Commercial Metals Co (CMC) 2013 Q3 法說會逐字稿

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

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 economic conditions and the Company's future results, prospects volumes, pricing, and profits.

These statements are considered forward-looking 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 and 10-Qs.

Although these statements are based on management's current 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 or 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 and thank you for joining us to review CMC's fiscal 2013 third-quarter results.

I will begin with highlights from the quarter.

Barbara will then provide further financial details.

And I will close out with comments on our outlook for the fourth quarter fiscal 2013, after which we will open the call for questions.

As detailed in our earnings release this morning, we reported net sales of $1.8 billion for the third quarter of fiscal 2013.

A decrease of 10% from net sales of $2 billion for the third quarter of fiscal 2012.

However, we continue to see an upward trend in sales in our Americas Fabrication segment.

For our 2013 fiscal third quarter, we reported net earnings of $19 million, or $0.16 per diluted share.

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

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

The dividend will be paid on July 23, 2013.

As we anticipated and communicated when we last spoke in March, our fiscal third quarter results are historically better than our fiscal second quarter results, as the construction market picks up in the spring.

This year third quarter was no exception.

Although modest increases in key directional indices continued to show signs of recovery in construction markets, these positive trends were more than offset by margin compression, caused by declines in selling prices across most of our segments and continued import pressures.

Extended weakness in global demand and significant over-capacity in Europe and China have depressed steel prices and margins, and negatively impacted results in our International segments.

Our results by segment and our market view are as follows.

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

In the near term, we expect scrap prices to fluctuate $10 to $20 per ton around current levels.

Our Americas Mills segment recorded another strong quarter, with adjusted operating profit of $47.5 million.

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

On the other hand, our rebar shipments continued to strengthen when compared to the prior year, signaling possible improvement in construction activity.

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

Imports into the US continued to pressure margins on our range of merchant products.

I'm pleased to report the performance of our Americas Fabrication segment, which recorded an adjusted operating profit of $13.5 million for this year's third quarter, as this marked a significant improvement over the prior year third quarter adjusted operating profit of $200,000.

In addition, this quarter's performance is a turnaround of $17.3 million compared to the second quarter of this fiscal year.

While our third quarter in North America was impacted by typical seasonal trends, international markets remain more difficult and uncertain.

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

However, the adjusted operating loss recorded in this year's third quarter of $3.8 million narrowed when compared to the second quarter of this fiscal year as a result of better shipments and improving margins.

While we showed a modest loss for the quarter, the month of May was profitable as seasonal volume demand materialized.

Inventory of imports into Poland, coupled with a strong Polish zloty, continued to impact this segment.

Our International Marketing and Distribution segment's operating results decreased compared to the prior year's third quarter, due mostly to revenue and margin declines in our raw materials business and losses from our Australian operations.

Construction markets in Australia continued to display weakness amid soft Australian GDP growth and oversupply.

Challenging market conditions in the global markets we serve, in particular China and other emerging markets, also continued to negatively impact this segment's results.

While both domestic and global markets are not improving as quickly as we would like, we have continued to improve operations by reducing costs and improving efficiency in manning and product mix.

In addition, we have taken actions in Poland to adjust our workforce and production schedule to current demand levels.

Lastly, weak markets in Australia have not improved, and near term expectations are unchanged.

Domestically, seasonally-adjusted annual residential construction spending has continued to strengthen year over year, which is a key leading indicator for improvement in non-residential construction spending.

April's architectural billing index broke a string of eight consecutive months registering above 50 before rebounding in May to 52.9.

Private construction activity improved not only in the aggregate but as a percentage of total construction spending.

We continue to be encouraged by these data points which are good leading indicators for future booking activity for our businesses.

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

The level of imports will impact our volumes and margins in the near term.

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

Barbara?

Thank you, Joe.

And good morning, everyone.

As Joe mentioned, for the third quarter of 2013, we reported net earnings of $19 million, or $0.16 per diluted share.

