Commercial Metals Co (CMC) 2013 Q4 法說會逐字稿

Hello one welcome everyone to today's commercial metals company fourth quarter and full year 2013 earnings call.

Today's call is being recorded.

(Operator Instructions)

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, the effects of recent capital investments made in other actions taken by the company, the company's capital budget of the company's future results and market share.

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

These statements reflect the company's beliefs based on current conditions and are subject to 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 on the company's website.

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 fourth quarter and full-year 2013 results.

I will begin the session was highlights from the fourth quarter and full-year and Barbara will then provide further financial details.

I will then close out with comments on our outlook for the first quarter of fiscal 2014 after which we will open the call to questions.

The detail in our earnings release this morning, we reported net sales of $1.7 billion for fiscal 2013 fourth quarter, a decrease of 7% from sales of $1.8 billion for the fourth quarter of 2012.

We reported net earnings of $4.1 million or $0.03 per diluted share in the fiscal year quarter ended August 31, 2013.

The results for the current quarter include asset impairments and other charges which Barbara will cover in greater detail in a moment.

Notwithstanding the impairment charges, results from operations were very solid for the fourth quarter.

As we have posted our 8th consecutive quarter of profitability.

Fabricating segment continues to show a profit.

Backlogs are solid and average selling prices improved again this quarter.

Our Polish operations also show significant improvement in their financial results in the quarter.

For the quarter, as indicated in the earnings release, the Board of Directors declared a quarterly dividend of $0.12 per share for shareholders of record on November 6, 2013.

The dividend will be paid on November 20, 2013.

For the full fiscal year we reported net earnings of $77.3 million or $0.66 per diluted share on sales of $6.9 billion.

As we complete our 2013 fiscal year and began fiscal year 2014, I will highlight market conditions in the key markets that we operate as well as update you on the progress we are making our various initiatives we have undertaken to reshape the business.

In the US, both leading and lagging indicators that impact our business are strong.

As an example we are -- the August Architectural Buildings Index posted the highest mark since February and has been above 50 for 12 of the last 13 months, indicating an expanding market.

The ABI is a key leading indicator of nonresidential construction activity.

Furthermore, the McGraw-Hill Construction forecast is showing double-digit growth in nonresidential construction for the next three years.

While a number of market indicators are showing signs of improvement, volumes and margins continue to be negatively impacted by a significant flow of imports from Turkey and Mexico into the US.

Commercially, 4 of our -- 4 of 5 of our US steel mills continue to be ranked in the top 10 in overall customer service by the Jacobson & Associates Steel Customer Satisfaction report.

This recognition highlights our commitment of unparalleled service to our customers.

The survey results also highlight our leading-edge eCommerce solution, myCMC.

This online tool allows our mill customers to, among other things, search available inventory, place orders, track deliveries and review invoicing.

Having started this in the East Region Mills, we are expanding use of this tool to our other mills and another lines of businesses.

Internationally, European markets are displaying modest signs of emerging from recession, though sustainable growth is not yet evident.

Resolution of the illegal imports into Poland from Latvia helped our Polish operations return to profitability this quarter.

In Australia, were credit remains tight, and public-sector building activity is weak, residential construction is at its 3.5 year high.

The recent election in Australia resulting in a change in administration is signaling action that will help stimulate the struggling Australian economy.

We also took important steps is quarter to restructure our Australian operations, consolidating locations and reducing overhead costs which gave rise to several accounting charges that Barbara will discuss later.

We have also been focused on improving our overall cost competitiveness as evidenced by the $40 million decline in SG&A expense since 2011.

This reduction equates to $0.02 per diluted share for 2013.

Despite uncertain and volatile markets we made key strategic investments in our businesses during the past fiscal year.

In August we commissioned a nonferrous downstream processing system at our Seguin, Texas shredder that will allow us to increase recoverable metallics.

The project is still in the start up phase, but is showing early promise and in some cases, exceeding expectations.

We believe this technology can be employed in other markets in which we operate.

In early fiscal 2013 we've replaced and upgraded the furnace at our mill in South Carolina.

This new equipment has enabled the facility to post several operating records.

In fiscal 2014 we will replace one of two furnaces at our Polish mill and thereafter run facility as a one-furnace operation.

The new modern, efficient furnace will allow us to maintain production capabilities to meet market demand levels, while improving our low-cost position in that region.

We have also been committed to focusing on our core operations.

During fiscal 2013 we sold our minority interest in Trinecke fuel-making operation, and we also made the decision to divest our copper tube manufacturing operation, Howell Metal, as announced in our press release last week.

