Commercial Metals Co (CMC) 2013 Q2 法說會逐字稿

Hello and welcome, everyone, to today's Commercial Metals Company second-quarter 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 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 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, 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 President and CEO of Commercial Metals Company, Mr. Joe Alvarado.

Good morning.

Thank you for joining us to review CMC's fiscal 2013 second-quarter results.

I will begin with highlights from the quarter, and Barbara will then provide further financial details relative to the results.

Following Barbara, I will close out with comments on our outlook for the third 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 $1.7 billion for our fiscal 2013 second quarter, a decrease of 12% from net sales of $2 billion for the second quarter of fiscal 2012.

Sales were down across most segments with the International segments having experienced the most difficult and the most significant sales decline when compared to the segment's strong second quarter last year.

On the other hand, we did see an upward trend in sales in our Americas Fabrication segment, which is indicative of the emerging US construction recovery.

For our fiscal second quarter, we reported net earnings of $4.6 million or $0.04 per share.

While markets remain volatile, we are pleased to report a sixth consecutive quarter of profitability.

As indicated in the earnings release, the Board of Directors declared a regular quarterly dividend of $0.12 per share for shareholders of record on April 9, 2013.

The dividend will be paid on April 23, 2013.

As we anticipated and communicated when we last spoke in January, our fiscal second-quarter results are affected by the normal seasonal effects of the winter and holiday months.

This year's second quarter was no exception.

In fact, we continue to see extended winter weather conditions in Poland, which are also affecting the start of our fiscal third quarter.

Ongoing economic challenges in the Eurozone and Australia and uncertain growth prospects in China also adversely affected second-quarter results.

Our results and market view by reporting segments are as follows.

Our Americas Recycling segment remained profitable in the second quarter of 2013, despite weaker demand than anticipated, which created pressure on pricing and margins.

Demand for scrap is currently steady in the domestic market but weak internationally, and over the next few months, we expect scrap prices to fluctuate $10 to $20 per ton around current levels.

These price fluctuations will likely vary by region.

Our Americas Mills segment recorded another strong quarter with adjusted operating profit of $48.8 million.

The Americas Mills segment has been able to sustain profitability near or above $50 million per quarter for the past six quarters, despite a softening of merchant product demand in the second quarter of 2013 as compared to a year ago.

On the other hand, our rebar shipments continued to gain momentum when compared to the prior year, signaling an emerging construction recovery.

Unfortunately, the decline in merchant sales adversely impacted our overall product mix and margin for the quarter.

As it relates to merchant products, imports contributed to the decline in both volume and pressure on margins.

As in most years, we took advantage of the seasonal trends to complete a number of planned maintenance items at several of our locations during the quarter.

Our Americas Fabrication segment slipped into a slight loss, reporting an adjusted operating loss of $38.8 million (Sic-see press release "$3.8m") for this year's second quarter.

However, compared to an adjusted operating loss of $10 million for the prior year's second quarter, we continue to see this segment improve overall.

The operating improvement compared with the prior year's second quarter is primarily due to improvements in both shipping volumes and transaction prices.

While our second-quarter North America was impacted by normal seasonal trends, our International market conditions remained even more difficult and uncertain.

When examining our International division, our International Mill segment results continued to be negatively impacted by a decline in volumes of our merchant and wire rod products driven by the economic weakness that continued broadly across European markets.

Additionally, as we highlighted in our last several calls, imported product into Poland, coupled with a strong Polish Zloty, continue to compress margins.

Our International Marketing and Distribution segment's operating results declined compared to the prior year's second-quarter operating results, due mostly to comparative weakness in our raw materials business and our Australian operations.

Economic conditions remain challenging in Europe and Australia, and both markets continue to lack positive momentum.

While we look forward to improving markets, we continue to focus on actions within our control to reduce costs, adjust our output to current demand, and preserve as much margin as possible.

We continue to work reduced schedules in Poland, managing down excess inventory, and we are examining similar actions in Australia's construction markets and Australia continue to lack any stimulation for growth.

Reiterating our view that International markets will remain difficult from a domestic market perspective, there is growing evidence of an emerging recovery in construction end markets, as noted in the February 2013 Architectural Billings Index registering 54.9, the highest level since January of 2007, marking seven consecutive months above 50.

Seasonally-adjusted annual residential construction spending as of January 2013 is 21% higher on a year-over-year basis, which is another leading indicator that nonresidential construction will follow.

Seasonally-adjusted annual private construction spending as of January 2013 is also 12% better than this time a year ago, and industrial production is nearly back to pre-recession 2007 levels.

