Commercial Metals Co (CMC) 2016 Q4 法說會逐字稿

Hello and welcome, everyone, to the full year and fourth quarter fiscal 2016 earnings call for Commercial Metals Company.

Today's call is being recorded.

After the Company's remarks, we will have a question-and-answer session and we'll have a few instructions at that time.

I would like to remind all participants that during the course of this conference call, the Company will make statements that provide information other than historical information and will include expectations regarding economic conditions, effects of legislation, US steel import levels, US construction activity, demand for finished steel products, the effects of a relatively-strong US dollar, the Company's future operations, the Company's future results of operations, the commissioning of the Company's planned new steel micro-mill in Oklahoma, and capital spending.

These and other similar 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, including those that are described in the risk factors section of 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 only as of this date.

Except as required by law, CMC does not assume any obligation to update these statements in connection with future events, changes in assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances, or otherwise.

Some numbers presented will be non-GAAP financial measures and reconciliations for such numbers can be found in the Company's earnings release or on the Company's website.

Unless stated otherwise, all references made to year or quarter end are references to the Company's fiscal year or respective fiscal quarter end.

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 welcome to everyone joining us to review CMC's results for the full year and fourth quarter of fiscal 2016.

I will begin the call with highlights for the fiscal year, and Mary Lindsey will then cover the year end and quarter financial information in more detail, and I will conclude our prepared remarks with a discussion of our outlook for the first quarter of fiscal 2017, after which we will open the call to questions.

As announced in our earnings release this morning, we reported fiscal year 2016 earnings from continuing operations of $72.5 million or $0.62 per diluted share on net sales of $4.6 billion.

We also finished the fiscal year with cash and cash equivalents totaling $517.5 million.

Also, as noted in our press release on October 25, I am pleased to report that the Board of Directors declared a quarterly cash dividend of $0.12 per share of CMC common stock for stockholders of record on November 9, 2016.

The dividend will be paid on November 23, 2016.

This represents CMC's 208th consecutive quarterly dividend.

Turning to trends and conditions in the markets in which we operate, as of our year end in August 2016, the US non-residential and non-building construction markets were mixed year over year.

Non-residential construction improved more than 4%, while non-building pulled back by 8%.

These trends are in contrast to strong construction starts activity, which improved nearly 29% year over year.

With respect to highway and infrastructure spending, recently-passed legislation in December 2015, the bill known as Fixing America's Surface Transportation Act, or FAST, has yet to result in meaningful incremental volume for CMC.

We are encouraged that this bill provides significant funding for infrastructure projects and we anticipate seeing improvements tied to this legislation within the next 12 months.

Despite good construction activity, margins have been negatively impacted by a glut of imported products, most particularly rebar.

As we've discussed in prior calls, certain foreign producers continue to dump unfairly-traded steel in the United States.

These producers are attracted to the US market as a result of the strong US dollar and relatively-strong US construction demand in comparison to their home markets.

We, along with other rebar trade action coalition companies, recently filed a trade case against Taiwan, Japan and Turkey.

We will continue to work with the US government to use its trade authority to create a level playing field for domestic producers against the surge of foreign steel.

Global overcapacity continues to impact steel producers worldwide.

We believe China's steel industry continues to exhibit behaviors that are harmful to global commodity flows, the most acute to CMC being the negative impact of excess global capacity on metals pricing.

Many Chinese mills continue to operate inefficient and outdated capacity.

These factors alone were a significant contributor to the pricing pressure for a number of major commodities on a global basis which, in turn, placed significant pressure on both the volume and margins in our International Marketing and Distribution segment during fiscal 2016.

Scrap markets have remained quite difficult.

We've seen additional pricing degradation for ferrous scrap in the early part of our fiscal 2017.

Though there are reports that scrap pricing has bottomed out, we have continued to adjust our cost structures at our recycling facilities in response to tightening metal margins in this part of our operations.

On a more positive note, the fourth quarter results reflect the value of the diversified assets that CMC has in its portfolio, with very strong performance coming from our Polish operations, which reported an adjusted operating profit that is the best fourth quarter in eight years.

These operations will also soon fully benefit from the recently completed and upgraded technology of the continuous [captured] in the (inaudible).

Our Americas Fabrication unit posted an eight-year high for adjusted operating profit.

While we expect margins will continue to be pressured in our fiscal 2017, we are extremely pleased with the operating performance of this unit, in spite of the challenges framed by imported steel and domestic competition.

Our downstream integration strategy is further strengthened by the execution announced yesterday of an agreement to acquire the assets of the steel-fabrication business of Associated Steel Workers, Limited, which operates in Hawaii.

The construction of our previously-announced new steel micro-mill in Durant, Oklahoma, is progressing well.

We continue to target the fall of 2017 for commissioning and startup of this facility.

Last, but not least, we remain committed to focusing on the matters that are within our control.