Consistent positive earnings for eight consecutive quarters are indicative of our commitment to improve the financial performance of CMC.

The investments in cost reductions I discussed earlier, reflect our commitment to improve our overall cost-competitiveness and should position our company to capitalize on the inevitable construction cycle recovery.

We are hopeful that the positive market indicators previously discussed will translate into meaningful growth and margin expansion for CMC in the very near term.

With that overview 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 fourth quarter of 2013 we reported net earnings of $4.1 million or $0.03 per diluted share.

Continuing operations for this year's fourth quarter included after tax LIFO income of $10.3 million or $0.09 per diluted share compared with LIFO income from continuing operations of $16.9 million or $0.15 per share during last year's fourth quarter.

Our fourth quarter net earnings were negatively impacted by several events including asset impairment charges related to our Australian operations of $25.9 million or $0.22 per diluted share.

As Joe said, factoring out the one-time charges of $0.22 per diluted share results from operations would have been approximately $0.25 per share.

Net earnings for the year ended August 31, 2013 were $77.3 million or $0.66 per diluted share on a net sales of $6.9 billion, as compared to the full year 2012 when we reported net earnings of $207.5 million or $1.78 per diluted share on net sales of $1.7 billion.

For the year ended August 31, 2013, after tax LIFO income from continuing operations was $34.4 million, or $0.29 per diluted share, compared with after tax LIFO income from continuing operations of $27.1 million, or $0.23 per diluted share, for the same period last year.

Our Americas Recycling segment experienced an adjusted operating loss of $6.7 million for the fourth quarter.

The quarterly loss was primarily driven by lower nonferrous shipments as well as reduced nonferrous margins of $51 per ton.

We shipped 60,000 tons of nonferrous scrap which was a 3% decrease over last year's fourth quarter.

Average ferrous scrap sold for $318 per ton during the fourth quarter, which represented a 3% increase over the $309 per ton reported in the fourth quarter of 2012.

We shipped a total of 528,000 tons of ferrous scrap, which is up 2% over last year's fourth quarter.

Our Americas Mills segment recorded an adjusted operating profit of $58.4 million for the fourth quarter compared to $63 million during the same period last year.

Shipments in metal margins for the quarter were lower by 7% and 2%, respectively, compared to the prior year quarter.

LIFO income declined $12.1 million compared to the fourth quarter of 2012.

Our Americas Fabrication segment recorded an adjusted operating profit of $8.2 million for the quarter, an improvement of $6.7 million compared to the same period in 2012, despite the decline in quarterly LIFO income of $2.9 million.

This performance marks the fifth quarter out of the last of six that our Americas Fabrication segment has been profitable.

The average selling price for the segment improved by $18 per ton.

Our backlogs in this segment also remain healthy.

Our International Mill segment reported an adjusted operating profit of $8 million for the fourth quarter compared to an adjusted operating profit of $5.4 million for the same period last year.

On a sequential quarter basis the performance improved by $11.8 million on seasonal shipping increases and resolution of the VAT circumvention schemes.

While volumes in shipments for this quarter were lower than volumes and shipments in the same period last year, we were able to achieve a $15 per ton of metal margin expansion.

We are encouraged by the outlook as the Polish government has enacted necessary legislation to control VAT evasion schemes.

Our International Marketing and Distribution segment fell to an adjusted operating loss of $16.2 million for the fourth quarter of 2013 compared to an adjusted operating profit of $1.5 million during the fourth quarter of 2012.

The decline in performance from the same period last year is mostly due to the charges related to our Australian businesses for goodwill and other asset impairment.

In addition, we closed some non-profitable locations.

We believe these actions will strengthen the business for the future.

Our European trading and warehousing businesses continue to suffer from weakness in the Euro zone.

On a positive note, our US-based trading division posted results as we compared to the prior year's fourth quarter.

Capital expenditures for 2013 were approximately $89 million.

We are estimating our 2014 capital budget to be between $120 million and $160 million.

We took many important steps this past fiscal year to improve our balance sheet strength.

Reducing costs, improving underlying cash flows from operations, divesting certain non-core assets, as well as our previously announced notes offering, has resulted in the company having a strong liquidity position as we enter the cycle recovery of our end markets.

Cash and short-term investments totaled $379 million as of August 31, 2013, which is an improvement of the $116 million over the end of the prior year.

Our available liquidity including our $300 million revolver and other credit lines is in excess of $1 billion.