All these data points are good leading indicators for future booking activity for our businesses.

Unfortunately, weak international markets and increased import activity will need to be monitored.

Increased imports will likely put pressure on volumes and margins in the near term.

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 (Sic) of 2013, we reported net earnings of $4.6 million or $0.04 per diluted share.

We reported net earnings of $28.9 million or $0.25 per diluted share in the second quarter of the prior year.

This year's second-quarter results included pretax LIFO income of $300,000 compared with pretax LIFO expense of $2 million during last year's second quarter.

Turning to our results by segment, our Americas Recycling segment recorded an adjusted operating profit of $2.2 million, despite weak ferrous pricing experienced this winter.

We experienced lower ferrous and nonferrous margins when compared to the same quarter of 2012.

Average ferrous scraps sold for $336 per ton -- per short ton during the second quarter of 2013, which represented a 7% decrease over the $363 per ton average in the second quarter of 2012.

Average sales price on nonferrous scrap were $2815 per short ton during the second quarter of 2013, which was comparable to the second quarter of 2012.

We shipped a total of 515,000 tons of ferrous scrap during the second quarter of 2013, which was a 6% decrease over last year's second-quarter shipments.

We shipped 59,000 tons of nonferrous scrap, which was a 5% decrease over last year's second-quarter shipments.

Our Americas Mills segment generated an adjusted operating profit of $48.8 million for the quarter compared to an adjusted operating profit of $54.4 million during the same period last year.

Selling prices for our Americas Mills segment decreased during the second quarter of 2013 to $682 per ton from $726 per ton during the prior year's second quarter.

Our Americas Mills segment shipped 602,000 tons during the second quarter of 2013, resulting in a 7% decline in volume when compared to the second quarter of 2012.

The decline in volume is primarily due to lower merchant and billet sales.

As Joe mentioned, merchant margins were negatively impacted by price reductions as a reaction to import pressure.

Our Americas Fabrication segment recorded an adjusted operating loss of $3.8 million for the quarter compared to an adjusted operating loss of $10 million during the second quarter of 2012.

Americas Fabrication LIFO income was $500,000 in the second quarter of fiscal 2013 compared to LIFO income of $3.4 million in the second quarter of fiscal 2012, resulting in an unfavorable change of $2.9 million.

The average selling price for our Americas Fabrication segment increased $36 per ton over last year's second quarter average selling price of $914 per ton.

Our International Mill segment recorded an adjusted operating loss of $4.2 million for the second quarter of 2013 compared to an adjusted operating profit of $6.6 million for the same period last year.

International Mill volume decreased by 54,000 tons or 16% to 331,000 tons, and International Mill selling prices declined $8 per ton to $605 per ton during the second quarter of 2013.

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

International Mill shipments in the second quarter of 2013 included 39,000 tons of billets compared to 26,000 tons of billets in the second quarter of the prior year.

Our International Marketing and Distribution segment reported an adjusted operating profit of $3.9 million for the second quarter of 2013 compared to an adjusted operating profit of $26.6 million during the second quarter of 2012.

Our raw materials and Australian operations experienced declines in both revenues and margins during the second quarter of 2013 as compared to the prior year period.

This segment continued to suffer from weakness in the markets we serve globally.

Turning to our balance sheet and liquidity, capital expenditures were $17.1 million for the second quarter of 2013 as compared to $23.4 million in the prior year's second quarter.

The decrease in spending from the prior year was in anticipation of the weaker global economic environment.

We have adjusted our full-year 2013 capital spending estimates to a range of $130 million to $140 million.

Overall, our balance sheet remains strong.

Cash and short-term investments totaled $170.1 million, and total liquidity totaled more than $800 million as of February 28, 2013.

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

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

Thank you, Barbara.

Our third-quarter results have historically been better than our second-quarter results following the holiday season and the winter months.

Our domestic mills should experience improved volumes entering the construction season, and pricing should move in unison with any scrap price changes.

However, we are concerned about the strength of the near-term construction activity as a result of the sequestered budget signed on March 1 and continued isolated regional strength in US construction markets.

Our International Mill and International Marketing and Distribution segments expect a moderate improvement in the third quarter compared to the second quarter, mostly due to seasonality.

We anticipate that the third quarter of 2013 will be profitable.

Thank you for your attention.

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

(Operator Instructions).

Kuni Chen, CRT Capital Group.

I guess just to start off, hoping you could just give us a little bit more color on the performance in fabrication.

