Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Joseph Alvarado - Chief Executive Officer, President and Member of The Board of Directors

Barbara R. Smith - Chief Financial Officer and Senior Vice President

Analysts

Evan L. Kurtz - Morgan Stanley, Research Division

Luke Folta - Jefferies & Company, Inc., Research Division

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Arun S. Viswanathan - Longbow Research LLC

Brent Thielman - D.A. Davidson & Co., Research Division

Jonathan Sullivan - Citigroup Inc, Research Division

Mark L. Parr - KeyBanc Capital Markets Inc., Research Division

Nick Farwell

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Charles A. Bradford - Bradford Research, Inc.

Luke McFarlane - Macquarie Research

Michelle Applebaum - Steel Market Intelligence Inc

Commercial Metals (CMC) Q3 2012 Earnings Call June 27, 2012 11:00 AM ET

Operator

Hello, everyone, and welcome to today's Commercial Metals Company Third Quarter Fiscal 2012 Earnings Conference Call. As always, today's call is being recorded. [Operator Instructions] I would like to remind all participants that during the course of this conference call, the company will make statements that provide information other than historical information and will include expectations regarding the company's future prospects, revenues, expenses or profits. These statements are considered forward-looking statements and may involve speculation and are subject to risk 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 risk and uncertainties that are listed in the company's press release and described in the company's latest 10-K and 10-Qs. Although CMC believes these statements are made based on management's expectations and assumptions, CMC offers no assurance that events or facts will happen as expected. All statements are made only as of this date, CMC does not assume any obligation to update them in connection with future events, new information or otherwise.

Some numbers presented will be non-GAAP financial measures and reconciliations can be found in the company's press release and on the company's website. And now for opening remarks introductions, I will turn the call over to the President and CEO of Commercial Metals Company, Mr. Joe Alvarado.

Joseph Alvarado

Good morning, everyone. Thank you for joining us to discuss CMC's third quarter fiscal 2012 results.

I will begin with highlights for the third quarter and an update on our strategic initiatives. Barbara will then provide further financial details relative to the quarter and the first 9 months of our fiscal year, and I will close out with comments on our outlook for the fourth quarter of fiscal 2012, after which we will open the call to questions.

As described in our earnings release this morning, we reported net sales of $2 billion for our fiscal 2012 third quarter ended May 31, 2012, 3% higher than fiscal second quarter 2012. We also reported net earnings of $40.7 million or $0.35 per diluted share in this year's third quarter, marking 3 consecutive quarters of solid profitability improvement. Our adjusted EBITDA for the quarter was $104.3 million, and Barbara will walk you through all the details in a moment including the impact of discontinued operations.

I'm also pleased to report that our board approved our quarterly dividend of $0.12 per share, demonstrating our commitment to delivering shareholder value.

This quarter's financial results represent the first time since early fiscal 2008 that all of our operating segments are profitable. Our Americas Fabrication segment broke even, ending a string of 10 consecutive quarters of losses. Domestically, shipments increased over the prior-year quarter for our Recycling Mills and Fabrication segments. Selling prices increased in most of our domestic units, most notably in our downstream fabrication unit. Our domestic order books remain solid. Our International Mills segment was negatively impacted by the continued crisis in the Euro zone as both shipments and selling prices were lower than the prior-year quarter. Conversely, our International Marketing and Distribution segment reported a strong quarter, primarily on the strength of our raw material sourcing and distribution operations.

Focusing on the Americas, our Americas Recycling Segment was profitable for the ninth consecutive quarter, with an adjusted operating profit of $3.9 million. Volumes shipped were higher than last year's third quarter, but declining scrap prices during the back half of the quarter were reflected in lower adjusted operating profits when compared to a year ago. For our domestic steel mills, we recorded increases in volume of products shipped and average sales prices compared to the same quarter a year ago. In May, we took an outage at our Alabama mill to replace and upgrade the equipment for the finished goods stacker. Our state-of-the-art Arizona mill achieved yet another quarter of profitability. Our steel mills operated with 79% of capacity the first -- for the first 9 months of the fiscal year as compared to 73% for the same period last year.

Overall, the adjusted operating profit for the segment was impacted by margin compression at our copper tube mill, as the average copper sales price was 12% lower than a year ago.

Looking at our Americas Fabrication segment, operating results improved to $14.9 million over last year's third quarter, resulting in a modest adjusted operating profit of $200,000. Solid shipment volume, higher selling prices, coupled with stable raw material pricing and a significant reduction in fixed costs were the primary drivers of the improved performance. This segment's backlog continued to reflect steadily improving prices. We continue to be encouraged by improving market conditions and we continue to experience growth in the private sector projects.

