Commercial Metals Company's (CMC) CEO Joseph Alvarado on Q2 2016 Results - Earnings Call Transcript

| About: Commercial Metals (CMC)

Commercial Metals Company (NYSE:CMC)

Q2 2016 Earnings Conference Call

March 24, 2016 11:00 AM ET

Executives

Joseph Alvarado - Chairman, President and Chief Executive Officer

Mary Lindsey - Vice President and Chief Financial Officer

Barbara Smith - Chief Operating Officer

Analysts

Curt Woodworth - Credit Suisse

Phil Gibbs - KeyBanc Capital Markets, Inc.

Paul Luther - Bank of America Merrill Lynch

Aldo Mazzaferro - Macquarie Securities Group

John Tumazos - Very Independent Research, LLC.

Evan Kurtz - Morgan Stanley

Charles Bradford - Bradford Research

Operator

Hello, everyone, and welcome to today’s Commercial Metals Company’s Second Quarter Fiscal 2016 Earnings Call. Today’s call is being recorded. After the company’s remarks, we’ll have a question-and-answer session and we’ll have a few instructions at that time.

I would like to remind all participants that during the course of this conference call, the company will make statements that provide information other than historical information and will include expectations regarding economic conditions, US steel import levels, US construction activity, demand for finished steel products, the company’s future operations, the company’s future results of operations, the commissioning of the company’s planned new steel micro mill in Oklahoma and capital spending.

These statements are considered forward-looking and may involve speculation, and are subject to risks and uncertainties that could cause actual results to differ materially from those expectations. These statements reflect the company’s beliefs based on current conditions, but are subject to certain risks and uncertainties including those that are described in the Risk Factors section of the company’s latest Annual Report on Form 10-K.

Although these statements are based on management’s current expectations and assumptions, CMC offers no assurance that events or facts will happen as expected. All statements are made only as of this date. Except as required by law, CMC does not assume any obligation to update these statements in connection with future events, new information 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.

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

Joseph Alvarado

Good morning, and welcome to everyone joining us this morning to review CMC’s results for the second quarter of fiscal 2016. I will first cover highlights from the second quarter, and I will be followed by Mary Lindsey who will provide further financial details. After Mary finishes her comments, I will conclude our prepared remarks with a discussion on our outlook for the third quarter of fiscal 2016, after which we will open the call to questions.

As described in our earnings release this morning, we reported net sales of $1 billion for the second quarter of fiscal 2016 compared to $1.4 billion for the second quarter of fiscal 2015. Earnings from continuing operations for our fiscal 2016 second quarter were $10.8 million, or $0.09 per diluted share, a decrease of $0.02 per diluted share when compared to the same quarter in our prior fiscal year.

Results from continuing operations for the second quarter include an after-tax impact of debt extinguishment cost of $7.4 million, or $0.06 per diluted share. Also as noted in our press release on March 23, I’m pleased to report that the Board of Directors declared a dividend of $0.12 per share for stockholders of record on April 6, 2016. The dividend will be paid on April 21, 2016. The cash dividend reflects CMC’s 206th consecutive quarterly dividend.

Next I’ll discuss current trends and conditions in the markets in which we operate. Overall, the second quarter of fiscal 2016 was a solid quarter for CMC. Our Americas Fabrication segment achieved its best second quarter adjusted operating profit since the second quarter of fiscal 2009. This segment benefited from reduced raw material input costs, resulted in expanded metal margins compared to the second quarter of fiscal 2015.

I’m pleased to report that we received the air permit for construction of our new steel micro mill in Durant, Oklahoma. We began site preparation prior to construction and for the groundbreaking. Plans remain on track, as we expect commissioning of this new facility to be in the fall of 2017. Capital expenditures for Oklahoma micro mill were approximately $23 million as of our second fiscal quarter.