Is that really just all seasonal, or were there any other factors behind the swing to a loss there?

And do you expect that to get to back to positive results next quarter?

Most of the decline in the fab business on, I will say, sequential quarter basis because year on year the business is much better.

But sequentially volumes are down, and prices were down.

And both of those factors contributed to a little bit higher operating costs and margin squeeze, but it's more seasonal than anything else, Kuni.

Our fab business is strong and the backlog is good, but there are only so many days in the quarter, and we were unfortunately impacted by that.

I should also point out, Kuni, we had a $7 million LIFO benefit in the prior quarter, and it was pretty muted this quarter.

All right.

That helps.

And as a follow-up, a question on Poland.

We've seen US Steel in the news recently evaluate its position in Europe.

What about you guys and your general thoughts there?

I mean look back over the last couple of years, you've had, I guess, five years or so of fairly uneven profits there and low margins.

The outlook continues to be pretty challenging.

Can you just walk us through your general thought process on why keeping the operation in its current form is the best outcome here?

Well, I guess I'd respond, Kuni, by saying we are not keeping it in its current form.

I commented that we continue to be very aggressive in managing our overall cost structure, and that includes our operating costs at manning in Poland.

It's a little bit more difficult in Poland to make manpower shifts as we might in North America, given the history of the country and some of the labor laws, but we are moving as swiftly as we can.

Over time it's been a good business for us, Kuni, and Poland has exhibited positive economic growth really until projections for this year started to decline, really in line with Germany, whereas the rest of Europe really wasn't very strong.

And there are still continued strong prospects for Poland in the future.

But we have been impacted somewhat by the economy and the catch up in the Eurozone and some of the factors.

But more importantly, we have been affected by what is essentially a VAT fraud scheme that has been discovered in Poland, resulting in imports consuming or covering 50% of the market in some quarters and on an annualized basis close to that level still.

We have been working with federal authorities to combat the scheme.

This is not unlike what happened on scrap about five years ago, and the authorities are working with us and proposing legislation both within Poland and to the EU that would help combat that scheme.

Okay.

And just last follow-up and then I'll turn it over, just on the notes maturing later in 2013, just any general thoughts there on timing and how you will look to address that?

Yes, Kuni, I'll take that one.

We've been monitoring the markets, and as you know, the markets continue to be open and attractively priced.

We do have a big nickel premium on that, and we would like to minimize that as much as possible, but we'll probably make a decision following our next fiscal quarter.

Okay.

Thank you.

Arun Viswanathan, Longbow Research.

First question I had was on IM&D, what's going on there?

Obviously I know that you are getting hurt on the raw material side and distribution, but that segment in the last couple of calls, we have been going -- experiencing quite a bit of volatility, and can that segment -- is it going to recover to over $10 million in quarterly profitability any time soon, or what's your outlook there?

So Arun, let me start with M&D activity includes trading activities in Europe, as well as Southeast Asia and Australia.

We also have trading activities in North America.

The North American results are pretty strong.

The activity that we are engaged in in trading steel products in North America really have been very good and fairly consistent.

We have been pressed on the raw material side, which is also part of our American trading activities.

Europe is depressed and has been depressed, and we're fighting through that.

And Australia is -- is also what I will call economic flat line these days, at least in construction markets.

Mining markets have been really strong, but for distribution we feel we are well poised for whenever there is a recovery.

We just can't project a strengthening economy.

And of lot of this is depending on federal fiscal policy, which is, I guess, up for debate in the sense that there is an election forthcoming.

And in Southeast Asia, our trading activities have been really strong.

Volumes are good, a lot of that owing to long capacity in China being moved into other regions.

But margins are really thin -- just very aggressive trading patterns in Southeast Asia, which while it's positive and we are essentially at our plan levels, it is on higher volumes than we had anticipated because of the lighter margins.

And what about the profitability outlook for that segment?

I mean in years past, it was noted that it could be $55 million to $70 million a year.

Is that still a fair characterization, or how do you look at the earnings power of this segment?

Yes, Arun, and I'll remind you, we don't give specific guidance, and I think for the past several quarters we have been signaling that this segment, because of the pressures that Joe just mentioned, particularly in Europe and Australia, which are essentially offsetting a little bit better conditions in our North America trading business, we expect to be on the lower end of that range.

In the near term, we see that segment getting back to first-quarter levels in the near term.

And when you say in the near term getting back to first-quarter levels, you did $14 million in the first quarter.

This is a pretty significant swing down to $3.9 million.

