Commercial Metals Company Earnings Call Insights: Poland Outlook and Regional Disparities
Commercial Metals Company (NYSE:CMC) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.
Luke Folta – Jefferies: A couple of questions, I guess first, it’s encouraging to see that the Polish business generated some profit in May. I understand you guys have been cutting cost there and also that perhaps some of the import pressure that you had been seeing may have abated somewhat. Can you talk about just what the overall drivers were, and also to the extent that you think, is this something that we can expect to kind of occur in the next quarter where you can, I guess, bottom line, do you expect positive results in the next quarter, out of Poland?
Joseph Alvarado – Chairman, President and CEO: Yeah Luke. This is Joe. We’ve been cautiously optimistic about the summer in Poland recognizing that the legislature still hasn’t concluded their work. However, the impact of a Latvian mill shutting down as well as a normal seasonal improvement in demand for construction products has helped improve operating rates and has allowed margins and selling prices to recover somewhat. There’s still a bit of an overhang of inventory from Latvia. As you know they scrambled very aggressively before shutting down and a lot of the VAT circumvention hadn’t been completely discovered. So, we know that we’re fighting some inventory and as a result of that, it’ll be difficult to continue to raise prices, but we’ll do that at every opportunity we can and as demand continues to improve, but until we have the VAT completely resolved, we want to remain cautiously optimistic, but we’re looking forward to a stronger quarter in the fourth quarter in Poland.
Luke Folta – Jefferies: All right. Also, can you talk about what you’re seeing as far as merchant bar imports into the U.S.? Is that a trend that has started to abate?
Joseph Alvarado – Chairman, President and CEO: I won’t call it. I can’t say it’s abated just yet. This is, and has remained an attractive market, and including for merchant products coming from south of the border. In particular, that’s where the imports are coming from. The impact has been on volume, but even more significantly on pricing and that’s what’s compressed our margins and impact profitability in a sense that, as a percent of our mix, the product is down slightly, but prices and margins are down more significantly…
Luke Folta – Jefferies: You kind of expect more of the same as far as the Americas Mills performance in the next couple of quarters?
Joseph Alvarado – Chairman, President and CEO: Yeah, on average we’re looking at continued performance at current levels. Until we see the spike in demand for merchant products and if you look at the MSCI inventory numbers, they’ve remained pretty flat. It suggests that there’s opportunity for growing stocks when they exceed demand and that could create some demand for product and on the rebar side construction, market remains – it’s okay. It’s flat. It has improved slightly – rebar shipments from a year ago, but we’re really seeing the markets look as being sideways more than anything else on a year to year basis, and that gets back to the confidence factor and trying to predict when non-residential construction will get stronger.
Phillip Gibbs – KeyBanc Capital Markets: It looks like early indication for scrap for July looks up a bit versus June. Do you think you have the ability to see higher prices for rebar and merchant into July and August, or is it just too early to know at this point?
Joseph Alvarado – Chairman, President and CEO: It’s always too early to know until we start transacting. And maybe Phil, your conjecture is based on some of the – well, the outages that’s been announced recently, that’s creating some additional demand for those that don’t have blast furnace problems. I would expect that that might put some pressure on scrap, but until we start going through the books and settling, it’s hard to know for sure. But that’s not bad to surmise. We said we’d see price moving up and down as we normally do this time of the year, plus or minus $10 or $20 a ton, and still expect that, but we could be surprised, certainly…
Phillip Gibbs – KeyBanc Capital Markets: Could you talk about some of the regional disparities in the book? What are the puts, what are the takes as far as the construction book in the U.S.?
Joseph Alvarado – Chairman, President and CEO: Yeah, happily. The way we describe our market basis is, Texas has always been a stronghold for us and it’s remained a strong construction market, albeit more highway work than non-residential the last couple of years. But non-residential continues to strengthen, just at a slower rate than we would like. The stronger markets outside of the Texas market happen to be in California, South Florida, and the Beltway. And the issue – and why we talk about regional recoveries as opposed to broad based. It’s all the areas in between, between Texas and California, between Texas and South Florida or between South Florida and the Mid-Atlantic. A lot of those markets still remain fairly flat and not nearly as robust in construction activity. Business is good but it’s just very, very flat year-on-year. So until we see broader economic recovery and broader construction, it’s hard to surmise what’s going to drive confidence enough to see investors invest in nonresidential beyond just residential construction improvement. No doubt that that will spur and so too will some of the construction related to the building of plants and manufacturing facilities because of lower energy costs in the United States. But that’s just a slow growth, not a dramatic growth opportunity.
Phillip Gibbs – KeyBanc Capital Markets: I think your stance there has been pretty consistent over the last several months. On California in particular, is that a mix issue more into the private side because our perception was that the public markets there are fairly challenged?
Joseph Alvarado – Chairman, President and CEO: It’s broad-based. There have been a fair amount of public projects as well as private. Maybe it differs a little by region, Northern and the Southern California, but in the aggregate, there is an overall strengthening both on the public and private side.