Commercial Metals Co (CMC) 2017 Q2 法說會逐字稿

Hello and welcome everyone to today's Commercial Metals Company second-quarter fiscal 2017 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 imports, the outcome of international trade proceedings including duties announced by the US Department of Commerce, US construction activity, demand for finished a steel products, mill pricing, ferrous scrap pricing and scrap flows, the Company's future operations, backlog margins, results of operation synergies resulting from acquisitions, the Company's planned new steel micro mill in Oklahoma and capital spending.

These and other similar statements are considered forward-looking within the meanings of the federal securities laws 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 expectations and beliefs based on current conditions but are subject to certain risks and uncertainties including those that are described in the risk factors section in 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 today 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 this year or the second quarter are references to the Company's fiscal year or second quarter respectively.

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

Good morning and welcome to everyone joining us to review the results for our second-quarter 2017.

Today I'm joined by Barbara Smith, President and Chief Operating Officer, and Mary Lindsey, Vice President and Chief Financial Officer.

I will review highlights from the quarter and then Mary will cover the quarter financial information in more detail.

Afterwards I will conclude our prepared remarks with a discussion on our outlook for 2017 third 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 second-quarter 2017.

Net earnings were $30.3 million, or $0.26 per diluted share.

Also as noted in our press release on March 22 I am pleased to report that our Board of Directors declared a regular quarterly cash dividend of $0.12 per share of CMC common stock for stockholders of record on April 5, 2017.

The dividend will be paid on April 20, 2017.

This cash dividend reflects CMC's 210th consecutive quarterly dividend.

Now I will cover current trends and conditions in the market in which we operate.

A mild winter and a growing economy in the majority of our US markets led to strong results in our second fiscal quarter of 2017.

As of January, non-residential construction spending increased 8% and non-residential construction starts increased by 46% on a year-over-year comparison.

Additionally, as of February the US oil and gas industry has seen some rejuvenated demand and a 50% increase in rig count versus 2016 levels.

One of the most significant challenges that we face is the global overcapacity of steel and resulting unfair practices of foreign dumping of low-priced steel into our markets, which has continued to negatively impact our margins in the US.

In the second quarter rebar imports increased 9% in comparison to the prior year.

Preliminary countervailing and antidumping rulings were recently announced by the US Department of Commerce aimed at rebar imports from Japan, Taiwan and Turkey.

The reaction by the analysts to the duties against Turkey, which collectively range between 7% and 9%, were mixed with some seemingly disappointed with the results.

We are pleased that there has been recognition from the Department of Commerce that producers in these countries have been trading rebar products unfairly in our markets.

These parliamentary rulings represent a first step in leveling the playing field though there is a long way to go.

The final results for the antidumping and countervailing duties will be released in the coming months and we will continue to support our government to both strengthen and better enforce our nation's trade laws.

In the meantime, we continue to invest in our steelmaking assets and know that given the chance to compete on an equal basis that our costs are comparable to any other global producer of rebar and merchant products.

The results of effective trade action can be seen in our Polish operations.

Preliminary antidumping rulings against Belarus have resulted in lower levels of unfairly priced imports into Poland and are partially responsible for the improved performance of these operations during our fiscal 2017.

In addition to the trade action, we are also seeing the benefits of the significant investment that we have made in these steelmaking facilities over the past few years.

Our second-quarter results in recycling were better than anticipated.

After seeming to bottom out in October, ferrous scrap prices increased significantly through our second quarter.

Our recycling business was able to reap the rewards of this increased pricing.

In addition, good market demand for rebar and merchant products generated solid mill results.

However, increased rebar pricing further pressured margins in our fabrication operations where competitive pressures resulted in contracts being awarded at depressed selling values.

The overall results in recycling, mills and the fabrication segments reiterates the strategic value of our upstream and downstream investments which help to stabilize our overall margins throughout the industry cycles.

Supporting this vertical integration strategy, we recently concluded transactions to add to our Americas Recycling and Americas Fabrication segments.

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

On January 6 we completed the purchase of Associated Steel Workers or ASW, a fabrication business in Hawaii.

And on March 6 we completed the purchase of seven strategic recycling facilities in the Southeast.

Each of these acquisitions complements and grows our existing footprint of operations and fits our vertical value-added strategy.

The integration is going well and we are confident in the synergies that these businesses will provide.

