Commercial Metals Co (CMC) 2014 Q2 法說會逐字稿

Hello, and welcome, everyone, to today's Commercial Metals Company second-quarter FY14 earnings conference 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 to provide information other than historical information.

And will include expectations regarding economic conditions and the Company's future results, prospects, operations and capital spending.

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 that are subject to certain risks and uncertainties, including those that are described in the Company's latest 10-K.

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 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 earnings release or on the Company's website.

And now for opening remarks and introductions, I'd like to turn the conference call over to 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 second-quarter FY14 results.

I'll begin this session with highlights from the quarter.

Barbara will then provide further financial details.

And I will conclude our prepared remarks with comments on our outlook for the third quarter of FY14.

Afterwards we will open the call to questions.

As detailed in our earnings release this morning, we reported net sales of $1.6 billion for the second quarter of FY14, which was 2% lower than our net sales for the second quarter of FY13.

For our second quarter of FY14, we reported earnings from continuing operations of $11.1 million or $0.09 per diluted share.

Which is an increase of $0.06 per diluted share when compared to the same quarter in the prior year.

The results for the second quarter mark our 10th consecutive quarter of profitability.

However, as anticipated, results for the second quarter declined over results for the first quarter due to the impact of normal seasonality, inclement weather conditions -- particularly in North America -- increased energy costs and holiday shutdowns.

For our second quarter, and as indicated in the earnings release, the Board of Directors declared a dividend of $0.12 per share for shareholders of record on April 9, 2014.

The dividend will be paid on April 23, 2014.

There are a number of factors that impacted our second-quarter results.

Following are a few comments on market conditions and other more strategic matters.

Many of the key US economic indicators that are relevant to our business remain strong.

Total US construction spending increased in January for the 12th straight month, with positive momentum in the residential, transportation, communications, manufacturing, water supply and highway and steel construction sectors.

As it relates to the renewal of federal funding of transportation programs, although we would prefer an approval of the longer-term bill rather than repeated extensions of the prior bill, we are encouraged by signs of higher overall spending approvals currently under discussion in Washington.

Since our last quarterly call to discuss our first quarter of FY14, the US Commerce Department preliminarily ruled against instituting any meaningful countervailing duties on importers of Mexican and Turkish reinforcing bar.

We were disappointed in the ruling, as imports into the US continue to negatively impact our business and capture market share in the markets in which we operate.

On April 18, the Commerce Department is scheduled to rule on anti-dumping duties on rebar.

We are hopeful that the facts, circumstances and economics of the petition are used to determine the outcome of the ruling.

Severe winter weather across much of the Eastern region of the United States negatively impacted production at our domestic operations.

In particular, our South Carolina minimill experienced energy curtailments from the effects of winter weather, forcing us to utilize higher-cost fuel at times during the second quarter.

Additionally, our Texas operations were affected by an unusual amount of snow and ice activity this winter.

Our customers were also affected by the severe winter weather, which softened demand for our products during the second quarter.

On a more positive note, backlogs in our Americas division as of February 28, 2014, were at record highs.

We expect demand to rebound in the third quarter as our customers get back on track.

As planned, we took advantage of the seasonal slowdown in the second quarter to conduct routine maintenance outages and to upgrade our equipment.

At this time, we are not planning any major outages during the third quarter for our domestic operations.

Shifting to our international markets, the Australian market remained flat, with ongoing aggressive competition for volumes.

We continue to focus on reducing cost and improving working capital efficiency as we wait for the economic activity to improve.

We continue to be encouraged by improvements in our Polish operations, which reported the best second fiscal quarter since FY08.

Results were largely a result of economic improvements in Poland and surrounding markets, as well as efficiency improvements we have been implementing over the past number of quarters.

As well, our Polish operations benefited from a relatively mild winter.

The Eurozone otherwise continued to improve during our second quarter of FY14, with business growth accelerating in February 2014 to its fastest pace since June of 2011.

However, the political situation in the Ukraine could have a negative impact on the results of our European operations.

In the upcoming months, we plan to commission a new modern electric arc furnace, which we anticipate will improve the efficiencies and overall cost performance of our melt shop in Poland.

Work on the furnace is progressing as planned, and we expect to begin commissioning toward the end of the fiscal third quarter.

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 second quarter of FY14, we reported earnings from continuing operations of $11.1 million or $0.09 per diluted share.

