Commercial Metals Co (CMC) 2013 Q1 法說會逐字稿

Hello, and welcome, everyone, to today's Commercial Metals Company first-quarter fiscal 2013 earnings 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 affect 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.

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.

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 Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, Mr. Joe Alvarado.

Good morning, everyone, and happy new year.

Thank you for joining us to discuss CMC's first-quarter fiscal 2013 results.

I'll begin with first-quarter highlights and an update of our strategic initiatives.

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

In our results for the quarter, as detailed in our earnings release this morning, we reported net sales of $1.8 billion for our fiscal 2013 first quarter, a decrease of 10% from net sales of $2 billion for the first quarter of 2012.

Sales were down across a majority of our segments.

However, the international mill segment experienced the most significant decline.

We reported net earnings of $49.7 million or $0.42 per diluted share in this year's first quarter compared to adjusted net earnings of $5.6 million or $0.05 per diluted share for last year's first quarter, after removing the effect of a one-time tax benefit.

The first-quarter 2013 earnings did include an after-tax gain of $17 million, or $0.14 per diluted share associated with the sale of the Company's 11% ownership interest in some assets in the Czech Republic.

The sale will also net $29 million in cash proceeds.

This marks our fifth consecutive quarter of positive earnings.

The operational results, after adjusting for one-time items, also represent a substantial improvement year-over-year, despite lower volume, as well as an improvement on sequential quarter comparison.

The first quarter also marked the third consecutive quarter in which all of our operating segments achieved profitability.

As indicated in the earnings release, the Board of Directors declared our regular quarterly dividend of $0.12 per share, for shareholders of record on January 18, 2013.

The dividend will be paid on February 1, 2013.

During the quarter, we generated $126.2 million of adjusted EBITDA, as compared to $55.5 million for the same period in 2012.

The increase in adjusted EBITDA reflects the turnaround in operating performance, including changes in our organizational structure, to improve operational focus.

Difficult but necessary restructuring actions taken over the course of the past 18 to 24 months, as well as shedding unproductive and non-core assets.

Turning to our results by reporting segment, our Americas recycling segment remained profitable in the first quarter, despite reduced volumes in our ferrous and non-ferrous businesses as they were negatively affected by lower demand as compared to the prior year first quarter.

Lower Domestic Mills operating rates, coupled with reduced flow at our yards, contributed to lower volumes during the quarter.

Our Americas Mills segment recorded another strong quarter, with adjusted operating profit of $52.5 million.

The segment's profitability was lower, as our South Carolina mill incurred an extended planned maintenance outage in the melt shop to install a new electric arc furnace and ancillary equipment.

Overall, our US shipment volumes were slightly higher than the year ago, but shipments did decline from our fiscal fourth quarter.

The mix has also shifted to more lower margin rebar.

At the same time, higher-value merchant margins came under pressure this quarter, unable to keep pace with raw material price changes.

Another important highlight for the quarter is the improvement in performance of our Americas Fabrication segment.

Actions taken to restructure and refocus the fab business have now yielded three straight quarters of profitability.

Our Americas Fabrication segment reported adjusted operating income of $10.2 million, a turnaround of $17.6 million from a year ago.

The segment benefited from lower raw material pricing, and improved backlog margin, in addition to lower conversion costs.

Turning to our international business, the International Mills segment's results continue to be negatively impacted by significant margin compression, driven by the economic recession in Europe, along with continued import pressures in Poland.

Our International Marketing and Distribution segment benefited from the sale of our minority interest in the Trinecke mill, as noted in my earlier remarks.

Operating results in the raw materials business experienced a profit recovery compared to the prior year's first quarter, and results in an improvement on the sequential quarter basis.

Market conditions remain challenging in Europe and Australia, where those markets continue to lack a positive direction.

The exit from the unprofitable Croatian business, the turnaround of our rebar fabrication business, and reduction in overhead continued to be the primary drivers of the improved year-over-year results.

Our fabrication backlogs have remained relatively steady, but we have seen some margin pressure, as raw material prices moderated in recent quarters.

From a domestic market perspective, there is growing evidence of an emerging recovery in construction end markets as noted in the Architectural Building Index registering four months in a row above 50, indicating an increasing trend in design activity, which is a precursor to increased construction activity in the future.