So you think you can hit something with double-digits in the near term is what I am saying?

Well, a lot of markets will be -- we're expecting seasonal uptick, and so it will depend upon a fairly dramatic improvement in Australia's results.

We do know that we have some additional business lift in Europe that should help improve their results quarter over quarter, and that's also assuming that the trend continues with the trading activities here in North America.

So based on our best outlook, yes, that is achievable.

Okay, great.

Well, that's encouraging.

I guess the other questions I had was just real quickly on the Americas side, just wanted to parse your comments a little bit more.

I mean it sounds like you're getting a little bit more positive on the construction outlook, and Americas Mills continues to do well as you referenced.

When do you see that really showing up in your volumes?

Because by my numbers, volumes were a little bit light, but do you see those improving from nonres in the second half of this year or early next year, and how typical is the lag between the indices that you are watching and numbers actually showing up in your shipment volumes?

Well, we have been asked this question many times and have been offered by people who asked the question whether it is eight months lag or an 18-month lag, and it's probably somewhere in between.

Typical is hard to define these days.

But because the trends are so positive, we remain encouraged about construction markets.

We'll have seasonal strength this quarter as we always do.

Our third fiscal quarter is consistently stronger than our second quarter.

And so while we are anticipating that, it's hard to project exactly when nonresidential will come back stronger.

Our bidding activity is more oriented toward private money business opposed to public.

So that's an encouraging sign.

We've seen our construction services business, some pickup in construction activity on a local basis.

I guess the biggest problem in projecting the change is that some markets are actually fairly strong.

The Texas market is strong.

Florida, South Florida, in particular, has become strong.

California has strengthened.

But other markets are not nearly as strong.

And so until there is a fuller and more robust recovery, it's hard to project when all nonresidential will strengthen.

So --.

I'm sorry.

You said that private was more -- is there a split that you can give us as far as your own backlog or book of business that is between private and public?

Yes, Arun, the normal -- what's been normal for the last couple of years has been about a 70%/30% public versus private, and our bidding activity is moving closer to something like 60%/40%, not exactly 40% yet.

But that's a significant improvement and a divergence from what we've been seeing for the last couple of years.

So I think it points to some of the confidence that we're seeing in construction markets in spite of the lack of direction or policy out of Washington.

But again, it's not universal.

It's very, very segmented into two particular markets that are much stronger than others.

We monitor it closely.

I would like to tell you that we know exactly when nonres will pick up, but it's hard to pinpoint an exact time.

But again, confidence is up, and bidding activity is still good.

Okay.

Thanks.

Thanks, Arun.

Brian Yu, Citi.

My question is, with the steel business in the US, I think, Joe, you mentioned that you're seeing some import pressures, and I know a bunch of mills have announced price increases for March with the scrap.

Are those prices flowing through given your comments on imports?

For the most part, prices are flowing through.

The residual impact of import has really been that some of the announced increases on merchant products did not cover the increased cost of scrap.

So the increases are flowing through, but they aren't necessarily -- because of import pressure, they aren't necessarily covering full scrap cost increases.

So those who have provided price leadership have taken that initiative in response to imports.

But there's import pressure directly in the sense that rebar imports have increased year over year.

We're seeing more significant import of rebar product from Mexico, as well as Turkey, and merchant products are also flowing, in particular from Mexico.

Okay.

And can you comment on just the order entry rates?

Because we've seen domestic steel production rates, and they haven't quite recovered.

I was wondering if you were seeing a pickup in your order entry to suggest better volumes.

Not a dramatically different.

When we look at our order intake, as well as our backlog, they are fairly flat.

We expect and normally see a pickup in order intake about this time of year.

We're optimistic that there will be strength in construction markets on a seasonally-adjusted basis and that will pick up, but there hasn't been a dramatic shift.

It's fairly flat.

Yes, we are definitely seeing that same here.

From your downstream business, are there any insights that you can gain from there to help explain why we're seeing this lag or lack of improvement?

No, I really can't point to any one particular thing.

We are so construction oriented in our downstream that so much of what I said ties back to construction markets.

And some of the other steel segments in terms of the downstream, they are mixed strength in end user markets -- a lot of competitive pressures in the flat rolled arena that we don't quite get exposed to.

So I can't really give you a good reason or rationale other than what I described for construction.

Okay.

Thank you.

Martin Englert, Jefferies.

Just wanted to see if you'd be able to provide the segment LIFO and the copper contribution for the quarter.

Yes.