Which compares to earnings from continuing operations of $3.9 million or $0.03 per diluted share for the second quarter of the prior year.

This year's second-quarter results included after-tax LIFO expense of $12.3 million or $0.10 per diluted share, compared with after-tax LIFO income from continuing operations of $300,000 or zero cents per diluted share during last year's second quarter.

During the second quarter of FY14, we also settled an anti-trust lawsuit for approximately $3 million after-tax or $0.03 per diluted share.

Turning to our results by segment, our Americas Recycling segment reported adjusted operating loss of $900,000 in the second quarter of FY14.

Average sales prices on nonferrous scrap decreased to $85 per ton or 3% when compared to the second quarter of FY13.

We shipped 54,000 tons of nonferrous scrap, which was an 8% decrease over last year's second quarter.

For our ferrous shipments, average ferrous scrap sold for $350 per short ton during the second quarter, representing a 4% increase over the $336 per short ton reported in the second quarter of FY13.

Ferrous scrap shipments during the second quarter of FY14 remained relatively flat at 519,000 tons when compared to last year's second quarter.

Our Americas Mills segment recorded adjusted operating profit of $44.1 million for the second quarter, compared to $47.7 million during the same period last year.

Selling prices for this segment decreased during the second quarter of FY14 to $675 per short ton from $682 per short ton during the prior year's second quarter.

Our Americas Mills segment shipped 631,000 tons during the second quarter of FY14, resulting in a 5% increase in volume when compared to the second quarter of FY13.

Our Americas Fabrication segment reported adjusted operating loss of $5.3 million for this year's second quarter, compared to the prior year's second-quarter adjusted operating loss of $3.8 million.

The primary driver of the reduced profitability was an unfavorable change in pretax LIFO expense of $5 million.

The average selling price for this segment decreased to $8 per short ton over last year's second-quarter average selling price of $950 per short ton.

As of the end of the second quarter of FY14, the volume in this segment's backlog increased by 9% over the prior quarter, and was up by 22% over the second quarter of FY13.

Our International Mill segment reported a substantial turnaround, recording adjusted operating profit of $8.3 million for the second quarter of FY14, compared to an adjusted operating loss of $4.2 million for the same period last year.

International Mill volumes decreased slightly by 6,000 tons or 2% to 271,000 tons.

And selling prices increased $23 per short ton or 4% to $628 per short ton during the second quarter of FY14 when compared to the second quarter of FY13.

Our International Marketing and Distribution segment reported adjusted operating profit of $2.5 million for the second quarter of FY14, compared to adjusted operating profit of $3.9 million during the second quarter of FY13.

Our US-based trading divisions within this segment reported an $8.1 million unfavorable change in pretax LIFO from the second quarter of FY13, the primary driver of the decrease in profitability for these divisions.

Partially offsetting this decline, all other divisions within this segment reported improvements in adjusted operating profit when compared to the same quarter of the prior year.

Despite continuing aggressive competition in Australia, cost improvements have resulted in improved operating results for this division.

Turning to our balance sheet and liquidity, our balance sheet remains strong.

Cash and short-term investments totaled $431.8 million as of February 28, 2014, an increase of $53 million over the balance sheet as of August 31, 2013.

$36.4 million of this increase came from cash from operations.

During the second quarter, we built up inventory levels in anticipation of spring and summer construction, and to prepare for the commissioning of a new electric arc furnace in Poland, which led to an increase in working capital levels over August 31, 2013.

As the construction season gets into full swing, we expect this inventory build to translate to greater cash from operations over the remainder of the fiscal year.

Total liquidity was approximately $1 billion as of February 28, 2014.

We continue to maintain significant unused credit lines that give us added flexibility.

Capital expenditures were $22 million for the second quarter of FY14, as compared to $17.1 million in the prior-year second quarter.

We estimate that our capital spending for FY14 will be in the range of $130 million to $140 million.

I thank everyone for joining us today.

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

Thank you, Barbara.

Our third quarter typically brings warmer weather and therefore, seasonal improvements in the construction markets, which we expect will spur activity in the industry.

Overall, the US construction markets continued to show improvement, whether the slower pace than we would like to see.

While the American Institute of Architects reported the Architectural Billings Index below 50 in November and December of 2013, the ABI index rebounded in January 2014 to 50.4, and to 50.7 in February of 2014, which we believe points to improvement of the domestic construction markets.