We are cautiously optimistic that this is a good leading indicator for future booking activity for our business.

With that as background, we believe that we are uniquely positioned to capitalize on the recovery in construction markets as it materializes.

Over the last six quarters, we have executed on our plan to exit non-core businesses, improve our liquidity and lower costs.

Despite some encouraging signs for domestic recovery and construction activity, we continue to face economic challenges in most of the international markets.

Nonetheless, we are committed to working safely, serving our customers, and improving shareholder return.

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 first quarter of 2013, we reported net earnings of $49.7 million, or $0.42 per diluted share.

We reported net earnings of $107.7 million or $0.93 per diluted share in the first quarter of the prior year.

The prior year net earnings included a tax benefit of $102.1 million, or $0.88 per share, related to ordinary worthless stock and bad debt deductions from the investment in the Company's Croatian subsidiary.

Our quarterly net earnings from continuing operations before taxes improved significantly to $72 million from $29.7 million in last year's first quarter.

This year's first quarter results included pre-tax LIFO income of $23.4 million, compared with pretax LIFO income of $23.9 million during last year's first quarter.

Also included in continuing operations for the first quarter is a pre-tax gain of $26.1 million related to the sale of our 11% ownership interest in Trinecke, a joint stock Company in the Czech Republic.

Turning to our results by segment, our Americas Recycling segment recorded an adjusted operating profit of $4.5 million, despite falling prices and lower shipment volumes.

Average ferrous scrap sold for $322 per short ton during the first quarter which represented an 8% decrease over the $351 per ton reported in the first quarter of 2012.

Average selling pricing on non-ferrous scrap was $2,798 per short ton, which was down 4% year-over-year.

We shipped a total of 503,000 tons of ferrous scrap, which was down 7% over the last year's first quarter.

We shipped 59,000 tons of non-ferrous scrap, which was a 2% decrease over last year's first quarter.

Our Americas Mills segment generated an adjusted operating profit of $52.5 million for the quarter, compared to $57.9 million during the same period last year.

As Joe discussed, we had a scheduled outage for the construction of a new furnace at our South Carolina mill.

We recorded $5.5 million in expense during the quarter as a result of reduced production and related planned maintenance projects.

Selling prices declined during the first quarter of 2013 to $669 per ton from $707 per ton during the prior-year quarter, due to changes in our mix of products as well as lower input costs.

Our Americas Fabrication segment recorded an adjusted operating profit of $10.2 million for the quarter.

This performance marks the third consecutive quarter of positive results for this segment, after breaking a stretch of 10 consecutive quarters of losses.

The average selling price for the Americas Fabrication increased $54 per ton over last year's first-quarter average selling price of $880 per ton.

CMCZ, our Polish steel making operation, reported an adjusted operating income of $876,000 for the first quarter, compared to an adjusted operating profit of $9.8 million for the same period last year.

Volumes declined by 33,000 tons or 9% to 345,000 tons, and margins declined 2% to $223 per ton.

This segment continued to be negatively affected by the unsettled Eurozone crisis, and import pressures from neighboring geographies.

Shipments in the first quarter of 2013 included 15,000 tons of billets compared to 79,000 tons of billets in the first quarter of the prior year.

Our International Marketing and Distribution segment delivered an adjusted operating profit of $40.2 million for the first quarter of 2013, compared to an adjusted operating loss of $4.1 million during the first quarter of 2012.

The improvement is primarily due to the $26.1 million gain on the Trinecke share sale during this quarter, in addition to improvement in our raw materials business which in the prior-year quarter recorded charges on long positions the Company held on iron ore purchase contracts.

Turning to our balance sheet and liquidity.

Capital expenditures were $24.8 million for the first quarter.

Overall, our balance sheet remained strong.

Cash and short-term investments totaled $271.4 million and total liquidity totaled slightly more than $1 billion as of November 30, 2012.

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

Furthermore, our financial ratios, such as total debt to total capitalization and interest coverage ratio continued to improve as compared to the prior year.

Thank you very much, and now I'll turn it back to Joe for the outlook.

Thank you, Barbara.

In summary, we posted our fifth consecutive quarter of positive earnings.

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

We reported $49.7 million in net income.

