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Commercial Metals Company (NYSE:CMC)

Q1 2011 Earnings Call

December 21, 2010 11:00 a.m. ET

Executives

Murray McClean - Chairman, President and Chief Executive Officer

Joe Alvarado - Chief Operating Officer

Bill Larson - Chief Financial Officer

Analysts

Timna Tanners - UBS

Brian Yu - Citi

Luke Folta - Longbow Research

Mark Linemov - Morgan Stanley

Chris Olin - Cleveland Research

Sal Tharani - Goldman Sachs

David Woodyatt - Keeley Asset Management

Brent Thielman - D.A. Davidson

Sanil Deptardar - Sentinel Investments

Charles Bradford - Affiliated Research Group

Barry Vogel - Barry Vogel & Associates

Michelle Applebaum - SMI

Operator

Hello and welcome to today’s Commercial Metals Company first quarter 2011 earnings conference call. At this time all participants are in a listen only mode. After management’s remarks we will conduct a question and answer session and instructions will follow at that time. Please be advised that today’s conference call is being recorded today, December 21, and your participation implies consent to our recording of this call.

If you do not agree to these terms please simply disconnect. Your host for today’s call is Mr. Murray McClean, Chairman, President and Chief Executive Officer of Commercial Metals Company. Mr. McClean, you may begin.

Murray McClean

Good morning and welcome to CMC’s first quarter fiscal 2011 conference call. With me this morning is Joe Alvarado, our Chief Operating Officer, and Bill Larson, our Chief Financial Officer. I’ll begin the call with a brief overview of the first quarter and then ask Joe to comment on significant operational events to be followed by Bill who will provide financial details.

Finally, I’ll comment on the outlook for our second quarter this fiscal year after which Bill, Joe and I will be happy to answer any questions that you may have. Overview of the first quarter, after a sluggish start to the quarter momentum built as ferrous scrap prices rose in November. In addition, we noticed a strong booking month in November for rebar merchants. Some of this is put forward demand in anticipation of higher steel prices in December and January.

Our backlogs both at the mills and rebar fabrication have expanded since August. In general we saw a slight improvement in non-residential construction markets both here in the US and in Poland. Joe.

Joe Alvarado

Our domestic mills FIFO operating profits improved $19 million or 65% in the first quarter compared to the fourth quarter while our domestic fabrication operating profit declined $4 million or 21%. Our domestic recycling business operating profits also improved quarter on quarter $5.4 million or 108%.

The net gain of $20 million in domestic operating results unfortunately was offset by international mills and fabrication results, which declined $18.3 million. The decline was almost entirely attributable to our Croatian operations as the Zawierci Mill in Poland was ahead of plan and profitable in the first quarter.

In comparison to the prior year first quarter domestic mills FIFO operating results improved more significantly, $43.6 million, and recycling improved $11.7 million. Domestic fabrication results however, declined by $7.7 million in the same period. International mills and fabrication performance improved $12.8 million quarter on quarter mostly due to the improved performance of our Polish operations as previously noted.

Our marketing and distribution business continued posting strong results. FIFO operating profits were $16 million higher in the first quarter compared to the fourth quarter and $6.3 million or 40% higher compared to the prior year first quarter. Prospectively we anticipate second quarter operating rates to be near first quarter levels and we are using the winter quarter to complete regularly scheduled annual maintenance work.

Murray McClean

Okay. Thanks Joe. Bill.

Bill Larson

Good morning everyone. Let me call to your attention the detailed Safe Harbor statement included in the press release and in our August 31, 2010 10-K that in summary says that in spite of management’s good faith, current opinions on various forward-looking matters circumstances can change and not everything that we think will happen always happens. In addition, we’ve given guidance regarding our outlook for the second quarter of fiscal 2011 in our press release.

Subsequent to this call we will not be under any obligation to update our outlook. Finally, in accordance with Regulation G of the Securities and Exchange Commission, you are aware of non-GAAP financial measures. Some of these have derived fairly straightforward from our financial statements or are in common business use can be the subject of our discussions today and in our investor visits but there are other items that may be outside of our ability for discussion. You may need to be patient with us if we defer comment. Our Web site has additional information at cmc.com

We had discussed a black zero at the end of the last quarter. This was achieved net but there is something to be gained by a bit more analysis. Operationally our focus as Joe mentioned is clearly on Croatia. It is difficult to escape Croatia in the numbers. As we are not assured of using their losses as offsets in the future they are not tax benefits and this has caused a rather extraordinary tax rate. When you are near break even, everything has an oversized effect.

Results both LIFO and FIFO profit before tax were as Joe mentioned, above our expectations and particularly notable was the continuing outstanding performance of our marketing and distribution segment. The LIFO reserve at the end of November stood at $236 million. The LIFO effect for the quarter was the decreased net earnings, 3.7 million or 3 cents a share. Last year it was income of 11.2 million and 10 cents a share.

The depreciation for the first quarter was 40,643,000. Before I had mentioned or I should say last quarter I had mentioned that I thought depreciation for 2011 might be in the range of 175 plus or minus. It’s probably now more in the range of 165 and it’s down because we have sold our Joyston Deck operations as well as our heavy forms business. I would remind you that $500 million of our long-term debt is swapped to floating rates and during the quarter that swap saved us $3.3 million in interest expense.

SG&A costs dropped 9.6 million from quarter to quarter, first quarter to first quarter. This is a result of our continued cost containment efforts. The specific categories were lower professional fees and lower head count and the associated benefits with that. The balance sheet remains strong. Only 3.2% of our total assets are represented by goodwill or intangibles. The current ratio is 2.1. Our long-term debt remains investment grade.

The book value per share is $11.02. In the first quarter the average shares diluted were 115,223,693. That’s 115,223,693 and the actual shares outstanding were 114,375,664. 114,375,664. We spent 11.9 million in capital expenditures. The budget for the year is 152 million, not terribly unlike fiscal 2010 and probably not terribly unlike fiscal 2010 where we spent only about 125 million.

We are being very cautious in our spending in the first six months of the year. That’s rather obvious from the 11.9 of 152 budget and we will continue to monitor that very, very carefully and we did not purchase any stock during the quarter. Finally, I’d like to end with my sincerest hope for all of you for a happy and blessed new year. Those of us from a Christian faith tradition, okay, this is a big week.

But regardless of where you currently stand let us all keep faith that times will get better and that we and our families remain healthy and strong in the coming days. Murray.