This growth may be offset by a continued influx of Turkish rebar imports pending the upcoming countervailing and anti-dumping decision by the US Commerce Department in April.

Despite improvements in the Eurozone during the second quarter of FY14, the recent turmoil in the Ukraine could have an adverse impact on our European operations.

And although growth in China slowed and import pricing continued to challenge our operations, we're hopeful that global economic improvements will positively impact our business.

I thank you for your time and attention.

And now we will open the call to any questions you might have.

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions)

Luke Folta from Jefferies.

I wanted to see if we can drill in a bit more on the inventory build.

If we look at the magnitude of it, it's the biggest that I think you've reported over the last cycle, outside of maybe one quarter in 2008.

And I wanted to see if we can segment out in some way what the impact is from the Polish new EAF furnace versus just building some inventory ahead of the Spring construction season.

In other words, it could be interpreted to be a very bullish signal that you're building this much inventory ahead of the season.

Could you help us understand the different magnitudes there?

Yes.

Luke, a couple things.

One is: Our seasonal activity in Poland was higher than we had anticipated.

And so, the need for inventory was sustained at a little bit higher rate, in addition to the build for the outage.

Essentially, the outage itself has already begun in terms of construction activity and the shutdown of one of our furnaces.

So, the inventory build was critical to continue operations while the furnace is down.

And we really won't be striking an arc until, as we said, later in the third quarter.

So, that's two elements of our inventory build.

We also have a significant backlog that's built up.

And in anticipation of a stronger third quarter, which is typical in North America, we've built inventory to be able to support that, as well as new order demand in the quarter.

So, in the aggregate, there's probably -- the guesstimate here is about 13 days of build in addition to what might be considered more typically normal.

And 30% of that was Polish-related.

Got it, that helps.

Also, there's been a handful of ethylene cracker awards in the Gulf Coast over the last several quarters.

We've got an LNG plant that was awarded also over the last quarter or so in Texas.

Are you seeing any activity in terms of rebar demand on these jobs?

We expect that we will.

Any of the petrochem business or any large manufacturing complexes that require foundation work, and then later on where subsequently any communities that build up surrounding such efforts, require rebar for construction.

I noted this morning that the fastest growing cities -- and I think it's in the US -- are in Midland-Odessa area, on a population basis.

But we haven't seen the same spike in construction.

But ultimately that construction will come.

So, it's a matter of timing, Luke.

It doesn't happen right away.

There are literally billions of dollars' worth of projects related to increased manufacturing in the petrochem industry, in particular, in the Gulf Coast.

And all of that will contribute to increased construction demand at some point, although it's hard to predict or project exactly when that might be.

Are you able to say if any of those major projects have actually been awarded the jobs yet or the contracts yet for any of the rebar supply?

Or are we just not there yet in the process?

I would say, if anything, that you're referring to recently announced.

They are hardly anywhere near a stage where they would be bidding for construction.

Great, thanks, Joe.

Thanks, Luke.

Sal Tharani from Goldman Sachs.

Two questions.

First, on recent iron ore price decline, how is your international trading business set up?

I know last time you had some losses on that.

How are you handling this time?

Well, as has been widely reported, iron ore pricing is down dramatically.

And our engagement in those activities have also been reduced.

So, in this case, as opposed to the time when we were hit pretty hard a year and a half ago in trading activity -- that was an unprecedented and unexpected decline of about 30%, really in about a month's period of time.

This has been more gradual, more projected, and really is a reflection of what's going on in China more than anything else.

So, we haven't seen any -- we haven't had any dramatic exposure in our volume activity, and iron ore trade is down.

Yes, Sal, where you would see it the most is -- overall, our top-line revenue in M&D segment is down compared to historical.

And a lot of that is just that we are not participating in that iron ore business to the degree that we were a couple of years ago.

Okay.

And the next thing is on the furnace in Poland.

Can you give us some color on -- is that the same size or a bigger size?

And what kind of efficiency improvement do you expect?

And would you be having some negative impact on the earnings during the quarter as you're commissioning this furnace?

Well, I'll answer the last question first.

The reason for the inventory build is to make sure that we continue operations of our rolling mills, and taking care of customers and any market demand in all of the products that we offer.

So, we don't anticipate any disruption.

There are always start-up costs.

But those are built into the capital expectations or the capital plan, as well as start-up costs associated with the facility.