Shifting to the International business, our International Mills segment recorded a quarterly adjusted operating profit of $1.3 million compared to $22.6 million in last year's third quarter. Our Polish mill operations were impacted by competition from imports in our key product lines at significantly lower selling prices. We experienced significant margin compression due to the oversupply as product -- of product as we work through higher priced inventory. We continue to evaluate options to adjust our operating rates and cost structure in response to the recent developments in the Euro zone. Our International Marketing and Distribution segment had an adjusted operating profit of $23.3 million as compared to $17 million in last year's third quarter. The raw materials operating group within the segment continued to execute well and was the largest contributor to the increased profitability. All operating divisions within the segment were profitable during the quarter despite difficult market conditions facing our operations in Europe, Asia and Australia.

Last October, we laid out a plan to improve the financial performance of the business, which included the decision to exit our Croatian steel pipe operation. On June 1, we announced the sale of all of the shares of our Croatian subsidiary, other than certain assets that were excluded from the sale. On June 13, we completed the sale of a portion of the excluded assets and we continued to market the remaining assets. As previously described, these transactions marked a key step in our efforts to position our business for both improved financial performance and shareholder value. With that overview, I'd like to summarize.

Our year-to-date earnings of $177.3 million are evidence that our strategic initiatives are returning results to our bottom line and thus improving shareholder returns. With that, we will continue our strategy to service our customers to the highest degree, competitively structure our company to adapt to changing market conditions and improve returns for our shareholders. I will now turn the discussion over to Barbara Smith, Senior Vice President and Chief Financial Officer. Barbara?

Barbara R. Smith

Thank you, Joe, and good morning, everyone. As Joe mentioned, for the third quarter of 2012, we reported net earnings of $40.7 million or $0.35 per diluted share. During the same period for 2011, we reported net earnings of $36.2 million or $0.31 per diluted share. We're pleased with the increase in earnings of $4.5 million on a year-over-year comparison. Continuing operations had net quarterly earnings of $39.1 million or $0.34 per diluted share, while discontinued operations, which consist primarily of the Croatian pipe mill, had quarterly net earnings of $1.6 million or $0.01 per diluted share as a result of liquidating the inventory at our pipe mill.

Included in earnings from continuing operations is an $11.5 million or $0.10 per diluted share tax benefit related to expenditures for research and development, primarily for the start-up of our Arizona steel mill. For the 9 months ended May 31, 2012, net earnings were $177.3 million or $1.52 per diluted share as compared to a net loss of $9.3 million or $0.08 per share in a year ago quarter.

Sales of $6 billion were 6% higher than the same 9-month period last year. Continuing operations for the first 9 months had net earnings of $191.9 million or $1.64 per diluted share while discontinued operations had a net loss of $14.7 million or $0.12 per share. Included in the results of continuing operations is a tax benefit of $113.5 million or $0.97 per share related to ordinary worthless stock and bad debt deductions from the investment in the Croatian subsidiary, as well as a tax benefit for research and development expenditures. As mentioned in our last quarterly earnings call, discontinued operations for the first 9 months included approximately $18 million of severance costs associated with the closing of our facility in Croatia.

Collectively, our U.S.-based steel mills generated an adjusted operating profit of $62.6 million for the quarter compared to $67.6 million during the same period last year. Net sales of $516 million were up 5% from last year's third quarter sales of $492 million. Pretax LIFO income was $3.1 million lower than the third quarter of 2011. Shipments were 58,000 tons higher than in the prior-year quarter. Within the Americas Mills segment, our copper tube mill recorded an adjusted operating loss of $3.3 million, with pretax LIFO expense of $3.7 million in the third quarter. This compares with a $3.5 million in adjusted operating profit with a pretax LIFO expense of $2.2 million that was reported in the third fiscal quarter of 2011.

Drop in copper prices during fiscal 2012 had a negative impact on results for the quarter. The average copper selling price in the current quarter was $4.79 per pound as compared to $4.98 per pound in the third quarter last year. Our Americas Recycling segment experienced another profitable quarter and delivered $3.9 million adjusted operating profit, including a pretax LIFO expense of $3 million primarily due to lower nonferrous demands and prices. This compares to the third quarter of 2011 adjusted operating profit of $13.2 million.

Average ferrous scrap sold for $3.54 per short ton during the third quarter, which is comparable to the third quarter of 2011. Average sales pricing on nonferrous scrap was $2,867 per short ton, which was down 16% quarter-over-quarter. We shipped a total of 588,000 tons of ferrous scrap, which was up 6% over last year's third quarter, consistent with improved demand in the U.S. market. We shipped 60,000 tons of nonferrous scrap, which is down 10% over the same period last year due to reduced demand from Asia. Our American Fabricating segment recorded an adjusted operating profit of $200,000 for the quarter compared to an adjusted operating loss of $14.7 million in the third quarter of 2011. We continue to see recovery in this market segment as the backlog is near all-time highs in terms of tons -- tonnage.

A pretax LIFO expense of $1.4 million was also included in the third quarter result as compared to a pretax LIFO expense of $3.4 million for the comparable quarter a year ago. The average selling price of $906 per ton increased $67 per ton over last year's third fiscal quarter average selling price.