On the mill side, 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.

With our dedicated team focused on this project and over 350 contractors involved in the construction of this facility on a daily basis, it's exciting to see the transformation of the construction site to a steel mill over the past several months.

In January, we announced that in addition to straight rebar the Durant mill will produce spooled rebar and be the first to introduce spool rebar in the United States market.

In February we followed with an announcement that we would also construct a highly automated fence post operation at the Durant site, also supporting our value-added downstream business and expanding our current geographic reach with these products.

Both of these incremental investments will provide synergistic opportunities to the mill and enhance our potential returns from our investment in Durant.

With that as an overview I'll 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 second quarter, we reported net earnings of $30.3 million or $0.26 per diluted share which compares to net earnings of $10.5 million or $0.09 per diluted share for the second quarter of the prior year.

$0.26 per share represents the strongest second-quarter results since 2012.

I am also pleased to report that all of our operating segments contributed positively to these results.

Summarizing our results the 2017 second-quarter Americas Recycling segment results were very strong, reflecting the impact of sharp increases in pricing.

Significant increases in both ferrous and nonferrous prices during the quarter combined with strong flows through the yards resulted in $7.8 million of adjusted operating profit for the quarter in this segment versus losses being incurred over the past 12 quarters as both ferrous and nonferrous prices generally fell throughout this period.

Our Americas Mill segment recorded adjusted operating profit of $51.3 million for the second quarter of 2017 compared to adjusted operating profit of $50.7 million for the same period in 2016.

As Joe previously mentioned, strong end market demand combined with some pull ahead volume as selling prices were rising during the quarter resulted in shipment volume increasing by 8% in comparison to the same period of the prior year.

Comparing selling prices to current production metal margins resulted in a compression of margins by 16% as selling prices did not increase at the same pace as scrap prices.

As a result of using the weighted average cost method for inventories, much of what we sold during the quarter was lower cost material produced when scrap costs were lower during our first quarter.

This impact contributed to the good results earned in this segment.

Our Americas Fabrication segment recorded adjusted operating profit of almost breakeven at $0.5 million for the second quarter of 2017.

This compares to adjusted operating profit of $7.8 million for the second quarter of 2016.

The decrease in adjusted operating profit was primarily due to an $86 per short ton decrease in average selling prices in comparison to the second quarter of fiscal 2016 recorded in this segment, offset by a smaller reduction in the raw material steel prices.

Fierce competitive pressure in this segment continued to drive down margins.

Despite the recent increase in mill rebar prices, which serves as the primary raw material for this segment, the current market pricing of fabrication contracts has continued to fall.

Bidding activity for new jobs is strong, indicating that the impact of lower unfairly priced rebar imports into our market has certainly been a key factor to keeping prices low.

We expect new contract pricing and margins will continue to be compressed in the coming quarters.

We had another strong quarter in our International Mill segment as second-quarter 2017 adjusted operating profit of $9.4 million was over four times the adjusted operating profit of $2.0 million for the second quarter of 2016.

This approximately $7.5 million improvement in adjusted operating profit resulted from increased volumes of 31,000 short tons, primarily driven by strong demand in the construction sector for rebar, a higher-margin mix of shipments including merchant products as well as the trade relief from Belarus.

Metal margin declined $12 per short ton in our 2017 second quarter compared to second quarter of 2016.

However, like the Americas Mill segment we sold material produced prior to the scrap increases and, therefore, realized margins that were actually higher than the prior year.

Our International Marketing and Distribution segment recorded an adjusted operating profit of $6.1 million for our second-quarter 2017 compared to an adjusted operating loss of $2.3 million for the same period in the prior year.

The improvement in this segment was spurred by increasing commodity pricing and increased demand in the oil and gas markets.

Turning to our balance sheet and liquidity, as anticipated we consumed approximately $70 million of cash during the quarter primarily for our acquisitions and the capital spending for the new Oklahoma mill.

Our balance sheet remains healthy and provides us significant optionality.

As of February 28, 2017, cash and cash equivalents totaled $395 million and availability under our credit and accounts receivable sales facilities totaled approximately $575.

Leveraging our strong balance sheet and the current favorable interest rate environment, we continue to monitor the market to refinance our upcoming maturities, taking into consideration the make-whole provisions contained in those arrangements.

