Commercial Metals Co (CMC) 2017 Q1 法說會逐字稿

Hello and welcome, everyone, to today's Commercial Metals Company first-quarter FY17 earnings call.

Today's call is being recorded.

(Operator Instructions)

I would like to remind all participants that during the course of this conference call, the Company will make statements that provide information other than historical information and will include expectations regarding economic conditions, US steel import levels, the outcome of international trade proceedings, US construction activity, demand for finished steel products, mill pricing, ferrous scrap pricing and scrap flows, the Company's future operations, the Company's future results of operations, 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 statement 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 annual report on Form 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 discussed or 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 first quarter are references to the Company's fiscal year or first fiscal quarter, respectively.

And now for opening remarks and introductions, I will turn the call over to the Chairman and the Board, President and Chief Executive Officer of Commercial Metals Company, Mr. Joe Alvarado.

Please go ahead.

Good morning and happy new year and welcome to everyone joining us to review the results of our first-quarter 2017.

I will review highlights from the quarter, and Mary Lindsey, Vice President and Chief Financial Officer, will cover the quarter financial information in more detail.

Afterwards, I will conclude our prepared remarks with a discussion on our outlook for our 2017 second quarter, after which we will open the call to questions.

As announced in our earnings release this morning, we reported net sales of $1.1 billion for our first-quarter 2017.

Earnings from continuing operations were $7.2 million, or $0.06 per diluted share.

Also as noted in our press release on January 4, I'm pleased to report that our Board of Directors declared a regularly -- regular quarterly cash dividend of $0.12 per share of common stock for shock holders of record on January 17, 2017.

The dividend will be paid on February 1, 2017.

This cash dividend reflects CMC's 209th consecutive quarterly dividend.

Now I'll cover current trends and conditions in the markets in which we operate.

Seasonally adjusted non-residential spending improved 9%, and non-residential construction starts improved 29% year over year for the quarter ending November 30, 2016 in the US.

While non-building spending pulled back 1%, non-building starts improved 5% year over year during that same period.

The streets and highway sector showed signs of promise with state-level gas tax and $203 billion of state-level bond ballot items earmarked for infrastructure spending that were passed in the recent November elections.

2017 street and highway construction starts are forecast to be up 5% from 2016, and 2018 through 2020 is forecast to experience continued growth as a result of increased funding from the FAST Act.

On the trade front, rebar imports continued to negatively impact our margins in the US.

The preliminary countervailing duty ruling in the current trade case aimed at rebar imports from Japan, Taiwan, and Turkey has been delayed to February 21.

In addition, a second remand of the 2014 anti-dumping case against Turkey is due from the Commerce Department on January 13.

Although the flow of rebar imports into the US during our 2017 first quarter declined 9% year over year, import levels remained near historic highs, which precludes domestic rebar producers like us from improving mill utilization rates and margins.

In contrast, for our Polish operations, the threat of an anti-dumping filing against Belarus has slowed imports into Poland and is partially responsible for the improved performance of these facilities during our first quarter compared to the same quarter in the prior year; however, results have also benefited from capital projects and operational improvements.

From a scrap market perspective, ferrous scrap prices fell during the first two months of our first-quarter 2017, which resulted in continued pricing pressure for our Americas Mills and Americas Fabrication segments; however, ferrous scrap pricing rebounded in both November and December, and now January.

We expect mill pricing to follow in line with these ferrous scrap movements.

From a strategic perspective, we have recently been able to conclude transactions to further our vertical integration strategy by increasing our capability in downstream markets.

On December 12, we announced the acquisition of Continental Concrete Structures, Inc, a fabricator of post-tensioning cable and related products.

The previously announced purchase agreement for the acquisition of the ASW Limited fabrication business in Hawaii will close today, as planned.

Construction at our technology-leading micro mill in Durant, Oklahoma is proceeding as planned, and on target to begin production in the fall of this year.