Murray McClean

Okay. Thanks Bill. The outlook for the second quarter fiscal 2011, that’s for us living in the Northern Hemisphere, our winter quarter, December, January and February. My Australian colleagues always complain mind you that this time of the year though they’re either drinking beer, watching cricket or on the beach. Some two or three. Anyway, the winter quarter is our weakest quarter historically and we don’t think it’ll be any different this year.

Despite rising ferrous scrap and steel prices it will - it’s basically volume related. Volume is clearly lower whether it’s in the scrap operations or the steel mills as construction slows down over winter. And with the rising scrap prices there is always the lag effect with finished good prices, which will create a temporary margin squeeze for the next couple of months. Based on anticipated demand for the spring construction season ferrous scrap prices are likely to increase again in January and February followed by further steel price increases.

We commented in the press release inventories across the supply chain are relatively low and we anticipate a period of restocking in the first half of calendar 2011 similar to what happened this year. Internationally it’s quite clear with contract iron ore prices up around 8% for Q1 calendar 2011 that ferrous scrap prices will continue to trend higher. China appears to be successfully managing towards a slower GDP growth rate for 2011. In our view it’ll be about 9% down from 11%.

But there will be an increase in iron ore and scrap and steel prices certainly in the first half of calendar 2011. And the Asian markets will follow the lead of China during this period. In summary, at CMC we’ll be focusing short term as Bill and Joe mentioned on CMC’s CSEC. That’s our Croatian operations to significantly improve their performance. In addition, over coming months we’ll continue to improve our Arizona micro mill operations.

As well, we’ll take advantage of favorable market conditions come springtime in Poland through the combination of our additional rolling capacity, their new mill there as well as offering the market a broader product mix. Longer term it’s still our intention to generate 50% of our revenues from our international operations. With those summary comments we’ll now open up the conference for questions.

Question and Answer Session

Operator

We will now begin the question and answer session. To place yourself into the question queue please press star then 1 using your touchtone telephone. If you’re using a speakerphone we ask that you kindly please pick up your handset and then press star and then 1 to ensure good sound quality. To withdraw your question you may press the star and then 2 key. We will pause momentarily to assemble our roster. And our first question comes from Timna Tanners from UBS.

Timna Tanners

Yes. Hi. Good morning. Happy holidays as well to you.

Murray McClean

Thanks Timna.

Bill Larson

Thank you. Good morning.

Timna Tanners

I just was hoping you could provide a little bit more color on what you’re seeing in the scrap market just for starters to understand kind of the abrupt increases in prices that you’re seeing there. And if you could talk about how the process is going for passing that along to your customers that’d be helpful.

Murray McClean

Well, I’ll start and maybe Joe can add some more color. We saw a similar situation last year, Timna. It started last year in November or actually late October/November period internationally and then the US followed. We’re seeing good demand in international markets but clearly here in the US and as I mentioned, inventory levels have been relatively low. So demand was reasonable, I’d put it that way, over the last couple of months. So that had an impact.

And clearly the flow is being tighter than we would have anticipated. And some of that is obviously psychology. People will hold back on scrap if they think next month’s prices are going to be higher. So we saw the tick up in November and then obviously a big increase in December and we would predict another increase in January. Joe do you want to add anything?

Joe Alvarado

That’s good. Thanks.

Timna Tanners

And you talked about how some of your demand in November seemed to be pulled forward of expected higher prices. Would we not have seen that in the inventory data? Would that maybe lag a little bit? I’m curious about that line item.

Murray McClean

Yeah. That probably lags a little bit. It’s interesting of course a lot of companies report the end of the calendar year so they normally watch their inventories. But I’m not saying they’re not watching their inventories but with prices moving fairly rapidly it becomes more important to get ahead of the markets.

So we’re seeing some pull forward in demand but we really believe the first half of next calendar year is going to be stronger than the first half of this calendar year so not just here in the US but internationally.

Timna Tanners

And I didn’t get clearly the sense that you have of construction markets if you could talk about any early indicators you might have for the level of recovery you might see or hopefully see this year or this coming year.

Murray McClean

Well, we think the midterm elections there was a lot of uncertainty leading up to that. There seems to be more certainty, maybe it’s psychological. I don’t know. Certainly with the tax situation being clarified we’re seeing customers now making decisions and things starting to happen. Also the stimulus package here in the US we think there will be an acceleration in 2011 to get that spent.

So there’s a combination of things happening in the markets and we’re seeing the Texas market here is generally quite good and has been good as you know. But even some markets in the east are recovering a little bit. The west is the worst. So there is a little bit of improvement and as I said, if there is a bit of improvement in demand we made those comments. And I think the seasonal improvement starting probably around February of next year will be more significant.

Timna Tanners

Okay. And then the last one for me - I guess you made this plain a couple times Bill that you remain investment grade rating but I was just curious the covenant metric looks like as you point out, it won’t be as much of an issue going forward. But if you look at debt to EBITDA or some of the other metrics that ratings agencies tend to look at, it’s obviously very high and ideally improving. Can you give us any color on how those conversations are going or how you think the balance sheet looks from a ratings agency perspective?

Bill Larson

You’re talking to the wrong guy. You’ll have to ask them Timna. No. Those conversations pretty much are in confidence and they publish reports and I suspect that to their subscribers they speak a little bit more. But I don’t have anything to add.

Timna Tanners

Okay. Great. Thanks a lot and have a happy holidays again.

Operator

Our next question comes from Brian Yu from Citi.

Brian Yu

Good morning and happy holidays to you. I’ve got a couple questions first with the micro mill start up costs, you stated that you absorbed about 11 million. What - do you have any outlook on what those start up costs are going to look like next quarter or how that improves going forward?

Joe Alvarado

Yeah. We’re past the stage I think of labeling them as start up costs. Last year remember that we didn’t roll our first bar until September and when you’re breaking in the mill and you’re at very, very low tonnages going through the machinery it’s the most expensive rebar we’ll ever make in that mill.

So the characterization I think is valid in start up costs. At this stage though that mill is fully functional and yes, we still have some fine tuning to do but realistically it’s rolling. It’s melting and rolling the way it’s supposed to. Yes, we could get a little bit better at it and God bless us we could certainly use a better market. But the results pretty much are what they are. So I guess Brian, what I’m saying is that whatever Arizona achieves it’s achieving because of the market that it’s allowed to achieve and not because they’re having disproportionate costs as on some learning curve. I would tell you what the expectations Bill, for the year for Arizona would be.