Let's see, by segment recycling, LIFO was an expense of about $1 million; the mills were $3.5 million; fab was $0.5 million benefit; and code metal was $4.3 million benefit.

I'm sorry, what was $4.3 million for?

M&D.

I am sorry, M&D.

M&D, okay.

And Howell had an adjusted operating profit of $1.1 million and basically breakeven LIFO.

Okay.

LIFO expense.

And then this is circling back on the import pressure that we're seeing on the bar side, I heard there are some rebar imports that are arriving this month, next month, and then there's potentially some also slated for the May/June timeframe?

Are you seeing additional discounting below list prices for either rebar products or merchant bar products that compete with those imports?

I guess in the past, some of the mills have done some foreign fighter discounting.

Nothing, Martin, other than what I already mentioned.

Price increases that maybe haven't fully covered the shifts in costs of raw materials, but otherwise those price increases are being fully implemented.

Okay.

And then I know you spoke a lot about the nonresidential construction and what you're seeing there, and that commentary has been helpful.

Just looking at your backlog at this point this year relative to where it was last year, are you able to see -- is there any kind of growth there on a year-over-year basis?

On a year-over-year basis, we're within 1% on our backlog, so fairly flat and stable.

We would expect it to improve in the third quarter, but as of the end of the second quarter, flat, so, overall.

Okay.

Excellent.

Thank you.

Chris Haberlin, Davenport & Company.

Going back to Poland, can you just talk a little bit about the two drivers there, the weak economy and then the imports?

Which of those are really having the bigger impact on driving the loss this quarter, and what's the outlook going forward for that business?

I know you said that you expect some modest improvement in profitability in F Q3, how should we think about that over the next few quarters given the economic backdrop and the import situation?

Well, Chris, compared to our second quarter last year in Poland, the second quarter was an extraordinarily strong quarter.

We weren't nearly as impacted by weather as we were this year, and our shipping volumes are down significantly.

But the economic results at least in terms of the driver of what is impacting our profitability there is margin squeeze, not only for rebar but for where we're seeing significant imports, but merchant products to the point where merchant products pressure on margin has gotten to the point where rebar and merchant product margins are almost non-differentiated.

So without a doubt, the imports have had a more dramatic impact overall in Poland, not only in this most recent quarter but really for the last three or four quarters.

We first started seeing this problem in -- well, I will say early 2012.

It might have been as early as late 2011, and it has become more pronounced.

And we thought we got some relief from the government over the course of the summer, but unfortunately that didn't happen.

And some of the fraud continued, and it has impacted overall shipments by ourselves, as well as our competitors, all of which are non-Polish-based owned companies.

So it might be that we didn't get as good a year as we thought we were getting, vis-a-vis the distributors which are almost principally Polish-owned, who were taking advantage of the scheme.

Okay.

And then looking at cash flow, I guess working capital is eating up a bit of cash here in the first half.

I guess how should we think about that looking into the second half?

Will we see some reversal of that in H2?

Yes, definitely in the second half, we should see -- as we did I think in the same pattern last year, we should see the inventory and the receivables turning to cash.

This quarter I should point out we consciously reduced our dependency -- we have been reducing our dependency on the use of the sale of receivable program, which was the facility that the Company had used quite extensively in the past.

And that is reflective of the improvements in the underlying cash flows of the business that we no longer need to rely so heavily on the sale of receivable program.

But the second thing, we did also reduce our dependency on deferred letters of credit really to save the financing fees.

As Joe mentioned earlier, while volumes of traded product have been fairly healthy, the margins have been extremely thin.

And so that was a conscious decision to not use deferred LCs and reduce those fees because we obviously have negative carry on our cash sitting in the bank.

And then lastly, you cut your guidance for CapEx.

Should we see some of that shift into fiscal 2014?

And then in the second half, it looks like you're going to have a pretty significant step-up in capital spending.

Can you just talk about what's planned for the back half of the year?

Yes, I'll talk about the first half of your question.

The reduction in the CapEx is really two pieces we talked about last quarter, a CapEx project that we authorized for some downstream recycling equipment, and we just found a creative way to finance that through a leasing option.

And so that's part of the reduction in cash flow projection for CapEx.

And then the other is we had a planned furnace outage in Poland that was due to begin later on this year, and that is really going to spill over into 2014.

But I think the back half of this year are just normal projects that will get going and accelerating here over the next couple of quarters.

So with the Poland mills shifting to 2014, I mean should we expect CapEx next year to be just directionally higher than this year?

No.

I wouldn't think so.