Capital expenditures were $47.8 million for our second-quarter 2017 compared to $51.2 million in the prior year's second 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 will now turn it back over to Joe for the outlook.

Thank you, Mary.

Our third quarter is typically a strong shipping quarter as we enter the construction seasons in both the US and in Poland.

Several indicators point to the continuation of strong demand for our products for the balance of 2017.

The most direct indicator is the robust volume of bidding we are seeing in our US fabrication businesses which is driven by the strength of the construction market.

In the US non-residential construction our primary end-use market has grown 8% year over year.

Additionally, the Architecture Billings Index for the Southern US and important geography for CMC has remained strong for the last several quarters.

We are also encouraged by many of the initiatives being considered by the new US administration including tax reform, reduced regulatory environment, infrastructure regeneration and more rigorous enforcement of trade actions.

However, it is too early to tell how these policies will be implemented.

Activity has also been strong during the second quarter in our Polish market where our shipments grew by 11% from the same quarter in the prior year.

While our Polish operations will see some squeeze in metal margins, we are confident that optimizing product mix and some upward movement in prices will result in continued good earnings from this segment.

Thank you for your attention.

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

(Operator Instructions) PT Luther, Bank of America Merrill Lynch.

Hi Joe, Barbara and Mary, how are you?

I wanted to start with your thoughts on the Turkish rebar trade case, the roughly round numbers 8% that we got between antidumping and countervailing preliminarily.

I was curious if you are seeing any sort of change in behavior from the Turkish importers so far after that result either in terms of price offers or volumes being offered or if you are not seeing much change at all?

PT, this is Barbara, I will give a crack at it.

We have seen higher offers as a result of the preliminary duty determination.

In terms of the flow of product from Turkey, candidly we are not seeing too much abatement in that regard.

We know there is significant tonnage sitting, as an example, in the Port of Houston and we do anticipate and we are hearing that they are continuing to flow product into the US.

Okay, got it.

Thanks.

And then I wanted to go to a comment that you made in the release about volumes from domestic mills in Q2 and some benefit from pre-buying ahead of price increases and then some mild weather boost.

I was wondering if you could maybe break some of that down a little bit and separate what looks like, if there is some way you can do this, in terms of underlying demand improvement versus some of temporary boosts from pre-buying or unusually good weather?

Yes, I will start and if I miss something I'm sure that Joe or Mary will jump in here.

If you look at our regions, as you know, we operate East, Central and West regions.

And in terms of weather clearly we had a milder winter in the Central region and to some degree in the East region, which is helpful in the flow of construction projects and shipments to our fabricators whether it is our own internal fab or third party.

However, in the West region we were afflicted by the heavy rains in California.

And so we actually saw lighter shipments in the West region as a result of weather.

The pre-buying is a little bit hard to predict, PT.

Service centers tend to draw down inventories toward the end of the year.

That's a natural phenomenon.

We know that inventories in service centers are low and we also know service center behavior is to try to catch the pricing ahead of anticipated price increases.

Just based on shipments thus far in March we continue to see nice shipment levels.

So hopefully the effect of that pre-buy wasn't too significant.

Great, thanks a lot Barbara.

Sorry Mary.

I'm sorry, PT, this is Mary.

And I guess I would just add to Barbara's comments that, of course, as we go into the third quarter and fourth quarter these are historically very good construction periods.

And so while we did see a little bit of pre-buying looking at both fab and mill shipments I think we are going to see continued strong shipping activity.

Okay, great.

Thank you very much.

Curt Woodworth, Credit Suisse.

Yes, hi, good morning.

You know, Joe, I just wanted to get a little more color on the concept that you think metal spreads in the Americas segment would continue to compress, I guess, next quarter.

Because this quarter it looked like the metal spread was at the lowest level since I think the second quarter of 2010, yet you are looking at a much more positive demand outlook.

You have incrementally trade case support and the MSCI data shows relatively below average inventory level.

So do you think that the idea that metal spread gets worse is more of a transitory time frame?

And then can you talk about price hike potential in the market?

I know there was a $40 hike in January that was slightly successful, and I think Nucor led another round of price hikes I think March 10 at $25 a ton.

So could you just give us an update on how successful those have been?

Sure.

You are absolutely right about metal margins and the compression that we've reported and that you have been seeing through the last few quarters.

And there has been continued downward pressure.

