Commercial Metals Company Earnings Call Nuggets: Fabrication Performance and Materials & Distribution Outlook

Commercial Metals Company (NYSE:CMC) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Fabrication Performance

Kuni Chen – CRT Capital Group: Just to start off, hoping you could just give us a little bit more color on the performance in Fabrication. Is that really just all seasonal or were there any other factors behind the swing to a loss there and do you expect that to get back to positive results next quarter?

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Joseph Alvarado – President and CEO: Most of the decline in the fab business on, I’d say sequential quarter basis, because year-on-year, the business is much better, but sequentially volumes are down and prices were down, and both of those factors contributed a little bit higher operating cost and margin squeeze, but it’s more seasonal than anything else, Kuni. Our fab business is strong and backlog is good, but there are only so many days in the quarter and we were unfortunately impacted by that.

Barbara R. Smith – SVP and CFO: I should also point out, Kuni, we had $7 million LIFO benefit in the prior quarter and it’s pretty muted this quarter.

Kuni Chen – CRT Capital Group: Just as a follow-up question on Poland. We’ve seen U.S. Steel in the news recently evaluate its position in Europe, what about you guys and your general thoughts there? I mean, look back over the last couple of years, you’ve had, I guess, five years or so of fairly uneven profits there and low margins, the outlook continues to be pretty challenging. Can you just walk us through your general thought process on why keeping the operation in its current form is the best outcome here?

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Joseph Alvarado – President and CEO: Well I guess, I’d respond to you by saying we’re not keeping in its current form. I commented that we continue to be very aggressive in managing our overall cost structure and that includes our operating cost (amending) in Poland. It’s a little bit more difficult in Poland to make manpower shifts as we might in North America, given the history of the country and some of the labor loss, but we’re moving as swiftly as we can. Over time, it’s been a good business for us Kuni, and Poland has exhibited positive economic growth really until projections for this year started declining, really in line with Germany, whereas the rest of Europe really wasn’t very strong. There’s still continued strong prospects for Poland in the future but we’ve been impacted somewhat by the economy and the catch up in the Eurozone and some of the factors, but more importantly, we’ve been affected by what is essentially VAT, fraud scheme that’s been discovered in Poland, resulting in imports consuming for recovering 50% of the market in some quarters and on an annualized basis, close to that level still. We’ve been working with federal authorities to combat the schemes, not unlike what happened on scrap about five years ago, and the authorities are working with us and proposing legislation, both within Poland and to the EU, that would help combat that scheme.

Kuni Chen – CRT Capital Group: Last follow-up, then I’ll turn it over. Just on the notes maturing later in 2013, just any general thoughts on timing and how you look to address that?

Barbara R. Smith – SVP and CFO: I will take that one. We’ve been monitoring the market and as – markets continue to be open and attractively priced. We do have a big nickel premium on that and we would like to minimize that as much as possible, but we will probably make a decision following our next fiscal quarter.

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Materials and Distribution Outlook

Arun Viswanathan – Longbow: First question I had was on M&D. What’s going on there? Obviously, I know that you are getting hurt on the raw material side and distribution but that segment I guess in the last couple of calls we’ve been going – experiencing quite a bit of volatility and can that segment – is this going to recover to over 10 million in quarterly profitability any time soon or what’s your outlook there?

Joseph Alvarado – President and CEO: Let me start with – M&D activity includes trading activities in Europe as well as South East Asia and Australia. We also have trading activities in North America. North American results are pretty strong. The activities that we are engaging and trading steel products in North America really have been very good and fairly consistent. We have impressed on the raw material side which is also part of our American trading activities. Europe is depressed and has been depressed and we are fighting through that. And Australia is also what I will call economic flat line these days at least in construction markets. Mining markets have been really strong, but for distribution we feel we are well poised for whenever there is recovery, we just can’t project a strengthening economy, and lot of its dependent on federal fiscal policy which is I guess up for debate in the sense that there’s an election forthcoming. In Southeast Asia, our trading activities have been really strong. Volumes are good, Kuni, lot of that owing to long capacity and China being moved into other regions, but margins are really (NYSE:BIG). Just very aggressive trading patterns in Southeast Asia which while it’s positive and we’re essentially at our planned levels. It’s on higher volumes than we had anticipated because of the lighter margins.