In addition, we announced today a further enhancement of the Oklahoma facility, which will be the first and only producer of spooled rebar in the United States.

This is in addition to our previously announced plan to produce straight-length rebar at this mill.

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 to everyone joining us on the call.

As Joe mentioned, for our 2017 first quarter, we reported earnings from continuing operations of $7.2 million, or $0.06 per diluted share, which compares to earnings from continuing operations of $25.6 million, or $0.22 per diluted share for the first quarter of the prior year.

The current-year quarter includes an increase of $2.7 million after tax for expenses related to the mark-to-market adjustment related to our stock compensation expense, which is approximately $0.02 per diluted share, a $1.6 million after-tax increase in severance costs, and an approximate $1.4 million unfavorable impact for a net mark-to-market loss on copper derivatives.

Summarizing our results by segment, while a loss, our 2017 first-quarter Americas Recycling segment results improved over 2016.

The increase in our first-quarter results was due to per-ton margin expansion of 38% on non-ferrous shipments and 2% on ferrous shipments.

Margins improved as a result of increased selling prices in both non-ferrous scrap, which was up 2%, and ferrous scrap, which was up 8%, compared to first-quarter 2016.

Non-ferrous shipments decreased 6% compared to first-quarter 2016, as the lower fourth-quarter 2016 prices slowed material flow; however, ferrous shipments increased 4% during our 2017 first quarter compared to our 2016 first quarter.

Additionally, in the first quarter 2017 compared to first-quarter 2016, overall conversion costs decreased 6% and SG&A costs decreased 14%, primarily related to decreased depreciation, labor, and benefit-related costs.

Finally, first-quarter 2016 included a positive insurance claim of $2.5 million.

Overall, we are pleased with the improvements in the first quarter of 2017.

Our Americas Mills segment recorded adjusted operating profit of $36.9 million for first-quarter 2017 compared to adjusted operating profit of $59.1 million for the same period in 2016.

During the first quarter of 2017, metal margins compressed by 17% and volumes remained relatively flat compared to first quarter 2016.

The decrease in metal margin was a function of lower selling prices resulting from continued import pressure, volatility of scrap prices, and uncertainty in markets.

Our average selling price fell $57 per ton, or 10%, during our 2017 first quarter compared to first-quarter 2016.

We continued to focus on cost control, as evidenced by a 2% improvement in overall conversion costs for our mills during our first-quarter 2017 compared to first-quarter 2016, somewhat offsetting the metal margin compression.

This improvement was primarily a result of reduced labor and consumable costs in our melt shops in both Alabama and South Carolina.

Our Americas Fabrication segment recorded adjusted operating profit of $6.7 million for the first quarter of 2017.

This compares to adjusted operating profit of $21.3 million for the first quarter of 2016.

The decrease in adjusted operating profit was primarily due to a $35-per-short-ton, or 13% decrease in composite metal margins.

Pressure from imports throughout 2016 carried into first-quarter 2017 and continued to drive down selling prices and margins.

Our fabrication backlog run out can be nine months or more, and as such, projects booked in 2016 at lower prices negatively impacted first-quarter 2017 transaction pricing.

All of this resulted in composite average selling prices declining by $107 per short ton, compared to the same period last year.

We expect our backlog and margins will continue to be stressed, as recently priced increases for finished steel inputs start to take effect and flow through against this lower price work.

Additionally, conversion costs increased $3 per short ton, or 1%, during 2017 first quarter compared to 2016 first quarter as a result of lower volumes.

We had another strong quarter in our International Mill segment, as first-quarter 2017 adjusted operating profit of $10 million was almost 4 times the adjusted operating profit of $2.8 million for the first quarter of 2016.

This $7.2 million improvement in adjusted operating profit resulted from increased volumes of 38,000 short tons, primarily driven by strong demand in the construction sector for rebar and merchant product as well as the threat of potential anti-subsidy filing against Belarus steel products.