We’re encouraged by the improvement in non-residential and non-building construction spending in the U.S. Although we have continued to see pricing pressure as a result of elevated import activity. The strong U.S. dollar and relatively strong U.S. construction demand continue to attract foreign produced steel. We continue to work with the U.S. government to reinstate a level-playing field related to these unfair trade practices.

In that regard, there was a voluntary remand request by the Department of Commerce following the International Trade Corp. ruling that U.S. rebar producers were materially injured by both Mexican and Turkish imports.

On March 18, the Department of Commerce issued a preliminary dumping margin on Turkish imports of 3.64%. The final ruling is set for April 7, 2016. The import issue is amplified by China’s economic slowdown, excess field capacity, and unwillingness to adjust steel output to meet current market demand, which is impacting steel markets throughout the world with significant negative impacts on global steel pricing.

With that as an overview, I’ll now turn the discussion over to Mary Lindsey, Vice President and Chief Financial Officer. Mary?

Mary Lindsey

Thank you, Joe, and good morning, everyone. As Joe mentioned for the second quarter of fiscal 2016, we reported earnings from continuing operations of $10.8 million, or $0.09 per diluted share, which compares to earnings from continuing operations of $13.5 million, or $0.11 per diluted share for the second quarter of the prior year.

Results from continuing operations for this year’s second quarter included an after-tax impact of debt extinguishment costs of $7.4 million, or $0.06 per diluted share associated with the tender offers for senior notes completed on February 17, 2016.

Looking at our results by segment, our Americas Recycling segment recorded adjusted operating loss of $7.6 million for the second quarter of fiscal 2016 compared to adjusted operating loss of $9.7 million for the second quarter of fiscal 2015. Compared to the prior year quarter, improved results were due to a per ton margin expansion of 9% on ferrous shipments and 7% on nonferrous shipments. However, ferrous tons shipped decreased 16% and nonferrous tons shipped decreased 14% compared to the second quarter of fiscal 2015.

Our Americas Mills segment recorded adjusted operating profit of $50.7 million for the second quarter of fiscal 2016 compared to adjusted operating profit of $59.5 million for the same period in 2015.

During the second quarter of fiscal 2016, metal margins compressed by 8% on flat volumes compared to the second quarter of fiscal 2015. Improvements in mill conversion costs partially offset metal margin pressure. Our Americas Fabrication segment recorded adjusted operating profit of $14.8 million for the second quarter of fiscal 2016, which represents this segment’s best second quarter since the second quarter of fiscal 2009. This compares to adjusted operating loss of $5.8 million for the second quarter of fiscal 2015. The $20.6 million improvement in adjusted operating profit was primarily due to a 15% per short ton increase in the average composite metal margin coupled with a 5% increase in volumes compared to the same period in fiscal 2015.

Our International Mill segment recorded adjusted operating profit of $2 million for the second quarter of fiscal 2016 compared to adjusted operating profit of 800,000 for the same period in 2015. Compared to the second quarter of fiscal 2015, the improvement in adjusting operating profit was a result of a $1.8 million decrease in utilities expense and a 4% increase in ton shift, partially offset by a 10% per short ton decline in the average metal margin.

Our International Marketing and Distribution segment recorded adjusting – adjusted operating loss of $2.3 million for the second quarter of fiscal 2016 compared to adjusted operating profit of $7.4 million for the same period in the prior fiscal year. The decline in adjusted operating profit for the second quarter of fiscal 2016 compared to the second quarter of fiscal 2015 was due to a decrease in volumes and margins for our steel trading business, both in the U.S. and Europe.

Additionally, declines in the average margins for our raw materials business headquartered in the U.S. and our Australian and Asian operations outweighed increases in volumes for these operations. This segment also recorded inventory impairments of $5.3 million during the second quarter of fiscal 2016 compared to $1.3 million during the same period in fiscal 2015.

