period, our International Mill segment shipped 90,000 more tons when compared to the prior year, while the average selling price declined $37 per ton.

As a result, the adjusted operating profit for the segment declined 52% year-over-year.

Moving on to the marketing and distribution segment.

CMC's international marketing and distribution segment delivered an adjusted operating profit of $1.5 million for the fourth quarter of 2012 compared to $22.7 million during the fourth quarter of 2011.

The decline in performance from the year-ago quarter is mostly due to weakness in our European trading and warehousing operations as well as our raw materials division.

Unstable economic conditions in the Euro zone, together with ongoing uncertainty in China, adversely affected the operating performance of these divisions.

Our domestic steel import business also experienced a slowing trend, but remained profitable for the quarter.

For the full year 2012, this segment generated $47.3 million adjusted operating profit on 3% higher sales -- net sales.

For the fourth quarter of 2012, net earnings from discontinued operations of $13.2 million mostly due to the $13.8 million pretax gains on the previously announced sale of the shares of our Croatian subsidiary.

Included in this gain is $7.5 million related to foreign currency translations.

As Joe mentioned, these actions were a significant contributor to our Company's turnaround effort.

In addition, the approximate $41 million in cash will further our strategic initiative to build our cash balances.

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

We incurred approximately $3.7 million in expense related to these matters in the fourth quarter of 2012 and approximately $15 million during fiscal 2012.

We expect to incur an additional $3.7 million of these expenses in the first quarter of fiscal 2013.

Capital expenditures were approximately $31 million for the fourth quarter and approximately $114 million for the full year.

We are estimating our 2013 capital budget to be approximately $160 million.

Overall, our balance sheet remains strong.

Cash and short-term investments totaled $262 million as of August 31, 2012.

Our $300 million revolver remains undrawn and we continue to maintain significant unused credit lines that give us significant flexibility to adapt to changing markets.

Furthermore, our financial (inaudible) such as total debt to total capitalization and interest coverage ratio continue to improve compared to fiscal 2011.

Thank you very much.

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

Thank you, Barbara.

In summary, we posted our fourth consecutive quarter of earnings and we netted one of the best years in the history of our Company during fiscal 2012.

As evidence of the progress we are making, the Company received several noteworthy recognitions this past year.

We are very proud to be named Steel Producer of the Year by American Metal Market as the pioneers of the integrated electric ark furnace steel making business model.

Furthermore, Alcoa recognized our recycling division as one of their top 10 North American raw material suppliers.

We have also been recognized by the Steel Manufactures Association for our safety performance and community involvement.

I give thanks to our employees for their efforts and for earnings these honors.

Reviewing again our key highlights for the quarter and the year, our actions to adjust our cost structure have helped to improve the financial performance of the Company.

We reported $30.2 million in net income for the quarter and $207.5 million for the full year.

We generated $109.2 million of adjusted EBITDA in the quarter and $364.2 million of adjusted EBITDA for the full year.

And we generated $196 million in cash from operations for the year.

Our liquidity has improved by $169 million and stands at $914 million.

We declared our regular dividend of $0.12 per share each quarter during fiscal 2012, and all of our operating segments have reported profits for two consecutive quarters.

We reduced SG&A by $30.2 million over the prior year.

Our Americas Fabrication segment continues to produce positive results for the second consecutive quarter.

And in June we completed the stock sale of our Croatian subsidiary and the majority of the assets of our Croatian pipe mill.

In September we completed the sales of the remaining assets and the aggregate proceeds from these transactions will provide us approximately $41 million in cash.

With respect for 2013 outlook, we currently anticipate that business activity will most likely mirror the economic activity we saw in 2012.

However, we have demonstrated that we can be profitable even at current business levels despite the lack of meaningful recovery in our largest end market.

We continue to believe that the United States, in particular, would benefit from greater spending on infrastructure.

We believe that such spending would jumpstart economic growth and help reduce unemployment in a period of general economic malaise.

We, therefore, are supportive of programs that are aimed at investment to expand and renew infrastructure across the United States.

As a reminder, our first quarter is typically a seasonally slower period as weather begins to affect construction activity in North America as well as Poland and Northern Europe.

Overall, we are pleased with our performance during fiscal 2012 and recognize we face continued economic hurdles as we enter fiscal 2013.

With that, we look forward to continued success and progress in the future.

Thank you for your attention.

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

Amy?

(Operator Instructions) Kuni Chen at CRT Capital.

I guess just first off, can you give us a little bit more color on what happened in marketing and distribution during the quarter?