We reported net earnings of $40.7 million, or $0.35 per diluted share, in the third quarter of the prior year.

This year's third-quarter results include a pre-tax LIFO income of $16.5 million compared with pre-tax LIFO expense of $4.6 million during last year's third quarter.

Turning to our results by segment, our Americas Recycling segment recorded an adjusted operating profit of $3.2 million despite a 6% decline in ferrous selling prices.

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

Average ferrous scrap sold for $331 per ton during the third quarter of 2013, a $23 increase from the $354 per ton average in the third quarter of 2012.

Average sales prices on non-ferrous scrap decreased $132 per short ton, or 5%, when compared to the third quarter of 2012.

We shipped a total of 532,000 tons of ferrous scrap during the third quarter of 2013, which was a 10% decrease over last year's third-quarter shipments.

We shipped 56,000 tons of non-ferrous scrap, which was a 7% decrease over last year's third-quarter shipment.

Our Americas Mills segment generated an adjusted operating profit of $47.5 million for the quarter, compared to an adjusted operating profit of $59.3 million during the same period last year.

Selling prices for our Americas Mills segment decreased during the third quarter of 2013 to $671 per ton from $715 per ton during the prior year's third quarter.

Our Americas Mills segment shipped 640,000 tons during the third quarter of 2013, resulting in an 8% decline in volume when compared to the third quarter of 2012.

We experienced volume declines in both billet and merchant products when compared to the third quarter of 2012.

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 profit of $13.5 million for the quarter, compared to an adjusted operating profit of $200,000 during the third quarter of 2012.

For the segment, LIFO increased $5.2 million to LIFO income of $3.7 million in the third quarter of fiscal 2013, from LIFO expense of $1.4 million in the third quarter of fiscal 2012.

The average selling price for our Americas fabrication segment increased $40 per ton over last year's third-quarter average selling price of $946 per ton.

Our International Mill segment reported an adjusted operating loss of $3.8 million for the third quarter of 2013, compared to an adjusted operating profit of $1.3 million for the same period last year.

International Mill volumes decreased by 49,000 tons or 13%, to 325,000 tons.

And selling prices declined $42 per ton to $582 per ton during the third quarter of 2013.

Similar to the Americas Mills, billet shipments were down compared to the year-ago period.

This segment continued to be negatively affected by market weakness across Europe and by import pressures.

Our International Marketing and Distribution segment reported an adjusted operating profit of $7.7 million for the third quarter of 2013, compared to an adjusted operating profit of $23.3 million during the third quarter of 2012.

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

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

Turning to our balance sheet and liquidity.

Overall our balance sheet remains strong.

Cash and short-term investments totaled $453.3 million.

And total liquidity totaled more than $1 billion as of May 31, 2013.

As previously recorded, in May 2013, we issued $330 million 4.875% senior notes due May 2023.

The net proceeds of $325 million were used to repay our $200 million 5.625% senior notes due November 2013.

And the remainder will be used for general corporate purposes.

Capital markets have backed up considerably since our offering, and we're extremely pleased with the timing and execution of the deal.

We continue to maintain significant unused credit lines that give us flexibility to adapt to changing markets.

Capital expenditures were $21.2 million for the third quarter of 2013, as compared to $29.1 million in the prior year's third quarter.

We estimate that our full-year 2013 capital spending will be in the range of $100 million to $120 million.

Thank you very much.

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

Thank you, Barbara.

Operationally we anticipate results during our fiscal fourth quarter to be similar to our results for the quarter ended May 31, 2013.

Non-residential construction in the US is showing some regional improvement but still lacks signs of a broad-based recovery.

Our International Mill segment should continue to show progress as compared to this year's third quarter, mostly due to improved shipment volumes.

With that, we expect recovery in the European markets will continue to lag the rest of the globe.

Our international Marketing and Distribution segment will be challenged until the global markets in which we operate display sustained improvements.

Thank you for your attention.

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

(Operator Instructions)

Luke Folta of Jefferies.

Hi, good morning.