Turning to our balance sheet and liquidity. Our balance sheet remains a key strength for CMC. As of February 29, 2016, cash and short-term investments totaled $381.7 million and total liquidity was in excess of $900 million. During the second quarter of 2016, we had cash flows from operations of $113.2 million. We purchased more than 1.9 million share of our common stock at an average cost of 13.43 – $13.43 per share during the second quarter of fiscal 2016, pursuant to our share repurchase program.

We have $27.6 million remaining under the $100 million plan approved by our Board in October of 2014. In mid-February, we successfully tendered for $200.2 million senior note for before-tax costs of $11.4 million. This transaction delevers our capital structure by $200.2 million in addition to reducing our annualized interest expense by approximately $14 million. It also provides us more flexibility regarding our 2017 and 2018 maturities.

Capital expenditures were $51.2 million for the second quarter of fiscal 2016 compared to $27 million in the prior year second quarter. We estimate that our capital spending for our fiscal 2016 will be in the range of $200 million to $210 million, which includes an estimate of expenditures related to the construction of our new Oklahoma micro mill.

Thank you very much. I’ll turn it back over to Joe for the outlook.

Joseph Alvarado

Thank you, Mary. As is normally the case, we expect demand for our finished steel products to improve heading into our fiscal third quarter, as construction demand ramps up. Non-residential construction spending, which is our primary end use market in the U.S. was up a 11% year-over-year in February. Furthermore, from the U.S. perspective, we are encouraged by the strength of the Architecture Billings Index, posting above 50 for 21 of the last 24 months, which has historically been a good leading indicator of improved non-residential construction.

Volumes in our backlog remain strong and although selling prices are down. Our margins remain strong as well. While we expect to continue to be challenged globally by compression in commodity prices, steel overcapacity in China, imports into the U.S. and Poland, and a strong U.S. dollar, we also believe, we are well-positioned to serve growing seasonal demand from construction markets in Poland and in the United States.

Thank you for your attention. This concludes our prepared remarks. We will now open the call to questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Curt Woodworth from Credit Suisse. Please go ahead with your question.

Curt Woodworth

Hi, good morning.

Joseph Alvarado

Good morning, Curt.

Mary Lindsey

Good morning, Curt.

Curt Woodworth

Joe, can you talk about what you’re seeing in the international markets right now? So metal bullets had a report out earlier this week that Turkish rebar pricing is up about $75 a ton in the past two weeks. So they think the landed price right now in the U.S. is somewhere around 360 a short ton, which is based on the numbers I’m looking at would be about a 120 to 130 premium versus where the U.S. markets trading, so down a lot from the 181, 190 we’ve seen. But I think historically the 120 number has been about average. So I’m just curious to see, A, maybe what you think the normal premium should be in this type of market? And how do you think the U.S. market will react to what we’re seeing in the Turkish market right now?

Joseph Alvarado

Curt, two weeks ago when iron ore prices spiked suddenly about 20%, there was clearly some adjusting – adjusting that was going on, really emanating from China in the way of fulfillment contracts and obligations. And so that started putting some pressure on pricing globally. So some had anticipated that it would subside pretty quickly and while it fell more recently iron ore prices are up, and as a result they will put pressure on other commodity prices. We’ve seen increased scrap costs this month, but we’ve also announced the price increase.

So it’s really hard to comment on what the premium should be of domestic to foreign product. But clearly there has been – there’s some adjusting that’s going on in the marketplace and that’s normal, given that raw material costs have shifted pretty significantly. And there’s always been a strong correlation over time between iron ore pricing and scrap pricing. I think, we’re a little bit faster to respond on scrap price changes, both up and down in the United States, and that’s part of what evolves from our flexibility in electric arc furnace manufacturing.

Curt Woodworth

Okay, thanks. And just as a follow-up, it’s more a technical question on sort of thinking about flow-through of scrap costs through the income statement, given the shift to an average cost of inventory model. How should we think about it, for example, the April bid week for scrap is up 30 a ton trace what you are seeing there? But how – when would that translate into kind of flowing through your cost of goods sold? Is that kind of consistent with the – I think historically it depend anywhere from five to six weeks lag time?