I think that's pretty obvious it's mostly commodity price declines.

But if you could help isolate it for us.

Is it all iron ore are there other contributing factors?

Yes, Kuni, the marketing distribution activity for the quarter this year as compared to year ago is really broad-based.

It's raw materials, it's energy related, our steel trading activities are included in that.

So, while there has been good activity and movement, not at the same levels nor at the same margins as we would have experienced a year ago.

Using the energy business as an example, we deal in tubular products and [SVQ] products and those have all been impacted both in volume and in margin.

Those are examples of some of the disappointment, I guess, on a year-to-year basis in our quarterly performance and international marketing distribution.

Okay.

Just as a follow-up.

Obviously, you guys continue to focus on things that you can control and focus on your cost structure and what not.

Are there any metrics that you can share with us to help us get our hands around the level of cost improvement that you've made over the last couple of quarters or better working capital and what not?

Well, I think that the most obvious is what you are seeing show up on the SG&A line.

And, you can see that steady progress throughout the year.

We will continue to look for additional areas of opportunity in the SG&A category, although I will tell you that we have taken the largest step.

In each of our operating locations, in particular our steel-making operation, they have ongoing cost reduction initiatives that, again, are very broad based from looking at power consumption initiatives to reduce the amount of energy that we use to produce steel to savings and maintenance supplies, every category that you can imagine.

There are ongoing inflationary pressures.

So, many of those activities are really just trying to keep pace with those inflationary pressures, but those are just a few examples.

Good.

Thanks.

I will turn it over.

Luke Folta at Jefferies.

Congrats on the progress so far.

Thank you.

My first question.

In our survey work in the steel space, we have distributors that we talk to that deal with long products have said that they have seen some push-out in some projects they thought would go forward in the fourth quarter and second half but didn't, because of some of the uncertainty around the election and the fiscal cliff and all those things.

I was curious to know if you are seeing that in your business and if that could be some pent-up demand or that could be a potential source of upside for you in steel in the first calendar quarter?

Yes, when you say push outs, Luke, you are referring to construction activity specifically?

Yes.

Yes.

This morning there was I guess what I would call some good news with the ABI index being above 50 again.

It continues to bounce.

We like to look at the activity level or the bidding activity level which has remained well above 50 for a much longer period of time, indicating that there's plenty of project work and pent-up demand, but a lot of the decisions that do get delayed or deferred as a result of waiting for decisions that are eminent or forthcoming.

It's more on the talk side, I'd say.

There's no doubt that some projects have been pushed.

It's more part of the common conversation than it is something that we can point to exactly because there's always bidding activity and project slide for a variety of reasons, but we've seen steady construction activity.

It just doesn't get better, that's the best way to describe it.

And that just to me reflects an overall lack of confidence in the market.

So, projects that are moving forward because they are well funded and there is a meaningful reason for them, I guess it's great there's no speculative sorts of activity, but there's no doubt that fiscal cliffs and the like have some impact on thinking and confidence, but it's hard to measure on a bottom-line bidding activity because that hasn't changed significantly.

Okay.

Does that help you, Luke?

That does.

That does.

Thank you.

And the second one is the fabrication business was profitable again this quarter.

As we look forward to the next quarter, to the extent that we get a scrap price driven rebound in rebar prices, do you think -- does that business stay profitable if scrap prices start to -- rebar prices start to move up here over the next couple of months?

One of the reasons that we have been able to improve our performance in the fab business is because of steady raw material costs.

That's the best way to describe it.

Any volatility can have some negative impact or potential impact.

I guess continued volatility is the worse sort of environment to be in.

Some adjustments either up or down we can weather, the market can weather and withstand, but when I get concerned is when we see a dramatic jump.

Now, our expectation is that while scrap costs have declined and then recovered and declined again, we are expecting a recovery of scrap prices in the winter months as is traditional and very common.

It's difficult to perceive that we will regain all of the lost revenue associated with the recent decline, but you will see an improvement nonetheless.

For fabrication, I would say that is going to impact us if we see continued jumping around of plus and minus, because starts affecting bidding activity and behavior overall.

And by behavior, I mean the bidding and quotation of projects.

So, for the time being we are focused on an approved order book, maintaining a better discipline than we have maybe in the past to ensure that there's some margin in business that we take on even in consideration of volatile raw material pricing, but there's no guarantee that we can preserve that.

Brian Yu at Citi.

The first question is just with the Americas Mill segment.

I noticed that metal margins have improved, lines picked up.