I'd like to believe that this will start up as efficiently as our new furnace was started up in South Carolina a year ago at this time, and that we'll see the same kind of benefits in improved productivity, efficiency and energy consumption.

That's why we're doing it.

Recall that while the Polish facilities have been a part of CMC for the last 10 years, those furnaces are about -- we have two of them -- about 40 years old.

And the size of the furnace is being increased, as well as the capacity to support -- for all of the infrastructure to support the larger-diameter furnace, consistent with the objective of moving towards a single-furnace operation.

Great, thank you.

Nathan Littlewood from Credit Suisse.

Just wanted to ask a couple of questions about the domestic scrap market during the quarter.

We understand there's a pretty big drop-off in export tonnages -- less material going to Turkey and wherever else.

There was presumably also less demand for the scrap itself, as a lot of the domestic [AIF] mills cut back production a little bit.

But at the same time, the Winter weather conditions probably also meant that there was a big drop-off in domestic risings of scrap.

So, there's a number of things going on there which are a little bit unusual, and probably causing some turbulence in the domestic scrap market.

Just wondering if you might be able to talk a little bit about how you are seeing that?

And how each of them is changing as we look into the current quarter?

Nathan, I'm not sure that you mentioned it, but the weather was a factor as well -- a significant factor.

And of course, as the Winter weather subsides, and supplies hopefully increase, that always has an impact on pricing.

But probably the single most significant factor is the inconsistency of exports.

We're expecting that scrap prices will be more or less sideways to slightly up, as is normally the case coming out of the Winter season.

But a lot of that will depend on demand for export product.

Because I think what has suppressed prices more than anything else is a lack of export demand has increased supply and availability, and has pushed prices down over the last couple months.

So, our expectation over the quarter is sideways to slightly up.

Got it.

And what about this processing margin for the scrap business?

How do you see them trending quarter on quarter?

We are all of us, in this business -- in electric arc furnace, minimill business -- relentless about trying to manage our costs.

And we're aggressively pursuing cost-reduction initiatives in all of our operations.

In particular, we've reorganized ourselves along business unit lines to be consistent with aligning the steel production with the scrap collection.

And it's -- the most important element of our scrap strategy is to have raw material supply availability.

But consistent with that organization is the administration or management of our cost structure consistent with how we run our mills.

So, it's a continuous effort to reduce costs.

And where there are excesses, we take initiative.

An example being that we mothballed our shredder in El Paso during the quarter, reflecting market demand, as well as an objective of improving our cost management and our profitability.

Got it, thank you.

And just one follow-up question on the import volumes and domestic rebar pricing for the next little while.

A number of industry commentators and service centers are saying quite conflicting things about the direction of near-term prices.

I know you guys don't do HFC, but Platts, for example, is indicating that most of the recent HFC increases of stock -- others are indicating that HFC prices are actually going down.

There seems to be a bit of confusion about the way some of these price trends are playing out.

What are you seeing in terms of domestic rebar pricing at the moment?

Well, there's no doubt -- as we reported in our earnings release and through the comments that we made today -- that there's constant pressure as a result of a large rash of imports from Turkey, which have increased market share to double-digit figures from what were well below single -- much lower single-digit figures in months and quarters gone by.

So, the Turks have been very disruptive.

The last quarter, they brought in nearly 400,000 tons of imported rebar into the market.

They remain relentless about booking cargoes into and beyond the April 18 preliminary ruling date on dumping duties.

We believe firmly that they are dumping product into North America.

And that's why we remain vigilant on this trade case because we see it as being very disruptive, and priced well below market pricing.

Great.

Thanks very much, Joe.

I appreciate your time.

Thanks, Nathan.

Evan Kurtz from Morgan Stanley.

I have a couple -- one on the trade case.

Were you surprised at all by the ruling on CVDs for Turkey?

Or are you really mostly expecting the anti-dumping rule to cover what we're seeing in the market there?

Well, we certainly expect duties based on anti-dumping provisions.

But we were surprised by the countervailing duties.

In fact, I'd say disappointed.

In reviewing with counsel some of the calculations that were made by the DOC, there were some anomalies, if you will, on the calculation of subsidies -- for power in particular.

And as you know, power is an important part of electric furnace steel-making.

We will appeal that in our petition following the preliminary rulings.

So, we'll have our opportunity to demonstrate why we believe that there were some countervailing duties that should be applied.