Bill Larson

Well, essentially we had originally planned on a learning curve that was going to be 18-24 months. I’d say we’re ahead of that plan operationally. And we’re hitting rated capability of the mill on a regular basis in sequencing through the mill. But it’s all about getting our daily operating costs down as opposed to any start up costs. I can’t think of anything significant that’s still hanging there.

Brian Yu

And then at Croatia, you talked about some of the problems you’re having there. For the last several quarters where you have disclosed melt versus roll versus shipment numbers it seems like that ratio has deteriorated. And can you just provide a little bit more color on what’s happening there and what some of the actions are that you’re doing to try to fix it?

Joe Alvarado

Sure Brian. Let me take that. First off, we did have an outage in one of our pipe mills, a planned outage in September that affects the overall shipments of product from that facility and also added to our cost burden and that major maintenance project. In addition, we had start up costs associated with the new (ladle net) station. You’ll recall that we had started the fungus back in May time period, about when I joined, and ran without a ladle mixation until we started commissioning and developing our sequence casting practices in October, again delayed from what was supposed to be an August start.

So we began the year behind the eight ball on the pipe mill and put ourselves behind the eight ball with a slow start up of the melt shop. And as a result as is noted in the commentary in the press release we made some changes in Croatia to bolster management there and to improve and reduce costs and improve overall performance including better standard operating practices. So we have got a team of individuals that have been assigned there to get us through the continued start up and that work will continue throughout this quarter.

Brian Yu

Okay. And just for clarification on my part for the quarter I mean the press release said you melted 38,000 tons, rolled 19,000 tons and shipped 13,000. The difference there, is that because of product rework or is there material that is going into inventory?

Joe Alvarado

There is some material that is going into inventory. We also have a qualification process that we’re going through on blooms. So we are melting product for trial testing. That material has to be tested and released before we would ship additional product. And then also with the pipe mill having been out of commission for the better part of the month in September yeah, we ended up building a little bit of inventory there.

And again, we’re trying to improve upon the operating practices of the facility and testing equipment. So some of that material will later be converted into pipe product or sold as bloom product.

Brian Yu

Okay. Thanks.

Operator

Our next question comes from Luke Folta from Longbow Research.

Luke Folta

The first question I have this morning is just on how you guys look at LIFO expenses. I forget, is it a full year expectation that is trued up quarterly or is taken on a quarter to quarter basis?

Bill Larson

We square it up at the end of each quarter Luke. So we do to the extent possible - now I don’t want to leave you with the impression it’s a full blown calculation because that’s just practical in the closing period that we have. So we go through as extensive a calculation as we can and we book the entire answer.

Luke Folta

Okay. So whatever you book this quarter is not indicative of what you expect in the future?

Bill Larson

No. It’s - and your point is well taken. Many, many years ago and the methods are perfectly acceptable, the alternative, which is to estimate the year and divide it by four and then three and then two. But what we found is that and you have heard me certainly confess that my ability to estimate LIFO is not one of my better traits. And you end up in the fourth quarter with some oddball answer that people keep asking me why did - please explain this LIFO number. So we opted about four or five years ago just to book the entire answer recorded.

Luke Folta

Okay. Secondly, just you noted that you’re seeing some improvement in backlogs in your fab business. Can you give us maybe some more color there on maybe the magnitude that you’re seeing or just maybe your base case on what you think shipments in the construction sector could do this year? I’m just trying to get a sense of what your base case expectations are for rebar and fab.

Joe Alvarado

Yeah. As Murray noted there has been a slight degree of optimism reflected in the order book. It’s really across the board so some of it is the inventory build that Murray referred to or the replenishment of stocks. But in the construction sector overall market booking rates continue to be more oriented towards highway workforce. Commercial work is more in the short lead time basis. And so while we have our fair share of commercial work expectation of that getting much stronger in the short term are not very great.

So if anything we seem to be benefitting from a little bit greater optimism and an order book that is a little bit stronger than we might have anticipated it to be. And hence the comment that our operating rates will be around the same level or slightly lower in the second quarter than the first quarter as compared to the first quarter, which is different than is traditional. So we’ve got a little bit of an improvement in the order book overall, which has helped our backlog at this time, which is unusual at this time of year.

Luke Folta

Okay. All right. Just lastly, just in case chuck forgets to ask, any thoughts on what electrode prices could be for 2011? Thanks.

Bill Larson

I should tell you I’ll wait for Chuck to ask but I’ll look. Actually you know we negotiate those contracts on a yearly basis and they were already negotiated about two months ago. And although for proprietary reasons I won’t get into the exact numbers, I think it’s essentially flattish.

Luke Folta

Okay. Great. Thanks.

Operator

Our next question comes from Mark Linemov at Morgan Stanley.

Mark Linemov

Yeah. Also on the rebar/fab business, I believe since previous good times in that sector there has been a fair amount of consolidation. Can you comment at all how the business in general is set up when demand does come back to a suitable level?

Joe Alvarado

Could you elaborate on that? I’m not quite sure what your question is, how the business is set up?

Mark Linemov

Historically it’s been a fairly low margin business because of a lot of players. It seems like there has been a little bit of consolidation. Is that something you would agree with and is the business in general set up to maybe have a little bit better pricing power?

Joe Alvarado

Well, I won’t get into pricing but certainly there has been some consolidation of the industry throughout. One would be hard pressed to say that it’s had much of an impact but there is certainly a large contingent of independent fabricators that are important customers of ours that don’t have necessarily the same sort of mill support that mill owned fabricators might. But it’d be difficult to speculate on what it might look like in the future.

Bill Larson

I would guess though if you look at it strategically Mark, that if the supply chain were a perfect world - it’s not - but if the supply chain were a perfect world where recycling only sold to our mills and our mills only sold to our rebar fabricators, it tends to be the only place that we touch the customer and therefore it ends up being strategically very, very important.

Joe Alvarado

Yeah. And I’d add to that that fundamentally one of the issues in the business relates to the nature of raw material costs and the structural pricing for long-term contractual business that doesn’t die out. And that’s something that’s a business model that we’re addressing as best we can, which has more of an impact than the number of competitors say.

Mark Linemov

Okay. Thanks for that. And maybe just on Croatia, you talk a little bit the way I read it anyway is that the people there were set up to succeed and didn’t. Can you talk about why or how the new gang that you’re bringing in there is going to be better positioned to put some good numbers on the board? Thanks.