Our International Mills segment reported an adjusted operating profit of $1.3 million for the quarter compared to an adjusted operating profit of $22.6 million for the same period last year. Shipments and other operational statistics were lower compared to a year ago quarter primarily due to the import pressure previously mentioned by Joe. Furthermore, new infrastructure projects in Poland slowed during the period compared to a year ago.

CMC's International Marketing and Distribution segment recorded an adjusted operating profit of $23.3 million for the third quarter of fiscal 2012. Our Raw Materials marketing division was the largest contributor to this improved profitability. This result compared to an adjusted operating profit of $17 million during the third quarter of 2011. During previous earnings calls, we indicated that we would incur unusual expenses related to the proxy contest and the tender offer defense. We incurred approximately $4 million in expense related to these matters during the third quarter of 2012 and we expect to incur an additional $4 million in the fourth quarter of 2012. Capital expenditures were $29 million for the third fiscal quarter and $83 million year-to-date.

Overall, our balance sheet remains strong. Cash and short-term investments totaled $234 million as of May 31, 2012. The business generated $95.8 million cash from operations during the quarter. In addition to our credit facility and receivables purchase agreements, which together provide access to a total borrowing capacity of $500 million, we continue to maintain significant unused, uncommitted credit lines that give us a great deal of liquidity to support our working capital needs, and adapt to changing market conditions. During the quarter, we liquidated our interest rate swaps relative to our long-term public debt for cash proceeds of approximately $53 million. This gain is being amortized over the remaining duration of our long-term debt. Thank you very much, and now I'll turn it back over to Joe for the outlook.

Joseph Alvarado

Thank you, Barbara. In summary, we posted our third consecutive quarter of earnings and we are profitable for the first 9 months of fiscal 2012. Key highlights include the following: We reported $40.7 million in net income for the quarter and $177.3 million year-to-date; we generated $104.3 million of EBITDA in the quarter and $255.1 million EBITDA year-to-date; we generated $134.8 million cash from operations year-to-date; and we declared our regular dividend for the 191st straight quarter. Our actions to adjust our cost structure have helped to improve the financial performance of the company. Our Fabrication segment produced positive results for the first time in 10 sequential quarters. And in June, we completed the sale of the stock of our Croatian subsidiary and majority of the assets of our Croatian pipe mill, generating approximately $37 million in cash that will be reflected in our fourth quarter results.

With respect to our fourth quarter 2012 outlook, we expect to record another profitable quarter. In our fourth quarter of 2012, we expect scrap prices to weaken amid weaker domestic flat roll demand, and concerns about the Eurozone and lower demand from China. We remain encouraged by the strong backlogs in our domestic operations and anticipate a relatively good shipping quarter. Our Recycling business has demonstrated that it can operate profitably in most market conditions but this quarter may prove to be challenging. Results from our Poland mill should improve in the fourth quarter of 2012, though we expect international markets to remain volatile. We are pleased with our performance and improvements in the first 3 quarters of fiscal 2012. In addition, we're also pleased to report that we've added Joe Winkler to the Board of Directors of Commercial Metals Company. Joe has a long career in the Energy Services industry. He's a great addition to our board. We've issued an 8-K to that effect this morning. We look forward to continued success and progress for the remainder of 2012 and beyond. Thank you for your attention. At this time, we will now open the call up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Evan Kurtz for Morgan Stanley.

Evan L. Kurtz - Morgan Stanley, Research Division

Just a question on scrap to start off. We've seen a big $60, roughly $60 decline last month and we're hearing that this could fall again in July. I was just kind of curious, what are your thoughts on -- what scrap price it takes to deter scrap peddlers from going out and actually collecting and just trying to figure out if there's some sort of economic bottom to scrap pricing?

Joseph Alvarado

We've been asked this question before. And before the run-up in scrap that started back in the 2004 time period when scrap sold on average for about $200 a ton or less, there's plenty of generation, but it's a difficult question to answer because I think it's a reflection more of economy and the initiative of people that would go out and collect industrial. Probably it's more important component in the summertime, that's a more volatile supply base. So I'd be hard-pressed to put a number on what that might be. I don't think there's an issue even with declining scrap prices that scrap will flow. Right now though, with the adjustment that's taken place in the market and expected continued adjustment, there's no doubt that stocks will have a higher impact on pricing than flows will.

Evan L. Kurtz - Morgan Stanley, Research Division

Got you. And I was just reading actually that the -- in March, construction kicked off on the Virgil Summer nuke project in South Carolina. And I'm pretty sure that's fairly close to your Cayce, South Carolina mill. Do you have a piece of that? Have you been bidding on any work there?

Joseph Alvarado

We've been interacting with them, Evan. I can't tell you exactly if we have some of that business. We can follow up on that. I don't really have an answer for you right now.

Operator

Our next question comes from Luke Folta from Jefferies.