Kuni Chen – CRT Capital Group: What about the profitability outlook for that segment? I mean, I guess, in years passed, it was noted that it could be $55 million to $70 million a year. Is that still a fair characterization or how do you look at the earnings power of this segment?

Barbara R. Smith – SVP and CFO: Yeah, Arun, I’ll remind you we don’t give specific guidance. And I think for the past several quarters, we’ve been signaling that this segment because of the pressures that Joe just mentioned, particularly in Europe and Australia, which are essentially offsetting little bit better conditions in our North America trading business, we expect to be on the lower end of that range. In the near term, we see that segment getting back to sort of first quarter levels in the near term.

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Kuni Chen – CRT Capital Group: When you say in the near term, getting back to first quarter levels, I mean, did 14 million in the first quarter. I mean, this is a pretty significant swing down the 3.9, so you think you can hit something in the double digits in the near term is what you’re saying?

Barbara R. Smith – SVP and CFO: Well, a lot of markets will be – we’re expecting seasonal uptick, and so it will depend upon a fairly dramatic improvement in Australia’s result. We do know that we have some additional business booked in Europe that should help improve their results quarter-over-quarter, and that’s also assuming that the trend continues with the trading activities here in North America. So, based on our best outlook yes, that is achievable.

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Kuni Chen – CRT Capital Group: The other questions I had was, just real quickly on the Americas side, just wanted to parse your comments a little bit more, I mean, it sounds like you’re getting a little bit more positive on the construction outlook and Americas mills continues to do well as you reference. When do you see that, I guess, really showing up in your volumes, because by my numbers, volumes are a little bit light, but do you see those improving from non-res in the second half of this year or early next year? How typical is the lag between the industries that you’re watching and numbers actually showing up in your shipment volumes?

Joseph Alvarado – President and CEO: Kuni, we’ve been asked those questions many times and I’ve been offered by people who ask the question, whether it’s an 8 month lag or an 18 month lag, and it’s probably somewhere in between. It’s typical, it’s hard to define these data, but because the trends are so positive, we remain encouraged about construction markets. We’ll see more strength this quarter as we always do. The third quarter is consistently stronger than our second quarter. So, while we’re anticipating that, it’s hard to project exactly when non-residential will come back stronger. Our bidding activity is more oriented towards private money bids as opposed to public, so that’s an encouraging sign. We see in our construction services business some pickup in construction activity on a local basis. I guess the biggest problem in projecting the change is that some markets are actually fairly strong. The Texas market is strong, Florida – South Florida particularly has become strong, California strengthened, but other markets are not nearly as strong. And so until there is a fuller and more robust recovery, it’s hard to project when all non-residential will strengthen, so…

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Kuni Chen – CRT Capital Group: Sorry, you said that private was more – is there a split that you can give us as far as your own backlog and or book of business that’s between private and public?

Joseph Alvarado – President and CEO: Arun, the normal – what’s been normal for the last couple of years has been about a 70/30 public versus private and our bidding activity is moving closer to something like 60/40, not exactly 40% yet. But that’s a significant improvement and a divergence from what we’ve been seeing for the last couple of years. So, I think it points to some of the confidence that we’re seeing in construction markets in spite of the lack of direction or policy out of Washington, but again it’s not universal. It’s very, very segmented in two particular markets that are much stronger than others. So, we know we moderate closely. I’d like to tell you that we know exactly when non-res will pick up, but it’s hard to pinpoint and exact time. But again confidence is up and bidding activity is still good.

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