Joe Alvarado

Yes. The issue that we face in Croatia was one of a lack of progress. I believe we do everything we can to make people and prepare them to be successful. We just weren’t seeing the sort of progress that we had anticipated. Recall that I mentioned the melt shop started up in May. It was supposed to have started up in February of last year. The ladle net station was supposed to have started up in August and didn’t really start up until the middle of October and we were way behind in our casting.

We were also not completely satisfied with some of the progress that we expected to make in selling tubular products in the various markets that we compete in and nor were we pleased with the cost structure and/or quality and some other fundamental management issues. So that’s why the changes were made. And the net result is that we have assigned individuals with a variety of operating experience in rolling mills and melt shops, quality systems, logistics to help provide some guidance and some day to day oversight while we get the right people in place that we think can execute the plan more effectively on a daily basis.

Mark Linemov

And how quickly would you expect to see them be able to kind of turn around the situation?

Joe Alvarado

Our team landed there earlier this month, the first full week of this month and they will remain on assignment. I would say that we’ll have a better indication of what progress has been made and what can be made by the end of the second quarter. Not that we’d be prepared to talk in much detail about it but that’s something that we’ll have a better sense for.

Mark Linemov

Great. Thanks. Good luck with turning it around.

Operator

Our next question comes from Chris Olin from Cleveland Research.

Chris Olin

Hello. I got on to the call late so I apologize if this was asked but you were talking about scrap prices moving higher into January and February. Did you give any thoughts on the magnitude? I mean it seems like there has been talk that prices could theoretically be up $70-100 a ton. Does that seem realistic?

Murray McClean

No. We didn’t give any magnitude but we think they could be significant but maybe not to those levels. And when you see prices now in Asia at 450, 460 and prices December in the US $105 higher than this time last year, you can see what increases are and are likely to be.

But clearly the 8% increase in iron ore prices, the contractor prices for Q1 of 2011 is underpinning scrap prices and the spot iron ore prices are higher than the Q1 prices. So everything indicates that scrap prices will move higher but to the levels you talk about, I think that some are saying it’s unlikely. But they will move but I don’t think to that degree.

Chris Olin

So maybe closer to $50 tipping number?

Murray McClean

Well, you pick it. I wouldn’t like to guess at this stage.

Chris Olin

Okay. When you look at the domestic drivers if you had to look at it from a point of flows or export demand or incremental domestic demand, what’s putting the greatest amount of I guess incremental stress in the marketplace right now?

Murray McClean

Well, the big flows for I’m talking the scrap that we’re mainly involved with, (robs elite grade). That’s the biggest flow and clearly the winter time, that slows down. The collections slow down. The second biggest area is the industrial or scrap from manufacturing and then the third is demolition. Well, that has also slowed down obviously at this time. So it does - I mean the winter has started early particularly in the northern part of the US and in Europe. So it’s definitely having quite an impact on scrap flows at this point in time.

Chris Olin

Just lastly too on the fabrication business, I know you said you didn’t want to get into pricing but the concern here when you look at this business versus your other business is you have scrap and rebar pricing, which has become far more volatile than past cycles and you’ve got a fabrication business that may be slower moving in terms of the contract structure.

And I guess is there anything we can do to help calm that volatility or is this a business that you think makes sense to be in over the long term?

Joe Alvarado

It makes sense for us to be in the fab business for the reasons that Bill mentioned earlier. It’s the only link that we have with the end user markets, it helps to guide our mill operating annual loads. And what I was alluding to a little bit earlier Chris is the fact that there is a mismatch between as I said raw material prices and the long-term nature of contract pricing, a lot of the rebar/fab business.

We are looking for solutions and have developed some alternatives and it involves getting our customers to make longer term commitments and understand that escalators are a part of the business. It’s not the nature of the business to be priced that way so there are some fundamental structural changes that are going on. The result I think of everyone seeing the same thing that we’re seeing in this business that fundamentally it doesn’t make sense to match long-term selling prices with short-term raw material costs.

Chris Olin

Okay.

Joe Alvarado

I wish I could tell you I had a silver bullet. We don’t just have it yet.

Murray McClean

I mean we’re clearly looking at all forms of hedging whether physical or financial and there are some mechanisms out there and maybe a combination of these makes sense going forward but as Joe said, fundamentally the business model has to change some at some stage.

Chris Olin

Thanks guys. Appreciate it.

Operator

Our next question comes from Sal Tharani from Goldman Sachs.

Sal Tharani

Good morning guys. What is the rebar price in the US right now approximately? And where was it at the bottom? What is the mill quoting at the moment?

Murray McClean

What’s being quoted and what’s in the marketplace are a little bit different. But we can give you an indication. Joe, do you have something there?

Joe Alvarado

Yeah. Compared to the same quarter a year ago prices are up about $90-95, kind of back to what we were talking about on scrap. That’s just a very general price on rebar.

Sal Tharani

And the scrap is up about the same or a little bit more?

Joe Alvarado

About the same. Scrap itself would be in the range of about $75-80.

Sal Tharani

Okay. So once you realize this price there might be some market expansion, once you realize the quoted price?

Joe Alvarado

Yeah. I think you know Sal and this has been discussed on other calls that we are able to buy unprocessed scrap at prices that are more favorable than the quoted benchmarks on these sorts of things. And therefore we can take the processing profits in. So once we catch up but you always have that lag, right? I mean but your point is well taken that in a consistent and God bless us that we should ever get back to that ferrous scrap market, the margins would increase.

Sal Tharani

If scrap goes up $50 60, 70 - whatever, do you think the market would take another $50 increase in rebar if prices go much above prices?

Murray McClean

We believe so because what alternatives are there? I mean obviously international prices are moving up quite strongly as well and with low inventory levels we certainly want to make money and we’ll push through prices.

Joe Alvarado

And there hasn’t been absent Mexico a lot of imports. We do understand that there is a Turkish shipment that may arrive in February but even that I think it was 30-40,000 metric tons and pretty modest compared to the overall market.

Sal Tharani

So Dallas trading division is not seeing much advertised opportunity to bring rebar into the US?

Murray McClean

No. Sorry? That 40,000 tons is not ours. It’s other traders but I’ve taken a position.