The supply-chain initiatives that we kicked off last summer have returned early dividends along with many others under development.

Our approach to both working capital and investment capital remains focused on optimum utilization, and we have remained diligent in reducing SG&A and other controllable costs throughout CMC.

With that as an overview, I will now turn the discussion over to Mary Lindsey, Vice President and Chief Financial Officer.

Mary?

Thank you, Joe, and good morning, everyone.

As Joe mentioned, for the full year of fiscal 2016, we reported earnings from continuing operations of $72.5 million or $0.62 per diluted share, which compares to earnings from continuing operations of $99.1 million or $0.84 per diluted share for fiscal 2016.

Results from continuing operations for 2016 included fourth quarter, after tax, long-lived asset impairment charges of $24.3 million or $0.21 per diluted share, while fiscal year 2015 included after-tax goodwill impairment charges in the fourth quarter of $4.6 million or $0.04 per diluted share.

For the fourth quarter of 2016, we reported earnings from continuing operations of $1 million or $0.01 per share; included in continuing operations was the $24.3 million after-tax impairment charge I previously mentioned.

Looking at our results by segment for the fourth quarter of fiscal 2016, our Americas Recycling segment recorded adjusted operating loss of $45.1 million for the fourth quarter of 2016, compared to adjusted operating loss of $13.9 million for the fourth quarter of fiscal 2015.

This loss was meaningfully increased by a pre-tax long-lived asset impairment charge of $38.9 million during the fourth quarter of fiscal 2016.

In the fourth quarter of 2015, this segment recorded a pre-tax $7.3 million goodwill impairment charge.

During the fourth quarter of 2016 versus the fourth quarter of 2015, ferrous metal margin decreased 5% and shipments increased 2%, while non-ferrous metal margin increased 11% and shipments decreased 6%.

Our Americas Mills segment recorded adjusted operating profit of $45 million for the fourth quarter of 2016, compared to adjusted operating profit of $60.1 million for the fourth quarter of 2015.

This decrease was driven by declines in both shipments and metal margin for the fourth quarter of 2016 versus 2015 of 4% and 15% percent, respectively.

Our International Marketing and Distribution segment recorded -- oh, excuse me.

Our Americas Fabrication segment recorded adjusted operating profit of $9.6 million for the fourth quarter of 2016 compared to adjusted operating profit of $18.7 million in the prior year quarter.

For the fourth quarter of 2016, margin compression caused by selling prices declining faster than our material costs, we felt it in a 9% decrease in the average composite metal margin.

Additionally, shipments in the fourth quarter of fiscal 2016 dropped 4% versus the fourth quarter of fiscal 2015.

Our International Mill segment recorded adjusted operating profit of $18.7 million for the fourth quarter of 2016, an improvement of $12.3 million compared to the prior year's fourth quarter.

The increase in adjusted operating profit in fourth quarter fiscal 2016 compared to 2015 was driven by improvements in shipments of 4% and a 3% increase in average metal margin as well as improvement in conversion cost.

Our International Marketing and Distribution segment recorded adjusted operating loss of $3.5 million for the fourth quarter of 2016, compared to adjusted operating loss of $14.3 million in the prior year's fourth quarter.

The decrease in adjusted operating loss is due to an increase in shipments for raw materials division in the US and our steel trading divisions in Asia.

Additionally, our steel trading divisions in the US and Europe experienced increases in average margins offset by declines in shipments due to continued global steel overcapacity and weak oil and gas tubular demand.

Turning to our balance sheet and liquidity, as of August 31, 2016, cash and cash equivalents totaled $517.5 million and total liquidity was more than $1.1 billion.

For the fiscal year ended 2016, we had cash flows from operating activities of $586.9 million, the highest since fiscal 2009.

For fiscal 2016, capital expenditures were $163.3 million.

We estimate that our capital spending for fiscal 2017 will be in the range of $250 million to $300 million, which includes costs related to the construction of the new Oklahoma micro-mill.

This concludes my remarks.

Thank you very much.

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

Thank you, Mary.

Our first quarter is typically a seasonally slower period, as the construction season begins to wind down before the onset of the winter months.

From a market perspective, many of our US businesses experienced margin compression throughout our 2016 fiscal fourth quarter.

These pressures have continued into our 2017 fiscal first quarter.

Therefore, we do not currently anticipate a material improvement in our financial results in the coming quarter.

In summary, as we look back on fiscal 2016, our Americas Fabrication and International Mill segments had outstanding financial results, some of which were the best since the onset of the global financial crisis, highlighting the value of the diversification of our portfolio.

We also concluded one of our safest years on record, based on OSHA recordables.

We are proud of the commitments we make as a Company and individuals to our customers, suppliers, shareholders, community and each other, and we look forward to continued success in fiscal 2017.

Thank you, and at this time, we will now open the call to questions.

Thank you.