A couple questions.

First, it's encouraging to see that the Polish business generated some profit in May.

I understand you guys have been cutting costs there.

And also that perhaps some of the import pressure that you had been seeing, it may have abated somewhat.

Can you talk about just what the overall drivers were?

And also, to the extent that you think -- is this something that we can expect to occur in the next quarter where you can -- bottom line, do you expect positive results in the next quarter out of Poland?

Yes, Luke, this is Joe.

We've been cautiously optimistic about the summer in Poland, recognizing that the legislature still hasn't concluded their work.

However, the impact of the Latvian mill shutting down, as well as normal seasonal improvement in demand for construction products has helped improve operating rates.

And has allowed margins and selling prices to recover somewhat.

There's still a bit of an overhang of inventory from Latvia.

As you know, they scrambled very aggressively before shutting down.

And a lot of the VAT circumvention hadn't been completely discovered.

So we know that we are fighting some inventory and as a result of that, it will be difficult to continue to raise prices.

But we'll do that every opportunity we can as demand continues to improve.

But until we have the VAT completely resolved, we want to remain cautiously optimistic.

But we're looking forward to a stronger quarter in the fourth quarter in Poland.

Okay.

Also, can you talk about what you're seeing as far as merchant bar imports into the US?

Is that a trend that has started to abate?

I won't call it -- I can't say it's abated just yet.

This is and has remained an attractive market, including for merchant products coming from south of the border.

In particular, that's where the imports are coming from.

The impact has been on volume, but even more significantly on pricing.

And that's what's compressed our margins and impact profitability in the sense that, as a percent of our mix, the product is down slightly, but prices and margins are down more significantly.

Do you expect more of the same as far as the Americas Mills performance over the next couple quarters?

Yes, on average, we are looking at continued performance at current levels until we see a spike in demand for merchant products.

If you look at the MSCI inventory numbers, they remain pretty flat.

It suggests that there's opportunity for growing stocks when they see demand, and that could create some demand for product.

And on the rebar side, construction market remains, it's okay.

It's flat.

It's improved slightly, our rebar shipments from a year ago.

But we really see the markets, Luke, as being sideways, more than anything else, on a year-to-year basis.

And that gets back to the confidence factor, and trying to predict when non-residential construction will get stronger.

Thank you, Luke.

Phil Gibbs of KeyBanc Capital Markets.

Hi Joe, Barbara, good morning.

It looks like early indication for scrap for July looks up a bit versus June.

Do you think you have the ability to see higher prices for rebar in merchant into July and August?

Or is it just too early to know at this point?

It's always too early to know until we start transacting.

And maybe, Phil, your conjecture is based on some of the outage that's been announced recently that's creating some additional demand for those that don't have blast furnace problems.

I would expect that that might put some pressure on scrap.

But until we start going through the books and settling, it's hard to know for sure.

But that's not bad to surmise.

We said we would see price moving up and down, as we normally do this time of year, plus or minus $10 to $20 a ton, and still expect that.

But we could be surprised, certainly.

Okay.

And can you talk about some of the regional disparities in the book?

What are the puts, what are the takes as far as the construction book in the US?

Yes, happily.

The way we describe our market base is, Texas has always been a stronghold for us.

And it's remained a strong construction market, albeit more highway work than non-residential the last couple years.

But non-residential continues to strengthen just at a slower rate than we would like.

The stronger markets outside of the Texas market happen to be in California, South Florida, and the Beltway.

And the issue, and why we talk about regional recoveries as opposed to broad-based, it's all the areas in between -- between Texas and California, between Texas and South Florida, or between South Florida and the Mid Atlantic.

A lot of those markets still remain fairly flat, and not nearly as robust in construction activity.

Business is good but it's just very flat year on year.

So until we see broader economic recovery and broader construction, it's hard to surmise what's going to drive confidence enough to see investors investing in non-residential, beyond just residential construction improvement.

No doubt that that will spur it, and so, too, will some of the construction related to the building of plants and manufacturing facilities because of lower energy costs in the United States.