We haven't seen the same degree of profit increase and it seems like conversion costs might have gone up a little bit.

I was wondering if there's anything notable in the quarter that stood out at you or is it just quarter to quarter variances?

Yes.

I would say is quarter to quarter variances.

We had a couple of Mills, South Carolina and Arizona, where the costs were actually down slightly.

South Carolina was related to the fact they were running pretty hard in preparation for a 42-day outage which they are currently undergoing a furnace rebuild as we speak.

So, they built some inventory ahead of that furnace outage.

So, their costs were pretty good.

But, we did see slightly higher costs in Alabama and in Texas.

Texas, specifically, we had an unplanned outage related to some NOx Burner work they did earlier in the year where they had to go back in and do some additional work.

So, that added a little bit of cost and certainly affected their output and their absorption, but nothing out of the ordinary.

As I mentioned earlier, we are starting to see higher energy prices and some pressure on some input materials, but we are trying to keep pace with that through other cost reduction initiatives.

Okay.

Do you have any planned outages to schedule for the November quarter?

Just for us to model out the comparisons?

Yes.

We do have significant outage I mentioned in South Carolina where the 42 day scheduled to come back up the following -- this coming week.

We also have another outage in South Carolina in November, a 15-day outage to upgrade some [PLCs].

And we have an outage in Poland in November where they are going in to do furnace work and some rolling mill work.

These are normal schedule outages.

We would expect higher costs related to all of that activity.

Typically, we'd want to do that kind of work towards the end of this quarter and into the second quarter, our fiscal quarter, Brian.

Also, this is normally scheduled stuff.

Arun Viswanathan, Longbow Research.

My question is on the public worksite.

I guess you guys that the backlogs were healthy and it was one of your better markets.

Can you just describe a little bit more what you're seeing and I guess in relation to some other parts of non-res (inaudible)?

Yes, Arun, I will take that question.

One of the things that continues to be a part of -- an important part of our book and our backlog is highway work, in particular.

In Texas there's still a number of projects on the drawing boards that are close to moving forward, a big part of our backlog is the fulfilment of highway work that was booked a couple of years ago.

We've also seen, interestingly enough, a little bit more active highway work on the West Coast.

So, our Arizona mill is benefiting from a little bit stronger market in California, more driven by public work than by anything else.

Unfortunately, the desert states continue to suffer under the weight of the recession there.

On the East Coast, it's more a mix of public and private work.

As opposed to being highway work it's a mix of activity.

More oriented to the private work than public.

So, we don't benefit from highway work in the east as we might in the central region and oddly enough have in western region.

Okay.

Thanks.

That's all I had.

Timna Tanners at Bank of America.

So, with my two questions, I wanted to ask.

First of all, the CapEx for next year would be a sizable increase.

Can you give us an idea kind of what you have planned for the next year, please?

Sure.

I will cover that.

Timna, one of the reasons that we -- that you will see that increase is we have been telling you in the street that we expected to spend about $140 million this year.

We haven't gotten there.

We ended up with $104 million in actual expenditures.

So, some of it is, I don't want to call it catch-up work because it was already planned for, it just hasn't been implemented.

That's a function of resources and timing and everything else.

But, the major initiatives that we have moving forward is the outage that Barbara has already talked about in both the melt shop and the rolling mill in South Carolina.

We also have improved some capital projects for downstream recovery of metallics in our recycling business.

This is a complement to our investments in shredder capability last year in both Corpus Christi and Tulsa.

We also have the early stages of and will begin a project to upgrade our furnace in Poland.

This is a major upgrade.

Much like what we are doing in South Carolina, going down to the foundation and doing significant restoration.

I will call it like the Brownfield startup, we're going back down to the foundation and putting in a new furnace as well as ancillary equipment.

So, those are some of the major activities that lie ahead.

Plus, catching up on some of the already approved projects is how we get to the $160 million in expenditures.

That also is always a lever, as you know, depending on economic activity.

But we're confident that those repairs will serve us will as the economy improves both here as well as in Europe.

So, a combination of growth, CapEx, and some maintenance, it sounds like?

Yes.

I would say a more significant portion of growth CapEx, particularly on the recycling side whereas the maintenance outage related to repairing furnaces does have some growth element to it as well.

Okay.

If I could get my second question.

Was really to ask about the trading arm distribution business internationally.

Is there something -- I think I asked this before, but I'm still confused.

Is there something that structurally changed there?

It used to be a little more stable and you used to be able to -- if you look at your fiscal 2011 it didn't fluctuate as much as it has this year.