(Operator Instructions)

The first question comes from Paul Luther with Bank of America Merrill Lynch.

Please go ahead.

Hi, guys.

Thanks for taking my questions.

Morning.

Good morning, PT.

Good morning, PT.

Morning, guys.

I wonder if I could start with an update on import activity.

Can you talk about recent trends you're seeing in terms of imports?

And, then, as a part of that, also, could you talk about or provide some perspective, Joe, maybe, on the rebar trade case that's been filed, in Turkey, in particular?

Because I believe the government had revisited Turkish margins back in April, so I want to get your perspective if you think there might be some sort of different outcome for this most recent trade case, particularly on Turkey.

Sure.

Happy to do that.

I guess I'll start with your question about imports.

It's really relevant to maybe look at some of the data on a comparative basis, and we've done that looking at our fourth fiscal quarter, which is June, July and August of last year, compared to this year or this most recent year.

Total imports in the prior year period were 460,000 tons, and in the current period, most current period, 725,000 tons.

It's an increase of over -- well, about almost 57%.

That contributed significantly to what we commented in the -- commented as being a glut.

I guess I could call it a deluge of imports that arrived, and inventories remain fairly high.

But this is a pretty extraordinary surge in imports and part of what prompted the filing of the trade case.

The majority of those imports, as you know, roughly 75% to 80%, come from Turkey.

So there are some financial results, along with the surge in imports, that prompted us to file, but there have also been some changes in customs monitoring and calculations of what constitutes injury, according to the new rules that were set a year ago May by the Commerce Department.

So that's some of the incentive that we have, as well as the financial results that we reported.

And we clearly see a strain in our margins, and it's clearly driven by import pricing that is easily over $100 a ton discount to what market prices are among domestic competitors in the United States.

So there's several reasons why we filed, and we feel pretty strongly about it.

At the same time, we can also see, from some of the licensing data, that imports from Taiwan and from Japan, licenses have cut back slightly.

Imports from Turkey continue at a pretty high rate, but below the rate experienced in the summer.

Cool.

Thanks for that, Joe.

And, then, for the follow-up, I just wonder if I could get more color on what you're seeing in terms of recent demand trends.

You know, you mentioned non-res in the comments.

And then I wonder if you could give a sense of public, because we've heard from some of the building materials names talking about a slower-than-expected ramp of road construction, I think out of probably Texas DOT, budget being lifted and, of course, the FAST Act, which you mentioned as well.

So I'm wondering if you could just comment a bit more on that.

Yes, PT, it's Barbara; I'll take a crack at it and certainly Joe can add additional commentary.

Let me start with the construction side, which really impacts our rebar shipments.

Most of the demand indicators are still fairly good.

ABI, particularly in the regions where we operate, continues to be above that 50 level and so we see good demand there.

Clearly, there is maybe a slowing of the growth on the construction side or the non-residential side, but we still see plenty of quoting and plenty of opportunities to book business for construction-related projects, non-res.

On the public side, public spending has been declining over the last number of quarters, and as Joe indicated in his opening remarks, we're really not seeing a pick up in demand related to the new FAST Act, and that's not particularly surprising when you go so many years with temporary extensions and states that don't have the confidence that the funding will be there for these infrastructure projects.

And, then, when the bill was authorized, it takes time for the states to get organized, get their own funding in place, get the engineering done and all that's necessary to restart some of these very-much-needed infrastructure projects.

So it's been a bit disappointing that we haven't seen any significant activity on the public side as a result of that new bill, but we do expect eventually for that money to make its way into steel orders, if you will.

And our best view of that would be that sometime during our busy part of the year next year we'll begin to see the public spending pick up some.

And that's before you factor in the upcoming election, and whatever the outcome, there has certainly been a lot of discussion on the need to not only do what's in the FAST bill, but also to increase the spending on infrastructure to really address the renewal of the very aging infrastructure in this country.

Great.

Thanks, Joe and Barbara.

That's really helpful.

Appreciate it.

Thank you.

Our next question is from Curt Woodworth with Credit Suisse.

Please go ahead.

Good morning.

Good morning, Curt.

I just wanted to follow up on the trade case that was filed in September.

As I understand it that, with respect to Turkey, the new trade case can only apply to specific producers who are not subject to, I think, the existing case, which is still under administrative review.

So can you just talk to the mechanics of that and how much of say this import exposure you think can be covered by the new case?

So, Curt, actually these get very complicated, as you know, and -- but all of the Turkish producers, I believe, are covered under this new case, which we were able to, through clear understanding of a law, to capture them, and so we're very pleased with that.

But there is still, as you know, the existing order and the existing appeal, which has been moving through the process, which, under the existing order and the appeal, there is additional relief that is possible to be forthcoming.