We still will keep it at or around depreciation level.

Okay.

Thank you very much.

Aldo Mazzaferro, Macquarie.

Can you talk a little bit about the currency impact you may have seen in the quarter in Poland?

I see the Zloty was up against the dollar, and I know that dollar was also up against the euro.

So I would bet that the Eurozone is seeing lower currency against what you operate in.

Is that something that penalizes your mill currently there?

The biggest impact to Poland when we see shifts in the Zloty is generally they can't take advantage of billet orders in other regions, and we will opportunistically fill up that mill with billets to utilize the mill shops when we have an advantage with the Zloty.

But our billets shipments were about on par this quarter.

And Aldo, they are pretty sporadic in any case, the billets shipments.

It's really windows of opportunity where there's a demand and a weak enough Zloty that we can make it work.

So it isn't a core business.

We had some normal billet business geographically, but in terms of behaving opportunistically, it really hasn't impacted us in a very significant way.

Great.

Joe, can you talk a little bit about the outage spending on -- I was wondering if you could talk on the severity of it in terms of days of outage or maybe the dollar impact that you had, and I think you said it was in the Americas Mills?

Yes, nothing significant, Aldo, in the way of spend.

We finished the capital upgrade in South Carolina in the furnace.

We had some work that needed to be done, took some time out on the rolling mill.

But what I am really referring to is utilizing down time in any of our mills to do what we would call normal, I'll call it, winter maintenance in anticipation of a stronger spring.

So we had some outages in Arizona that also weren't planned for, but this is just normally the way we operate our business is we use the winter period to do any significant maintenance whether it is with contractors or ourselves to be in good shape for operating full out in the third quarter.

Great.

And just one last follow-up, Joe, in terms of pricing, I know you probably won't say specifically, but can you talk about what the spread between merchant and rebar is now?

I know it is coming down, and it's been amazingly strong -- wide, I think, in the last few years.

I wonder whether we're getting back to a normal spread, or if you want to tell me how much it is, that would be great?

Yes, I don't think I'm supposed to tell you exactly what it is, especially with my lawyer sitting next to me here.

But I try to differentiate -- there's always been a significant difference between merchant and rebar in the US as compared to Poland.

In Poland it has essentially almost gone away.

To say that, we don't price accordingly where we can, but there's been a lot of price pressure.

The pressure in the US has been more related to imports and a little bit more aggressive pricing on merchants vis-a-vis those imported products which have squeezed down margins.

But it hasn't been a dramatic shift.

And I can't give you an exact number off the top of my head, but we can take a look at that, Aldo.

So it still makes sense to chase the merchant market, though?

I mean --.

Without a doubt.

Yes, there is an advantage to the merchant business, and part of our results are impacted by the fact that our merchant shipments were down.

So merchant shipments were down.

MSCI inventories continue to remain really low, and lead times are really short.

So despite that, our margins are still better on merchant than they are on rebar, particularly in North America.

Great.

But you ship more rebar than merchant, right, volume wise?

Yes, we had a stronger book in rebar, quarter-on-quarter, year-to-year basis.

All right.

That's helpful, Joe.

Thanks very much.

Okay.

(Operator Instructions).

Evan Kurtz, Morgan Stanley.

This is [Alexander Levy] filling in for Evan.

Have you seen any of the recent cold weather affect your business or construction activity, or have you been mostly insulated by your geography?

We're more insulated in our geography on construction markets, but certainly the difficult weather conditions do affect our recycling business and pricing for ferrous and nonferrous materials.

So while we're not impacted on flows as much, we can be more impacted.

But construction activity less so.

What we're more impacted by is the length of the holiday season and the less number of shipping days that we have in our second quarter.

So I wouldn't say that we have been dramatically impacted.

We did a little bit of fab business up in the Midwest, but it's not a dramatic shift.

Poland is where we have been more impacted by winter weather.

And particularly as you look at the volume in Poland a year ago as compared to the most recent second quarter or this year's fiscal second quarter, there's been a dramatic shift in reduction in volume really owing to a much milder winter last year than this year in Poland.

Great.

And could you talk a little bit about your copper mill?

How is business there, and what would need to happen for utilization to increase?

Our business there has been pretty steady throughout the year.

We saw more wild fluctuations a year ago.

Residential construction picking up has generally a positive impact on copper tubing business.

And what was the second part of your question?

What would need to happen for utilization to increase there maybe in terms of demand drivers?

As with the rest of our business, nonresidential, as well as residential construction in their case, nonresidential helps our copper business just like it helps our steel fab business.