But that's just a slow growth, not a dramatic growth opportunity.

Okay.

I think your stance there has been pretty consistent over the last several months.

And on California, in particular, is that a mix issue more into the private side?

Because our perception is that the public markets there are fairly challenged.

It's broad-based.

There have been a fair amount of public projects as well as private.

It maybe differs a little bit by region, northern to southern California, but in the aggregate there's an overall strengthening, both on the public and the private side.

Thanks a lot.

Appreciate it.

Good luck.

Aldo Mazzaferro of Macquarie.

Yes, hi Joe.

How's it going?

I just had a question on your product mix going forward.

Do you think there's a possibility -- I'm not talking about diversification into things like flat-rolled or anything, but within the bar business there's some opportunity for assets that are for sale in the higher end alloy bars.

Do you think you have an interest in any of those kind of assets possibly?

One of the things that we've talked about in the past, at least in terms of strengthening our product portfolio, is that we're limited to only merchants and rebar, for the most part.

We have fence posts, and fab business is really important to us.

But we do make some, what I'll call, higher-end merchant, lower-end SBQ products in some of our operations.

But it's not the majority of our operating strength.

The only way that we could really get into the SBQ business, for example, or the structural business, would be to build a mill, whether it's light structural or large structural.

And, of course, we talk about over-capacity on a global basis, and even in North America there's plenty of capacity.

If opportunities present themselves where we can strengthen our portfolio of products, we think that would be good for the Company and good for our shareholders.

But it has to make economic sense.

And in my view, not extend the capacity issue and bring it to North America, as well.

Right.

So, rather than in greenfield, if it were acquisition opportunity, how would you feel about United Steel Workers Unions?

Having been one myself a long time ago, a card carrier for a very short period of time and having dealt with unions in the past, we have no reservations about working with unions.

That wasn't the strategy of the Company in years gone by.

And as a result a lot of the consolidation was precluded from becoming a part of Commercial Metals because of, I guess, a concern for unions.

But we're prepared to deal with unions if that's part of the equation of going forward with an entity.

Great.

And my final question, on the international M&D business, you mentioned it was going to remain subdued as the markets remain subdued.

Would you say, would you go far enough to say that you think the earnings might stay in this range as you're going forward?

Or do you see any changes ahead?

Aldo, you snuck a third question in there, didn't you?

(laughter)

I thought it was a follow-up and a separate second.

(laughter)

That was pretty good.

International continues under pressure.

The unknown factor here is the impact that Chinese exports will have.

Demand in China is soft.

We know that.

There are a lot of activities for export, which is good for our trading business from a volume perspective in Southeast Asia.

But there's a lot of pressure on margin and Chinese always have a spillover effect.

We've seen some imports, for example, from Korea -- rebar on the West Coast.

And had not seen imports from Korea for a long time.

And I suspect that that may be partly because they are getting squeezed by the Chinese and Southeast Asia and markets they might otherwise be serving.

So the big question for us is the overhang of capacity.

I wouldn't want to speculate that we're going to see dramatic changes either positive or negative.

But we're monitoring it very closely because the economics of doing business in China are very different than the economics of doing business here.

They continue to operate even at what we know are very low prices, while still paying up for iron ore.

So, it's not a scenario that makes economic sense but they continue to ship.

And it pressures the market.

Okay.

Sal Tharani of Goldman Sachs.

Thanks.

Hi, Joe, Barbara, how are you?

You used to sell billets out of US and Poland.

Is that still an option to do that?

When it makes economic sense.

These days neither from Poland nor from the US have we been doing much billet sales.

There's been a lot of pressure on prices and margins and plenty of availability.

So, no, we haven't been pushing much in the way of billet product.

But we'll do it from time to time.

Okay.

The quick question is, I was looking at your elimination numbers, and despite quarter-over-quarter higher revenue, elimination was significantly down.

Is that something, is that less material transfer or is it lower price material transfer internally?