But this case will, in essence, re-review the situation, given the change in circumstances, and there's been very clear evidence not only in our business but in our peers that there has been significant harm to the industry with the significant increase in imports, particularly coming from Turkey prior year to this year, and then the resulting decline in prices and et cetera.

And maybe just one other comment.

The dumping is company specific, because there are existing dumping orders in place, which Barbara referenced already, on other producers.

And one final note, the first important date's coming up, November 4th, where we should hear what the preliminary ruling is.

Okay.

That's super helpful.

Thanks.

And then just as a follow up, just wanted to get what your expectations are or what you're seeing so far for November scrap, and just given the moves we've seen in the coke and coal market spot now, above 250, would you expect, given Turkish scrap, scrap is going up, Chinese billets going up, that eventually the US scrap place would follow or do you think the fact that demand is so relatively weak and to your point on winter that could potential limit upside?

So there are a couple things to factor in here, Curt.

Oil prices have begun creeping just a little bit, a little bit above $60 a ton the last few days.

There have been some reports, industry reports of expected increase in scrap pricing, and there is some parity over the long term between iron ore pricing and scrap pricing.

And, certainly, the export market is putting some strain on the domestic market because of the more attractive prices that exist elsewhere, and, quite frankly, flows have slowed, which is not unusual when prices fall.

And so all of those would point towards increased scrap pricing, but, quite frankly, it's a little bit too early to know for sure.

I'm just trying to give you some guideposts of what we look at, what we're monitoring, and we'll get into this first week in November.

Okay.

Thanks a lot.

The next question is from Seth Rosenfeld of Jefferies.

Please go ahead.

Good morning.

Good morning.

I have two questions for now, first on the recent acquisition of ASW.

I was wondering if you could give us a bit of color on the size of this transaction in terms of kind of the scale of billings processed or incrementally how much that could increase your vertical integrations in downstream fab.

And then separately, in the quarter, you seemed to perform very well in conversion costs versus our own expectations.

Can you give us a bit of color on your current cost-cutting opportunities and what perhaps drove the beat in the last quarter there?

Thank you.

Thanks, Seth.

I'll start and, again, if others want to add additional comments that I may miss -- you know, we're really excited about the ASW acquisition.

We've been working with ASW for some period of time as a supplier on projects on the island and -- however, it is a rather small acquisition; we're talking about 25,000 tons of fabricated product.

However, Hawaii is one of the strongest markets for growth in infrastructure and non-residential construction, also has -- given the challenges to get raw materials to the island -- it has some of the highest fabricated rebar pricing.

The other benefit to the ASW acquisition is we do source product to Hawaii from our Arizona mill, and so this does secure a certain amount of tonnage to the Arizona micro-mill.

So we look forward to some interesting synergies as we conclude and close that transaction.

Transaction won't close for another 60 days.

In terms of the conversion-cost side, this is really just part of our cultural norm, which is continuous improvement and continuous cost reduction.

Having said that, when you move into these more difficult market situations, we have to dig deeper, so to speak, or continue to -- or maybe accelerate some of those actions.

So we're working very hard, particularly on the overhead line, to find ways to reduce costs.

If you strip out the one-time bond refinancing cost on the SG&A line, we did see a reduction year-over-year.

We would anticipate to see our SG&A line continue to reduce over time as we complete our continuous improvement activities.

We're also very, very pleased with actions that occur in the cost of goods sold area.

We have a new leader of supply chain and his team is finding opportunities for leverage and cost reduction.

We have -- a good portion of our CapEx outside of the Oklahoma micro-mill goes towards projects that are very high-return projects that either improve throughput through our operations or they're straight cost reduction.

For example, we rebuilt the reheat furnace in the Texas mill this year, and with any refresh of a portion of the operation provides opportunity for increased throughput or energy savings.

And we have those throughout the system.

The capture project in Poland had a very strong startup and, as Mary mentioned, we will anticipate further cost reduction in our fiscal 2017 as a result of the new capture coming on line, so just a wide variety of initiatives across the enterprise to continue to be low cost in this difficult global backdrop.

Thank you.

Of those cost savings, are there any of those that you are concerned would not be able to be retained if the market were to improve into next year; so if scrap price started to improve, and volume throughput started to improve with the FAST Act, et cetera, will you be able to retain all of this or are some of those kind of one-off savings or temporary savings?

We're always looking for permanent improvements.

Now, certainly, you know alloys or other consumables, if commodity prices continue to improve then there will certainly be pressure on those types of consumables for just inflationary pressures.

Okay.

Thank you very much.

The next question is from Alex Hacking of Citi.

Please go ahead.

Thank you.

Good morning.

Good morning.

Hi.

How are you?

My first question is about Poland.

Maybe you can give us an update on market conditions there in terms of demand, import pressure, prices.

And then second question is just, on the US side, how does your fabrication backlog look if we compare it to the same time last year?

Thanks.

Let me take Poland and Barbara will talk about the fab backlog.