Sal Tharani

Got you. I’m going to just divert back to fabrication. Obviously that was one of the biggest negative impacts on the earnings as we’ve seen consistently. And it’s just that if you add back the LIFO benefit you had in there and the 1.9 million of (selling), this was almost a $30 million loss. And Joe, you alluded to the business helps mills and you’re not the only one to do that. All competitors do the same thing if they have a fabrication business.

Is this business important for everybody because it helps to offset the mills load and it’s better to show better operating rate at the mill and just have this business continue to show? And you’re not the only one affecting negative impact. Everybody else is having it. I just wondered what is the usefulness of this because when I talk to the fabricators the conversion costs plus the metal costs if you add it up is higher than what the selling price of what this fabricated bar is right now. And this is going to get worse. So is this something, which is something you may want to divest more going forward?

Joe Alvarado

Sal, the way I’d answer that question is go back to a comment Bill made earlier about interacting with end users in markets and the fact that as I stated that this is a business model that doesn’t work. If we didn’t have access to the end user markets we couldn’t have conversations about why this model doesn’t work and how in order to be a long-term viable supplier both in the mill as well as in the fab business there is a business model that needs to be changed.

If we were to not have contact or sell only through distribution channels that would preclude us from talking to end users we wouldn’t have a chance for that dialogue. So it’s important on two accounts. One is it does certainly help us with loading the mills but it also helps us to address issues like this when they come up by talking directly to the consumers of those products who are also stuck with contracts whether they are at the state or the federal level that push them towards wanting to lock in for long-term pricing.

And so what we’re doing is trying to address some of those fundamental needs of customers as well as their need for product and match that with our own business model. So it’s important for that reason as well.

Sal Tharani

Okay and then last question - Murray, you mentioned that backlog in fabrication in November was better than expected. Do you expect that to continue? Is that something which is a turning point in the non-residential construction market do you think?

Murray McClean

It’s a little bit early Sal. I mean December looks quite good as well for future bookings with them. As was mentioned, I think the psychology turned a little bit after the mid-term elections and we’ll know early next year. But there are certainly some better pockets of activity, put it that way, than there was over the last few months. So I would say on our next earnings call we’ll be able to say is this trend continuing or was it just a bit of a blip and it just remained pretty flat with our backlog.

Sal Tharani

Thank you.

Joe Alvarado

And Sal, except for the first quarter of fiscal 2010 since the second quarter of 2009 there has been a steady improvement in the backlog. So it’s something that has been building little by little over time, not spectacularly so but a steady improvement.

Sal Tharani

Great. Thank you everyone.

Operator

Our next question comes from David Woodyatt from Keeley Asset Management.

David Woodyatt

Yes. With regard to the Croatian situation what is your current understanding of the chances of Croatia joining the European Union and what the timing might be and how critical you think that is to getting that operation turned around?

Murray McClean

Well, it’s the in terms of the timing it’s flagged for January 2012. But the three chapters that haven’t been closed yet to our knowledge and one involves corruption. And I think the EU is a lot more sensitive after issues in a couple of the other countries that joined the EU a few years ago. So that could be delayed a few months or 12 months. We’re not sure.

In terms of being critical for us it’s not on the bloom side. It’s on the pipe side where there is an (antidumping of usually 29%). So that would go away once Croatia joins the EU. In fact, it’ll go away six months before they join the EU. And so that would mean we’d have access to the European markets for pipe, which would be relatively significant. Joe, want to comment?

Joe Alvarado

Murray has captured it quite well. On the bloom side there are no issues for us to sell product throughout European. On the pipe side it’s important to help us improve our margin and focus on what’s a more natural market for the Croatian facility. We’re entirely too dependent on export from that facility at this point.

David Woodyatt

Okay. Thank you.

Operator

Our next question comes from Brent Thielman from D.A. Davidson.

Brent Thielman

Hi. Good morning. Yeah. Just on the international marketing and distribution segment obviously it continues to be a solid contributor to the bottom line. Can you just give any color on any near-term seasonality we should expect there just given all the different geographies that are associated with that?

Murray McClean

Yeah. There will be a little bit of a slow down this quarter. I mentioned Australia, their operations, they have their summer holidays down there, quieter. Asia in general is a little bit quieter leading up to Chinese New Year, which is early this year. It’s the first week of February. But we would expect their third quarter or our third quarter results to be better than second quarter for marketing and distribution.

In Europe it’s a bit mixed. Once again a lot of that is seasonal and activities pick up definitely around February/March period. And here in the US where the raw materials business is pretty constant and it depends on the product there. A lot of the products doing quite well so in summary we’d expect probably the second quarter results to be down and then pick up again in the third quarter.

Brent Thielman

Okay. That’s great. And then just a point of clarification I guess on the fabrication segment but you did indicate you’re starting to see some better pricing there maybe in that segment. Are you still expecting to see the losses widen in Q2 versus Q1?

Joe Alvarado

No.

Brent Thielman

Okay. Great.

Joe Alvarado

Would expect them to shrink.

Brent Thielman

Okay. Great. Thank you. Happy holidays.

Murray McClean

Happy holidays. Thank you.

Operator

Our next question comes from Sanil Deptardar from Sentinel Investments.

Sanil Deptardar

Thanks. Murray, you talked about slight improvement in the non-residential construction market. Do you think that is sustainable?

Murray McClean

It’s hard to say. I think as Joe mentioned, when we’re looking at our backlogs, rebar, fabrication it’s just a slow steady trend of improvement. Nothing spectacular but as I said earlier, we just anticipate more money that we spend based on what has to be spent on the stimulus package and we just anticipate a little bit better in commercial work. I mean slightly better, nothing great. So we think spring and summer here in the US is definitely going to be better than this year. How much better, it’s a bit early to say.

Sanil Deptardar

And this improvement, is it because of the improved credit availability or it’s like some financials being provided by the government?

Murray McClean

Well, I think a combination of both. Definitely financials from the government. Obviously I think a slight easing with the banks too. We certainly see that internationally with credit insurance it’s a bit easier to get credit insurance now and customers than even it was even six months ago. A little bit but nothing spectacular. Joe, have you got any comments?

Joe Alvarado

Yeah.

Sanil Deptardar

On the service center side given the prices rising so fast, do you think that the service centers are getting compelled to restock more than what they did last year in the first half of calendar 2010 versus what they would be doing here? Or do you think that?

Murray McClean

Well, the indications we get, we obviously supply the service centers with some of their products it’s a little bit more optimistic. They’re the customers. They sell through so I think so. I think they’ll probably build their inventories not spectacularly but they will build them certainly starting now but certainly into calendar 2011 and just see how the market develops. So yeah. I think there should be an improvement. Joe, have you seen any?