Metal margin declined $6 per short ton in our 2017 first quarter compared to first-quarter 2016, driven by decreases in average selling price of $11 per short ton and average cost of ferrous scrap utilized of $5 per short ton.

This was offset by a reduction in conversion costs of $10 per short ton, as higher volumes absorbed fixed costs, as well as cost reductions primarily related to utilities, taxes, and other direct expenses.

Our International Marketing and Distribution segment recorded adjusted operating loss of $1 million for our first-quarter 2017 compared to adjusted operating loss of $2.2 million for the same period in the prior year.

The improvement was primarily due to an increase in margins for our raw materials trading division headquartered in the US.

Turning to our balance sheet and liquidity, our balance sheet remains healthy and provides a significant optionality.

As of November 30, 2016, cash and cash equivalents totaled $465.2 million, and availability under our credit and accounts receivable sales facilities totaled $555.4 million.

Additionally, $5.5 million in restricted cash primarily related to the construction of a new steel micro mill in Durant, Oklahoma is included in other assets.

Capital expenditures were $43 million for our first-quarter 2017 compared to $11.2 million in the prior year's first quarter.

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

Thank you very much.

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

Thank you, Mary.

Our second quarter is typically slower as a result of the seasonal downturn in construction activity due to winter weather conditions, holidays, and reduced shipping days.

While that is typically normal, several indicators point to improvements in market conditions during calendar 2017.

Non-residential construction, our primary end-use market in the US, has improved over the last several months.

Additionally, the Architecture Billings Index for the Southern United States, an important geography for CMC, has remained strong for the last several quarters and continues to outpace similar measures in other regions.

We are also optimistic about potential investments in infrastructure during our FY17 as a result of the Fixing America's Surface Transportation Act.

Ferrous scrap pricing improved from November through January, which we expect will support finished goods pricing and reentry into the market by customers anticipating a market bottom.

Finally, the change in the political leadership following the US elections may result in more favorable business conditions and economic growth in the medium and long term.

Potential changes in the regulatory environment related to trade, taxes, infrastructure spending, and other matters may bode well for the domestic steel industry, and we are well positioned to capitalize on any such changes.

With that, I thank you for your attention, and at this time we will now open the call to questions.

(Operator Instructions)

The first question comes from Evan Kurtz with Morgan Stanley.

Please go ahead.

Hi, good morning, Joe and Mary.

Happy new year.

Good morning, how are you?

Doing well, thanks.

So I just had a question just on the guidance.

I was a little surprised that you have scrap pricing moving up and rebar pricing seemed to bottom in November and is coming back up.

And I figured that now that you're on FIFO, you might actually see a little bit of metal margin expansion in the steel business and perhaps, in the recycling business with scrap moving up, you'll see some margin expansion there as well.

And I thought that might be enough to offset some of the seasonal weakness that you see in December.

Am I reading the press release correctly, that you actually think results will be lower sequentially?

I thought maybe you might say that they would be improving.

No, we didn't indicate that results would be lower in the second quarter We just -- all we're commenting on is that seasonally, this is a slower quarter for us; it generally is and has been a slower quarter.

Statistically, if you look at it, Evan, and I'm sure you have, it's by far and away our lowest quarter.

We're seeing some positive benefits from the actions that we've taken.

Pricing we expect will start to move commensurate with the scrap price increases.

We don't view scrap price increases as being bad, but there's always a bit of a catch up, and volumes are good.

So our outlook is typically softer seasonal adjustment for the second quarter, but we're still seeing good activity and strong bidding activity, and I hesitate to jump too far ahead because so many things can happen in the second quarter

Last year, we had a good winter and experienced some positive results in our domestic as well as our foreign operations, but cold weather causes disruptions that we're not always prepared to, there isn't an outlet or an alleviate for it, like reduced power supply and things like that.

We haven't seen any of that yet, so, so far operations have been smooth.

But in the aggregate, we're still optimistic that things will continue to improve, starting with the second quarter

Okay, thanks.