But in the aggregate, we believe that there's dumping, as well.

So, the combination of the two are significant enough that we believe that it would affect rebar supply in North America.

Got you.

And then my other question is on iron ore.

I don't know how much feedback you've had from your traders on this, but we understand that maybe two-thirds of what's sitting in the Chinese mills or port inventories right now has been bought on import LCs, and that maybe these Chinese mills are using iron ore as a financing vehicle.

I just wanted to get your thoughts on that -- if that's something that your traders are hearing about in the market.

And is there some sort of concern?

It sounds like a lot of these deals are done on 90- to 180-day terms, and maybe more of them were struck at the end of last year.

Are you concerned about a near-term unwind in some of this?

Evan, from what we can tell, there's some of that type of financing going on.

We're not participating in it.

It's one of those situations where it's a little bit difficult to get all of the facts.

But certainly there's rising concern that there's going to be an unwind.

Okay, great.

Thanks, guys.

Timna Tanners from BoA Merrill Lynch.

I have one really straightforward one, and then wanted to pry a little bit more about downstream and fabricating.

So, one was just: I'm sorry if you said this, but why was there the lower tax rate?

Yes, the lower tax rate really reflects the improved performance out of Poland.

Poland carries a 20% tax rate.

And over last year, our effective tax rate was elevated because we weren't getting the benefit of profits out of our foreign jurisdiction.

So, the second quarter in Poland was a bit better than we anticipated because, as we mentioned, the Winter weather was a little milder.

And so, we looked at our full-year effective tax rate and adjusted appropriately as a result of that.

Makes sense.

Okay, so, we should look to see that continue, it sounds like.

The second question -- yes, go ahead.

(multiple speakers)

I'm sorry, Timna.

We're estimating right now about a 34% ETR for the year, if you want to model that in.

Awesome, thank you.

The second question is about the downstream comments that you made in non-res improvement.

So, record backlogs -- one of the things that I'm confused about, in general, with modeling that division is how to think about the smaller size of it, given that you have sold off a bit of it.

That was one part of the question.

And then just any more details about that backlog and your conviction, just given how protracted the recovery has been, as you mentioned.

Thanks.

Timna, I'm not sure I understood your question.

Could you rephrase it for us?

Yes, sure.

On the one hand, I'm just curious how to think about your recovery and your record backlogs.

Does that include the fact that you sold off some of your fabrication business?

Or is that just given the new size of the fabrication business?

And then, along those same lines, was hoping that you could comment about the conviction around those record backlogs, just because, as you mentioned, there's been a lot of delay in the recovery.

And sometimes the orders haven't translated into -- or that the interest hasn't translated into orders.

Are you referring to the sell off of deck and joists, Timna?

Yes.

Okay.

That was almost four years ago now.

Right.

So, when you talk about a record, this is a new cycle, and just wondering.

Yes, we're referring to our fab backlog, and being consistent in looking at our fab backlog overall.

So, there are a couple things that are at work here.

One is that obviously shipments were a little bit shorter in the second quarter.

As we noted, we're impacted by the weather, as everyone else was.

But more genuinely so, there's been an increase in fabrication demand, really across the board.

But still in the regions that we've talked about before: south Florida, the Beltway, Texas without a doubt, and the Houston market in particular, has picked up significantly.

And then on the western region, both Los Angeles and San Francisco areas are all strong construction markets.

That's not to say that we're seeing any dramatic improvement in other markets in between those major points.

But activity is picking up, and that's contributed to a more significant backlog at prices that are consistent with our earnings objectives.

So, it isn't about pricing or being aggressive.

It's about being responsive and taking on business that's good for the bottom line.

Now, we always have an exposure because of the nature of the fab business being bid on a -- more consistently on fixed pricing, despite the volatility associated with rebar prices, which ties back to scrap pricing.

And as a result, we've seen some depression of our fabricated rebar selling prices.

However, as markets pick up and demand strengthens, we do everything we can to restore those margins.

And you'll see that as our backlog continues to ship.

Remember that our backlog is fairly significant, and roughly in the range of about 800,000 tons on fab business.

All of which will not ship in the next month or the next quarter, but over an extended period of time.

So, there's always some degree of volatility associated with that, Timna.

I hope I've answered your question.

I'm not sure that I got it clearly.

But we're happy to take that offline if you would like.

That's good, thank you.

Brian Yu from Citi.