In particular on the rebar side, this is a function of import pressure and pricing at below what I would say normal market pricing.

And in our view there is still an inventory overhang that persists in the market.

There are these continued shipments that Barbara has already highlighted that really didn't abate.

They increased on an annualized for the quarter on a year-to-year basis.

And there have been scrapped increases or increases in our raw material costs.

So price increases haven't quite kept pace with the raw material cost increases, and even though there has been some higher offers by the Turks in their rebar offerings for delivery in the next quarter, all of that still has left us a little bit short of what we need to cover our raw material cost increases.

So hence we have worked really hard on the cost side of it and made significant process.

We continue to aggressively price products where we believe we can earn the margin that we can.

And, quite frankly, at times we will walk away from business that just doesn't make good economic sense for us in order to support some growth in our metal margins.

So it's a compression, but we are working through it.

And I anticipate that we will continue to work our way out of it, both on the cost side as well as on the selling price side and somewhat contingent around what happens in scrap markets, which are always volatile and have been more on the upward path.

But at this point it's difficult to know that they will increase or abate.

Our expectation is that they will move sideways.

Okay, that's helpful.

And then just to follow up on the micro mill ramp, is there a way to quantify what the start-up costs could be for that this year and then what's your expectation on when you think that facility could reach more steady-state volume performance?

Yes, this is Barbara.

And I think in prior calls we did guide that there is about $1 million of expense per month for operating expense related to bringing on the staff and the start-up of the operations.

So I think you can model that in for the balance of the year.

We are early terms of doing our budgeting for fiscal 2017 or fiscal 2018, which is when we would anticipate the bulk of the commissioning and the start-up.

So I think we can get some better guidance in the coming quarters.

We are still on track to begin production in the fall of 2017.

And based on our experience at Arizona and the fact that this is our second micro mill, we would anticipate a strong start-up and ramp-up to roughly a three-crew operation probably within our fiscal 2018.

Okay, thank you.

Evan Kurtz, Morgan Stanley.

Hey, good morning Joe, Barbara and Mary.

So I had a question on the trade cases, as well.

Wilbur Ross was confirmed after the preliminary ruling here for rebar.

And I was just wondering do you or maybe your trade laureates had any view on how the new team over at the DOC could potentially impact the final ruling specifically on the rebar case?

Yes, Evan, I wish I had a perfect crystal ball here.

As you know, the administration is getting their team in place and those team members have to staff up their groups.

We are hopeful there will be some impact between now and the final.

But it's just really too hard to predict at this stage of the process.

But we are quite encouraged in terms of what it might mean for us on a go-forward basis and we might see better enforcement of our trade laws.

And as we've said many times we are really looking for a level playing field in which to operate.

The evidence is pretty clear that there has been dumping into the US.

And so, again, I think based upon the team that is being put in place we are hopeful going forward that we will get better results and better enforcement of our trade law.

Has the question of maybe delaying the case come up to give a new team time to ramp up and focus on this case or is that something that's under discussion at this point?

Well, as you know it's a coalition.

So I can't speak for the other members of the coalition, but at this stage we are not anticipating or requesting a delay.

Now that could come from Turkey, a request for more time, but at this stage it's still set for mid-May.

Got it, thanks.

Then maybe just one on margin compression.

It sounds like from your comments that's mostly pertaining to rebar next quarter.

Do you see a similar sort of margin compression in merchants and beams?

Well, as you know, merchant tends to be a higher-margin product and it's still competitive across the board.

We hope that we will have more success in reflecting the scrap increases into the selling price of other products.

But I want to remind the group that with the level of imports approaching 25%, 30% of the US market for rebar, that means that a lot of rebar mills are running at really reduced capacity utilization.

We here at CMC enjoy pretty nice utilization rates but that's in addition to the cheaper import offers, the competitive dynamics domestically with utilization rates being so low across most of the rebar mills.

Also puts pressure on prices.

And it's just even though there have been a number of announced price increases, they haven't been able to be effectively moved through the marketplace to the same extent as the scrap increases.

So they are just not keeping pace with the scrap increases.

Got it.

Okay, thanks.

I will hand it over.

Martin Englert, Jefferies.

Hi, good morning everyone.

Within both of the mill segments, like maybe even more so with Americas Mills, there has been a low conversion cost ex- the scrap input.