And then maybe just one follow-up on trade.

I know there's a lot of moving pieces these days, but with the duties coming off of Mexico and then the trade cases in the hopper for -- late February will be the preliminary ruling when the retroactive period starts.

Are you seeing an uptick in imports right now just based on people trying to move material into the country before the gates go up?

Or what patterns are you seeing out there from a trade perspective?

Hi Evan, it's Barbara, happy new year.

It's hard to say.

There's still, I would call it, a consistent flow of imports coming into the US, and Turkey is one of the largest importers into the US, and they seem to be unphased by the cases that have been filed.

I think longer term, we're more optimistic with the new administration that there will be a more fair look at what Turkey is doing and the unfairly imported product.

Certainly, we're monitoring the Mexico situation and hope that Mexico will not disrupt the market.

But certainly, I'm sure they're taking a look at it and trying to see where they can participate.

We have seen Taiwan and Japan back away following the filing of the case, but then you'll start to see others pop up.

So it's something that we continue to monitor on a regular basis, and to date, we're not seeing significant shifts in behavior patterns.

Okay, thanks so much.

I'll turn it over.

Thank you, Evan.

Gary, are you there?

Pardon me, the next question comes from PT Luther with Banc of America Merrill Lynch.

Oh, thanks, hi, Joe, Barbara, Mary, happy new year.

Happy new year, good morning.

Good morning.

I was wondering if I could dive a little bit more into trade case action, and specifically the second remand on Turkey that's expected, I think you said later this week.

I'm just wondering if you think there's potential for a different outcome on that.

And one, if there was information that you had delivered that was different than the prior remand?

And then what would be the next steps after that decision?

Would injury still be determined if those go forward or not, like a typical trade case?

Or if it's a somewhat disappointing outcome are there alternatives that you can do to continue to try to attack the Turkish imports that are coming in?

Yes, so let me take a shot at that, PT.

This is always more complicated than we would like it to be, but partly, it's because of the process that we're following.

Remember this is a case that goes back to 2014, and this is remand on data that goes back to 2014.

So while we filed because we believe that there was good reason for a review of the data, to date, I wouldn't be surprised if results were mixed or not exactly to our liking.

But that's all based on 2014 data.

The more recent case for which the preliminary anti-dumping, or CBD will be issued on February 21 relates to more current data.

And as you can see from the results of all of the companies that participate in the trade case, it's been more problematic.

The import levels at exceptionally high level have had in fact not only on selling prices but on margin and we've seen margin compression.

So we're optimistic that both will be found, but certainly the second case we believe has stronger merit because it reflects more current financial results, as well as more current importing activity by the Turks, in particular.

Got it, thanks, that's helpful.

And then for my follow-up, if I could shift gears over to domestic fabrication.

I know you've been flagging for a couple quarters that there would be some margin pressure coming in on prices versus higher input costs.

Just wondering if you had a sense in terms of visibility when you think some of that pressure might start to alleviate that we saw in this quarter?

Yes, PT.

It's Barbara.

Thank you for remembering that we've been flagging this for quite some time.

As you know, scrap is moving up and there have been a number of rebar price increases announced.

Time will tell how much of the [pricing] pieces will actually materialize in the marketplace.

But certainly that's going to mean that the input cost into fab is now rising again, and it's rising while we are still servicing backlog that was entered into in the prior two or three quarters.

And so, therefore, we would anticipate continued margin pressure in the fab side of the business in the near term until we begin to see the ability to pass price increases through on the fab side of the business.

This is also where the import situation factors into it, because fab business is often you're bidding against import pricing.

So it becomes a complicated, a bit of a complicated scenario that we just don't see fab pricing turning yet.

We're anticipating that eventually, we will begin to see and have an ability to move fab prices higher, but this phenomenon in the fab segment is certainly going to continue to haunt us.