Yes, Sal, if you look at it on a year-over-year basis, one of the big changes is the fact that we no longer have any of the takeover defense expenses.

And then it's just other cost containment items.

Professional services was one category that was down this quarter over prior quarters.

And that tends to ebb and flow based upon projects that we have going on.

Okay.

And does that also include your ERP system you were putting in?

Historically, I'm sure there was expense that flowed through that corporate line.

Obviously we've concluded the majority of that activity.

And part of the major shift in SG&A was the rebalancing of our overhead cost as a result of concluding that work.

Michelle Applebaum of Steel Market Intelligence.

The rebar fab business, you did the best in three years.

And I'm wondering, at least part of it was due to crummy prices on bars, right?

Yes.

We've talked long and hard about the fact that there's a timing issue.

Raw material prices for the fab business are going up faster than we can cover them on the sale of fabricated product because we're locking in at certain levels.

The reverse is true when raw material prices are going down.

There's some enhanced margin.

But I wouldn't attribute it all to that, Michelle.

That was my question.

It looks like it's more than that.

Yes, I believe it is.

We've talked about how we've organized ourselves regionally to manage the stream of raw materials from scrap to finished product and fab shop.

And I sincerely believe that those that have responsibility for the P&L on a regional basis are doing a better job of screening jobs, of not taking on business that doesn't make good economic sense, passing on opportunities where we might lose money on a project to wait for opportunities where we can make money and we're assured of a margin.

It's still very competitive though, Michelle.

It's easier said than done but I think we're doing a much better job of screening the work that we take on.

There's been a little bit of shake out.

Do you think that we still need to see more to have real pricing power beyond the commodity?

On the fab business, Michelle?

Yes, on the fab business.

I'd like to say that -- well, first off, there's been a lot of consolidation and I'd like to say that more consolidation is better.

But in the end, I think we all have to recognize, particularly when demand is strong, that barriers to entry into the fab business are not that great.

So there's always potential that independents would become much more active than they have been.

But, sure, consolidation helps substantially.

And I think we've seen some benefit from that but in the aggregate we're still, I think, the three majors, only about 50% of the fab capability.

Okay.

The second question, when Nucor starts up their DRI facility in the coming months, A -- I'm going to make this into one question -- A, can you comment?

You've already snuck in your third, but go ahead, Michelle.

Oh, no it was a follow-up.

(laughter) It was a clarification on your comment.

A, can you talk about what's going to happen, your view on how that will impact the scrap market.

And, B, I bet you get a lot of questions on your, quote/unquote, DRI strategy.

I think every company is dealing with this right now.

And so can you give us the quick one-liner on why a DRI strategy might not make sense for your Company?

And why it might not make sense for a lot of companies.

Yes.

Let me start with that.

Because my view, as I understand it, is a significant portion of what Nucor will be doing with their DRI is substituting it for pig iron, which they've been large buyers of pig iron, And they need virgin iron units for the varied applications and high-quality applications that they are engaged in, in flat-rolled and SBQ, and maybe even plate products.

So, virgin iron units are an important part of the mix of any electric hearth furnace, particularly those producing higher-quality products.

For those of us who are merchant and rebar producers, we work really hard at buying scrap and processing it, and keeping our scrap costs as low as possible.

The cost of scraps is favored over DRI for us, especially when considering the capital costs associated with it.

For many of us on the lower end of the product range, scrap-based production is just fine.

And for those that have crept up into higher-quality products, they need virgin iron units.

With gas costs as they are in North America, it probably makes good economic sense as an alternative to buying raw material feedstock in the form of pig iron.

Okay.

And then the second part of the -- or, the first part of the question, which is, what happens?

Is there an impact on the ferrous resource market in the region when that happens?

Whenever demand and supply are interacting, there's going to be an impact, positive and/or negative.

I would suspect that this may free up stocks or availability of some prime scrap.

Nucor will prioritize their DRI production over anything else, whether it's pig iron or clean scrap.