As far as Poland's concerned, we clearly are very pleased with the results that were recorded in Poland, this being one of the best years on record for them since the global financial crisis.

It's a combination of efforts that have gone into that, starting with an electric arc furnace consolidation and rebuild.

We put in a new furnace two years ago to align the operations in Poland to be a single-furnace operation in the same manner that we operate with all of our other mills.

That was followed up this year by a renovation -- a installation -- a brand new caster which will make the Polish operation a single furnace, single caster operation garnering further benefits.

And all of this is with an eye towards improved efficiency and energy and consumption of consumables.

So we're really pleased with that and that's helped us a great deal on our costs.

On the market side, there was a trade case that was filed in March against Belarus, which had been quite disruptive.

If you went back a couple years, Alex, you'd see that we had issues with VAT circumvention from one of the neighboring states and more recently the Belarus facilities have been dumping product into the Polish market.

And with the trade case that was filed in March, for which there'll be a final ruling in November timeframe.

No -- November?

Yes, November (multiple speakers) --

November timeframe.

We expect a final that the Belarus shipments or exports have cut back significantly.

So you can see that there's been an appreciation on the volume that we've been processing as well as pricing and margin improvement.

So the situation in Poland is one that we're encouraged by, not only because of current circumstances, but the fact that funding from the European Union is solid and is aimed towards infrastructure expansion and improvement in the same way that we talk about FAST Act funding in the United States.

And so we see a continued bright future with improved operating performance and less influence, if you will, of dumped product in the market, assuming that the case is ruled as we expect it to be ruled.

So, overall, the situation in Poland is strong and aside from the winter months, we look to improve -- continue to improve performance in Poland.

As for the backlog, Barbara can talk about that.

Yes.

Alex, in terms of the fab backlog, I think the fab backlog is still strong and consistent with prior quarters and consistent with what we would see from a seasonal perspective.

I will further comment that on the fab backlog, we not only manage the tons but we manage the margin and we've been in this period of margin compression on the fab side, and we are very cautious not to load up with a lot of tons in our backlog at extremely low prices.

So we try to manage that very carefully.

If scrap prices do move higher, which is the current expectation, then we would expect to see a bottoming in those rebar prices and potentially an improvement in rebar prices.

So we try to manage the margin side of the fab backlog very carefully as well but, as I said earlier, we still see steady demand in our various regional markets and our backlog remains consistent.

Thank you.

It was very helpful.

The next question comes from Phil Gibbs with KeyBanc Capital Markets.

Please go ahead.

Hey, good morning.

Good morning, Phil.

Good morning, Phil.

I have another question on fab.

Talked about a little bit of slippage in margins in your first fiscal quarter from your fourth fiscal quarter and I think things slipped a little bit more than we expected in the fourth quarter.

Trying to just gauge, with all the volatility we've seen, what is more of a normalized level of unit profitability relative to, call it, this $30 or $31 a ton that we saw in the fourth quarter.

Yes, Phil, maybe I'll take a crack at it, and certainly Joe and Mary can add color.

If you look through the cycle, average fab EBITDA per ton, and this is -- we've studied this over 10 year cycles -- is in the $40 to $50 a ton range, but the range from peak to trough in fab EBITDA per ton is much wider than if you did the same comparison for our mills.

And that's the nature of the business and we have been talking over the past three or four quarters that eventually we were going to cycle through the high-priced fab backlog as rebar prices were free falling and that, as we cycled through and we got into, I will call it, a more current priced fab backlog, there was going to be a commensurate squeeze in that fab margin.

And, as you also know, a fab backlog can consist of jobs that are shipping -- booking and shipping within a month to jobs that are booking and shipping within two or three years.

So I think the good news is that the shipments were quite strong for the year and we remain encouraged in terms of demand for fabricated steel, but as a result of the strong shipments, we cycled through that higher-priced backlog pretty quickly, and now we're into this period of time where we've seen the deluge of imports.

And on the fab side, we're competing with imported bar price, and there's obviously the balance between walking away from the fab job or keeping that consistent flow back through our mill segment.

And so we're always constantly making those decisions.

Now, going forward, if prices turn and rebar prices begin to increase, then we'll be chasing -- we'll be trying to rebuild the fab backlog at higher prices, and that will have a compressing effect in the short term on the fab segment, but it should have a positive effect on the mill segment.

So, in summary, I think, at least for the next two quarters, we're going to feel pretty pressured on the fab side, and then it just remains to be seen where rebar prices go relative to fab backlog pricing.

Okay.

I know at certain points in time you've provided the mix within fab in terms of the private versus public side.

Any color you could give us on that in terms of the composition?

Well, it continues to be more heavily weighted to the private side, which tends to be better over the long run, because pricing is stronger and sometimes it cycles through a bit quicker.

That goes back to the comments I made earlier about -- on the public -- it's really been declining over the last couple of years, and we haven't seen yet the impact of FAST.