We generated $126.2 million of adjusted EBITDA, and our liquidity stands at over $1 billion.

We declared our regular dividend of $0.12 per share this quarter, and all of our operating segments have reported profits for three consecutive quarters.

Our Americas fabrication segment continued to produce positive results, and we sold our 11% ownership interest in the non-core asset and received $29 million in cash.

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

We'll take advantage of lower activity levels related to normal weather-related seasonality to extend holiday-related outages and adjust our production output and inventory levels to current demand.

Thank you for your attention.

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

(Operator Instructions)

Our first question comes from Kuni Chen at CRT Capital Group.

Congrats on the quarter.

Just first off, with the fiscal cliff now averted, does that change your outlook or any of your thought process going forward, as far as end market demand, and can you comment at all on any feedback that you're getting from your customers these days?

Yes, Kuni, we commented on the fact that we're cautiously optimistic about the future, and there's a pick up in construction activity.

We've had this sense of what I'll call nascent demand for the last couple of quarters, and if it wasn't the fiscal cliff it was the elections, and if it wasn't the elections it was the stock market so there's always some bugaboo that investors are concerned about.

But generally speaking, the money is available.

There is construction activity and some pent-up demand, so we remain optimistic.

I don't know that we've heard the last of what's going to come out of Washington.

There are always other obstacles that get thrown in the way, and so a lot of matters to be resolved, but we're cautiously optimistic.

And our customers have not been overly optimistic, but we see enough strength in demand and projects that we look to a greater future.

It's all a matter of timing, though, Kuni, and there's still a lot of fiscal matters that need to be resolved, particularly on the spending side.

Right.

Fair enough, and just as a follow-up, obviously the fab performance continues to improve there.

I think the margin that you posted this quarter was about a 3% operating margin, I think, which is the best in well over three years.

Do you see that level of margin performance sustainable going forward, or are there any puts and takes that might add or subtract to that over the next few quarters?

Well, Kuni, I guess all the credit for the improvement in the operation goes to the fab operators in each of our mill operating regions, who are responsible for the fab business, and paying attention to the bottom line and managing the kinds of products that we take on.

Over the long term, our margins, our backlog margins improved, because they've done a better job of taking on projects more responsibly, and not looking at it from the perspective of filling the fab shops, but doing what's right for the region for both the recycling and the mill segment, as well as the fab business, so that whole value chain, I think is starting to pay some dividends, and so a lot of credit to the guys who are making decisions day-to-day to take good business where we can make money, as opposed to businesses that will fill the projects, that will fill the shop.

The next question comes from Timna Tanners at Bank of America-Merrill Lynch.

A couple questions, I'll try to limit them.

But one of the biggest ones we've had is understanding what you're seeing in the construction market besides the ABL, because its been a little misleading over the last couple years as you point out.

There's been maybe offsetting factors, but just anything more detailed that you can provide in terms of what you're seeing on the ground, on the construction side?

Timna, the other factor in the ABL is the quoting activity that they also report, so it isn't just a matter of the primary indicator but secondary indicators, which show activity levels as being consistently high, and consistently in the high 50s, so there is what we believe is pent-up demand.

We have a good enough feel for construction projects which are on the ground, that are more related to commercial.

There's still some public infrastructure, but I guess I'd say that the non-res recovery is still some time off.

It really will depend more on strengthening unemployment levels and some fiscal policy that can support infrastructure spending, but in California and Florida both, as well as in Texas, we see good construction activity, certainly better in California and Florida than we have seen in the recent past, and Texas just remained consistently strong throughout the economic downturn.

Okay, that's helpful.

And then a follow-up question really is, we were looking at your 10K and it shows on the Domestic Mills segment that your capacity for melting and rolling is about 2.8 million, and your recent utilization has been pretty close to that, so in terms of leverage to construction, are we missing something?

Is it going to come from the mill side or more of the fabrication side?

No, we still have some room on the mill side.

It's going through the operations, the Arizona facilities have been running at more or less full rate and we mentioned last quarter that we've increased the capability there by permitting, not by doing anything other than running the facility raw.

Texas has always run very strong and very well.

Where we have some time on the mill is both in Alabama, as well as South Carolina.