Luke Folta - Jefferies & Company, Inc., Research Division

I had a question on your Fabrication business. I remember just coming out of your results last quarter, I think there was some discussion around there being some contracts, some infrastructure contracts that are there that are multiyear, at least 18 months-plus that had unfavorable pricing that were going to take some time to work off. So I was pretty surprised to see you generating a positive result for the quarter. And just to get into more detail, what drove that? Was it -- was that just a function of a pickup on the private side with maybe better price tonnage? Or I know that some volumes ticked up pretty meaningfully too, is it some just better fixed cost absorption? I mean, can you, maybe give us some sense of the magnitude on how these things might have impacted with the result?

Joseph Alvarado

Yes, Luke, I'll take a shot at that. And I think we've been talking in sequential quarter reports about the fact that we continue to improve the quality of our backlog, both as a function of new work that we're booking at higher prices, reflective of higher scrap costs during the period of time, and also as a result of reducing the backlog of those fixed-price contracts that were a burden to the order book. So it's a mix of that, and as well as more private work on the books that's shipping on shorter lead time, which is more reflective of our cost than the long-term contracts might be. And bear in mind, too, that we do mark-to-market on our fab accounting projects. So that, too, has an impact.

Luke Folta - Jefferies & Company, Inc., Research Division

Okay. So -- if we assume that there's not going to be any major swings in pricing from here, that we see some sense of stability, do you think that a breakeven-plus number in fab is sustainable going forward?

Joseph Alvarado

Yes, we certainly think it's sustainable that we'll continue to improve the profitability of fab, but we just saw a swing of $60 a ton in raw material pricing. So ultimately, that -- if that works itself into finished goods pricing, as well as a quoting activity in the fab business, which I expect it would at some point, we -- it's a matter of managing our margins. But yes, we believe the quality of our backlog will allow us to improve, continue to improve performance of the fab business.

Luke Folta - Jefferies & Company, Inc., Research Division

Okay. And second question I had was just regarding the highway -- some bill that's being proposed. It looks like -- assuming something happens by this Saturday and we don't get another short-term extension, have you taken a look at it, and do you have a sense of -- how does it match up relative to your expectations, and what sort of impact do you think it'll have on your business there?

Joseph Alvarado

Luke, the highway bill is just an extension of the existing bill. And so we're better off to have it, because it funds projects. But it really doesn't even begin to address the infrastructure needs of the country. And 3 year -- 3-month extensions don't allow businesses to plan properly or to plan on increased demand from the Federal Government side. So and that's part of the malaise that we face today.

Operator

Our next question comes from Sohail Tharani from Goldman Sachs.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Joe, the scrap prices have moved down significantly, you mentioned, we all know it and perhaps go down again in July. But when we see the official numbers or at least the announcement of the metal prices or steel prices, the announcements show that there could be some metal margin expansion going to July, perhaps in even June. How do you feel about that at your business that -- do you think that you will see that?

Joseph Alvarado

Well, yes. Based on the relative difference between the scrap price reduction and price creeps announce -- price announcements which are down roughly $30 a ton on average, there should be some margin enhancement. But at this point, Sohail, we're chasing things a little bit. The anticipation of lower scrap prices always causes some uncertainty. And could have an impact on prices in the future. So for the time being, there's an improvement in margin, but there's also still some instability in scrap pricing.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Got you. And it -- this also flows into your fab business, as you mentioned earlier that if the steel price is coming down, fab business should benefit also with that?

Joseph Alvarado

Sure. Absolutely. Any of those fixed-price contracts that we have, reflective of higher scrap cost -- as reflective of a higher scrap cost with lower scrap as part of our raw material input would benefit.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Great. On the Croatian pipe mill, were you selling product from there to your international distribution business? Will that impact some -- have some negative impact in terms of not being able to -- because Danieli is planning to close that pipe mill down, as far as I have heard from them.

Barbara R. Smith

Yes, Sohail, if you look at our results for this year, we haven't been moving much product through International Marketing and Distribution. They used to move some of that product through historically, but overall, it wasn't significant to the overall top line. Of course, it was a big negative to track it around cost.

Joseph Alvarado

And in the aggregate, Sohail, we have other sources for tubular products and the greater demand for tubular products is in OCTG as opposed to line pipe and predominantly, what we're shipping from Croatia would have been in the line pipe category.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Okay, great. And then the last question on copper spreads, the impact will be when the prices are coming down. Once the prices are down and stable, you should start to get some margin, better margins over there, is that correct to assume?

Joseph Alvarado

Yes, our guys in Howell would like to know what stable means. There's so much volatility in copper prices this year. But yes, stability in any raw material pricing, whether it's copper or ferrous materials, helps to stabilize the order book in operations and otherwise there's a lot of reaction not only to the price but inventory valuations and trying to maintain margins. So yes, we would love to see stable copper prices. But I don't think we've seen that in a long, long time.