Thank you very much.

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

Thank you, Barbara.

In summary we posted our eighth consecutive quarter of earnings.

With respect to our 2014 outlook, we currently anticipate that business activity could begin to show a more meaningful recovery in construction end markets.

As evidenced by our last two fiscal quarters, overall the company is profitable.

However, a curbing of rebar import activity from Turkey and Mexico would allow CMC to recapture market share and margins lost to these volumes.

As a reminder, our first quarter marks the beginning of a seasonably slower period of holidays and winter weather begin to affect construction still shipments in North America as well as Poland and Northern Europe.

Overall, fiscal 2013 was a solid year.

We continue to make meaningful progress to improve our overall cost-competitiveness and focus on our core strengths.

With that would look forward to continued success some progress in the future.

Thank you for your attention and at this time we will now open the call up to questions.

( Operator Instructions )

Sal Tharani, Goldman Sachs.

Just wanted to get some more color on your comment about the meaningful recovery.

What regions and what type of construction you are seeing, you are expecting these, and what product do you think is it for both rebar and [mesh rebar] or you think it'd be more towards mesh rebar for (inaudible) construction?

Sal let me take that question.

First of foremost, being in the Sun Belt helps an awful lot because construction activity in the Sun Belt, particularly in Texas, has remained fairly strong.

We've seen some improvements in the South Florida and more recently in the California markets both the southern and northern California.

Project expenditures are included in that.

There have been some pick up in certain markets, but overall we are fairly steady.

Our backlog has remained strong and relatively same levels, a little bit stronger year-on-year.

In the aggregate, the recovery that we are alluding to is more isolated and regional, it is not widespread.

Though the indicators of non-residential recoveries to some of the embassies that we monitor on a regular basis continue to be quite favorable, and ultimately those will translate into orders.

That has not happened at this point, but our order book remains strong.

In terms of your comment that your year over year backlog in aggregation was up, how is it progressing sequentially?

If we were to cover it on a sequential basis, our backlog has been pretty flat at roughly 1.2 million tons in the aggregate.

Better than 50% of that in the fab business, really for about the last 4 to 6 quarters.

There have been some tips below and above that, but that is about where we have been sitting.

We consider that to be a solid overall month.

Evan Kurtz, Morgan Stanley.

With the sale of the copper tube business and some of the write-downs in Australia, I'm kind of detecting, maybe, renewed focus on asset divestitures, is that a fair statement and other any other kind of sales that we might be able to expect over the coming year or so?

Evan, we have been asked about our copper tubing business for years now.

We recognize that our core competency is not in copper tube manufacturing, so that was a strategic buy for the buyer, and we think that Howell Metal is better in a company that is in the copper tubing business.

As a relates to others, we have been discovering our portfolio for all kinds of opportunities, down to real estate sales of vital property.

There's always and intent to make sure we have a strong balance sheet and that we do not maintain idle assets.

I wouldn't call it a renewed focus as much as a continued focus on managing all elements of the balance sheet to improve our balance sheet and our overall competitiveness.

One other question I had on CapEx guidance for 2014.

Would you be able to breakout some of the pieces there, what is the new furnace replacement in Poland and some of the other bigger projects?

We don't breakout each individual product Evan, we put a range around it because, as evidenced by this past year, sometimes we make decisions to delay or defer, we had moved out the Polish Mill rebuild until 2014.

That is probably the, near term, one of the single biggest projects we have, but we are looking at to deploying the downstream processing at some of our other locations depending upon the results from the new unit that we just started up in Seguin.

Some of it is just normal cycle maintenance type of work like furnace rebuilds et cetera, and others are our special projects like the downstream shredding

Is there any number we should use, just for maintenance going forward, and -- given the changes in the asset base over the past couple of years?

Evan, the number that we talked about, and generally speaking as pure maintenance, is in the $80 million range.

Investments over that are normally enhancements or expansions of capability or improvements in cost efficiencies.

Certainly the furnace rebuild in Poland is exactly that.

It is replacing existing equipment with faster, stronger more efficient operating capability [in an off-shot] Without compromising on production capability.

Timna Tanners, Bank of America.

Along the same lines, I wanted to see if you, since you've given us new 2014 CapEx, in light of the divestitures or changes, how should we think about overhead and SG&A?

SG&A has been coming down, as you have seen, over the last several years and, I think, if you target it at the levels that we've been experiencing the past few quarters, that is a steady state level.

Obviously we are always looking for ways to be more efficient and reduced cost and network will continue.