That's related to the merchant business, as well as the construction business, and we can exploit export opportunities as well from time to time, and from those facilities.

And we do when it makes economic sense, but there's plenty of room to grow on the mill side as well as on the fab side, and mix is an important part of that as well.

I mentioned in our comments that shipments were more, had grown more on the rebar side than on the merchant side, and margins are being pressured, but margins still are better on the merchant side, so there's some room to grow.

Outage had some distortion to our capability.

Our mill utilizations this past quarter, as we took the South Carolina facility down for a little bit over a month.

The next question comes from Sal Tharani at Goldman Sachs.

On your international fabrication distribution business, there's always an impact from the iron ore price.

I was wondering if iron ore prices came down in the quarter, but you reported pretty good operating profit.

Was there something in there we missed?

Sal, why don't you try that again?

I'm not sure I got your question.

I mean generally, when the iron ore prices have gone down in the past, like last year, you had to take some charges, because you always buy ahead and sell it, and I'm just wondering in the November quarter, the iron ore prices actually did come down quarter-over-quarter, but you reported pretty strong numbers, and I'm just wondering if there's anything we missed in this business.

Yes, so last year's quarter, Sal, was a really unusual circumstance where the market, iron ore market went down 30% in a matter of 15 to 20 days, and it was the timing of our purchases and the precipitous fall in iron ore prices that got our deals hung and our customer backed away.

As we talked about a lot during that quarter, we've done some things, process-wise, to try to prevent us from being caught in a long position like that, with a fairly large exposure.

But last year was an unusual circumstance where we had to mark-to-market that inventory.

We subsequently sold it in future quarters, and recovered some of that.

This year, in this current quarter, you're right.

Iron ore prices are down, but interestingly, there was a lot of spot activity in iron ore this quarter that we took advantage of, and we didn't have price exposure, so we were able to generate a little bit of additional margin in the M&D business and maybe what you had modeled in.

Now, I don't know that we're necessarily going to have that same opportunity going forward.

It was again, sometimes when there's a lot of volatility, that's an opportunity for our M&D business to take advantage.

Got you, and one more follow-up, on the guidance you gave, you have mentioned that, and which is correct, that the February quarter is generally a weaker quarter, but you're seeing some improvement.

Are you saying that the quarter could actually be better than the usual seasonally-weak quarter we see?

No, not at all.

But what we're suggesting, Sal, is consistency with past second quarters, where we're impacted not only by construction activity in Europe and northern America but by the number of shipping days and holidays that fall within our second quarter, even extending to our Australian operations, where essentially the last two weeks of December, and a good part of January is the summer season there, so activity is just slower.

So no, we're expecting the quarter to be light compared to the first quarter, and secondarily, consistent with other seasonal adjustments that we see in the second quarter.

Our next question comes from Arun Viswanathan at Longbow.

I guess my question has to do with the non-residential activity, given that you are more levered to the government side or public infrastructure side.

What are you seeing there, and do you expect typical lag?

What is the typical lag, is it 12 to 18 months or after residential improves?

Maybe you can just talk a little bit about that, thanks.

Arun, while we're presently leveraged more to the government side and we talked in past quarters about the fact that our traditional order book is more related to non-residential construction activity, as much as, say, 70% of our order book.

And today, that 70% non-residential and 30% I'll call government work, has been inverted for the last almost three years now.

So as we see strength in non-residential construction, we see improved potential for margins and less exposure to long-term fixed price contracts.

We look more to the non-res side of the business in improving our bottom line than we do government or project work related to the government, although that business is good for us and it helps base load the mills, albeit at lower fabricating margins, generally speaking.

So we try to manage that balance, and we don't see any growing demand for what I'll call government work until funding issues are resolved, but it would certainly be nice to have the choice between public projects funded by the federal and State governments or non-residential commercial activity funded more by private investors.

We would like to have that problem, and hope that we will in the foreseeable future.

As to the lead lag, anybody's guess.

Traditionally in the past, it normally was, we'll call it a 10 to 12 month lag for construction activity pick up, but under today's circumstances and the experience in the last five years, hard to know what will happen, because every other rule of thumb seems to have gone out the window.

Our next question comes from Evan Kurtz at Morgan Stanley.