So it could have an impact.

But we'll wait and see, Michelle, because the market seems to sort it out pretty well, such that if it impacted demand and that impacted flows, that would have the effect of ultimately driving prices back up.

So we'll watch it but I don't see any dramatic change coming.

I think it will be gradual.

If there is a significant change, it will maybe be more related to overall demand than any specific unit startup.

The Voestalpine, for example, was -- the DRI unit that was announced there was intended to supply -- 50% of its production was to go to Austria for their operations.

My understanding from trade reports is a significant portion, if not the remainder, has already been sold to a customer in Mexico.

That wouldn't have any impact at all here, though it would in Mexico, obviously.

Brent Thielman of D.A. Davidson.

Hi good morning.

On fabrication, sales were higher but shipments were a little lower from last year.

Is that just tougher comparisons relative to last year, maybe some lumpiness in project timing?

Or did you actually see some softening demand?

I think it's as you described it, Brent.

It's just really changes in overall mix.

And there's nothing specific related to that.

Okay, fair enough.

And then you mentioned you saw some benefit from lower input costs in that segment.

Just given some of your previous commentary, do you think that performance is repeatable in Q4?

Or should we be thinking about some moderation in contributions there?

If you factor out LIFO, which is hard to forecast, and if you assume prices are more stable, that, in and of itself, I think, results in a lower number.

Again, if prices remain stable at the current levels, then we would expect to see another good reporting quarter for the fab segment.

Okay, thank you.

Thomas VanBuskirk of Sidoti & Company.

Hi, good morning.

Most of my questions were answered.

I did have one, though, on CapEx.

It looks like your expectation for CapEx is down from what you previously had said.

I think you were looking for more like $130 million to $140 million.

What's changed?

Have things just been pushed out?

Largely projects have been pushed out.

There's nothing specific that comes to mind.

For example, we've had the rebuild of the furnace in Poland, which was scheduled to begin in the fourth quarter of this year, and that's going to spill over into next year.

That's probably the biggest project.

What I would add, so there's no misunderstanding, we're not consciously cutting back projects because of a perceived weakness in market.

The market has been fairly flat.

These are projects we need to do.

We still have confidence that an economic recovery is imminent and so we continue to take care of our operations and build for the future.

Okay.

Just as a follow-up to that, I think in the last forecast for CapEx, that already had factored in the Polish mills being more of a 2014 thing.

Is there anything else that was pushed out that's of any significance?

Or is it really all just small incremental things?

It's really small incremental things, Tom.

We had two or three big projects this year.

One was the furnace rebuild in South Carolina.

The second was our downstream shredding operation.

The third was the Poland project.

But we have a whole host of $80 million-plus, $90 million, of smaller projects.

They get earmarked in a year, and each one of them gets evaluated individually and sometimes those things just get pushed out for a variety of reasons.

But as Joe said, we're doing what we need to do in terms of major work to be prepared for the cycle recovery and to keep our equipment in good condition.

Chris Haberlin of Davenport & Company.

Hi, good morning Barbara and Joe.

Maybe starting on merchant, you all talked about imports have abated, at least somewhat.

With the dollar strengthening here, does that maybe open the door for a rebound or an increase in merchant bar imports?

If I said they abated then I misspoke.

We're still seeing significant pressure in import of merchant product.

More specifically from Mexico, which its close proximity allows them to service that market, particularly in the Gulf Coast region, better than someone shipping product from overseas.

When merchant lead times are as short as they are, from a quality perspective, and more aesthetic than anything else, domestic mills are more than capable of supplying demand.

And in some regards, the facility south of the border is like a domestic mill, at least into the Texas market.

The strength of the dollar could always be a contributing factor to higher import figures in the future, whether it's rebar or merchant.

Rebar ships better than merchant product does so I would expect it would take significant changes in the economics.

And it would have to be significant incentives to the buyers because it's a commodity that really principally goes through distributors.

And it is a piece count business as opposed to ship load quantities of flat-rolled product, which is just a very different product.