For modeling purposes I think in that $115 million-per-quarter range is probably appropriate.

Also if we could think a little bit about LIFO income, that has been a benefit of course in the last several quarters, and, is that just scrap prices move, or is it the amount of inventory?

Is it a structural change that you have been reducing working capital that is part of what has been driving, or how can we think about that going forward?

What are the main drivers of how to think about your LIFO income or expense?

The biggest driver is your first point, Timna, which is movements in scrap price, and movements in finished or semi-finished product pricing will have the biggest impact.

However, we are always, again, looking at ways to run more efficiently including more efficiency in our working capital days.

You will also recall back to the December/January timeframe where we saw an increase in working capital which is also typical moving into the busier season, the busier time of year, and we normally take advantage of the slower quarter, our slower second quarter, to take care of various maintenance requirements.

You might see us build some inventory ahead of those planned maintenance outages, but yes, we are working on working capital efficiency in addition to all those other things that I talked about.

Luke Folta, Jefferies.

Two questions, I guess firstly, on what you have done as far as restructuring in Australia.

Can you give us a sense of how much cost that takes out of the system and if-- post of those actions, is the Australian operations of the now profitable on a go-forward basis?

Yes, the impairments, the specific impairments-- you run an annual impairment test of your goodwill and your assets, and obviously with a difficult market environment in Australia, it triggered the impairment charges.

At the same time, we also had to put a valuation reserve against their deferred tax asset and that is, again, a very mathematical accounting equation where you look at cumulative losses.

Clearly the other things that we have been doing, such as consolidating locations, closing locations, working to reduce their overhead costs, are also aimed at improving the financial performance in Australia.

And clearly, we are expecting that, that will help Australia return to profitability along with, we are also anticipating under the new President in Australia, that we will see a slightly more stimulative government posture and some improvement in the overall economy, and market conditions will help restore profitability in Australia and operations.

I guess, what I would add to that, Luke, is that will be gradual.

It is not something that is going to change overnight.

The efficiencies of shutting down operations and reducing our cost will help restore profitability, but I wouldn't try to model it to be a dramatic change quarter-on-quarter.

On recycling, it looks like nonferrous was the culprit there in driving down the loss in the quarter.

I want to understand more.

How much of that was an inventory impact in the sense that, as prices came down it was holding losses or something associated with that?

I guess what I'm try to get at is, if prices were to stabilize from here would that business be operating at a loss or is this more of a one-time timing issue?

Luke, we really work hard to turn inventory both in ferrous as well as nonferrous, and I think we're pretty good at it.

We've learned lessons from the past, so very little of any of the change would be related to inventory or positioning.

We do not to do that either on the down side or the upside.

Mostly it's just a reflection of market pricing what has been going on in the market.

Recycling activity is softer.

There is no doubt about that.

A flat pricing and ferrous and nonferrous markets without some of the volatility that we have seen in the past, is a more challenging market for all recyclers, including us.

As a follow up to that, to the extent that losses continue in recycling, is there a footprint reductions our restructuring efforts that you we do in that business as well if you had to?

If we had to, we have done that in the past, but most of the facilities that we have also are strategically located to service our Mills.

So it would be in the outer reaches were there might be some need to do that, but we do not envision that just yet.

It's all part of the well-integrated network, but of course if it were to be sustained then we would look at that.

Brian Yu, Citi.

My first question is a follow up on Luke's.

With the nonferrous, do you have a hedging program in place to protect from market movements, or the price movements?

Yes we do look at that, and we do execute on those strategies from time to time.

That is part of what, Joe you were talking about, that is why you guys do not see much of an impact on say, the market price does move quite a bit, is you effectively try to lock in those margins?

But I guess the market is much more competitive, so people are having to bid up to get the materials, is that correct?

Yes.

That is definitely a factor at the current time.

How does, if at all, does the commissioning of the Texas, or Seguin nonferrous shredder, will that impact your volumes or profits on a go-forward basis?

As we pointed out before Brian, that is a significant, it's salvage operation is what it is, to help recover as much of metallics both ferrous and nonferrous as possible.

Is a significant cost reduction for us with a quick payback for the investments.

That is why we made the investment.

It also reduces what goes to the landfill that previously had value that we were burying and now will recover.

For us we thought it was a very worthwhile activity initiative, and that is why we're looking at further downstream recovery systems and some of our other shredder or large scrap-concentration areas.

Last one if I might, the Polish VAT, that was enacted in October.