Near-term can you talk about what you would be expecting over the next couple of quarters here with conversion cost in Americas Mills as well as Poland?

You know, both in the US and in Poland the operations are running well and we did take advantage of a few maintenance items in this second quarter.

I'm not thinking that we have major outages coming up in the coming quarters.

So we would anticipate if demand and utilization rates stay as they are that we would have very good costs in the mills.

I would only highlight that with the recent run-up in some commodity prices we are starting to see a bit of inflationary pressure, particularly in things like alloy.

Okay, so that would contribute to your metal spread compression, I guess.

If we cannot effectively pass that through, yes.

But we would anticipate pretty good conversion costs going forward, and strong demand.

Okay.

And maybe if you can just touch on a couple of things that have been changing with the new post facility that you are planning, what kind of capacity and tonnage that may add as well as maybe the recent acquisitions there, what could be additive for the volume across the different segments there.

Yes, I don't think we are prepared to disclose the post volumes at this stage.

But certainly we will keep you abreast as time moves on.

In terms of the recent acquisitions, you know the rebar fab in Hawaii is small but in the second month of our ownership we did see positive EBITDA out of that.

We are very pleased with that.

As you know, there is always some integration cost that goes into any acquisition, so we would expect the ASW fabrication operation to be a positive contributor the balance of the year.

Continental Concrete, which was post tension out in the East, that was a very small but, again, we expect positive EBITDA contribution.

And we just closed on the recycling assets which was a little bit larger in terms of size.

We expect about 0.5 million tons of volume on an annual basis with the acquisition of those operations.

And, again, once we get through some of the integration cost and purchase accounting we would anticipate that those yards would be positive contributors.

So to summarize, on the seven recycling yards probably won't contribute positively until our fiscal fourth quarter and ASW and Continental Concrete we would expect a couple million dollars of positive contribution the balance of the year.

Okay.

And if I could one last one on the backlogs and bidding activity for rebar fabrication, just what you've seen, I guess, as far as bidding and backlog since exiting the quarter, quarter on quarter and year on year how is that looking?

Bidding is strong, bidding is very strong.

Certainly there is stronger pockets across the country but overall in all regions bidding is healthy and strong which is a really good sign.

Our backlog is quite robust exiting the second quarter, which to Mary's point earlier bodes well for the balance of the year in terms of shipments.

It's really just a pricing in a margin challenge at this point in time.

And as Joe pointed out, we try to remain very disciplined in terms of our stack cost and looking at how to capture the most value through the entire value chain.

We oftentimes will walk away from projects where we just can't justify the margin or a lack of margin for those particular projects and wait for a better opportunity.

But we see good bidding, we have a very strong backlog and we are trying to manage that margin as effectively as we can.

Excellent.

Thank you very much.

Jorge Beristain, Deutsche Bank.

Hey, good morning everyone.

At the risk of beating a dead horse here, I just want to circle back.

What is your opinion that you think led to the lower-than-expected duties against the Turks particularly?

So comparatively speaking to other products, the duties against the Turks we would always like them to be higher but we were relatively pleased at the level compared to past rulings that we've seen with the Turks.

And I think there's a recognition and as was pointed out earlier that we have maybe some friends in Washington that we didn't have before.

We didn't touch on Lighthizer and his appointment.

That hasn't been approved yet.

But certainly there are some friendlier faces in Washington and hopefully a better understanding on trade matters, and the administration has been pretty strongly vocal about trade and strengthening manufacturing in the United States.

So while the duties were, we'd always like them to be higher, the 7% to 9% ranges has caused some movement on the parts of the Turks in terms of adjusting their selling prices in the United States.

It hasn't really affected shipments yet, but we haven't had a final ruling.

So we will reserve judgment.

As we said we are supportive of the trade laws and we will do everything we can to support any initiatives to enforce those trade laws.

And that's an important part of the overall strategy and perspective that we have about trade going forward.

And we will see where the final comes out, but there has been some benefit already.

And I would add that remember the case is against Turkey, Taiwan and Japan, and while Turkey is the primary offender here Japan did not participate in the case and so they were slapped with the maximum duty and we have seen both Taiwan and Japan retreat from the West Coast market, which is helping some in our West region.

But as Joe pointed out this result was better than the 2014 result.

If you look at trade cases broadly, certainly there has been higher duties for other products.