Having said that, there's a positive benefit to scrap prices moving up in our recycling segment, and hopefully, we will also begin to see or we will see margin expansion first in the mill segment and then fab will be lagging.

Okay, great.

Thanks again, appreciate it, Joe and Barbara.

Yes, thank you.

Thank you, PT.

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

Good morning, happy new year.

Good morning, happy new year, Phil.

I had a question on the potential for a border adjustable tax and I know you import a little bit, maybe a little bit in fab marginally there, but more so on your trading business.

And whether or not a potential border adjustable tax would alter your view on your willingness or wantingness to have that trading platform?

Or whether or not it will impact that in any way and how you're thinking about it?

Well hi, Phil, this is Mary.

First of all, I think I have seen some discussion of how the border adjustable tax would affect US industry.

I think, first of all, I'll say the chances I think are slim to none that there's going to be a tax path so that US importers can't deduct any of the cost of imported product into the US.

Just think about Walmart, think about all of the other folks that are importing 100% of their stuff that they sell in the US, and so I think the chances are slim to none.

We certainly do import product into the US from outside the US, as you know, and that obviously would have an impact on that business because it would increase the cost basically by 35%.

But I don't think we're losing a lot of sleep over the possibility of that happening.

I think there are other potential tax proposals by the administration that are more likely to benefit all of you as manufacturing, just by virtue of lower tax rates overall and the possibility to repatriate foreign earnings.

This is the least likely tax proposal, I think, to actually get traction.

Okay, that viewpoint is helpful, I appreciate it.

And just remind us on what the status is of Durant, and in your CapEx budget of $250 million plus this year, how much of that includes Durant?

Yes, the Durant project is going full speed, and those of us that have been able to drive up there and take a look at it can actually see a steel mill now rising up from this greenfield site, so we're very excited about it.

In the CapEx estimate that we provide for the full year, which is $250 million to $300 million, about $125 million of that is associated with Oklahoma.

And of that, I think the first-quarter spending for Oklahoma out of the $43 million was about $36 million.

If I could add, Phil, and for the rest of the analysts on the call, to just make you aware that we are starting to build a team in Oklahoma and then we are incurring SG&A and other expenses that are non-capitalizable expenses as we move towards the start up of that operation.

And in this past quarter, to put it in perspective, there was about $2 million of expense associated with the team that we're putting in place there that's going to operate the mill.

And we're starting to begin the hiring and the training process, and that will continue to ramp until we begin operations.

That $2 million impact will continue to ramp, you're saying, until you move into production phasing?

Correct, correct, we won't have any corresponding revenue until we begin operations.

But as you might appreciate, we're going to have to put the team in place and begin training prior to commencing operations.

Right, no that makes sense.

I appreciate it.

I just wanted to make sure folks were modeling that in.

Well, it makes sense in hindsight now, because I think our corporate responses were a little bit higher than we would have anticipated so I think that's probably where it flowed through.

Thanks very much.

Thank you.

The next question comes from Jorge Beristain with Deutsche Bank.

Good morning, guys.

Good morning.

I just wanted to ask about the fab margins again.

I think we've asked this question a few different times, but can you give us a sense as to when you see the lapsing of this higher cost inventory, or better put, the depression of prices on this inventory finally cycling?

Because you are optimistic that there are improved orders coming in now.

But you said it's -- is it a 6- to 9-month lead time to when we could see the fab margins start to normalize again?

Jorge, I wish we could give you precise guidelines on how to model it.

Backlog consists of orders that we might take today that would cycle through that backlog within a month or two to orders that are projects that span over a couple of year time frame.

And so you're constantly adding new projects and shipping from that the backlog that you've priced in a prior period.

In general, we have, I'll call it a 10-month backlog, but it doesn't exactly cycle out over 10 months.

I think the other thing that we are hesitant to make a commitment to is we are not yet seeing traction for higher fab pricing.

Even though rebar -- even though scrap and rebar prices are starting to move up we're not seeing yet an ability to pass through those increases on the fab side.