Did you start to see some of the benefit in October and in November, the lag effect, as we think about your fiscal 1Q, do you see it having more like a two-month or three-month impact, positive impact?

Yes, we expect a full month impact or a full quarter impact in our first fiscal quarter.

We saw some of the benefits as we noted.

Already the fourth quarter showed some of the benefit of that, that continues into September.

And the downside in Poland, is it is not unusual to get snow in November in certain parts of Poland.

We caution on the seasonality in Poland being a little bit more extreme than what we might see in our North American operations because we are mostly Sun Belt located for construction activity.

We should see a full quarter benefit and we saw the initial benefits in the end of our fourth quarter.

Brent Thielman, DA Davidson.

Just on the restructuring in Australia, just to clarify do you have the same addressable capacity in that market, or do we think of Australia as being a smaller deal for CMC going toward?

In the aggregate, we believe that we can service the market from some of the existing locations.

We were spread pretty thin regionally.

And some of our decision was based on the fact that some of the markets, for example, in Queensland, could be serviced from our Brisbane operations-- or North Queensland.

We didn't feel we were losing any competitive advantage because that is the way some of our competitors service that market because there's not enough volume or activity.

In the aggregate, we cannot move as many tons as we might move locally but I wouldn't look at a big change.

For us is about getting profitable in doing the most economically efficient thing, we think we have done that.

In the aggregate, there's still a lot of upside of the Australian market as demand picks up, so we believe we can maintain our fair share of that with the existing facilities.

I guess any comments or thoughts in terms of the timeline on the trade case, rebar, here and US?

I think you have to dial 1-800-USGovernment to figure that one out.

They have a significant backlog, and the recent shutdown seemed to put all of Washington behind schedule a bit so I do not really have anything.

I have been told it is about November 1. As a preliminary.

Don't be surprised if that moves though Brian.

Phil Gibbs, KeyBanc.

Barbara, the $26 million of cost, that you pointed out for the Australian operations in the quarter, you had also called out in your release one-time exit costs associated with moving away from some unprofitable businesses.

Are those one-time exit costs in that $26 million and if they are not can you give us a sense of the magnitude?

It was not included in that, at least a couple million bucks.

We have some other severance charges for various [refund] actions taken around the world but we did not call the smaller items out.

The crossover from two furnace operation to a one furnace operation in Poland, there would obviously be some nice conversion leverage associated with that.

When does that transition take place in your mind right now?

The plan to start up is late March, early April and as you know with an metal shop there's always a little bit of a start up, in particular metal shops' debugging process.

When we did the South Carolina operation, it came on stream rather quickly, the debugging was minimal and we are sharing everything that we have learned from the start up, but we always have anticipate a little bit of slowness and Poland is not South Carolina.

Late March, early April, but I would think that really we won't go to a purely one-furnace operation until late in the summer.

Just had one follow up if I could, the scrap export market, Joe, from abroad picture, how do you see the volume momentum for the market shaping up for calendar in 4Q as far as the ferrous and nonferrous markets?

That is a really good question.

With the activity that we are seeing, there have been significant, and have been for a long time, significant, shipments, to Turkey in particular, and there was some back-to-back activity that was associated with the bringing rebar in and taking scrap out.

I would anticipate that if we are successful in the trade case that would have some impact on the flow levels of scrap.

It is such a dynamic situation right now, with global over-capacity and a lot of pricing pressure, so it is really hard to say where scrap markets are going.

We see them flat in the near term and that would include the impact of export activity.

The flatness continues, and you might recall, a couple of years back we had about six or seven months a very flat pricing in a scrap, mostly going to global demand, and we might be in one of those periods.

That might mute some of what is normally a seasonal pick up in November and December before the holidays.

It is hard to tell right now.

We are not real big players in ferrous exports, but our non-ferrous is an active export program and I do not see any dramatic changes in activities in the near term.

I'm encouraged with all your strategic progress.

I appreciate it, keep it going.

Mike Gambardella, JPMorgan.

Couple questions, one, going back to the non-res construction recovery that you are seeing.

Can you talk a little bit about the breakdown between government infrastructure projects and private sector spending?

Yes, we are going to look that up quickly.

Give us a minute, but our backlog has continued to improve from, as you recall a couple of years ago, about 70% was public and 30% with private.

That has been continuing to shift and I think we are at a mix of about 60%, 40% at this stage in terms of our backlog.

We are trying to look up the bid activity but at least the bid activity is skewed even more towards private, away from the public.

Second question, in terms of the big improvement that you have talked about in SG&A from 2011, was the biggest component of that improvement a decline in SAP costs?