I've got a follow-up question on just the fabrication [and] also the backlog.

You mentioned you have about 800,000 tons of backlog now.

And as we think about the margins as these projects flow through, I recall in the past that there were issues with margin compression as rebar prices go up.

Have you guys devised a way to try to hedge out or insulate from moves in rebar prices in the future with these new projects?

Yes, so, a couple things.

First is: The compression usually comes when scrap and/or rebar prices are in decline, not when they're expanding.

And so, that's what leads to pressure in the market and pricing for fabricated business.

I mentioned fixed pricing and longer-term contracts.

One of the things that we focus on, and we've talked about before as well, Brian, is the mix of private versus public.

Public normally being a longer lead-time business, which is fixed price for a longer period of time -- hence, the longer exposure.

Private normally being smaller projects -- relatively smaller projects, with relatively shorter exposure.

We were as high as 70% private and 30% public before the economic downturn.

And then those numbers flipped dramatically to 70% public and 30% private.

And over the course of time -- up until the most recent quarter -- the relativity of those numbers has changed significantly, such that we're at about 45% of private work and 55% public.

So, we're working towards a more ideal mix.

That's how we reduce our exposure.

Okay.

And then the second question is: You mentioned that, in the second quarter, there was impact from weather disruptions and electricity.

Could you help us try to quantify what the impact on cost is from higher electricity costs?

And also the natural gas hitting $6?

You know, we've tried to do that, and it becomes a little bit of a futile exercising.

Our costs were significantly higher -- in the millions of dollars range -- not hundreds of millions or tens of millions, but several million dollars' worth of additional costs that were incurred in the quarter.

We weren't as badly impacted as some of the northern mills might have been.

But we were really hard hit in the east -- had significant disruption because not only the snowfall, but energy curtailment and availability.

But we also, ironically enough, were also impacted in our central region, when northern Texas was pretty hard hit with snow and ice over the holidays.

And so, we had the double effect of holidays in the middle of the week -- that being Christmas and New Year's -- and then bad weather in between, which effectively hurt us for the better part of 10 days of shipments.

And impacted our shipments overall.

Got it.

Okay, thank you.

Thanks, Brian.

Michael Gambardella from JPMorgan.

Got a question on your Polish operation, and scrap in general.

You mentioned you had a good quarter in Poland, but you're being a little bit conservative or cautious about the outlook, given what's happening in the Ukraine with Russia.

Are you seeing any evidence of that already?

Or is that just anticipating that could happen?

We have seen a little bit of evidence.

And the best way that we can highlight it, Mike, is to tell you that we're seeing products from traders that normally wouldn't be in the Polish market, or haven't been in the past.

It could be temporary.

And the reason we give caution is that it could be more prolonged.

So, to say it differently, there's rebar supply, for example, in Poland from locations that we haven't seen before.

Not the usual suspects, I guess is the way to describe it.

And that can abate, depending on flows.

Everyone tries to keep their mills running, and looks for outlets, and they go to markets where product is moving.

And so, we've seen a little bit of that.

Enough that we want to be cautious about the quarter, depending on how things play out over the next couple months.

And just in regards to scrap, even back in the United States, do you think this issue going on in the Ukraine could back up into lower scrap prices, especially with the recent drop in iron ore prices?

And what I'm saying there is: If you're having potentially slower demand production in Poland and the surrounding areas because of what's going on in the Ukraine, could that back up into even lower exports of US scrap over to Turkey and some of the other places that it typically goes?

That's a good question, Mike.

And I would say that if there are disruptions in production -- which we really haven't heard or sensed that much -- we're seeing different trading patterns, but not necessarily disruptions in production.

But if there are disruptions in production, for example, in eastern Europe, that could make scrap available at better prices for the Turks, who are huge importers of scrap on a global basis.

That might take them out of the United States.

So, yes, your speculation has some probability.

But I can't assign a number to it.

It would be hard to say.

But yes, it's possible.

Okay, all right, thanks very much.

Thanks, Mike.

Phil Gibbs from KeyBanc Capital Markets.

I had a question on the litigation piece, and just SG&A in general.

I assume that the litigation is within that SG&A segment, and a piece of the P&L.

If you exclude that, your SG&A was down pretty dramatically quarter on quarter.

Just looking for any color that you have there.

Is that baseline number sustainable?

Did you ratchet down costs more than you thought?

Is there accruals that should reverse in the back half?