Just a couple quick questions on current conditions here.

First on scrap, I'm hearing that January is kind of coming off flat.

Is that what you are seeing as well?

Flat to slightly up.

There's significant differences regionally, Evan.

Coastal regions in particular seem to be impacted a little bit more by export opportunities, driving prices up a little bit, the central regions less so, so we would call it flat to slightly up.

Great, thanks and then also on rebar, just hearing that in December, buyer activity has fallen off there.

Have you seen any signs of improvement so far in January, or is it just too early for that?

No.

It's too early to give any strong indication of what's going on in January and beyond.

Our backlog has remained fairly flat, so while there was a bit of a decline in overall shipments compared to the prior quarter, it's comparable to where we would expect it to be, and close to what we anticipated.

So it's fairly normal, so far, and so we haven't seen any dramatic shift one way or the other.

Great.

Thanks, helpful.

The next question comes from Brent Thielman at D.A. Davidson.

As a follow-up to one of the previous questions, can you talk about what the current mix of private jobs versus public sector jobs is in your fabrication backlog, and where you'd expect to see that, I guess in sort of a normal construction environment?

Yes, Barbara is checking our numbers but I just alluded to a 70/30 ratio of contractor government work versus non-residential and private work.

That has been improving slightly.

We've been as high as 35% on non-residential commercial, and 65% on what I'll call fixed price or government contract work, and it hovers in that range so it's going to be in that 65% to 70% range for what I'll call government work and 30% to 35% for non-residential.

Does that help you?

That is helpful, thanks, and then in regards to Poland, any additional commentary you can provide regarding trends?

I know you see some seasonal pressure, but maybe relative to where you were a year ago, just with respect to volumes and pricing?

Yes, that's a great question because it will help us talk a bit more about what happened a year ago.

A year ago at this time, we started to see a significant influx of imports from neighboring countries.

In particular, new mill start ups in Eastern Europe, and we didn't really recognize it until after the fact.

It was seasonally slow, and it always is slow in the winter there, and when we didn't see order demand picking up, we found out that there had been significant buys made at significantly lower costs, for prices than what we were offering so all of the domestic competitors in Poland were impacted by this deluge of imports.

We've been fighting that all year and trying to get government support and action.

Government and bureaucracies continue to move fairly slowly, and we'll continue to lobby for what I'll call a fair trade in Poland, but we're still seeing some import pressure there.

So the combination of slack demand in the second quarter and import pressure has put significant dent in demand from all of the domestic Mills in Poland, so we're working through that, and expect that to abate with government support, but in the meantime, we still have wintertime to deal in Poland, and it is a slack period.

It always is for us.

Does that help, Brent?

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

Just wanted to qualify some of the commentary you made in the guidance about the scrap market moving higher.

I think as someone else alluded to, it's muted to little flat to up for January.

Based on your comments, are you expecting a stronger February at this point?

Stronger February in the sense of, are you talking about the quarter or--?

Just pricing.

Scrap pricing.

Normally, Phil, we always expect that coming out of the holiday season in the winter months, there's increased demand and activity.

I think we're off to somewhat of a slow start in January.

We might have seen traditionally a little bit stronger demand and higher pricing, and we fully expect it to recover, but I call it a little bit too early to call right now.

Okay and your view of the construction markets domestically, is it more favorable than it may have been on your prior call, or would you say it's more of the same?

Actually more favorable, at least in terms of optimism and confidence, and that's something that we've talked to all of you about, is that what really is missing in the economy is not projects or resources, but confidence to move forward and so the sense of optimism we have is from customers that we talk to, who see projects moving forward, who have a little bit more confidence in the economy.

Not fully to the point where everyone is going really crazy and over-committing on new projects, but talking about bidding, and anticipating some of those projects will start, which will keep operating rates where they are, so we aren't expecting any deterioration or any big pick up.

When we see it, it will probably be too late to have recognized a dramatic pick up, but we do sense that there's enough confidence building, that demand will continue to improve over the course of the year.

The next question comes from Brian Yu at Citi.

Hi.

This is actually [John Sloan] filling in for Brian.

I just had a quick one.

In terms of the adjustment to operating rates in Q2, is there any sense of what the volume decline is likely to be sequentially based on that adjustment to operating rate?