Hopefully, we will see a pick up in the public spending as the FAST money starts getting deployed, but we still expect our fab backlog to be more heavily weighted to the private.

Okay.

And then last question I have here is just on some of the Texas maybe chemical-processing projects, like the chemical plants and some of these cracker projects, I think they're maintaining some resiliency right now, but may come off in the later years.

Is that something that matters to Commercial Metals in terms of rebar consumption, and -- and that's --

Yes, I think -- go ahead.

-- essentially what I'm asking.

Yes.

So of course, we're monitoring all these projects; in any large industrial expansion, there's foundations and there's steel-related products involved in those huge CapEx projects.

The other effect is the employment that it brings, and then the non-residential construction around communities and schools and housing developments, et cetera, that are needed to support those types of projects.

And you're right, there's been a certain amount of resiliency, and companies that have made large commitments have remained committed to some of those projects, and no doubt with the fall in energy prices that we've seen in this past couple of years, those projects, I'm sure, are being reevaluated and some will continue to go forward and some will potentially be delayed.

And, again, we're monitoring it but, overall, we still see pretty strong construction demand in the near term.

From those applications?

Yes.

And there continues to be funding for wind farms.

That's been great business for us.

There was a re-upping of the funding for that.

So you just kind of have to look at it on a total basis, but we never did expect the 60 billion of projects to all come to fruition that were on the drawing boards for the petrochemical space, but we'll continue to monitor.

Thanks very much.

Thanks, Phil.

(Operator Instructions)

Next question is from Aldo Mazzaferro with Macquarie.

Please go ahead.

Hi.

Good morning.

Good morning, Aldo.

Good morning, Aldo.

I just had two questions.

A couple of mine have already been answered, but could you give us any of the details behind the asset impairment charge?

Was it kind of across the board on goodwill on the assets or was there specific geographies and facilities that were targeted?

Hi, Aldo.

This is Mary.

I hope I can help you with that question.

So it was in the Recycling segment, as we mentioned, and it was not a goodwill impairment.

That segment doesn't have any goodwill left.

It was actually a long-lived asset impairment, and it was -- we examine all of our long-lived assets every year and periodically as necessary.

And, in this case, the particular assets that were most exposed were more recent shredder investments that at this point in time have a relatively high asset value, and in the challenging period that we've got associated with such low scrap prices and overall business disruption in the recycling area in general, those assets were pretty stressed.

So they were partially impaired.

And so it wasn't a geographic effect.

It was more an effect of those particular recycling yards that had higher-asset values that were difficult to support with the current business environment.

Great.

I get it.

Okay.

And second question, Joe, this is more of a kind of a big strategy question, but I'm wondering whether the makeup of the Company, where if scrap goes up, the mills get hurt; the rebar goes up, the fab gets hurt.

I've seen the Company in the past work all together and have margins consistently better that that required a -- almost a full global strong steel market and very, very high pricing.

I was just wondering, do you think it's the volatility in the market that is keeping your overall earnings compressed in a narrow range here or is it the structure of the Company that needs to be addressed in terms of exiting some of these businesses that tend to drag you down just when some of the other assets seem to be hitting their stride?

Yes, Aldo, that's a great question.

Thanks for asking.

And we've really attacked the structure, if you will, pretty aggressively already in the sense that we've exited unprofitable businesses, whether they're fab shops or recycling yards, and made some critical decisions along those lines.

And we did that in conjunction with our go-to-market strategy, which is based on regionalization, wherein, we have P&Ls that are managed by local management in the central, western and eastern regional bases.

We do the same thing in Poland.

And the idea there is to optimize the flow of materials in our value chain.

And our value chain includes securing low-cost scrap and using the lowest-cost scrap for our own operations, but at the same time, being a third-party merchant.

We only consume about half of what we procure and process.

And on the other end of the mill is the fabrication, which gives us access to the market, gives us an insight to the market.

The issue in the fab business, more than the volatility of ferrous pricing, is the volatility of the fab business and how jobs are quoted.

In this case, what we're fighting today is import product.

But, you're right, there is a tendency to swing.

So if you looked at the overall competitiveness of our operations and looked at the mills in particular, you'd see a very, very competitive mill that's fed by low-cost scrap and has access to end-user markets without intermediaries, because our fab business manages our customer relationships.

And so we think it's a model that works very efficiently for us.

That doesn't mean that we don't move and prioritize or reallocate assets or investments and capital towards one business or the other.

And we've done a little bit of that in all of our businesses.

Barbara mentioned the reheat furnace in Seguin, the built welder in South Carolina.

We've also built a mega-fab shop in Virginia that's to our advantage.

So we're doing everything we can to improve the efficiencies of the operations and to make the unit work smoothly.

We've also exited businesses that don't make sense.