That, for the most part, had been taken care of, we are not spending on SAP at that level.

This is really more consolidation of some of the IT infrastructure, not associated with SAP anymore, and that is part of the problem, is we carried over a lot to people on staff.

There have been cuts across the board in everything that we do here and throughout the organization in trying to reduce our SG&A, but, there is no doubt that IT costs were a significant component, but not so much associated with SAP, as much as I would call the overhang of staffing, related to the project.

Early on Mike, we did a benchmarking exercise to our SG&A, and that really helped to -- helped us develop a path to reduce SG&A, but it is very broad-based across all aspects of the business.

I did look up the bidding, the bidding is a similar 60%, 40% mix.

That is 60% on the public side or private side?

60% public, 40% private.

( Operator Instructions )

Tom Van Buskirk, Sidoti and Company.

I wanted to see if we could get a better sense now, in the current environment with some of the things that you have done, with how the International Marketing and Distribution segment actually breaks out, in terms of what the operating income contributors are with the current sizes of the business in which you are expecting.

You mentioned domestic trading being a little bit better, and I have seen what you have done in Australia, but I want to get a sense of proportion going forward.

Tom, as you know, we did not give specific guidance and certainly we haven't historically broken out that segment in that level of detail, but you can think of it as really the three different regions.

We have our domestic raw material and steel trading business that moves a lot a product around the world, but it is based here out of the US.

That has been profitable and it continues to be profitable, but I will say that margins remain very very thin, there is a lot of competitiveness in terms of the margin you can capture on whatever activity is out there.

Europe, as Joe mentioned, continues to be challenging and difficult so we are not expecting a dramatic change there, but that is a much smaller piece of the overall business.

Then, Australia, as we commented earlier, it has been-- a portion of the business has been under pressure from economic markets, Australian market perspective, they have been losing money.

And we do expect these actions to restore profitability, albeit, as Joe said, it is going to be a gradual thing as we complete all our cost reductions and as that market begins to turn around.

In the near term, any profitability would be driven by our domestic business.

That helps a little bit.

I guess, basically, we have to look at this and, for the next few quarters, as being, if it is a net profit contributor then it is going to be somewhat smaller than it had been in the past periods.

Yes, I think that is fair to say.

Chuck Bradford, Bradford research.

I would like to first talk a little bit about the scrap price situation.

I heard what you said, but you didn't mention the big Nucor DRI plant that is coming online probably towards the end of the year.

I know that is more likely to impact higher quality scrap than you typically use, but how did you see that impacting the market and maybe gravitating toward other grades?

Chuck as you know the price of scrap is very sensitive to other available metallics in the marketplace and some of what has been recorded, or that I have read, is that, in many regards, DRI will be replacing pig iron purchases that have been engaged in for a long period of time.

It is a great substitute in an iron unit basis or cheaper for them, I'm sure, to produce DRI than to buy pig iron.

Ultimately, as they are consuming more DRI, I would expect it would have some impact on prime grades.

But with the start up in December, January, I'm not sure when their actual start will be, in learning to curb on a DRI facility, I would not expect an impact until the end of the first quarter.

And I'm not sure how measurable it will be but we are anxious to find out what impact it will have on the market.

In Australia, the currency has been, obviously, pretty weak.

That would seem to be helpful to local manufacturers but that is not you, you are more of a distributor.

The issue could be a translation of whatever profits back to the US, but do you see the customer base that you are serving getting held by the weaker A dollar?

Chuck, if you think about our Australian business, it is somewhat a mirror of our North American exposure on an end market basis.

Less oriented toward mining, which would be manufacturing, or big manufacturing business in Australia, more oriented towards construction.

Our fate is closely tied with construction activity in Australia, including residential and non-residential.

That is why we talking about the strength of the Australian market in residential construction permitting and expansion activity, which we believe is a precursor of more construction activity which is beneficial to our business.

In terms of serving manufacturing, lower component of our business in Australia than it might be in some other places, and mining is a small portion of our business there.

It all comes back to construction markets, and the weaker dollar I am sure will help the Australian economy in the aggregate.

At this time there appear to be no further questions Mr. Alvarado, I will turn the call back over to for closing remarks.

Thank you everyone for joining us on today's conference call.

We appreciated and we look forward to meeting with many of you in our investor meetings in the near future.

Thanks very much.

Goodbye.

Ladies and gentlemen this concludes today's Commercial Metals conference call.

You may now disconnect your telephone lines.