So, is there something that's changed?

How do we think about modeling this going forward?

Is there something in your downgrade of your credit rating or in the nature of the industry itself that we should be factoring in for modeling purposes?

Timna, I'll take a stab at it and Joe can follow on if he has any additional points.

I think we have said that M&D can have lumpy quarters, but if you look at it year in and year out, the total contribution from the M&D segment is fairly consistent and stable.

However, in volatile markets that can create an opportunity for them to really capture a lot of material movement and margin, it can also represent a headwind.

In this past quarter, that's the situation.

I think you all understand the slowing in China and the economic crisis in Europe.

Both of those are having a big impact on both volume and margin of material flow.

I think you heard from our peers significant slowdown in SBQ and other energy-related products and that is certainly having a significant impact on us as well in this current quarter as it relates to the results in M&D because we move a fair amount of those products through that segment and several of those products have been highly profitable products for us.

Now, in 2012, we have the unfortunate mark to market back in the first quarter which is something that we haven't seen since the crisis.

So, I would say last year first quarter was unusual, but the group did a terrific job to make that up throughout the year.

And, overall, their results on a total year basis are on par with other really good years in the marketing and distribution segment.

Brent Thielman at D.A. Davidson.

Just on Poland.

Your volumes were up in the quarter though obviously your commentary is pretty cautious there.

Have you seen some pressures or signs yet of a reversal and for that positive volume trend you experienced in Q4?

Yes.

The greatest impact in Poland was I think we shared with you in the second quarter we saw a sudden, I'll call it a deluge of imports into Poland which really complicated matters in volumes and prices declined really dramatically.

Third quarter, those prices began to recover, and some of the volume as well.

And the fourth quarter is just a kind of a continuation of that.

We also did take a write-down of a fab business of about $3 million which also impacted the quarterly results, making it look a little bit worse than it was.

But we've seen some improvement both in volume as well as in pricing.

We expect the postmark to remain difficult, however.

We're going into the wintertime when things are more volatile and there's less activity and margins do get squeezed.

So, that's typical.

We are working on our mix of merchants versus rebar and still a lot of upside on shipping more merchant.

But the same phenomenon that we have in the United States of what I call a premium for merchants, isn't quite as large as it is -- it's much larger in North America than it is in Europe.

I think that owes to the fact that there's not the same level of consolidation and more aggressive pricing on merchants vis-à-vis rebar in Europe, particularly under the current economic condition.

So, we've been squeezed on that end as well.

Okay.

Thanks for the color there.

And then just secondly, the volume decline in structural and other just with the Americas Mills business, you've been seeing growth there for the last several quarters.

Anything in particular that affected that this quarter?

I can't think of anything in particular other than seasonal.

One of the interesting things that we're seeing is that our shipments, despite the price volatility, have remained fairly steady, Brent, and I think that owes to the fact that inventories are pretty low throughout the distribution chain.

That may be more a function of timing than from missed opportunity.

I don't recall anything significant in the way of change in our shipments.

Do you have the figures, Barbara?

Down a little from 2011, but I don't have any particular items.

So, nothing in particular, Brent.

In fact, we're encouraged that shipments remain as strong as they might be when we see the volatility in pricing because normally there is a lag effect there with price increase announcements and shipments and we haven't seen that.

Volumes have been good.

Aldo Mazzaferro at Macquarie.

I just had a couple of quick ones, actually.

Barbara, I heard you mention a lot about numbers and charges.

And I was wondering if I missed your comment on the tax rate on the continuing operations, why it was so high?

Yes.

The major item there was we had to put up a valuation allowance on some of our tax NOLs in the quarter and I think that was detailed out in the press release about $2.5 million.

So, that was really the major item.

We are in a tax paid position.

Obviously, the rate in the US is higher than the rate in Poland.

So, to the extent that you have lower of earnings in Poland, that's going to cause the overall rate to be higher, but we did have to put up a valuation allowance this quarter which drove the ETR up.

We would probably tell you to model in about a 33% ETR going forward.

So, other than that $2.5 million of the deferred tax allowance, the high rate was because of Poland was, what, contributing less?

Poland has a lower tax rate and their contribution was modest relative to the earnings in the US.

Okay.

And, Joe, here is kind of a strategic question.

I understand the diversity of Commercial Metals is one of the things that you focus on and I can see how the mills and the scrap company and the fabrication go together and balance each other out time to time.

The marketing distribution sector is almost like a wild card within the Company that doesn't really balance the other divisions, it just actually adds to more volatility as it has this quarter.