So it's just very difficult to line out exactly how that backlog evolution is going to occur.

Okay, in terms of the recent order activity that you're seeing, is it more on the public side now or private side?

Could you just give us some color as to some of the FAST projects maybe starting to enter your bidding activity and just when we could start to see some of that flow through?

And do you expect, generally, to have the public side be higher margin or lower margin than the private side?

So, Jorge, I'll try and take that on.

We've talked about our mix before, and there's been a decided swing away from what used to be predominantly public projects to more private.

That ratio hovers at about 50% each for us; that may differ for others, but we're roughly 50/50.

And if you throw highway tons into it that, that starts to swing things a little bit differently, but those are bid as project work opportunities.

So on a bid basis, it's a good mix, and generally speaking, private work is more profitable than public work.

That's a function, however, of supply more than anything else.

And some public projects in the past, we've had the ability, depending on demand, to have escalators, which helps to protect against cost increases.

I'm not suggesting we're at that stage at this point yet, but certainly it's one of the things that we try to apply to use that opportunity to maintain margins.

But generally speaking, private projects are shorter in duration, less exposure to market risk than public projects, and as a result, they are, generally speaking, a little bit more profitable for us.

Thanks, and, sorry, if I could just squeeze one last one in, have you guys factored at all the possibility of the wall being built?

It does seem to be a first order of priority for Trump.

And could that create a real demand draw for rebar by your estimates?

Well it certainly would.

Yes, we're observing the same thing and now in order to facilitate the speed of building the wall, the US is going to pay for it and we're going to try to collect it back from the Mexican government apparently.

But certainly, it would increase the requirement for rebar and fortunately close to our steel mills.

But we certainly don't have that factored into our business planning or our modeling at this point.

Got it, thank you.

The next question comes from Alex Hacking with Citi.

Hi, good morning and happy new year.

Good morning.

So on the same topic, my question is regarding potential federal infrastructure program.

Have you done any estimates based on preliminary proposals on how much incremental demand for long steel that we could see from a federal program?

And if such a program was announced in 1Q, based on your experience, what would be the lag to actual steel going into the ground.

Thank you.

Yes, I'll start and then I'm sure Joe may have some additional thoughts that I might miss.

Certainly, we are starting to plan for and anticipate what we believe will eventually be passed.

And it will be another look at the infrastructure bill and funding.

And we are very optimistic over the medium to long term that we will see a multi-year, large investment in infrastructure, whether it's the discussion around the wall that we just had or infrastructure in general that is well documented and needs to be refurbished.

However, we are really focusing on how much additional product could we put into the market and what would some of our labor needs be if we needed to ramp up to that.

It's less focused on mathematically calculating how many additional rebar tons might be needed in the US market.

The other thing I would say is our current view is it's going to take some time for this to get through Congress, and then it will take time for the projects to be planned and engineered and to actually translate into steel orders.

And so, while we're optimistic we may see some increase in activity during our second half of our fiscal year, my personal view is that would be more related to the prior FAST Act that was passed, and the fact that a number of states have taken action to increase gasoline or sales and use tax for their matching funds associated with the previously passed FAST legislation, and any new legislation that would come out under the Trump administration for reinvestment in infrastructure probably won't impact us until FY18, which coincidentally, will be nicely timed with the start up of our Durant facility.

Okay, thank you, Mary.

One follow-up question, if I may.

I saw the press release today on the spooled rebar.

I'm not so familiar with that product.

Could you just briefly -- my question is, is that a product that you're going to sell for a higher price or a product that you're going to sell at a similar price to existing lower quality rebar and attempt to take market share?

Thank you.

Thanks, Alex, this is Barbara again.

So in the US, there's a product that is coiled rebar.

And the best way to describe it, for those who haven't spent a lot of time in steel mills or fabricating operations, is when you have your garden hose and you wind it up, it gets a twist.