Great.

Thank you.

Phil Gibbs, KeyBanc Capital Markets.

Joe, can you just elaborate on your sequester cautiousness comments?

Because I know you are somewhat insulated on the public side given your Texas exposure, but I just wanted to dig a little deeper regarding what you were alluding to there.

Yes, what I am referencing and what I'm alluding to is the fact that confidence is such an important part of construction markets moving forward.

And some of the anecdotal stuff that comes out of Washington on sequester and how it's going to impact construction activity or jobs in general always is cause for caution, cause for caution -- that was hard to say.

But that's what unnerves us a little bit is it starts affecting people's psyche and their confidence in the markets.

And so when we hear that, it tempers things a little bit.

We haven't seen any direct impact but could.

A lot of the jobs that have been let were let in prior periods of time, and those will go forward.

But it doesn't mean that we have the assurance that everything will continue to go forward on a new project basis.

So more than anything else, it's confidence.

And that affects the private sector in some regards as much as the public sector.

Okay.

It's just a caution.

Okay.

And regarding Poland, wouldn't the easiest thing for the government to do to help a market leader like yourself and the jobs creator is just to get rid of the tax altogether?

Yes, but the VAT is prescribed by the European Union, so the Polish can't do that by themselves as members of the European Union.

But what we are striving for is to have that tax paid, instead of sequentially throughout the supply chain, at the end user level, which is where it would be most appropriate.

The VAT just goes back and forth between buyer and seller.

Ultimately it should be paid by the end user and some obligation to make sure that the tax is paid.

And so because it is supplier to vendor throughout the supply chain, there's always room for fraud for what I'll call paper companies being set up and then suddenly VAT disappears.

And that 23%, that is a significant chunk of change for opportunists and people who are willing to take a chance in the face of the law to do it, and it's gone with those funds.

That is what we saw in scrap, and that's a little bit of what we are seeing in the distribution supply chain for rebar products coming into Poland.

Okay.

Just lastly, if I could, your line of sight on IM&D, can we get back to a 3% segment operating margin there in the next six to 12 months?

Is that possible?

I think your guidance somewhat would get us near there but below that level.

But it's a seasonally strong quarter, more on a recurring basis, when can we get to that level?

Thanks.

And what would you need to see to get to that level?

Yes, Phil, I think a lot depends our Australian operations and how well they can recover from this timeframe that we're in right now and the pressures that they are under.

And I think Joe mentioned earlier that the government there has not done anything to stimulate their economy.

While mining has been doing well, construction has been down, and they are experiencing a similar situation to the US.

We're hopeful that now that they've called for an election, that maybe they will take a -- the government will take a different posture and become a little bit more stimulative.

But Australia is going to be the swing factor for us, I think.

Timna Tanners, Bank of America/Merrill Lynch.

Just wanted to take a step back and a lot of questions already addressed, but one thing that I still want to understand better is hypothetically, let's just say that the ABI is wrong or it is an 18-month horizon.

Can you just remind us what kind of activities or initiatives you have to further your own earnings profile without a construction recovery or irrespective of a construction recovery?

Yes, I can.

It's what we've been doing all long for the last three years here is aggressively managing our own cost structure, whether it is SG&A, conversion costs, energy costs, manning levels, and we continue to do that on a daily basis.

We've reduced our SG&A dramatically.

We've improved the efficiencies in our operations.

And I've also shared with you some of our approach about going to market on a regional basis and not deluding ourselves into taking business that really doesn't contribute to the bottom line.

And I think we've become much more disciplined about taking on business that's profitable as opposed to taking on business that just fills the mills.

We don't see our competitors doing that all the time, and it's somewhat disconcerting.

But we just walk away from that business.

And ultimately, we believe that's the right thing to do, not only for profitability but for our shareholders and for utilization of our operations.

So it is a multi-level effort that we have from our raw materials procurement down to the way we sell our fabricated products.

So is there a lot more that can be down there?

Because granted, of course, you've been talking about the initiatives there and the improvements since you became CEO, but just wondering, are you in the final innings, or is there always a lot more that can be done?

Are we talking dollars?

Are we talking about tens of dollars of cost savings?

Just if you could help us there.

Timna, I'll answer it by saying that our mission in life is continuous improvement.

So whether it's improvement in margin or improvement in cost, there's always a gain.

But if you're asking about, for example, SG&A taking out another $30 million in SG&A, that's more difficult to envision, but can we continue to improve and reduce?

Yes.

And we will.