Mary Lindsey

I think as a result of the change, our scrap inventory turns over pretty quickly. And so I don’t really think there’s going to be a significant difference in how you see scrap prices flowing through the income statement. I think it should be pretty consistent with what we’ve seen previously because of their quick turnaround.

Curt Woodworth

Okay. Thank you very much.

Mary Lindsey

You’re welcome.

Operator

And our next question comes from Phil Gibbs from KeyBanc Capital Markets. Please go ahead with your question.

Phil Gibbs

Good morning.

Joseph Alvarado

Good morning, Phil.

Barbara Smith

Good morning, Phil.

Mary Lindsey

Good morning, Phil.

Phil Gibbs

I had a question on the U.S. Mills backlog and how that stands right now relative to last year?

Joseph Alvarado

Backlog in the U.S. Mills compared to a year ago is pretty flat, I think it’s down 2%, Phil, overall. But it’s at a higher level than we saw at the end of the – the first or the second quarter. So there has some build in the backlog, but not to the exact number, so pretty flat a year – on a year-on-year basis.

Phil Gibbs

Okay. And then if you could…

Joseph Alvarado

And I mean, that’s [Multiple Speakers]

Phil Gibbs

Go ahead, sorry.

Joseph Alvarado

[Multiple Speakers] that, there’s a building backlog over the course of the summer into over the course of the winter into the spring, and we expect that to continue.

Phil Gibbs

Okay. And, Joe, can you comment on demand in Texas and then also on the other side of the pond what you are seeing in Poland?

Joseph Alvarado

Yes. So I’ll start with – I’ll say Texas, but it’s the Sun Belt and I’ll make some comments specific to Texas. Demand remains good and strong really across the Board. And there has been some anticipation that we would see weakness in the Houston markets and while there have been some adjustments, we still see strong demand there as well.

We’ve also are encouraged by not only the private spend, but the potential for additional public spend. The data that that’s been shared with us is that infrastructure spending in Texas will almost double over a three-year period from less than $3 billion to almost $6 billion, incrementally year-by-year. So for us that bodes well not only for our existing business, but for opportunities related to the Durant Mill when it comes up in the fall of 2017. So we’re seeing good, strong order demand in Texas and see a good potential for incremental business.

The same is true across the Sun Belt in markets that we serve, in particular, as compared to northern markets. There is a good solid order book and a stronger backlog in Sun Belt markets and there’s some in northern markets. So we’re encouraged that that construction demand activity will continue in each of the markets that we serve, including Poland, where our biggest issue has not been demand related, Phil, it’s been more imports.

There have been some trade actions that have been initiated in Europe against Belarus. The La Pias [ph] mill that used to be a problem for us and creating some bad issues have been idled. And so we’re seeing better demand in our construction markets in Poland. Though when I say it’s better demand, it’s along with – for the better overall environment.

Phil Gibbs

Okay. And I appreciate the color and lastly and I’ll jump off. How are you seeing current metal spreads in the U.S. business relative to the average in the second quarter? And that’s all I got. Have a great holiday.

Joseph Alvarado

Okay. Yes, thanks, Phil. Our metal spreads as you can see year-on-year down a little bit on a quarter-to-quarter basis, also down, and that reflects the pressure that we’re seeing because of the imports. It will continue to pressure margins and we work through that and that’s why we’re encouraged by some of the results in our operations in the Americas in reducing their overall costs and improving their cost competitiveness, but reducing cost – conversion cost has helped to offset some of the price pressure that we’ve seen.

And the recent price increase will have an impact on margins as well. And so it’s hard to give you exact figures at this point in time, but we still see strong demand and good metal margins with pressure as a result of some of the things we’ve been talking about already on imports and pricing.

Phil Gibbs

Fair enough. Thanks, Joe.

Joseph Alvarado

All right. Thank you, Phil.