Joe Alvarado

Sanil, I’d add to that that the rate of the price increases as compared to their inventory levels as well as prospective year-end tax issues they might be facing on inventory have compelled them to think that it’s worth putting material on the ground. So that has helped the order book a little bit. But also I’d say a fair share of improved optimism that would allow them to do that as opposed to lead times jumping up dramatically because that hasn’t been the case. So those are business decisions that they’re making that are supportive of the order book.

Murray McClean

One other thing I’d add is we’ve got very low inventory levels at our mills and service centers have been drawing inventory from not just our mills, other mills too I guess. So they have to make sure they’ve got the sizes they need, the products they need for their customers so that encourages service centers to buy a little bit more. So I think they’ll be watching it very closely in the next two or three months to see where prices are going to go. And as we mentioned, our view is prices are going to move probably through to February period before there is a thought.

Sanil Deptardar

So just help me understand since you are looking for improved conditions here why expect a small loss for the second quarter? Is there something, which is there which is contributing to that loss?

Murray McClean

Well, it’s a lag effect when you think about it. I mean if you look at our five segments recycling will be profitable but it will be down because volumes will be down. As we mentioned, you don’t collect and process as much scrap over winter. You look at our US mills, they’ll be profitable too. They’ll have a bit of a margin squeeze with the scrap price increases going through. You look at our fabrication segment, obviously they’re going to make a loss.

As Bill said, we anticipate a lower loss than first quarter. You look at international mills, I mean clearly we’re still going to make losses there at CSAC and Poland because it’s already a tough winter in December there. So that segment will make a loss and then M&D, their results are likely to be lower than Q1. So if you add all those things up that’s why we may be conservative but we’re just banking on a tough winter. Joe, do you want to comment?

Joe Alvarado

There is one other thing I’d add to that Sanil. We and I mentioned this in my comments in the winter quarter we’ll spend at a higher rate than we might otherwise spend on major maintenance activities. We’ve been doing that throughout the company in Europe as well as in the States. And so with the holidays, holiday shutdowns, opportunities for doing major maintenance, allow us to get that done so that we’re prepared for any pick up in activity in the spring. So that’s a pretty common phenomenon that our spend pattern would be generally higher in the second quarter.

Sanil Deptardar

Okay. And in Croatia what timeframe do you think that you might break even with the change in the people there now?

Murray McClean

Well, as Joe said, we should have a reasonable indication by the end of our second quarter. But by the end of the third quarter we would know pretty well where we’re at. It’s too early to say when we’re going to hit breakeven. We’ve just been disappointed. I think that’s fair to say and so we’re putting - like we did in Arizona - putting our best people in the melt share, MLS, cast shop, etcetera and really looking at that operation from top to bottom to turn it around.

Sanil Deptardar

Okay. Well, thanks. Happy holidays to you all. Thanks.

Operator

Our next question comes from Charles Bradford from Affiliated Research Group.

Charles Bradford

Good morning. Hi and I’m not going to ask about electrodes.

Joe Alvarado

Bill was waiting for you.

Charles Bradford

I know. How about a little bit of enlightenment on the current pipe and tube business? I mean I know you don’t do any of that in the US but it is a market for Croatia. And since you have some experience and some training what we’ve been seeing is prices coming down. Is that pretty much in line with what you’re seeing as well?

Joe Alvarado

Chuck, you know pipe and tube market is always an up and down market, in the States highly driven by drilling activity. And we participate in this market both with line pipe as well as with a little bit of OCTG. So in responding to your question about pricing, it bounces all the time and there has been a slight turn downward recently and that’s consistent with what is happening on the energy front from a drilling perspective.

But overall we ship product to not only to North America but to the Middle East. Those markets have been stable overall. I wouldn’t say that there has been a huge or significant deterioration. It’s been fairly flat. But as you know, from month to month and quarter to quarter it can bounce pretty substantially.

Charles Bradford

On the collateral side your marketing people are pretty knowledgeable about that market worldwide even though you may not make any of it. What are they seeing at this point? Obviously we’ve been hearing about pretty massive price increase announcements. Is the product actually being sold at anywhere near these price levels? Or is a lot of this geared more to impact the CRU Index on the contract business?

Murray McClean

Chuck, it’s fair to say we do trade in those products but many of our customers rightly or wrongly are feeling very cautious at this point in time. I don’t know Joe, if you have anything to add.

Joe Alvarado

Yeah. Chuck, whenever prices spike like this dramatically you see interesting reactions. I read in the paper and only read in the paper this morning about one international player committing to whole prices through March maybe because prices are jumping too quickly. And while we trade in flat products kind of around the globe it’s more concentrated in Southeast Asia and hence the conservatism that Murray alluded to.

It’s a bit of a wait and see and we haven’t seen as broad a reaction as there has been in the States, which I think now this is just me speaking, it’s more capacity driven - partly demand but also availability on account of blast furnaces and their ready status to start or not start.

Murray McClean

I think Chuck, the key will be around Chinese New Year. Late January/early February is the Chinese New Year period. So probably mid-February to late-February you’ll see a market trend and customers will believe these prices are going to stick or not. So we just see quite a bit of caution particularly in the Asian markets at this time.

Charles Bradford

We heard that one of the domestic mini mills cut themselves to the short sleeves on scrap and that’s been pushing the whole thing up.

Murray McClean

We don’t know about that.

Charles Bradford

Okay. Thank you very much.

Murray McClean

Thanks Chuck.

Operator

Our next question comes from Barry Vogel from Barry Vogel & Associates.

Barry Vogel

Good morning gentlemen. Murray, first question for you and I know that many questions have been asked about FISAC. Obviously investors are concerned about these losses, which have been consistent for the last few years. What if it doesn’t improve? Do you have a game plan if it doesn’t improve?

Murray McClean

Well, clearly Barry yeah, I mean we have contingency plans if it doesn’t improve. If we don’t think we can get the returns that we’d like to get long term, yeah there are different things we can do. So definitely and we’ll be focused on that in the next few months.

Barry Vogel

And I have a question for Joe. Could you tell us the capacity utilization for your domestic steel mills in the first quarter?

Joe Alvarado

Yeah. 72% I believe is the overall capacity utilization that we had. I have that figure here. Hang on a second. 72.