And we have this quarter.

So it's a continuous effort, Timna, and there's no end to it.

And that's what we are here to manage.

And at the same time, not assume that markets will get better, but we do look forward to them improving.

And they will.

For sure.

Okay.

Super.

For sure.

And then the only other question I had was on recycling.

It's going to help that market get better?

I don't think we even touched on that, so I thought I'd just throw out any visibility?

I know at one time you were talking about growing out your recycling operations, a little more optimism there.

And what has changed or if anything in your outlook in not recycling longer-term?

For me at least when I look back over the last few months, the recycling business issue is one of consistency.

Volatility, as we said before, isn't necessarily good when it's down or when it's up and down.

But consistency in pricing, in raw materials, with some slight improvement in the cost of scrap, the ferrous products is actually good for us.

So the volatility is, I think, what hurts us all the most.

We concentrate on -- we're about half retail and half our own consumption.

So where we can, we utilize the consumption of our ferrous product rev and speculating in international markets.

And that always been our core business is balancing our supply with our retail and our consumptive demand.

So I think for the time being, because we're expecting continued volatility, the recycling business will be challenged.

And until global demand improves, including in particular in Europe more consistently, it's going to contribute to that volatility.

Sal Tharani, Goldman Sachs.

I wanted to ask you, Joe, does it make sense to have still these five divisions in the business, or do you think that like in the sense scrap, steel, and fabrication maybe have some synergies across?

Do you still want to be in trading?

Does it give you any synergy?

It grew a lot at one point and did very well.

I just wondered if it is worth spending time on that business, or is it something you think you can exit?

And also Poland I think you already answered the difficulties in getting internal labor relationships also, but I'm just wondering if trading is part of the business or is one segment which you can get away with and concentrate more on your core business of steel and scrap.

Sal, have you been talking to Aldo?

Because he asked this question last time.

Okay.

No, I did not.

And whenever we fall on difficult times, it's a question that we are asked frequently.

The way that I will respond, Sal, is the trading business has been good for us.

Over the cycle, we are going to have bumps and bruises, but the trading business has been good for us and there are synergies.

And probably 90% of our trading activities is in some way, I will call it, steel related.

It can be in providing products for refractories or for steel or for coke production.

We are selling to a large number of our competitors and to other steel producers.

So yes, we do get a good window into what's going on in activities on a global basis.

We see trends coming out of China I think significantly earlier than others might see them because of our trading activities.

So yes, there are some synergies.

We flow a lot of product into -- raw materials into North America, as well as into China, from South America and back and forth between Australia and China or the southeast Asia region.

So yes, it gives us a good feel for the pulse of what's going on there.

We'd like it to be more consistent.

We wouldn't like the margin pressure to be as great as it is, for example, when the Chinese are moving as much product as they are moving out of China into Southeast Asia, but it does give us some insight into their own synergies.

And we've exploited that in sales of raw materials, as well as some sales of semi-finished products, and in some instances, finished products, as well.

Okay.

I'm not sure you made a comment, but has there been any change in the backlog on the fabrication business in the US?

Yes, the bidding activity is up significantly.

I believe at 40%.

But in terms of the backlog right now, it's flat year on year about within 1%.

Okay.

And Australia, how big is your business Australia is of your total trading platform as you report as one segment?

Well, Australia, there are three components to our Australia business.

One is raw materials trading.

The other is steel trading.

And the third is distribution.

The largest of those is the distribution component itself.

We have roughly 13 locations in Australia where we store and distribute steel products.

So 20% -- what does that say?

22% to 25% -- it's about 25% of the overall M&D.

Yes.

Is Australia all three combined or just the distribution?

That would be all three combined.

Okay.

And you've seen a slowdown in all three, my assumption is.

Yes.

And when we bring raw materials in, we're selling them to steel producers like Arrium -- well, OneSteel and BlueScope, and they've cut back their production.

We bring in a lot of long products for construction markets, so we've already commented that that's been a pretty slow market for us in Australia.

So yes, it's really across the board in Australia.

Okay.

Great.

Thank you very much.

Thanks, Sal.

Thank you, Sal.

This concludes our question-and-answer session.

I'd like to turn the conference back over to Joe Alvarado for any closing remarks.

Well, thank you, Emily.

I appreciate that, and thank you to everyone who's on this call for joining us today.

We look forward to meeting with many of you in our investor meetings in the coming weeks and look forward to talking to you again at the end of our third quarter.

Thank you.

The conference has now concluded.

Thank you for attending today's presentation.

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