And it's a, I'll call it uneven coil of -- and that's how coiled rebar looks.

And while coiled rebar has some efficiencies for fabricators, spooled rebar, if you think of a bobbin of thread, and it's very nicely wound and there's no twist.

And it's very tightly wound spool.

That is the product that we're introducing from the Oklahoma mill, and we're very excited.

Coiled rebar today sells at a premium to straight rebar.

The real advantages that you have less waste in your fabricating operation, because you're not cropping the end of a straight piece of bar that doesn't need to be part of whatever shape that you're cutting and bending.

So there's other efficiencies other than just the reduced waste in your fabricating operations, but there is a significant difference in the -- between coiled rebar and spooled rebar.

And as I said, you tend to be able to attract a premium for that product.

Thank you, Barbara.

That's very clear.

The next question comes from John Tumazos with John Tumazos Independent Research.

Thank you very much.

I have two questions, if you'll indulge me.

First, on the non-res construction market, how much of the market is retail space like Macy's or Kmart stores?

How much of that decline do you think is contributed to the total market?

And then concerning scrap, when should we see a large [gains] in your scrap collections because of the other yards that have shut down around the country and because of all of the scrap that wasn't collected in 2015 and 2016 when collections appear to be 30% less than 2011?

So, John, let me take a shot at this.

First, on the example that you give of construction, strip mall construction, most of that is tilt-wall construction.

And we participate in that market, supplying rebar for the fabrication of tilt-wall buildings.

It's a significant part of the market, but not an overwhelming part of the market.

We'd have to do a little bit of research to tell you what percent of the business it is.

It's certainly an influencing factor, but it's not a dominating factor.

So I wouldn't think of that in terms of having a tremendous effect, but it does move the needle in certain markets and certainly in Texas.

In the Houston market, the Dallas market, where we continue to see market expansion, it contributes to demand for rebar fabrication.

As far as scrap is concerned, I'm not sure I understood your question.

Maybe you could just restate it a little bit?

I want to make sure --

If you simply add up the tons of the several publicly traded companies that recover scrap, either mills or brokers, they are 30% less than 2011.

These large companies like yourselves, Nucor, Steel Dynamics, should be gaining share because of all of the yards that have closed down around the country.

Also, the scrap that didn't get recycled in 2015 or 2016 probably eventually will get recycled.

So I look at your volumes each quarter and I'm waiting for the scrap volumes to be up 10%, 20%, 30% from a year ago, either because competitors shut down or there's all this scrap out there that hasn't been collected that probably will get collected some day.

Is that a realistic expectation?

Yes, that's very realistic, and that's -- whenever we talk about flows, John, that's really what we are talking about is the ability to attract scrap metals to our yards.

And the fact of the matter is that there's a strong correlation between flows and prices, and as prices go up, flows tend to increase pretty significantly.

Likewise, when prices start going down, people sit on metal.

So if you just think about -- and this would relate really to I'll say, automotive markets where cars are sitting around in yards or obsolete appliances are sitting around, those don't have a tendency to move until prices are high enough to attract them.

The industrial scrap moves at the rate of industrial scrap as we normally see it, and there's a more steady flow.

But it's that kind of scrap that people are sitting on, as well as demolition, which isn't even a factor today.

Demolition is only out of need or necessity for new construction, not because it's an attractive business proposition.

So that too is a market that could be made more attractive as prices continue to escalate.

So yes, we think there's an ample reservoir of scrap in the United States, don't have any concern about that.

Increased demand from domestic mills, not only mini-mills but integrated mills, as their operating rates increase, will also push prices up.

And as prices go up, we expect that flows will become more ready.

Does that answer your question?

Yes, thank you very much.

Alright, great.

Thank you.

(Operator Instructions)

The next question comes from CJ Baldoni with Principal Global Investors.

Yes, hello.

I'm wondering about the debt maturity in June relative to the cash balance and what are your plans for the maturity?