Barry Vogel

Okay. And as far as the Arizona mill, can you give us some idea of what the operating profits or loss was in the first quarter and your best guess about the results for the year versus last year?

Bill Larson

We’ll definitely do better than last year Barry. And I’m offended that you didn’t ask me the first question. But that’s okay.

Barry Vogel

I’ve got to give Joe some questions.

Bill Larson

Yeah and I would say we would hope to be cash flow positive. But you know on brand new large capital intensive operations the depreciation expense is going to be very hard to overcome given the market that we have out in the west.

Barry Vogel

All right. So what you’re saying is you’re going to lose money this year?

Bill Larson

I didn’t say that.

Barry Vogel

Are you going to lose money in the Arizona mill this year?

Bill Larson

Barry, we don’t disclose that individual - I’ve given you the best answer I could. Go ahead and ask Joe the same question. You like him better.

Barry Vogel

I have a couple of questions for you Bill. I didn’t see tax refunds receivable in the balance sheet and I think that I wrote down in my notes that there are some big tax refunds coming this year. Can you give us a little color on that?

Bill Larson

Yes. I can give you a lot of color on that Barry. It’s in other current assets. It’s north of $100 million.

Barry Vogel

All right. Other current assets. And you expect to receive it this year?

Bill Larson

I would say within the next three months give or take.

Barry Vogel

Okay. And as far as the line item write down of inventories, I hadn’t noticed that before as a line item. And it says here you had a $3.8 million write down in inventory in the first quarter versus 13 last year. Is that over with in your opinion?

Bill Larson

Which segment are you pulling that from Barry?

Barry Vogel

That was on the balance sheet or the cash flow statement. The words write down.

Bill Larson

No. That’s just the lower cost of market adjustments that you’re going to see and that’s mainly predominant in Croatia where our costs are higher than the finished goods selling prices.

Barry Vogel

Okay. So do you expect that in Croatia to continue for the rest of the year?

Bill Larson

Well, I think that’s the part that we’ve been addressing. I would certainly say that in the near term it is going to be.

Joe Alvarado

Yeah Barry. I’d add to that that one of the principal charges of the people that we sent over there is to address our costs. And sequence casting for example on the caster has tremendous implications for the overall manufacturing costs of any product obviously. And we’re just getting into that and seeing the benefits of it but it has the potential to reduce our total operating costs significantly.

And that’s why those people are there. And so it depends. Then the other side of the equation is what happens with pricing, which is the question Chuck was asking about tubular products. And we’re generally positive about tubular products and don’t expect any wild swings, just the typical ups and downs throughout the course of the year. We’re still very bullish about the energy markets.

Barry Vogel

Thank you very much.

Bill Larson

Thanks Barry.

Operator

Once again if you would like to ask a question please press star then 1 using a touchtone telephone. And our next question comes from Michelle Applebaum from SMI.

Michelle Applebaum

Hello. Can you hear me? Hi. Sorry. I’m in a hotel room with a weird phone. Hi. Nice performance at the domestic mills this quarter. I wanted to ask you there is so much conversation about whether or not you can pass through higher scrap costs that I thought I’d ask the question a different way. Can you tell me in the history of the long product business how many months have you ever gone in a row where you have not passed that? So in other words, how bad has the lag been historically for long?

Bill Larson

I can remember back in 1943 we really had - no Michelle.

Michelle Applebaum

You can’t see me smiling but I am smiling because I expected that from you Bill and I should have asked it a different way. You just couldn’t resist.

Bill Larson

I know. Realistically in normal market situations if you consider what the mills have in terms of a backlog and that may run 45 days. And then the fact that our price increases generally don’t take effect until the beginning of the next month so you’re usually 60 days minimum Michelle, before the first product that you can roll and will be shipped under a new pricing contract. So I generally would give the guidance that it takes about 60 days or so to see the first.

And it takes an entire quarter to realize the new prices. And then of course every time and you know at least as well as I do if not better the volatility that these prices have had over this last year, the 60-90 days. It starts over again at the beginning of each month. And so I have had a hell of a time trying to explain average selling prices because it’s 1/3 from September’s increase and then you had October’s decrease and then 40% of November’s increase.

But generally I would say in our experience it takes 60 days to see the first prices rolled through and 90 to get the entire price into the product mix.

Michelle Applebaum

Okay. That’s an answer to the question of how long does it take for a price increase to hit your P&L. My question was and I’m sorry if it wasn’t clear - my question was historically speaking for how long have you ever seen the spot steel price for longs not follow the scrap price? It’s never historically been more than maybe a month or maybe two in terms of the posted price, not how long it hits the P&L. I understand you have to sell the steel and it goes to the income statement. But has it ever been more than a month or two where the long credit price hasn’t followed the scrap price?

Murray McClean

In a simple answer, no.

Michelle Applebaum

Okay. I’m looking for the simple answer because I see a lot of people spinning their wheels saying whether or not the steel price on the long product side will follow the scrap price. And historically speaking it never has not followed it for more than a month. Or has it been as much as two ever?

Joe Alvarado

I would agree with Murray but I would caveat that that’s a domestic answer. We certainly have seen in Poland where scrap prices have gone up and steel prices have gone down and vice versa. We have gotten every permutation and I know you were asking domestic. But I just want to clarify that the markets are a little different overseas.

Michelle Applebaum

In Poland, how long has it been where scrap prices have gone up and steel prices have gone down?

Joe Alvarado

Sometimes we spend a good part of last year in that mode. I mean sometimes it’s three and four months at a time, Michelle.

Michelle Applebaum

Okay. And in terms of global price trends in general how many months has it ever been?

Joe Alvarado

I don’t know. That I haven’t calculated.

Michelle Applebaum

Okay. Because if you go back and look at posted prices globally and domestically they typically respond within a month. And I’ve never seen anything in terms of posted spot prices more than two months.

Bill Larson

You know, you get mucked up here on a global basis by the fact that the integrateds are out there in such a huge proportion especially in China that now you have to have the conversation about iron ore and not just scrap. And there the whole thing just kind of collapses on all the information you’d have to have.

Murray McClean

Michelle, I think that’s one of the reasons why Newcorp brought their scrap surcharge and adjusted the prices monthly either up or down or flat. So I think that’s been going on now for what, four or five years? I think people react much faster than they used to and you have to in this environment. In the old days of $10 a ton scrap price increases being a big thing are over. They can move 20 to 30 to 40 to $50 a ton as you know, in a month. So you have to react quickly with your finished good pricing.