I'm wondering if you agree with that view?

Maybe would consider this as a possibility of a divestment?

If you look at -- this goes back to the comment Barbara made earlier.

If you look at the marketing distribution business as a segment over time, it's been a pretty stable and steady business for us.

That doesn't mean that there isn't some interglobal volatility because of certain regions, whether it's Australia or Europe or China don't move in sync with one another and probably the biggest issue we have overall is, well, three

fold.

One, the Australian economy still really hasn't recovered.

They are suffering with the burden of a higher dollar.

You can see what that's done to some of our competitors there, not only in distribution but in steel production.

The Chinese economy continues to -- well, it continues to grow below levels that are capable of supporting the total steel production there.

So, that leads to maybe more trading activity at lower margins, but certainly puts a lot of price pressure in the region.

And then lastly, the Euro zone.

For a long time we had talked about the Euro zone being a stable market for us in Poland.

We hadn't been impacted.

It finally did impact us.

I expect that there will be continued pressure on margins and volume levels in Europe, but that will recover with time.

So, the volatility that we are seeing, as Barbara pointed out, the iron ordeal in the first quarter had a significant impact.

Falloff in business is really what's happened in the fourth quarter.

Generally speaking, it's a fairly steady busy for us, but there's no way to counteract all of the things that are going on a global basis, the changes and the shifts in global activity which, ironically, has made North America a much stronger market.

We have heard some of our competitors talk about North America being a good market to participate in, not only because of free trade but because of the fact that while it's depressed relatively speaking to where we were a few years ago, it's been a fairly steady market.

We've seen that even in our construction activity.

Well, we'd like to be operating at more than 75% rate of production utilization, that's what the market allows.

We've adjusted our cost structure.

And that's what help us improve our performance on the domestic front.

So, I won't answer the last part of that question, although it's a good business for us and we're going to continue to build upon it and take advantage of it as we can.

(Operator Instructions) Phil Gibbs at KeyBanc.

Just curious what you're seeing as far as public works spending momentum, particularly at the state level?

Obviously much written about in the press about states having fiscal difficulties.

Wondering what you are seeing there.

I got at this a little bit earlier when I talked with the highway programs and activity that continues.

A lot of that isn't purely state money anymore.

Some of the tollways that are being built in Texas are partially privately funded.

So, it's a joint effort of public and private.

There's no doubt that there are a lot of states that are suffering from the budgetary perspective.

But even here in Texas there's some projections that not as a result of stimulus but just better fiscal policy that there's a potential for surplus.

We don't think that's a reason to be excited that something is going to change dramatically because we do business in more than Texas.

And certainly public funding under the current circumstances for projects is going to require some sort of broader stimulus at the federal level in order to kick start the economy.

We recognize that and that's why we are supportive of any initiative to address the infrastructure or rebuild that's required in the United States.

We all recognize that it needs to be done.

It's a question of where does the revenue come from and what are the offsets?

That's the tough part of -- that's the tough part of the job that politicians have to try to sort through how we kick start the economy and I'm confident that after we get through this election phase cooler heads will prevail and we'll start working on building the US economy instead of focusing on elections four years out.

I think to follow on what Joe is saying, no doubt there is some momentum on the residential side.

Residential construction activity is up, was up quarter over quarter and is up about 16% year-over-year.

That, as you know, is a good leading indicator to non-residential construction.

No doubt, Phil, the public construction activity is -- it was about flat quarter over quarter, but it is down slightly from the prior year.

But at the same time, private spending is up about 12% year-over-year.

So, you have to dig for the positive inside the data.

And there's definitely some good signs emerging here.

Okay.

And then -- I really appreciate all that color.

Anything that we should be thinking about as far as changes in LIFO going forward?

Whether you expect any benefits to continue modestly or it's too challenging to tell end of the first half of next year?

Thank you.

Thanks, Phil.

We expect to have a LIFO benefit in the first quarter, but then it's just really going to depend upon where pricing goes.

The first quarter is a little tough to call right now.

There's been downward price movements thus far, but we could see price movement back up in November.

Our best view right now is that we would see a LIFO benefit in the first quarter.

Mark Parr at KeyBanc.

Phil and I are just in different spots, but we're on the same page.

One thing, Joe, I was wondering if you could just give us an update on the Micro Mill.

How that mill is performing relative to the other operations and if you have any updated thoughts on how you might want to deploy that technology in other locations?

The Micro Mill -- and thanks for that question, Mark, it's a good question.