Just anything that you could provide there.

Yes, the anti-trust settlement did fall in the SG&A line.

And we did have -- typically our spending patterns are lighter within this quarter because of holidays, and there's less travel, and all those sort of things.

We are having a strong year financially.

So, we will be making some adjustments to our variable compensation accruals in the back half of the year.

I would ask you to probably model in SG&A for the next two quarters in the $115 million to $120 million range.

Okay, that's really helpful.

And I know you had given the after-tax number for LIFO.

But can you give us color on what the pre-tax number was for the overall Business and for the mills piece -- US mills?

Yes, let me find my page with the LIFO numbers on it by segment.

Okay, for the recycling segment, it was a positive of $1 million.

And for the Americas Mills, it was a LIFO expense of almost $12 million.

And I think we noted that fab was almost $5 million expense, and International M&D had $3.8 million of LIFO expense -- for a total of $18.9 million.

Okay, that's really helpful.

I appreciate it.

And just the last question, if I could.

The mothballed shredder in El Paso that you mentioned, Joe -- is there more to come here?

Clearly, I think the issue has been of the excess capacity of shredders in general making it ever more challenging on a cost side for the recycling community.

Any thoughts there on whether you think this will broadly accelerate the process you're doing a little bit on your side?

But anything more that you could see or hear that would suggest that there's more to come broadly?

Thanks.

Yes, there's nothing imminent that we can look at.

We are always looking at our assets, and we've had some other facilities that have been either mothballed or completely shut down.

In this case, it's not the scrap collection.

We're still doing scrap collection and processing in El Paso.

It's only the shredder.

It was a cost issue.

So, back to the earlier question -- we're always looking at our costs and trying to make sense of our raw material supply, and optimizing the mix of products that we use in any of our operations.

So, there are plenty of others that operate on margin.

And I think that's some of what's put pressure on the ferrous industry.

I think we do a good job of managing the assets that we have and taking appropriate action.

I'm not sure others are looking at it the same way we do on a return basis.

So, there could be others in the industry and that might need to be shut down.

We don't foresee or project any of our own.

Thank you.

Aldo Mazzaferro from Macquarie.

I just wanted to drill down a little bit more on the Ukraine risk.

Is the electricity source for your mill there -- is that a natural gas or coal fired electrical plant?

Do you know offhand?

I believe -- it's a combination.

But I believe the majority of the sourcing is coal for the utilities in Poland.

And then, your natural gas expense in the mill -- would that be impacted if there was some disruption of the supply from the Russians?

Sure it would be.

But we haven't seen any disruption in availability or supply.

Despite all of the saber-rattling about sanctions and the like, there really hasn't been much impact on us in that regard.

Right, okay.

And then, Joe, do you have any way of breaking out the international marketing distribution business by geography a little bit?

Like, if there was -- is there losses continuing in Australia, for example, offset by profits in the US?

And how does that break down?

Yes, so, I'll break it down for you this way.

First off, Australia has three different components to it.

There's raw materials trading, steel trading, and distribution.

In talking about regions on the trading basis, I'd characterize it this way.

The European market continues to be the most challenged, really because of lead times and availability, as well as availability of imports.

When I said availability the first time, I was referring to short lead times in availability from the mills.

So, it's really, really a very competitive market in Europe, and we're challenged in every regard moving product, really, across the board.

Asia is a good market.

Southeast Asia is a good market for us.

There's a lot of profit movement, but margins are very thin.

And the margins are thin because there's a lot of supply and a lot of flow of information about end-use -- about mill pricing available to the end users.

So, it's a very, very competitive market.

The Australian market, on a trading basis, is neutral.

It's not under the same sort of pressure that we see in southeast Asia, but there are significant pressures there.

And in North America trading activity is stronger, and our profitability is stronger as well, not only in the raw materials segment, but the steel segment.

However, there's always the potential, as we source some material from eastern Europe and Russia -- in the flat-rolled side in particular -- that, too, could be disrupted in the future.

It's a nice book that we've built, but that would be our concern with anything coming out of Russia and eastern Europe as it relates to our trading business.

Great.

And I know you've got a really good cat bird seat for the Turkish rebar coming in.

And frankly, myself, I was surprised -- I actually wasn't surprised, I should say, that you lost the CVD.

But I thought that would be actually more difficult to prove than the dumping.