So there's always the possibility that the dollar strengthens so much that this market becomes attractive that it's a risk.

But we don't see it nearly as dramatically in the long products as we might if we were in the flat roll business.

Okay.

Then my second question, in Poland, I know you're going to have the furnace rebuild, and I believe that's going to take place in Q1.

Can you just talk about any impact from a volume side that that might have.

Are you building inventories ahead of that shut down?

Or would we expect to see volumes come down in the quarter with the rebuild?

We did the same thing this year in South Carolina, where we shut down and rebuilt a furnace all the way down to its foundation.

We planned accordingly, and we built inventory to be able to service our customers.

The benefit of having done this so recently, we're applying everything that we learned from South Carolina to Poland to make sure that the construction and the startup goes smoothly.

And that we are minimally disruptive to our customers.

So, I don't anticipate -- you'll see shifts in working capital requirements but I don't anticipate large shifts in volume demand.

And we're trying to time it, obviously, for a period of time when Polish shipments normally are off for seasonal reasons.

The best example I can give of that is that April of this year there was still snow on the ground in Poland.

So we got off to a fairly late start in our third quarter.

Jonathan Sullivan of Citigroup.

Yes, hi, good morning.

I just had a question on the tax rate.

It seemed the effective tax rate was a little higher than I expected in the third quarter.

Was that related to the International Mills loss?

And, secondly, I was wondering if you had any expectations for the effective tax rate for the full year.

Thank you, Jonathan.

I'll take that.

You're exactly right.

It was the mix of the income for the quarter that drove a lot of the very high effective tax rate.

We experienced a similar phenomena in the prior quarter where the mix of our income largely coming from the US operations, which carries a higher tax rate than some of the foreign jurisdictions.

And when you have a loss in Poland, you also don't get the full benefit of that loss at the same rate as you would if it occurred here in the US.

So it was really a mix of income.

For the fourth quarter, I think we're -- and for the full year -- expecting a tax rate, we'll expect the tax rate to come down a little bit in the fourth quarter to around 42%.

And I don't know that I know the exact number off the top of my head for the full year.

I could follow up on that.

Terrific.

Thanks a lot.

Charles Bradford of Bradford Research.

Good morning.

Questions on Australia.

As I'm sure you're aware, they just had a change in leadership of the Prime Minister.

They called an early election, the currency is coming down.

You've got significant operations there.

How is this playing out for you?

Chuck, [Gillard] was put in office, I think, in September of 2010.

And in that entire time period there has been, what I'll call, economic strife in Australia.

The strengthening of the Australian dollar, the mining segment was good, but the construction markets have been really weak.

And there hasn't been much stimulus.

The changeover in government, I think, was led by Rudd with the idea that the government needs to be more stimulative.

And, of course, they will have a referendum when they have their election.

I didn't even say anything about it in our comments because it's all over the last two nights that this has all transpired.

We want to understand it better.

And think, and have believed all along, that a more stimulative government policy would be good for construction spending.

The banking system is strong, unemployment rates are very low, the Australian dollar had strengthened.

So, maybe weakening it will help them to be a little more competitive.

I'd like to believe that that would help a recovery.

Certainly a more advantageous economic policy from the federal government would strengthen the economy.

But we have to watch it.

And it's really too early for us to speculate or guess.

I hate to say it couldn't be worse because everything, almost anything could be worse at one time or another.

But we would hope that the change in government would strengthen fiscal policy in Australia.

It would seem like the weakened currency would be helpful except you've got assets and now have a lower value.

How does that play out?

Or does it not play out?

Sure.

It plays out over time.

It's a function of how much of the currency devalues.

This is an immediate reaction.

We'll have to watch the currency and obviously manage our inventories very closely.

And it's something that we've been doing all along.

We've not been long in inventory as much as there just hasn't been concurrent demand.

And we continue to watch our inventories closely, Chuck -- and will.

Thank you.

(Operator Instructions)

John Tumazos of John Tumazos Very Independent Research.