John, we don't give specific guidance.

I would just direct you towards past seasonal trends.

Probably, we might see Poland even a little bit weaker than prior quarters.

You saw in this last quarter that their billet production was down, we use billet opportunities to fill the mill during slack times, and those opportunities don't always present themselves, but I'd say Poland is probably going to be a little bit slower but the US Mills will be a normal trend.

Excellent.

Thanks a lot.

The next question comes from Luke Folta at Jefferies.

Couple quick ones.

Barbara did you give pre-tax LIFO income by segment?

I didn't, but I can rattle it off here if you'd like.

For the recycling, it was $2.3 million, income, for the Americas Mills $4.9 million income, for fab, $7.2 million income, and for M&D, $8.7 million income.

Okay and then second question I had was a two-part question.

One, can you just give us some thought on what you plan to, your spending plans are for 2013, and also along with that, I guess I just want to get a sense of where the long-term strategy is going, because it seems like you guys have done well at executing the cost and debt reduction program, and you've done some portfolio optimization.

Seems like those things are progressing well, but what do you think the next major step is in the long term CMC growth story?

Luke, we continue to manage our balance sheet to improve not only cash flow but to improve the health of our balance sheet, reducing our exposure, our debt to total cap.

We would like to look at any opportunities that make good sense for us, so we still have markets where we are struggling and need to continue to improve, Poland in particular, because of the Euro zone prices, and Australia just because of the general malaise.

We invested recently in both of those areas, and want to capitalize on the investments that we've made, and we're open to figuring out different ways to be creative in growing our business in North America, but they have to make good strategic sense for us long-term and that's something that we continue to unravel and fold, as we find our strengths and weaknesses.

Not the least of which is building up the capability of the workforce, as well as the new operations, and people in new operating positions, and relatively new over the last couple of years.

Do you have CapEx plans for 2013?

Yes, I think we had guided last quarter around $150 million to $160 million for the year, and we're still projecting in that range.

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

I've got a couple of small questions.

On the Americas Mills profits of $52.5 million, Barbara, can you break it down between copper and steel?

That's my first question.

Yes.

[Powell] was 862,000 so a little above breakeven, the balance of course was the mill.

Okay, so copper was 862,000.

Was there any charges that attempt to disrupt the Company last year?

Is there any further charges in the first quarter, and will there be more in the rest of the year?

Yes, we had $3.8 million I think is the number, or $3.9 million in the first quarter and then we will have $1 million that trickled over into the second quarter, and then I think we're done.

Okay, and as far as, let's see here.

And Barry, I'm sorry to interrupt you, also that was a contingent contract so the cash payments also would be made for the full amount of roughly $20 million--

Could you explain that?

I don't know what you're talking about.

The defense, the proxy defense, so we were accruing expenses because it was a contingent agreement.

Okay.

And from the cash flow perspective, the payments were made in the second quarter.

Of last year?

No, this year.

So how many, what kind of payments were made in the second quarter?

Around $20 million.

Okay, so it was a cash outflow?

Yes.

That's helpful.

And do you have -- a useful looking at interest expenses this year net at around $73 million?

Yes, that's a pretty good figure.

Okay, thank you very much.

I think your situation has improved very nicely considering you don't have the leverage certainly in the United States, you don't have the leverage of strong operating tonnage and stuff like that, but you're making very good progress, so I congratulate you.

Our next question comes from Charles Bradford of Bradford Research.

The President's proposal for solving the fiscal cliff included a pretty big expenditure for infrastructure spending, that didn't make it to the final bill that passed the Congress.

Do you have any feeling for whether or not the administration is going to try it again?

I really don't, Chuck.

It's something that we monitor, and we work with closely, with [Comdanchick and SMA], to provide whatever influence we can.

I guess there's a secondary benefit from some of that work, as there was an extension of the tax credits on wind farm energy, and the wind farm business has been pretty good for us over the last three years.

The foundations are concrete and rebar, and it's a project work that we like and while it doesn't fill the mill completely, it's good business to have, so I don't know all of the particulars in what was rejected.

We certainly will be looking at that, but there were some positives, to simply the wind farm.

Could you talk a bit more about the South Carolina mill new furnace?