Will you be (inaudible) or paying it down in cash?

Well, fortunately, the balance sheet gives us plenty of options in terms of how we address that maturity.

And the high yield market is an attractive market right now and certainly something that we're looking at all the time, together with our own cash forecast and our cap spending requirements and the other needs for our cash.

So we haven't reached any particular conclusion right now regarding how we're going to address those, but we're watching the market carefully.

We do well in the high yield market, and so we're certainly have access to that market whenever we need to.

So no conclusion at this point, but something that we look at on a daily basis.

So it's a good question.

So it sounds like you're more inclined to keep the cash on the balance sheet for you opportunistic use?

No, I wouldn't say that.

I would say, again, it's something that we continue to look at.

And fortunately, the balance sheet position that we've got allows us to go either way.

And as that date approaches and bearing in mind our other opportunities, we'll take the appropriate action at that point in time.

Okay, thank you.

The next question comes from Charles Bradford with Bradford Research.

Good morning.

Good morning, Chuck.

Hi.

The Trade Association of General Contractors came out with a survey a couple months ago of their membership, and 70% said they were unable to take additional business because they couldn't get the workers with the skills they needed.

Now, obviously, that's a national number.

Are you seeing same kind of problem in the areas where you operate?

Chuck, this is Barbara.

To date, we are not seeing any significant difficulties in this regard, but we certainly are monitoring the situation.

And as I indicated earlier, if you look forward and you think about a moment where there's increased demand due to a robust growing economy and an infrastructure plan that has significant investment in infrastructure, we would need to increase our labor pool in order to service that.

We're certainly taking steps now to plan for such a situation, but in our market, we aren't seeing tremendous difficulty at this point in time.

Thank you.

Yes, Chuck I would just add one more thing, and that is that where we tend to occasionally have a challenge in this area is with the skill trades, in particular, electricians.

And so in the locations where we have steel mills that require that kind of skill trade, we work very hard to develop training programs with local community colleges and things of that nature to be sure that we've got a good source for those kind of skill trades.

And something that we've done very successfully and as we look at the Oklahoma mill, it's something that we're doing with some of the local colleges in that area to be sure that we do have a source for those skill trades, which is where you tend to see the challenges.

Thank you.

The next question is a follow-up from Phil Gibbs with KeyBanc Capital Markets.

Hi, I just had a question on these items that you called out.

Was it $2.7 million of stock comp, was that in corporate expense?

And then was the copper derivatives piece in the recycling side?

Yes, that's exactly right.

Yes, and so the copper piece was in recycling and cost of goods sold.

And Phil, the copper is really a timing issue and we should see that reverse itself in the second quarter.

Is the--

Pardon me?

Sorry, go ahead.

Well I was just going to say copper prices ran up very significantly towards the end of the first quarter, which gave rise to that mark-to-market.

There's been some pull back in copper prices, but also it's the timing between when we procured the copper and when we shipped the copper to the end customer.

And that should reverse itself in the second quarter.

Okay.

And the stock comp expense, will that carry over into -- assuming your stock stays around the same range is that going to carryover?

Is that more of just an isolated 1Q issue?

No, that's a one-time catch up.

You've all seen the incredible increase in the steel sector equity prices, so that's a one-time catch up to get it to the current mark-to-market level.

So I think the stock prices seem to be stabilizing to some degree.

So unless the stock price goes up precipitously again, we won't see that kind of mark-to-market adjustment.

Okay.

Thanks very much.

Have a great afternoon.

Thank you, Phil.

At this time, there appear to be no further questions.

Mr. Joseph Alvarado, I'll now turn the call back over to you.

Okay, well thank you, Gary.

Appreciate that.

You caught me by surprise, but just want to thank everyone for joining us on today's conference call.

Appreciate it very much and we look forward to speaking with many of you during our investor visits in the coming weeks.

Thank you very much and have a good day.

This concludes today's Commercial Metals Company conference call.

You may now disconnect.