So in terms of redeployment, we exited the distribution business this past year and, at the same time, made a critical decision to get out of M&D in the UK and we're in the process of winding that down.

So there are a lot of good things that have happened and, for us, we're really particularly optimistic about our business.

Despite the difficult time that we're facing today, we're able to generate cash flow from operations that's the best that we've seen since 2009.

Even after tendering for $200 million in long-term bonds, we have cash at year end of over $500 million, and the benefit of that is reduction in the interest that we'll be paying from this date forward.

On an annualized basis, that's about $14 million a year.

So I think we're doing a good job of reprioritizing where we deploy capital.

We've done a good job of investing for efficiency in costs, because that's what we can control.

And we're optimistic about the market.

Now, I say that with the full understanding that the winter months -- the winter quarter isn't our best quarter.

It never is and, historically, we would expect the pattern to continue itself, but as the spring builds, we're optimistic that some of this pent-up demand, some of the issues related to the current political cycle will all be resolved and that some of that FAST money, if not FAST money plus, will start to strengthen demand for construction products in North America.

So that was a long-winded answer, Aldo, but you asked me about strategy, so I wanted to make sure I covered it as best I could.

I know.

It's not an easy -- not an easy answer for sure.

Hey, Joe, I thought of one other question quickly.

Given all the changes you had in Poland and the good results, I'm wondering what is the capacity of that mill now?

What kind of a utilization rate are you at?

Yes, Aldo, it's Barbara.

Hey, Barbara.

Going -- good morning.

How are you?

Going back in time, we were a two-furnace, two-caster operation and historically had indicated pretty high capacities in Poland that we frankly never achieved the utilization.

Today, under the one caster, one-furnace operation, we would rate that mill around 1.3 million tons and we're running very full out in Poland in the current moment, and given some of the initial relief we're seeing with the filing of the Belarus case, we would -- and the overall growth in Poland -- we would anticipate running at high utilization rate, certainly in the fiscal 2017 time frame, absent normal seasonality.

As you know, the winters are much more difficult in Poland.

All right.

Thanks very much.

Thank you, Aldo.

And the next question is from Nick Farwell with The Arbor Group.

Please go ahead.

Joe, Barbara, good morning.

I just want to add an additional thought to Aldo's comments, in that -- would you mind updating us on additional restructuring, if any, that you believe is appropriate, relative to your sort of long-term strategic objectives?

I'm not talking out a year or so.

I'm really talking as you've been restructuring the Company over the last three-plus years, within that context.

Yes.

Well, so maybe the -- I think I did touch upon this in the sunset.

We're really aggressive in looking at our businesses and our objective is to earn the -- exceed the -- the cost of -- the weighted average cost of our capital, which is a never-ending battle in our business, because we have some units that do well and a year later they struggle, and that's some of the volatility that Aldo had suggested.

And so our mind is always towards earning that weighted average cost of capital to continue to not only create shareholder value, but to justify continued investment in business.

So any of the projects that we embark upon as we go forward are with that pie in mind, and that's what we've been doing all along.

And that's what's led to some of the capital redeployment that you've seen in the Company over the last year.

That's what led to the capital investments and expenditures.

That's what led to the decision to build the micro-mill in Durant, Oklahoma, which we haven't talked about, but it's consistent with the strategy to be close to market, reduce our operating costs, highly-efficient operations, which ultimately give us an advantage with our customers, because underlying all of this is the fact that we know that we have to differentiate ourselves in the eyes of our customers, and earning that respect and earning their business is a function of taking care of their needs and getting paid for the services we provide.

So some of the value add that's inherent in some of the decisions that we make to invest going forward is really critical.

The ASW investment, for example, includes some [placing] services in Hawaii, which is something that we do on the West Coast that we don't do really across the board, but it's a value-add component of what we do.

So we're constantly evaluating and redeploying, as best we can, in a timely manner without sacrificing the short term for the long term.

Sometimes we get questions, for example, about redeploying assets.

I'll use the example of Poland.

We've said all along that we've invested heavily in Poland.

We're getting our costs in line.

The market would recover and we're seeing that market recovery.

And so now it's time to earn that return that hasn't been at the levels that we'd expected when we made the huge commitment to build the rolling mill there about seven years back, a rolling mill and a wire rod mill, and followed up by the investments in the melt shop and the caster.

So it's an ongoing process, Nick, and not something that we take lightly because we know it's the most important thing we do is deploying capital for our shareholders.

Nick, this is Mary.

I would just make one other kind of general comment, and that is that we're fortunate that we've got the strong balance sheet that we've got.

And we've been very, very careful in the past several years to control the amount of working capital that's available in the businesses that we have in our portfolio that don't return as well as our steel-manufacturing businesses which is where we've seen very, very good returns on our capital.

And we're committed to grow, and we're committed to grow in those areas that are good returns for us, and that's why we made the decision to expand our capacity with the Oklahoma micro-mill, but -- and that's also because there were not other inorganic M&A opportunities available to us.