How much of what was done will add capacity, how much will reduce costs, and can you give us a little bit more color?

Yes, the facility, the operation that we had there in South Carolina needed to be replaced completely, so this is considered all the way down to the foundations, all the way up through the exhaust from furnace.

The whole mill was rebuilt, and it was a good project for us.

Done more or less on time, certainly on budget.

Its improved our throughput and productivity, even to a higher level than we had anticipated this early in the game, so we're really pleased with the furnace work that was done, the new furnace that we're operating, and expect that it will have continued benefit, but it is to dollars per ton, we won't get into that specific.

(Operator Instructions)

Our next question comes from Timna Tanners at Bank of America.

Just a couple follow-ups if I could, please?

Sure, Timna.

Thanks.

So you have $200 million debt pay down later this year, and just wondering if you could update us on your thinking for that?

Yes, I think our thinking remains consistent with what we've commented in the past.

Our objective has been to have flexibility to either reduce the debt and pay it down, or tap the markets if the markets continue to be open and attractively priced.

At this stage, the markets look like there will be some opportunities to extend the maturity on that at some pretty attractive rates, so I wouldn't be surprised to see us go in that direction.

But we want to have the flexibility to go either way, so I think we've been building the balance sheet strength to do that.

Sure and you've got some time.

Just wondering The other big one is that your SG&A and your overhead costs have come down substantially, and I know that was a real focus of yours, but $18 million of corporate eliminations and then $29 million a year ago.

Just wondering how sustainable, what numbers should we be thinking about going forward?

Is this Q1 level for SG&A and overhead something we should be modeling in the next several quarters as well?

Yes, so on the income statement on the SG&A line, I think it showed $99 million, and that included that Trinecke gain, so you need to add that back in there.

But we are on a run rate of I'll call it $118 million to $120 million per quarter of SG&A.

Then on the per segment, I think the $18 million you're referring to Timna, absent I'll call it quarterly one-time things like adjustments to BRP gains and losses or ForEx, that should remain fairly consistent as well.

Okay, thanks a lot.

Next question comes from Sal Tharani at Goldman Sachs.

Joe, generally, when do you start to see the construction-related benefit into your order book for the US?

Is it March or is it before that?

We'll see order pick up more significantly in kind of the February to March time frame.

That's why our third quarter, generally speaking, Sal is our best quarter.

We're a little bit away from that, but if we were going to see any lapse or change in direction from prior years, last prior years in particular, we would start seeing that in the February and March time frame.

Got you.

So that's a good way to gauge it and we monitor closely and keep track of the projects and watch our backlog as well.

Good order intake is normally on the increase in that time period.

And it generally shows up in fab and mill both, or just fab?

More mill, because it's short lived, it's quick turnaround and lead time, our lead times are still fairly short, but there are some fab projects that will also show up.

When we have time in the fab shops with the normal turnaround in the mill of 30 days, some of that business would be seen in the same quarter, but generally speaking, there's a little bit more of a lag in the fab.

Our next question comes from Marc Pomper at MEAG.

Just following up on the debt question.

Sounds like there's some bias and reactions to markets, and obviously they have been pretty wide open.

Do you have as an objective, an improvement or stabilization in your current ratings?

We had an internal objective to get our financial ratios back in investment grade territory, and we are there, but we do not have an expectation that the rating agencies will take action on that in the near term.

I think that their sentiment on the whole sector is still relatively negative, and generally, they're going to want to see a longer-term string of improving signs, particularly in construction before they would make a change in our rating.

Sure, and then just in terms of only so much you can manage that's internally based, but the level of gross debt is one.

Is that something you have an idea of bringing down a level of gross debt, or you just tend to grow the business and keep the debt at a similar level?

Well our preference would be to grow the business, and bring the ratios down, but our second objective is to have flexibility in case there is a set back in our markets and dislocation somewhere But clearly, we can handle the level of debt if the markets continue to improve.

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

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

Well thank you very much, and thank you everyone for joining us in today's conference call.

We appreciate the input and the feedback and we look forward to meeting with many of you in our investor meetings in the coming weeks.

Thanks again, and again, happy new year.

Goodbye.

This concludes today's Commercial Metals Company conference call.

You may now disconnect.