Operator

Our next question comes from Paul Luther from Bank of America Merrill Lynch. Please go ahead with your question.

Paul Luther

Hi, Joe, hi, Mary, thanks for taking my questions.

Joseph Alvarado

Good morning.

Paul Luther

Good morning. On fab metal margins, can you talk a little bit about the sustainability there with capturing some margin boost from higher price backlog. And if you have a sense of when that higher price backlog is going to start to roll off and get to better – lack of better word I guess more normalized margins in that business?

Joseph Alvarado

Well, Barbara has joined us for this call. And so I’m going to ask her to address that question for you, Paul.

Barbara Smith

Yes, good morning, Paul. Great question. And as you know, rebar prices have been falling for a number of quarters now. And that allow the opportunity for our fab margins to expand, because our backlog, of course, was created on a historical basis that at higher pricing levels for their input cost.

So as we cycle through the backlog for the balance of this year, we do anticipate that our fab margins will compress, because we’re now moving into shipping some of the more recently price fab jobs. We do expect to retain good profitability in the fab segment, however, through the balance of our fiscal year, but it’s certainly you could expect this current fiscal quarter that we’re reporting today as somewhat of the peak to that fab earning potential.

Paul Luther

Okay, thanks, Barbara, it’s helpful. And then I – if I could quickly shift gears to International M&D, are you seeing any sort of recent improvement there, given some uptick in commodity prices and US dollars off a little bit from recent peaks. Are you seeing any change there?

Joseph Alvarado

Yes. So whenever there’s a sudden change in pricing and I’m referring to the iron ore pricing and the impact it had on orders in not only in Southeast Asia, but really across the globe. Most of that pricing movement is upward, because of the raw material cost pressure. Those contracts will all be settled and many renegotiated as a result of the increased pressure. But overall, the overhang of excess capacity still weighs on the market.

I wish I could say that we see dramatic difference in – differences in our steel trading activates, but I’m not anticipating that. Raw material trading activities, we expect some improvement. And our international mill operations back to the question that we answered early about demand overall, demand is good in Poland. GDP is strong in Poland. And seasonally adjusted, we always see higher shipments and we expect that to be realized in the second and third quarter in Poland as well.

Barbara Smith

And, Paul, I would just add further that we’re very encouraged by the improved results in the Polish operations year-over-year and that’s really reflected of them working on things within our control and really managing their costs very effectively and resonates some investments there, as you know, in particular, the new furnace, and that’s definitely yielding dividends.

We do have a second project, our caster project that is underway and we will have an outage in the coming quarter to complete that project and then we would expect to see dividends from that going forward into our next fiscal year. But the Polish operations have done a great job in working on things within their control and lowering their cost.

Paul Luther

Great. Thanks, Barbara and Joe, I appreciate it.

Operator

Our next question comes from Aldo Mazzaferro from Macquarie. Please go ahead with your question.

Aldo Mazzaferro

On the steel pricing on the rebar pricing, I’m wondering about the potential for the market to react positively even if you don’t get the higher 3.6% tariff on the Turkish material?

Joseph Alvarado

Well, that clearly is a factor and we’ve heard reports said that there’s already been a reaction. I think the reaction from – on imported product is a combination of raw material costs. There might be some influence of potential duties, but more would be the raw material costs. I haven’t checked transportation costs, I don’t think those have subsided in anyway.

But clearly everyone who want to cover their costs as best they can when raw material costs spike and that clearly has happened and whether it’s iron ore or whether it’s scrap-based production. And a lot of the – some of the imports that we see from Turkey have both origins, in other words billets that have been purchased versus scrap. And there’s probably some adjusting that’s going on in the mix of sourcing to be either scrap or nillet purchase based.

Aldo Mazzaferro

Right. It’s actually a fairly small tariff either way right and compared to the premium you have on the Turks right now, and I don’t think it’s a big risk it seems to be, but I was just wondering about the pricing?