So, the way I understand dumping is: If they sell below their whole market price in our market, or they sell below their cost -- do you think -- I don't think the Turks are losing money, as far as I can tell.

And I'm pretty sure they're not selling below the Turkish market price in the US.

What grounds do you think you're going to win the dumping cases on?

We were disappointed with the countervailing duty decision for some of the reasons that I already cited, in terms of formula.

And probably the better thing is: Because there's a preliminary determination coming out on April 18, we won't even try and debate that.

We've submitted our arguments to the proper authorities, and we'll let them decide on it now.

But we just believe strongly that there's pricing behavior that would lead to anti-dumping duties.

Okay, thanks, Joe.

Good luck.

All right.

Thanks, Aldo.

Thanks, Aldo.

Charles Bradford from Bradford Research.

First of all, on domestic pricing for rebar -- about 10 years ago one of your major competitors started a pricing system tying scrap to the rebar price, and announcing every month what the change would be.

That seems to have broken down over the last few months.

Has that system now basically been eliminated?

Chuck, we probably shouldn't be talking about pricing and pricing methodologies on a call.

We just settled an anti-trust suit for $4 million, and I'm not really interested engaging in more.

But I would say systems change.

As opposed to break down, they evolve.

And we'll just leave it at that.

In the south -- or I guess it's southeast Europe -- and the Turks and their scrap buying -- have you seen any indications that the Russians, with a much weaker ruble and a much weaker economy, may be increasing their sales of scrap into places like Turkey?

Haven't seen it yet, Chuck, but it's entirely possible.

We haven't seen any dramatic shift in availability in our Polish operations or surrounding areas on disruption and supply, or new supply.

Brian Yu from Citi.

I just wanted to ask on the scrap.

As you mentioned, Joe, we are seeing fairly weak demand in international markets.

US prices are high.

Are you seeing product going from the coastal regions to the Midwest?

And if so, how does that keep pricing in the US flat to up, say, over the next month or two?

That's always a major contributor.

When export markets aren't available, materials that have been collected in or near the coasts do make their way inland.

And that has propensity for putting pressure on prices.

So, my comments about looking forward, there's an assumption that there's increased demand in the aggregate -- higher production rates.

Some of the Winter outage -- Winter problems that competitors had in the north, in particular, will abate, and they will be in the market for scrap.

And I'm assuming that there will be some export -- significant enough export market that that will help drive prices.

If we're wrong about exports -- if, for example, what Chuck just hypothesized is right and the Turks don't need scrap from the US, that will put pressure on pricing.

At this point, we're all guessing about what's going to happen with scrap pricing.

Timna Tanners from BoA Merrill Lynch.

I just wanted to follow up real quick on the case.

And I know you settled, and I can imagine why.

But I just wanted to get from you directly, why bother settling this anti-trust case that's been going on for a while, if you don't even sell a lot of the product that seemed to be in dispute?

Thanks a lot.

Yes, this case was introduced in 2008 when I was more involved in tubular markets than other steel products.

And I was pretty amazed when it was first introduced, but it is what it is, and we've spent significant dollars preparing for litigation.

It's been a long and extended process, somewhat extended by the fact that the same judge who was ruling on this was tied up with a guy by the name of Rod Blagojevich for a period of time.

But the answer to your question -- and as succinctly as I can is -- our expected expenses or anticipated expenses for continued defense of this were significantly higher than the costs associated with settling.

So, it was an easy economic decision.

Okay, fair enough.

Thank you.

Thanks, Timna.

Sal Tharani from Goldman Sachs.

There has also been quite a bit of news about export of non-ferrous scrap to China, zorba, and so forth.

And I was wondering: Are you seeing some pressure on that part of your Business also?

Yes, Sal.

We participate in that market.

And as their need for product changes, it obviously is going to have a backward effect on us.

Is there another market for zorba besides China, if China stops buying or slows down in buying zorba?

Yes, there are other markets.

Okay, thank you.

And at this time, I'm showing no additional questions.

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

Okay.

All right, well, you caught me off guard there.

I thought we were going to get another question.

So, thanks, I appreciate it.

And I'd like to just say thanks to everyone for joining us on the conference call today.

We appreciate it -- your interest and your questions.

And we look forward to speaking with many of you during our investor visits in the coming weeks.

Thanks very much.

Have a good day.

And ladies and gentlemen, this concludes today's Commercial Metals Company conference call.

You may now disconnect your telephone lines.