But if you look at the cases that are all related to Turkey beyond just rebar, you will see a similar pattern and a similar range of duty.

And our only conclusion, because we know factually from the data that there has to be subsidies and dumping going on, our only conclusion is there is some bigger strategic relevance and importance to Turkey that is being factored in here.

Okay.

That's unfortunate.

And I just, maybe just two other questions.

Your recycling and trading business was nice to see a sequential rebound.

Can you comment there, particularly on the bulks trading, I think iron ore and other raw materials, are we expecting to see an improvement there going forward?

I think in general across the trading platform we would anticipate in the coming two quarters, at this stage we would anticipate results in line with this second quarter.

I would say on the bulk trading side we are seeing an increase in activity and we will be monitoring any inflection points carefully.

I wouldn't say we are at a big inflection point right now, but definitely there are some better signs with higher commodity prices and the number of inquiries and activity level is improved.

On the steel side as Joe pointed out earlier, with a little bit better energy prices and with rig count coming up we have seen increased activity level there.

And it has been pretty muted for well over a year.

So it's been nice to see the increased activity level there.

And we would also anticipate that steel trading would stay in the black and contribute on a similar basis to this past quarter.

I think if you go back we've also taken some one-time charges to that segment, and at this point we think all that is behind us.

And so the second quarter is reflective of where we think things will be going forward, but certainly we will monitor it.

Okay.

And then lastly on fabrication, based on your new orders and backlogs would you say that 2Q was the trough and do you expect improvements going forward?

Or could we see the margin there just be flat-ish for the next two or three quarters as you digest the higher steel prices?

Yes, unfortunately we are not prepared to call the trough at this point.

Now hopefully we will see prices stabilize in fab and even move higher.

But we don't have enough evidence of that yet.

And bear in mind that in fab you have a long dated backlog, so we are shipping a combination of current orders that ship within a quarter and we are also shipping orders that may have been booked 12 months ago at a better price.

So as you cycle through that, we are now getting into more I will call it current pricing.

And that will continue until we see the ability to move prices up in fab, and we are just not seeing that yet.

But as Mary tried to indicate I believe earlier, we are managing through the entire value chain.

So when fab margins are under pressure it can mean that in this case recycling or scrap is moving up, so recycling is seeing a better ability to capture margin and if mill pricing moves up then they capture better margin and that is sometimes on the back of fab.

So they don't all move in concert but through the value chain is how we are trying to manage the margin.

Got it.

Thanks very much.

(Operator Instructions) Tyler Kenyon, KeyBanc Capital Markets.

Hi Joe, Barbara and Mary.

I know it was asked earlier on here in the call, but the nonmetallic cost just in the Americas Mills business down pretty substantially quarter over quarter, and I'm sure part of that was associated with stronger volume leverage.

But the absolute costs also declined pretty meaningfully.

So assuming no substantial change in energy or labor costs and what have you, what was the primary driver of that?

And I know, Mary, you mentioned that there was some cost benefit from purging some lower-cost inventory in the second quarter.

So was there a piece that was work in process that maybe didn't flow through the scrap costs and were there any other factors that led to the cost performance in the quarter and how we should think about that moving into the third?

You know, there's about a six-month -- six-week lag between when you are acquiring the scrap and it moves through to finished goods.

So clearly within the quarter and some of what you are seeing based on the information we provide you is the, I will call it, change in inventory effect of shipping out product that was produced with a lower-cost layer of scrap.

And so in the third quarter we will not see that same effect and that benefit.

So my suggestion would be that you look over a longer time horizon at our operating cost.

And I think that you use an average or something of that nature and then that will probably get you closer when you are trying to model.

But higher utilization rates in the seasonally stronger quarters will have a positive effect, of course, of spreading our fixed cost over a bigger base.

So we anticipate really strong or really good operating costs both in Poland and in the US through the busy season.

And that's, as Joe pointed out that is the lever that we can control in the absence of having a lot of control over metal margin with the import situation.

And it's a daily grind, and you take action today and it shows up in your results the coming quarter or two quarters out.

We have been making any number of investments to make our operations more efficient whether that's the reheat furnace that we installed in Seguin last year, which was a replacement of a much older furnace.

But when you do that you always look for the most current and efficient technology, so there's a number of benefits whether it's increased throughput or lower energy costs.

And I could go on and on other types of projects that we are constantly implementing.