Operator

Our next question comes from Arun Viswanathan from Longbow Research.

Arun S. Viswanathan - Longbow Research LLC

So I guess my question is on the rebar side. Maybe you can just talk about a little bit on what you're seeing as far as pricing and the demand outlook as well as trade in North American rebar?

Joseph Alvarado

We shared with you our -- the pricing statistics. I'm not going to -- I really can't comment on pricing activity right now. But demand remains fairly strong. It's summertime, our backlogs have remained stable, our shipping levels are a little bit higher this quarter as compared to the prior quarter, and that includes rebar as well as merchant products. So the industry is still dealing with short lead times, and sometimes it's hard to have order visibility, so that's why the backlog is a strength for us. But volumes remain fairly strong. The pessimism that we read about every day in the steel business, in many regards is more of a reflection on flat roll business than it is on the long products. And certainly while we're impacted in the Eurozone, in our Polish operations, and it's broader based there, but more on the pricing side than on total demand or shipping volume, we aren't seeing as much volatility, or I'll say, bad behavior as the flat roll side of the business in North America. So I think we suffer a little bit because of the -- being grouped with all steel, whereas long products has been a little bit more stable.

Arun S. Viswanathan - Longbow Research LLC

And what about the trade side? I mean, Barb, I guess [indiscernible] has also been there. So I mean, has that been a problem? And do you see that continuing to impact the business, or...

Joseph Alvarado

Yes, certainly, imports from Turkey in particular are up significantly, I believe. Off the top of my head, I have 34% from prior year. The Turks have been more aggressive. More recently, they've been out of the scrap market and this -- and then just this past week came back in the scrap market. And I think it's -- for them, it's all a function of what their home or near location market's demand is like because with scrap going one way across the Atlantic and rebar coming the other way, it must be a very difficult proposition for them to consistently make money. We haven't been as severely impacted as one might expect, but of course, it has an influence when imports are our largest figure.

Arun S. Viswanathan - Longbow Research LLC

Yes, so my -- I guess as a follow-up, last question, just how would you characterize the supply-demand situation in rebar? I know that you guys had some consolidation activities yourself over the last couple of quarters, but is the supply-demand situation in North American rebar such that when the market does recover in construction especially, you should see some pricing power in that market segment?

Joseph Alvarado

The consolidation that you refer to, Arun, was in our fab business, not in the mill business. So our mills are capable of running at a higher than the 79% year-to-date level that we recorded. So yes, there's some upward potential on volume. But we don't see the markets changing anytime soon. We see stability in the markets, not significant growth.

Operator

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

Brent Thielman - D.A. Davidson & Co., Research Division

Question, Joe, you mentioned that the strong backlog headed into the fourth quarter. And I'm wondering, have those backlogs since dwindled from the start of the quarter as prices have taken more of a hit here in June and maybe your customers are waiting for a bottom. Or are you still seeing stability in orders despite the pressure on prices?

Joseph Alvarado

What we're seeing -- and just the backlog in general is flat, quarter-on-quarter. But last quarter was a record quarter for us. So our backlog being flat from prior quarters is still a good level for us. In the aggregate, over 1 million tons of backlog in our rebar and our fab business. But in terms of the impact that the price environment has on us, it's more a pressure on shipping than it is on order entry. And it's a timing matter. A lot of customers will hold, wait and see what's going to happen in the ensuing month. So that can be disruptive to shipments, more than bookings.

Brent Thielman - D.A. Davidson & Co., Research Division

I see. Okay. And then when you referred to the kind of backlog in the international operations going into Q4, are you referring to the Marketing Distribution business or the mill in Poland? Because that statement kind of seems to conflict with the comment about the difficult market conditions in Poland for Q4.

Joseph Alvarado

The mill in Poland, when we talk about backlog in Poland, we're talking principally about the backlog and the mill in Zawiercie. And the backlog there has improved, quarter-on-quarter, but at the end of the second quarter was when we saw, well, in the middle of the second quarter was when we saw the deterioration in pricing in Poland, so there was a lot of uncertainty in Poland about pricing because of imports, principally from Latvia. And that's worked its way through the system, and so now we're seeing a little bit more stable order entry pattern there. With stronger pricing as well.

Operator

Our next question comes from Brian Yu from Citigroup.

Jonathan Sullivan - Citigroup Inc, Research Division

This is actually Jon Sullivan filling in for Brian. I just have 2 quick questions. One on the Americas Mill segment, it seems that scrap costs were flat quarter-on-quarter, when I would have thought that perhaps we’d have seen a decline there based on stock pricing? And secondly on the International Mills segment, I was just wondering if there's anything behind the apparent increase in unit cost x scrap?

Joseph Alvarado

I'll take the first one and I didn't hear the second.

Barbara R. Smith

I got the second.