Second question is on the scrap market, do you think there’s a chance you’d be profitable in scrap in the next quarter or two?

Joseph Alvarado

Go ahead.

Barbara Smith

Well, we’re always aiming to be profitable, Aldo, and it really – it’s a little really early in the quarter to know how this is going to play out through the balance of the quarter. I mean, early signs are that that scrap is moving up and that will create a better set of conditions for the recycling operations to improve profitability. And then we’re always working on the costs side and finding ways to restructure the operations to produce a profit. Clearly with the trade cases on the flat roll side, that may increase the demand for scrap overall, which could affect flows and put some pressure – upward pressure on scrap prices. So, again, it’s a little early in the quarter, but stable to rising scrap prices will create a better condition for our recycling operations.

Aldo Mazzaferro

Great. All right, thank you. I’ll pass it on.

Joseph Alvarado

Thank you, Aldo.

Operator

Our next question comes from John Tumazos Very Independent Research. Please go ahead with your question.

John Tumazos

Thank you.

Joseph Alvarado

Hey, John, we know who it is.

John Tumazos

John Tumazos, thanks.

Joseph Alvarado

We got there right. We got it right.

John Tumazos

So could you explain the marketing plan for the Durant, Oklahoma new product? And give us an update as to which of your steel producing mills ship mostly to your own fabricating system and which one ship mostly for third-party product? And if those integrations are competitive conditions changed over the years after that company Nucor bought Harris Steel and decided they wanted to fabricate rebar just like CMC?

Joseph Alvarado

John, that’s a long question to answer. But let me just try and give you a bit of an overview. The Durant facility will produce rebar, much in the same way that our Arizona facility produces rebar almost a 100%, we have the ability to make smooth bar. But just think of it as being another rolling mill, if you will, or line for us produce rebar into the North Texas market, where freight costs are less. And where we compete into our own scrap and to our own fabrication facilities and we can utilize existing scrap yards.

What it does in the aggregate is it allows us some flexibility in our other operations like Seguin to make rebar or merchant product. And of course, we’re always working on developing and improving our product line. So there will be some shifting of loads between the mills in terms of the total overall productive capacity, but on surface, we’ll have 350,000 tons more of rolling capacity.

As for the fab shops that we go into, generally speaking across the board, we sell to independent third parties as well as to our own fab shops. And presently and for a longest period of time, the majority of what our fab shops buy is about 35%, 80% comes from our own production capabilities. And conversely about 60%, correct me if I’m wrong of the total rebar construction goes into our own fab shops.

John Tumazos

So, I was hearing, Joe, the other questions about trade in Turkey and this and that. And I was wondering which of your mills sell mostly to CMC and aren’t really in the firing lines of all that?

Joseph Alvarado

John, we’re all in the firing lines, because whether it’s a CMC sale or not, we’re competing for projects for fabricated rebar. So the driver of all of our pricing is the base product, that’s important and it puts pressure on our fab business, regardless of where the sourcing comes from, because they are trying to secure business. And what we believe has helped our margins that we are going after business for which we can provide value and add – and added services and improve and enhance our bottom line, because there are some projects that are strictly done on price and then those instances, it can often be difficult to meet the imported price.

Operator

Our next question comes from Evan Kurtz from Morgan Stanley. Please go ahead with your question.

Evan Kurtz

Hey, good morning, Joe, and Barbara, hope you’re doing well.

Joseph Alvarado

Good morning, Evan.

Barbara Smith

Good morning, Evan.

Evan Kurtz

I had a question on the remand order in the Turkish case here. I mean, maybe disagree with me, but it seems like the 3.64% is fairly modest impact on the market. How do you think about what can change between the preliminary kind of 3.64% number they put out, and what they might say on April 7, when they come out with the final determination? Do you have an ability to influence that in anyway adding data to the case or strengthen it, where you can maybe see some sort of a lift in that number?