Michelle Applebaum

Right. And since the surcharges I think the correlation between scrap and sheet has gone to 80% and I think it was 40% before that. And I think that longs have gone from 80-90% so even on the long product side in the United States, which was already virtually it was 100% scraps at steel, the surcharge actually did improve that relationship, which I wouldn’t have actually expected that given how tight the relationship was before ’03 when the surcharge started.

The other question is you were talking about on the one hand you were saying that the current environment has had buyers, distributors and whatnot pre-buying ahead of price increases. And then you were saying that you expected to see first quarter inventory build ahead of the spring demand. And I was actually really wondering if you had a press release written a week ago and then you changed some things because things got so different in the last week. Or if you could otherwise explain - it almost seems inconsistent like maybe the pre-buy inventory build that you would expect in the first quarter is actually all happened in the last week. Can you reconcile those two things?

Murray McClean

Well, there was some pull forward.

Bill Larson

Michelle?

Michelle Applebaum

Yeah.

Bill Larson

When we talk about inventory builds we’re referring more to what’s going on in the merchant business through distributors. Whereas the spring improvement is strictly a rebar phenomenon that we’re talking about. And there might be some additional inventory building the second quarter or what would be the second calendar quarter but those are two different things. A little bit stronger rebar market for construction is seasonal and we would anticipate that.

Michelle Applebaum

And that goes direct?

Bill Larson

Yeah. That goes direct.

Michelle Applebaum

And the merchant is what goes through the distributors. And you take for granted that we all remember that when we read your press release.

Bill Larson

Okay. We’ll be clearer.

Michelle Applebaum

No. It’s funny because now I’m thinking that was obvious but it honestly didn’t occur to me. So it’s a product.

Murray McClean

Michelle, you are right. I mean if you asked us three weeks ago about scrap pricing our view would have been different. I mean the magnitude we put in our press release there, it did surprise us how strong it was because you have both international markets and the US mills coming in at once. So you’re normally more larger, international mills when the international markets led a few weeks before the US caught up.

Michelle Applebaum

Yeah. Last year around this time I wrote a report saying that and I’m talking about sheet and I know that’s not your domestic sweet spot but you guys trade it globally. I wrote a report saying that sheet prices had gone up an unprecedented $100 a ton in eight weeks. And this week or last week and it was last year at this time. Last week I wrote a report saying sheet prices have gone up an unprecedented $100 a ton in a week. I’m just wondering is this global warming that’s causing this? What are your thoughts on what’s happening here?

Murray McClean

Well, Michelle, I think to be fair you should ask the flat product producers.

Michelle Applebaum

Okay. So you don’t have a view on the volatility?

Joe Alvarado

Michelle, I tried to allude to it a little bit earlier. I don’t know what percent. When you look at the data on rolling capacity or production capacity of integrateds in particular in the flat roll business there is a lot of swing in that number. And mini mills are able to respond a little bit more quickly to increased demand. I think some of the integrated producers have blast furnace issues to deal with.

And I have no idea what rates are running at but I know there is still idle blast furnace capacity. So any pick up is going to put some strain on their order books.

Michelle Applebaum

And you haven’t seen any - have you seen any increase in import activity from the inquiry side of buyers since all this has been going on either in the longs, which has been also pretty high, pretty fast price increases or on the flat side?

Murray McClean

Not really. On the long product side yeah, Mexico is the biggest supplier or has been of imports of rebar and they’ll put their prices up fairly significantly. And Turkey have come back in but that was just a spot opportunity I believe and it’s tapered off. But as I say, prices have moved here but they’ve also moved significantly internationally in the international markets.

Michelle Applebaum

Do you think that there is more of I guess a reluctance on the buyers’ part to place an import order everything else equal because it’s more of a longer term commitment than - it seems to be the key piece of the market right now is that everybody’s only willing to make a commitment for the next few days. So that’s same for the domestic?

Murray McClean

I would agree with that in this environment of volatility and people watching inventory levels, obviously their cash position, etcetera, to take a punt on material that is going to arrive in three-months’ time say from Asia or wherever is - I mean some people do it. Some people take positions but I would think many wouldn’t in this environment. Providing they can get it from the US mills I think all things being equal they will favor the domestics.

Michelle Applebaum

Historically we used to always say as long as I have done this that the kind of equilibrium domestic to foreign price everything else equal would be the global price plus the freight and logistics of getting it here. So the US market had always traded at a premium up until it started to change because of China the last seven or eight years. Would you say that there is potential because of the risk factor of an import order for the US market to trade at a higher premium than it had historically at some point?

Bill Larson

I wouldn’t think unless demand picks up and the US dollar gets a little better, I don’t know why the US market would pick up, Michelle. I mean all the economic factors are against it right now, right?

Michelle Applebaum

Okay. I’m just thinking theoretically I thought how markets work. So the offset, the historic premium of course is the weakness in the market here. Can I switch to a different question?

Joe Alvarado

Well somebody else may want to ask. Can we go back to the queue and maybe come back Michelle?

Michelle Applebaum

Sure. No problem.

Joe Alvarado

Okay.

Operator

And gentlemen, at this time I’m showing no additional questions.

Joe Alvarado

All right. Well then Michelle gets one more.

Michelle Applebaum

Okay. Can you hear me?

Joe Alvarado

Yes.

Michelle Applebaum

I just wanted to ask. I mean my experience with you guys is that you’re some of the best thinkers that I’ve worked with. So another conceptual question - there has been some talk actually the Chinese a month or two ago were talking about expanding their participation in the scrap market. And I was wondering if you had any thoughts about that.

Joe Alvarado

Well, we look at scrap more strategically than we do anything else. And our long-term vision is certainly to build up our capacities more so internationally. Our mill in Poland has twice the capacity of anything we have in the United States and is on a percentage feed basis the lowest of what we have in captive recycling. So I would say definitely in terms of our international view of it, we would expand in there.

Michelle Applebaum

Okay. Great. Thanks. Great call.

Murray McClean

Michelle, thank you.

Operator

At this time there appear to be no more questions. Mr. McClean, I’ll turn the call back over to you for any closing remarks.

Murray McClean

Thanks Jaime. Joe, Bill and I will be on investor visits the first week of January and we’ll be happy to answer further questions during our visits. In the meantime thank you for your attendance and wishing everyone happy holidays.

Operator

That concludes today’s conference call. We thank you for attending. You may now disconnect your telephone lines.

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