Joseph Alvarado

I'll take the first one. Jon, the erosion in scrap pricing really didn't hit us full tilt until this month. So we're out of the third quarter at this point. There'd been some slight erosion during the period that we would -- that's our third fiscal quarter. So quarter-on-quarter, we're okay. You'll see a difference, I think, a more significant difference at the end of the fourth quarter. So everything that we're talking about is more a fourth quarter fiscal year for us impact than third quarter.

Barbara R. Smith

Yes, and on your second question, I think is around conversion costs out of the international -- out of the Polish mill and, as Joe mentioned, we saw significant deterioration in that market, about mid quarter because of the impact of the imports that were being placed in the market there. And so obviously, we tried to dial back our operations to adjust to that and whenever you do that, you know you're going to see a higher unit cost there.

Operator

Our next question comes from Mike (sic) [Mark] Parr from KeyBanc.

Mark L. Parr - KeyBanc Capital Markets Inc., Research Division

I had a couple of questions, one -- yes, we've seen scrap come down a lot here in June and heading into July, but iron ore, on the other hand, has actually been recovering somewhat, say from the low 130s to the high 130s. Is that -- do you view this move in iron ore over in China as any kind of a leading indicator for potentially the U.S. ferrous marketplace?

Joseph Alvarado

I wish that we could say that there is a real strong correlation dollar for dollar or day for day, but as you might recall, back in the fall when there was a rapid decline in ore prices that scrap prices lagged by at least a month, maybe a little bit longer, and then recovered much more sharply back to the level they've been at than ore did. So there's some correlation and there might be sympathy. I think that in this instance, while we could still see some weakness in July on scrap prices, seasonally adjusted, we would expect still in August for that to recover. More related to demand and production activity than necessarily iron ore prices. So I don't always see a strong correlation and it's certainly not a dollar for dollar, Mark, but in the metallic world, there's always the impact and influence of alternative sources.

Barbara R. Smith

I think over the long term, there should be a correlation, but you can have dislocation.

Mark L. Parr - KeyBanc Capital Markets Inc., Research Division

Yes, okay. Just one other follow-up, if I could. In the fabrication business, are you seeing any movement as far as base pricing is concerned in your backlog relative to the shipment activity you had in the most recent quarter?

Joseph Alvarado

Certainly a future business, Mark. We'll have customers that are going to put pressure on us for what are lower raw material costs. There's no doubt about that. But no change or erosion in the base presently. The backlog is pretty strong backlog. It's a good backlog in the fab business and reflects higher selling prices than what may come to pass, depending on what happens with raw material pricing.

Operator

Our next question comes from Nick Farwell from Arbor Group.

Nick Farwell

Joe, can you please remind me if you -- to what degree you hedge any of your commodities, take copper as an example, other than the natural hedge that comes from the scrap flows?

Joseph Alvarado

We deal with copper not only in the copper tube mill but also in our Recycling business. In the Recycling business, we have a higher percentage of hedging to cover our exposures, principally because of the lead times associated with procurement and sale of that commodity. A lot of it is exported, so we'd have a fairly large period of exposure. We have, in the copper tube mill, hedged from time to time but as a rule do not depend -- our turnaround is normally faster in the copper tube mill than it would be in the Recycling Export business.

Nick Farwell

When you aggregate up to your hedging positions, has it had much impact on the P&L, say, over the last 3 or 4 quarters?

Barbara R. Smith

I think the copper hedges don't qualify for hedge accounting. So we do end up mark-to-marketing that. And this quarter I think it was about a $3 million loss for the quarter. But I don't have the prior quarters off the top of my head. We could …

Nick Farwell

Okay. So is that a realized loss or that's just marking to market as of the end of the quarter?

Barbara R. Smith

It's just mark-to-market as of the end of the quarter.

Nick Farwell

Okay. And then I'm curious -- and I'm sure you'll look at this in a variety of ways, but what are the quoting trends in sort of your -- what I'll call your early cycle businesses, your earlier cycle businesses, suggesting about your outlook? Is there some informational content there? Or is it -- or are we in such an uncertain period of time that, that really doesn't provide you much insight?

Joseph Alvarado

I'm not sure I understand what you mean by earlier cycle businesses?

Nick Farwell

Well, I think of an early cycle business as those that might be associated with, let's say, residential construction as opposed to that which is associated with the highway bill or later cycle businesses that have their own funding sources or sources that aren't necessarily tied directly to the economy. Like commercial construction tends -- my expectations are -- tends to lag residential construction. So one would tend to look at residential construction as an early cycle set of businesses.