Good morning.

Congratulations on the profitability.

I know it's a tough climate.

I'm trying to look at the long-term performance of the Company.

And I was comparing your implied conversion cost.

I didn't deduct depreciation or LIFO.

But in the Americas Mills, it appeared to be $249 a ton for the nine months, or $248 for the quarter.

And I tried calculating what it was 10 and 20 years ago and the numbers ranged from $209 to $166 a ton.

They actually didn't change much two decades ago but they changed in the last decade, going up $50 to $75 a ton.

And I would guess that labor costs per man used went up, and maybe there's a penalty from having less volume and mix these days than better days.

But could you just review how the cost structure has changed?

I know the productivity of the mills is very good, and always was very good.

Yes.

My immediate reaction to your conversion cost number is they're significantly higher.

But I'm not sure how you're calculating it.

I was just taking your price per ton minus scrap, minus the profit per ton.

John, a couple things that has changed structurally, I think, between the time frame you compared to current, is the yield effect and conversion cost.

Because scrap prices have gone up dramatically since early 2000, or 2004 forward, as compared to prior periods.

And, so, yield losses cost you a lot more today than they did 10, 20 years ago.

You mean the yield of scrap, not the yield of finished steel, because it always was around 92% yield.

Finished steel.

You're talking about the scrap that doesn't become a billet?

The yield losses through your processing of materials.

The yield loss that shows up in conversion cost.

So, you're talking about finished steel divided by billet, as opposed to billet divided by scrap.

Or both.

Both.

Both.

The other factor for us would be the fact that we have a new mill.

And depreciation because it's a newer mill and the capital that we put into that, we probably have a little higher depreciation cost than on average we did historically.

And maybe our depreciation cost is, on average, a little bit higher than peer companies who don't have newer mills, like the one that we put in in Arizona.

But there are other cost advantages and productivity and other improvements that have taken place over that time.

Now, iron ore and met coal and scrap prices have fallen a little bit from their peaks.

How much further do you expect deflation to go through your input and conversion costs?

Do you plan for high scrap or do you plan for low scrap?

I think we anticipate scrap remaining around current levels.

It's obviously really hard to predict.

There are many factors that go into that.

We talked about one earlier, which is the effect of DRI capacity coming online and having some impact on the balance of the scrap supply.

So it's really hard to predict.

But for our planning purposes, we're not predicting raw material scrap prices to fall below $200 a ton.

John, maybe I'd elaborate a little bit on that and say that there is a correlation between iron ore prices and scrap, from a trend or directional perspective, that's pretty strong.

But supply and demand in local markets causes much more volatility in scrap than we see in iron ore, but in general.

And if iron ore prices were to fall below $80 a ton for a long period of time, that would have implications for the value of other metallic units, including scrap.

Don't subscribe to the belief that iron ore prices, even though they've been down, that will stay down there.

And it's hard to gauge what the real value is, or price, because of the behavior of the Chinese who are in the market and out of the market.

A recent run up in iron ore was because they needed to restock.

They are a big consumer of iron ore and that has a tremendous impact on swings in prices.

We know that there's going to be some relativity between scrap and iron ore that we can't escape.

And that's why our business model of being involved in the collection of scrap as a raw material for our mills, as well as third-party sales, is something that we think strengthens our hand to be able to get access to the raw material at the lowest possible cost.

And then the work that we do in our mills and in the Americas with Tracy's group, and in Poland with John Elmore's group, is to do the best job we can at converting that scrap into finished product at the lowest cost possible.

And that's something I believe we excel at.

Thank you.

At this time, I would like to turn the conference over to Mr. Alvarado.

Please go ahead with any further comments.

Okay.

Thank you, everyone, for joining us today on the conference call.

We appreciate it very much.

We appreciate your interest and continued support in Commercial Metals Company.

And look forward to talking with you all again in the near future.

Thanks very much.

This concludes today's Commercial Metals Company conference call.

You may now disconnect your line.