But we continue to look for those, and we're going to continue to grow in the business segments that provide the best return.

And we are committed to grow, so --

So, Joe, just very simplistically, are you -- and I realize that this is a relatively mature business and highly cyclical, but are you 85% to 90% through restructuring the business as you found it when you and Barbara joined the Company?

Just some rough idea of where you think you are in repositioning the business for your longer-term vision.

Yes, if I'd gone back the 6-1/2 years from when we started on this journey and started changing some of the things that we've done, I think we've upset the apple cart better than 40% already.

So it's hard to say exactly, and I don't want to evade the answer, Nick, because we're evaluating all the time and I wish I could share with you some of the examples of how we bring our team together to highlight some of the strengths and weaknesses of the Company and where we've got to improve.

And that's how we get to decisions like exiting our distribution business, in two lots, incidentally.

We exited a major portion of it over a year ago, and then this past summer finished the exit of the distribution business, but we remain active traders in Australia.

But, likewise, the decision to exit trading business in the UK was as a result of an inability really to generate a return, much less return on capital, but a pure return, because of falling commodity prices and just a much more difficult business environment.

So we will redeploy that capital into other parts of our business where we can generate a return.

So without putting an absolute number on it, I think it evolves constantly and consistently, and we'll continue to do what we can to reshuffle the deck to optimize the assets that we have, and where opportunities present themselves, to add to those opportunities, even in some of the businesses that are more challenged, because it can strengthen our performance overall.

One quick add on to that, if I may, either Mary or Joe, and that is if you were to, at this point in time, give us some sense of your priorities in redeploying capital, between internal investment acquisitions -- like Hawaii -- and then perhaps enhancing the actual return to shareholders, as you've done in the past -- share repurchases, a higher dividend, et cetera.

Yes.

So I guess I would start with the dividend and we have 208 quarters of paying dividends to our shareholders, and it's a fair, I think, a pretty reasonable return on investment, a yield of over 3%, and, unfortunately, going up sometimes when we don't want it to, but it is a good return.

Secondly is, we reduced our long-term debt with an eye towards improving our capital structure.

As I mentioned, there's a benefit about $14 million a year in less interest expense that's related to that.

We have additional long-term debt that will mature in 2017, end of July, and so we're evaluating all of our options for that.

We continue to invest in the business and investing in the business and the capital since the Durant facility, without a doubt, is the most significant investment, but there are other parallel smaller investments that are really critical to improving our cost structure.

And so, in an aggregate sense, we're moving on all fronts.

And I didn't mention share buy-back because we do have an authorization to spend $100 million.

We've spent $72 million under that program to date, and if that's the best alternative for us to create shareholder value, we'll do that, but as Mary has already indicated, we're really focused on investments that will allow us to grow the most successful parts of our portfolio and, hence, a decision to proceed with the Durant facility, because it really does hit at the heart of our strength, not only from an operating perspective, but from a return perspective.

Thank you.

Our next question will come -- it's Phil Gibbs, once again, with KeyBanc Capital Markets.

Please go ahead.

Thanks; back in action, I guess.

I had a --

Hey, Phil.

-- a couple of follow-ups.

Mary, what -- mostly housekeeping -- Mary, what's the tax rate that you're anticipating for next year, one?

And, then, two, how much of this, call it, midpoint of CapEx guidance of $275 million is related to Durant?

Yes, so the tax rate for next year we're estimating to be in the high 20%s, so let's say 28%.

And the capital spending that we're guiding to, the $250 million to $300 million, about $166 million is dedicated for Oklahoma.

Okay.

So the rest is what, ongoing maintenance, basically in line with D&A?

Yes, normal maintenance, and there are some smaller strategic projects that are -- as Barbara mentioned, there are always -- our engineering staff come up with a lot of very great ideas to improve the productivity in the mills.

And so there are those types of investments as well.

We're finishing up the -- but the others are maintenance-type things.

For example, we have a baghouse that's being replaced in Alabama, relatively in -- a relatively expensive project, but the mix of regular maintenance and projects intended to pay back by improving productivity.

Thanks a lot.

Appreciate it.

Thank you, Phil.

At this time there appear to be no further questions.

Mr. Alvarado, I'll turn the call back to you for closing remarks.

Okay.

Well, thank you very much, and thank you to everyone that joined us on the call today.

I already commented, we're really optimistic yet about the future and working hard to improve our performance and create wealth for our shareholders, but we know that this coming quarter will be a challenging quarter.

The winter quarter always is.

But in any event, thank you for your time.

We look forward to meeting with you and answering more questions that you might have in the coming days as we conduct some of our investor business.

So thank you very much for your time and attention.

Thank you, sir.

This concludes today's Commercial Metals Company conference call.

You may now disconnect.