The new caster in Poland, the new furnace in Poland a couple of years ago.

We put a new furnace in South Carolina couple of years ago.

All of those things help us work on that important element called cost which is the number one thing under our control.

Okay, thanks for that.

Just a clarification question and I know we have touched on metal margins here, but as far as what was mentioned in the release your expectations, it sounded like you were referring to just EBIT margins within the Americas Mills business.

Did you mean to imply that those will remain under pressure as in remain pretty stable quarter over quarter, or would you expect a little bit of a decline sequentially?

It is so hard to anticipate because where is scrap going?

And scrap trades once a month.

We have a view or there is a market view for what may happen in the coming month, and most are predicting sideways.

And so that will help in terms of further margin erosion.

And if the price increase that has been announced for early April is able to stick and be sustained and maybe that gives us some ability to capture the prior raw material price increases.

But beyond April it's just too hard to anticipate where scrap is going and where the import situation is going to settle out.

Is Turkey going to continue or is Turkey going to abate a bit, how aggressive are the competitors going to be?

I would add as someone pointed out earlier the metal margin this past quarter is at a low point, if you look back, I think I looked back 13 quarters and this past quarter it's at in all-time low in metal margin.

So at some point there has to be a turn, a swing in the metal margin, but we also know it's a slow climb out.

And so hopefully it has bottomed and hopefully we will see the strong demand, which will help to elevate prices a bit and improve our margins.

Thanks, Barbara.

And Mary, how should we be thinking about just the working capital?

As we move into the second half of the year a pretty strong build in the second quarter relative to the first.

And I'm sure a lot of that had to do with IM&D, but any way to be thinking about that as we progress through the remainder of the year?

Well, I think you are right Tyler.

We did see a little bit of a working capital build in the second quarter compared to first quarter primarily related to commodity pricing and scrap pricing.

So I think we've built the inventory that we need to satisfy what we are going to have to deal with in the heavy construction period.

So you might see some slight additional increase in inventory.

But, again, I think that scrap prices are the big driver of working capital to keep an eye on.

Thanks for the color.

John Tumazos, John Tumazos Independent Research.

Thank you very much.

Could you give us an indication as to how much of your gain in ferrous and nonferrous scrap volume was due to the new yards you picked up first or whether it's entirely higher prices and a better market?

And secondly, if the wall were built promptly, how much rebar do you think it would create and extra demand?

Hey John, the increased activity in the Recycling segment was more driven by our existing operations.

We only closed on the new recycling yards almost, well, last week, so March 6. So there is no factor for that at all.

Barbara mentioned already that on an annualized basis that's about 0.5 million tons of ferrous volume that we will anticipate.

So it wasn't really a factor at all.

And as far as the wall is concerned, there have been some really broad range of estimates from 0.5 million tons to 2.5 million tons.

And, quite frankly, we will not know until there is some commitments that are made and there is an active process design and build and a bid process associated with that.

But until those details are known it's really hard to know what volume would be associated with it.

Thank you.

Martin Englert, Jefferies.

You had mentioned earlier that there was some rebar inventory sitting at the Port of Houston.

Do you have any idea about how much might be there sitting in inventory at the port?

Yes, Martin, it's hard to say but it's a couple hundred thousand tons.

So it's significant.

And then one last one there.

If scrap would step down in April, any expectation of whether rebar prices would move in lockstep with that or if there would be an opportunity to maintain and expand the metal margins there, at least near-term?

Yes, we as a rule don't talk about prices.

As best we can we try to give the best guidance we can.

But as far as pricing is concerned that's a verboten topic, as you might well understand for antitrust reasons.

Sure.

And maybe I am able to ask, have you lowered your scale prices at your recycling yards versus where you were at the beginning of the month yet?

Martin, I'm not close enough to that particular detail at this point.

But every yard, every region has different pricing dynamics, and I'm sure our prices, they are trying to capture as much price as they can.

Okay, excellent.

Thank you very much.

At this time there appear to be no further questions.

Mr. Alvarado, I will turn the conference back over to you.

Okay, well, thank you everyone for your questions and your patience and thank you for joining us on today's conference call.

We appreciate it and look forward to speaking with you in the coming weeks as we conduct investor visits.

And I look forward to talking with you again in June.

Thank you very much.

This will conclude today's Commercial Metals Company conference call.

You may now disconnect your lines.