Joseph Alvarado

So let me take a shot at this and then Barbara can expand on that, if she has something more to add. Our longer lead time business -- maybe the best way to talk about it is in terms of the Architectural Building Index. The ABI, for about 5 months consecutively, had been up and then took -- up above 50% and then 2 months consecutively was below 50%. But if you look at the underlying data, it was the industrial side that continued to track above 50% while the nonindustrial or -- I can't remember the category, is where the hit had been taken. Which is consistent with what we've seen in construction patterns that residential itself is still a long lead time. While there is still a long time before we're expecting strength in the residential and/or nonresidential, but some of the industrial has improved and some of the economic activity on the construction side has been buoyed by private spending and I think that's what we're seeing more than anything else. I'd love to see the public sector increase budgets like in the highway bill that would give us some indication of where we would -- we could anticipate some strength in demand from that sector. But in the meantime, the private sector's been a stronger sector for us though not nearly -- though not anywhere near traditional levels. We've been as high as 70%, what I'll call private, and we're tracking still below 40% on private construction in our order book.

Operator

Our next question comes from Phil Gibbs from KeyBanc Capital Markets.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

We've seen a nice SG&A cost reduction trend here over the last several quarters. Can you discuss where you believe you are in terms of your opportunities and how the completion of the IT system may be assisting?

Barbara R. Smith

Yes, we appreciate you taking note of that. And clearly, there's been a lot of blocking and tackling, and cost reduction efforts have been ongoing and I describe that as a never-ending process. But clearly, if you go back to our announcement back in October, we did announce that we were taking a significant reduction in our overhead structure. And it takes a little bit of time to implement or fully implement all of that. All of those actions are largely complete, and where we are today is -- I'll call it the ongoing process improvement that needs to occur within any business to continue to look at ways to be more efficient, not only in our operations, but also in all of our administrative and back-office processes. I would further point out that included in the SG&A, of course, is the proxy contest in tendered sense, which was $4 million for the quarter, it's $11 million year-to-date. We'll have another $4 million in the fourth quarter and about $5 million spill over into next year. When you get past that, you need to take that into consideration because we would hope that, that would not be an ongoing reoccurring expense item, which further enhances that reduction in SG&A that you're seeing.

Operator

Our next question comes from Chuck Bradford from Bradford Research.

Charles A. Bradford - Bradford Research, Inc.

I noticed that Carl Icahn sold about 1.8 million shares in the first quarter, leaving him with about 8.7 million as of the middle of March. Do you know if he's been continuing to sell shares and how much he might still own?

Barbara R. Smith

Yes. Based on our monitoring, it seems like he's held steady at that level, with about 7% overall of our shares. So down from almost 10% to 7%.

Charles A. Bradford - Bradford Research, Inc.

Can you talk a bit about conversion cost? Natural gas, obviously, is a lot cheaper than it used to be. And could you go through whether that's had a meaningful impact on what refractories and electrodes might have done or are doing?

Joseph Alvarado

Yes, natural gas -- we've talked about this a little bit, Chuck, that natural gas is an important part of our manufacturing process. But in some places, like Arizona, it's not an issue at all because the continuous operation there, more electricity costs are a factor. And while natural gas prices have gone down, the bulk of the nation still sits at about 55% coal-fired generation, and we're no different. And there are sectors within where we operate where the percentages are lower. But the real benefit of natural gas is for those who are consuming much larger quantities than we might, and I use as an example, the DRI operation, which is a huge consumer of natural gas. And certainly, hot strip mills, rolling flat products or plate products would have a significantly higher cost of natural gas in their manufacture. I guess, what I believe is our benefit in natural gas is that, as more and more companies, industries switch to more natural gas or relocate to North America because of low raw material prices in natural gas, we'll have a residual effect in jobs and construction and housing that would be the real benefit for us, more so than someone for example, who's in VRI business.

Barbara R. Smith

I think the second half of your question, Chuck, was why does the roll through effect in other raw materials that we purchased. And of course, lower natural gas price is a positive for us. I don't know that we've seen that effect roll through other raw materials, like if there are other competing inflationary pressures, and some of those are annual contracts, which will get revisited again whenever that cycle turns. But I think overall, it's going to have -- it has a good effect, but it's not significant or material to those other materials that we purchase.

Operator

Our next question comes from Luke McFarlane from Macquarie Capital.

Luke McFarlane - Macquarie Research

So what I was wondering, is the research and development tax benefit you got, can you just expand a little bit on that? And I mean, just more in terms of -- I mean, is that an ongoing thing? Or is that just for this quarter that you receive that benefit?

Barbara R. Smith

Yes. We have a new Tax Director who's been in place for the past couple of years, highly skilled, Mary Lindsey [ph] who comes with deep experience and she has undertaken a number of important initiatives to optimize all our tax situation. And as evidenced by the work flow stock deduction that we were able to take in the first quarter related to our exit of the Croatian operation. This is another project that Mary has undertaken in the past number of months, because she noticed that Commercial Metals did not have -- was not taking any R&D tax credit. So in this instance, it was a project to look at the open years and what may exist out there. So a lot of this benefit is related to all of the R&D that was done with the start-up of the new state-of-the-art Arizona micromill. But clearly now, with her leadership, we will have an ongoing process with our engineering organization and all of our operations to examine opportunities for R&D tax credits on a go-forward basis. So I wouldn't expect to see a onetime significant number, but we would expect to see some on an ongoing basis.