We didn't touch upon it too much other than when I talked abut the West Coast construction activity in California.

We have -- we're really pleased with the mill and with the technology.

We feel like we've taken full advantage of everything that was designed into it and then some to the point where we've gone back to local authorities for permitting to increase production capability.

We've done that.

And even this month we think we're pretty close to hitting the name plate -- the adjusted name plate capacity on that facility according to the permit.

So, the mill has been really, really successful for us and we're pleased with the technology.

And, yes, we would like to deploy elsewhere, but in the global economy that is over supplied, it's difficult to envision where we might do that.

But we feel that we have a competitive advantage and having operated that facility for a few years now, all the way back to the beginning and designing construction that was a shared project with Denali, and John Elmore who joined us on the international front made comments.

He visited the facility last week for the first time and said that would be a great sort of facility for us to put some place where a regional market production capability would serve us well and we could take advantage of the technology that we've developed jointly with Denali.

It's just difficult to envision where that is in today's global oversupply situation.

So, we reserve the right to take advantage of it, the opportunity presents itself and we'd like to.

It's really worked very well for us.

It's very efficient, low energy cost in terms of conversion costs.

We do pay higher rates in Arizona than we might otherwise.

But that aside, we are pleased with the technology in the facility.

Okay.

I appreciate that.

Just have one other follow-up.

Barbara, I'm not sure if you mentioned what you're seeing as far as scrap outlook for November.

I know you commented that you would expect scrap prices to move higher over the winter.

But do think there's reasonable potential for upside in scrap here as we move into next month?

Mark, I think we both have a crystal ball and it's hard to say.

There's a lot of whisper talk going on and whether or not that will materialize in November, I think it's a little too early to tell, but I think most people believe that there's not going to be further fall in scrap prices and certainly we generally see them move up as we move into the winter months and the January time frame.

Flows have been compromised, Mark, and that has significant impact on availability.

So, that's why -- partly why we're expecting a turnaround.

Nick Farwell Arbor Group.

Can you hear me?

Yes.

Thank you.

I'm curious if you would please update us on the Board's priorities with respect to the redeployment of your excess cash flow over the next, say, period of time?

I'll take that question, Nick.

We just had a Board meeting yesterday.

It's noted we -- they approved the dividend for the quarter.

The Board is fully supportive of our initiatives to improve our balance sheet and improve our cash position.

We have some bonds coming due next year, about a year from now, $200 million.

So, strengthening the balance sheet is important for us to have the flexibility to move whichever direction we might want to move, including further growth of the business through investment or additional M&A activity, or just investing in the business like with our capital plan.

There's some organic growth potential that we still have within the Company that we could fund.

And what we want to do is have as much flexibility as possible and hence the priority to improve our balance sheet and leverage cash.

So, the Board is fully in alignment with that as the near-term strategic initiative and long-term strategic initiatives we really don't talk about publicly.

In terms of deploying capital into building, for example, the recycling side of your business, to what degree does the Board feel that's an appropriate use of capital given the nature of the uncertain economic environment and the perhaps leverage and scale you may get out of that operation with incremental -- ?

So, Nick, let's talk about our business model because there are two components to our recycling business.

Clearly, it's all affected by the market dynamics, but there's a certain part of our recycling business in Poland and North America which is aimed at securing raw material for our mills and if we don't have access to those raw materials, we could pay dearly and drive our costs up dramatically.

So, raw materials is an important part of our recycling business.

So, too, is our retail business.

Not only for ferrous but for nonferrous as well where we've done quite well in the past.

So, some of the investments that were made last year in shredding capability were designed to help us garner some of what we had already invested in the way of yards and collection and controlled the processing, which is good for our bottom line and good for our steel making business as well as our retail business.

And the downstream investments that we will be making this year in recovering metallics help us reduce our cost by minimizing the amount of metallic that are going to the landfill and allowing us to capture the benefit of those metallics and resale in our retail business.

So, those investments are important for us, both the raw materials as well as retail.

In all cases, what we do with our prioritization of capital is measure the returns of those projects before we approve them and prioritize those projects based on strategic need as well as economic return.

And our recycling business is both strategic and economically just -- those investments are both strategically and economically justified.

This concludes today's question and answer session.

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

Okay.

Thank you, Amy.

And thank you, everyone, for joining us on today's conference call.

We look forward to meeting with many of you in our investor meeting in the coming weeks, and we thank you for your attention.

This concludes today's Commercial Metals Company conference call.

You may now disconnect.