And then just also on that subject, once that final determination is set, is that the end of the ability to appeal the Turkish rebar product and are you kind of out of the Turkish business for a little while?

Joseph Alvarado

Yes. So let’s start with the number itself, both you and Aldo raised a question about 3.64% being light or maybe not significant. I guess, I would consider anything in the single-digit category to be light. But it does add costs and concerns for additional potential dumping if those costs aren’t covered and including the margin.

So longer-term they have some impact, shorter-term, I don’t expect much significant impact. We’ve assumed all along that Turks will continue to shift to this market until such time as their home markets are stronger. This is a good market for the Turks and they’ve had – they have a presence here. They purchase scrap in the past and that’s – that helps with their freight cost on backhauls. So we don’t expect a dramatic change as a result of the remand order.

As for the order itself, while we have a final different termination date, it is still subject to appeal that appeal process could take several months up to year depending on the backlog at the CIT. So in many regards it’s in somewhat business as usual with just a higher potential margin, a margin which would not be imposed until there’s a final determination.

Evan Kurtz

Got it, thanks. And one question on scrap, with scrap pricing now kind of pushing beyond the $200 ton mark for the first time in awhile, are you starting to see a pickup in flows of some of these peddlers that might have gone and done other things? Are they coming back into the market yet and what do you think that means for volumes in the remainder of the year?

Joseph Alvarado

Yes, I would expect that that flows have picked up and will continue to pickup in anticipation of higher prices. But scrap pricing is a month-to-month thing, Evan and as quickly as prices go up, they can go down depending on other factors. Now the fact that iron ore is sustained itself well above $50 a ton is good for scrap markets. But I wouldn’t comment on flows changing dramatically for a $20 ton show.

There’s enough flow that we can run our yards, but we made adjustments in our yards and our staffing. Barbara’s point earlier about containing the manage cost, we’ve taken staffing reductions and cut back operations at yards. So would I expect an uptick in the third quarter? Yes, if for no other reason that we need scrap for our own production. But I wouldn’t attribute it necessarily to stronger longer-term scrap pricing at least not yet.

Evan Kurtz

Okay, great. Thanks, guys.

Barbara Smith

Thanks, Evan.

Operator

And our next question comes from Charles Bradford from Bradford Research. Please go ahead with your question.

Charles Bradford

Hi, good morning.

Joseph Alvarado

Good morning Charles.

Charles Bradford

Can you talk a little bit about some of the other costs that might have changed somewhat for example electricity and electrodes? What are you seeing with the switch to natural gas by a lot of utilities and so on?

Joseph Alvarado

And you want say, go ahead.

Barbara Smith

Yes, Chuck I think overall we’ve seen of course a number of cost that have gone down over the last period of time driven by all of the various commodity prices coming down. Our energy cost was good in this past quarter, good – better that due to the weather and not facing a severe weather conditions across our operations as we might have seen a year ago.

A year ago we had bad weather in Texas and a lot of days in the Southeast that were very cold and lot of peak power rates. We just didn’t experience as many days this year in this past quarter. Clearly, we are benefiting from lower natural gas prices. But that’s not a huge component of our overall cost as you know.

Definitely power is a major factor in Poland, because they have much higher energy rates in Poland as compared to our rates here in the U.S., but our leader there Hiroshi in Poland has been working hard in this regard. They work hard, not only their consumption, but also to try to get a level playing field for us to not be the sole supporter of all the green energy initiatives in that region. And he has made some good progress in that regard.

Joseph Alvarado

Chuck, I think that only I’d add that as there is a continued shift to more use of natural gas. We haven’t seen any dramatic change in the utility pricing, but many of the arrangements that we have are on a contractual basis whenever there’s an opportunity to negotiate those contracts. We’ll do the best we can to reduce our cost.

We focused on again the things that we can control and when there is contract renegotiation, we certainly do everything we can to leverage our buy. But in the meantime we work on the utilization rates of the costs and manufacturing including electrode costs and one component of many components that make up our total cost. So Barbara’s point is – of where we seen the best gains were in Poland and where we had an opportunity to challenge some of the pricing, particularly as it related to green energy component of our pricing structured here.

Charles Bradford

Thank you very much.

Barbara Smith

Thanks, Chuck.

Operator

[Operator Instructions] And our next question comes from Phil Gibbs from KeyBanc Capital Markets as a follow-up. Please go ahead with your follow-up.

Phil Gibbs

Thank you. The SG&A at $94 million really was aggressively lower quarter-on-quarter and year-on-year. Just wondering how much of that is structural, given some of the moves that you’ve made, and how much of that maybe some temporary, or seasonal SG&A reduction?

Mary Lindsey

Thanks, Phil. Yes, I would not regard it as something that’s truly structural. Some of that was related to compensation costs, fluctuations that we had for some particular reasons, and we also have a benefit replacement program that that had some gains in this particular quarter. So I think that the $100 number is a better number for you to think about on a going forward basis.

Phil Gibbs

Okay, that’s helpful. And I know that the tax rate has been sort of all over the place and even on an adjusted basis it was, at least, our model somewhere between 26% and 28%. So what do we think about the tax piece moving forward?

Mary Lindsey

So I think for the full-year, we’re anticipating on tax rate of about 29%. This quarter you did see a very low tax rate because of a one-time settlement with the internal revenue service. But if you model 29% for the full-year, you should be pretty close.

Phil Gibbs

So model 29% in terms of the back-half and then also on a run rate basis moving forward?

Mary Lindsey

I would say, look at the full-year and considering what was already booked in the first two quarters, we’re expecting 29% for the full-year.

Phil Gibbs

On a GAAP basis?

Mary Lindsey

On a GAAP basis, right.

Phil Gibbs

Okay.

Mary Lindsey

Yes.

Phil Gibbs

And is that a good rate to use on the out years as well?

Mary Lindsey

Right now, I would say, that’s a good rate, yes.

Phil Gibbs

Okay. Well, good work. Have a good weekend.

Joseph Alvarado

You too.

Mary Lindsey

Thank you, Phil.

Operator

And our next question is also a follow-up from Paul Luther from Bank of America Merrill Lynch. Please go ahead with your follow-up.

Paul Luther

Hi, thanks. Just wanted to check in on working capital trends. I think Q2, I think was a source, but kind of bucked the seasonal trend I thought. Could you give us a sense for what you anticipate for working capital for the second-half?

Mary Lindsey

Yes, the working capital was down quite a bit in the second quarter, some of that due to inventory management, but a lot of it due to just lower commodity prices kind of flowing into our inventory levels and our payables. So it was quite a drop. But I think as we go into the third quarter, the strong construction period and also as Barbara mentioned some outage – an outage in Poland associated with the caster coming online that you are going to see the inventory increasing to some degree.

So that’s some – and that’s seasonal and it happens every year. And as we approach the – as we approach at the end of the year, some of the inventory will start to bleed out again. But I think you’ll see a creep up in the inventory in the third quarter.

Paul Luther

Okay, great. Thank you.

Mary Lindsey

Thank you.

Operator

And ladies and gentlemen, at this time we’ve reached the end of today’s question-and-answer session. At this time, I would like to turn the conference call back over to Mr. Alvarado for any closing remarks.

Joseph Alvarado

Yes. So thank you again everyone for joining us. We thought we had a good quarter and look forward to increase shipments and demand in the third and fourth quarter because of seasonal – seasonality construction markets and we look forward to reviewing those results with you in just a few months. Meantime, thank you for joining us on today’s conference call, and we look forward to seeing you and speaking with many of you during our investor visit in the coming months. Thank you very much.

Operator

Ladies and gentlemen that does conclude today’s Commercial Metals Company conference call. We thank you for attending. You may now disconnect your telephone lines.

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