Operator

Our next question comes from Michelle Applebaum from Steel Market Intelligence.

Michelle Applebaum - Steel Market Intelligence Inc

So a couple of questions. First off, Nucor's got a big DRI facility that's going to be starting up in the next few months. And I was wondering what kind of impact do you think that might have on the scrap market.

Joseph Alvarado

Certainly, maybe I said earlier, in one of the questions we had about raw materials, from, I think it was from Mark, about iron ore pricing and scrap pricing, that there is metallic competition and their entry into producing DRI will -- it's going to have an impact, there's no doubt about that, on total scrap demand. Pricing will be what the pricing is for scrap products. But that metallic alternative for DRI is a much more important source of raw material for Nucor than it would be for our order book. So less competition for some of the cleaner and more prime grades, I would suspect, and for us.

Michelle Applebaum - Steel Market Intelligence Inc

Is it big enough, the -- when you say it will have an impact, is it big enough to have a material impact? Are they big enough?

Joseph Alvarado

As they ramp up, I guess we'll find out, Michelle. But in the initial start-up phase, I doubt that they would have a significant impact.

Michelle Applebaum - Steel Market Intelligence Inc

Okay. You said that with the scrap price down $60, you kind of said in a far more diplomatic way, I think earlier, that with the anticipation of further scrap price declines, it may be impacting customer activity. Were you trying to say that customers are waiting to see if there's another drop in scrap to place their steel orders?

Joseph Alvarado

It's not so much placing steel orders, Michelle, as it is pressure on selling prices and shipments. You know that the industry practice is, for the most part, applied against shipments in terms of reduced prices. So if a customer has something on the books and they're anticipating that there'd be further reduction, it has the tendency to slow shipments down. There's usually a catch-up factor. It's just kind of unavoidable in the way that we do business in long products and on rebar and merchant shipments. So it always has the tendency to slow things down a little bit. But not on the order entry side, Michelle. More on the shipping side.

Operator

Our next question comes from Phil Gibbs from KeyBanc Capital Markets.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Just had a quick follow-up. Barbara, the interest rate that stepped up in the quarter, should that be indicative of what we should be looking at, going forward? I know that the debt load didn't really change all that much but the interest rates and the expense crept up.

Barbara R. Smith

Yes, we had a little bit of an impact because in my comments, I mentioned that we had monetized our interest rate swaps, so we did have some termination costs within this quarter. But what it also means is that we fixed the value of that swap and we'll amortize that over the remaining life of the swaps, from the P&L perspective, but it also allowed us to bring in $53 million in cash. So for modeling purposes, we have been seeing about a $4 million benefit from that swap in the quarter. And going forward, that benefit will be about $3 million.

Operator

Our next question comes from Sohail Tharani from Goldman Sachs.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Joe, how is the Arizona mill doing in terms of utilization rate and profitability? Are you consistently profitable at that mill?

Joseph Alvarado

Yes, we are consistently profitable at that mill. We're really pleased with the progress that we made in the Arizona facility, not only getting up the learning curve, but essentially getting to its capacity. So it is a profitable business for us. It's running at its nameplate capacity. The biggest issue that we face in the Western region is the geography that we're covering. It's a micromill. It wasn't intended to cover as much geography as it does. But we are using it to service our fab shops. And it's -- we're really happy with it.

Operator

Our final question comes from Michelle Applebaum from Steel Market Intelligence.

Michelle Applebaum - Steel Market Intelligence Inc

Just a follow-up. It's pretty clear that your old employer here in Chicago is in an asset divestiture phase, and they've got an awful lot of small pieces of businesses that would complement yours all over the U.S., in particular North America. I'm wondering, might there be some good fits for you with that organization and would you look at acquiring right now.

Joseph Alvarado

Our focus right now, Michelle, is on building our cash reserves and strengthening the balance sheet. That would be inconsistent with the strengthening of the balance sheet. We wouldn't have the resources to do something that big today. And so while they're long products, it's a mix of long products that we're not particularly familiar with, either on the SBQ side or the real side and it's pretty far outside our geography from a scrap collection perspective. So we -- if we were going to look at something, we'd have to have the ability to implement the strategy that we employ at our other plants, which is sourcing scrap through our own network, and we don't really have much in the way of scrap operations in the North, Northeast, and certainly not in Canada. Hope that answers your question.

Operator

At this time, there appear to be no further questions. Mr. Alvarado, I'll turn the call back over to you.

Joseph Alvarado

Okay. Well, thank you, everyone, for joining us on the call today. We appreciate it very much, and we look forward to meeting with many of you in our investor meetings in the coming weeks. Thanks again. Goodbye.

Operator

This concludes today's Commercial Metals Company conference call. You may now disconnect your telephone lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Commercial Metals Management Discusses Q3 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts